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The Cautionary Tale of Correspondence Schools

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Regulators Reawaken: Congress Intervenes

The correspondence school sector contracted during the latter half of the 1970s, primarily due to new laws from Congress and new regulations from the Veterans Administration restricting veterans’ and servicemembers’ access to correspondence courses. In 1972, Congress moved to requiring home study schools to have a pro rata refund policy for courses (with some adjustments for institutional costs),1 reducing the amount of unused educational aid that proprietary institutions could collect from the VA after veterans dropped out of their courses. The 1972 law also stipulated that home study course contracts for veterans would only be honored if a veteran or serviceman reaffirmed his commitment to signing the contract after a 10-day “cooling off” period,2 and beginning in 1973, GIs would have to pitch in 10 percent of the costs of home study courses for the first time from their own pockets. Moreover, the VA required counseling from company commanders or education advisors before soldiers could get reimbursement for correspondence courses.3 Finally, correspondence course providers had to show they offered an education that would meet pre-determined occupational requirements, like preparing veterans to pass a licensing exam,4 and refund unused tuition based on how many lessons veterans completed, rather than how much time had elapsed since enrollment.5

The 1972 amendments to the GI Bill weren’t enough to stanch fraud and abuse at correspondence schools, but lawmakers’ ongoing concerns helped prompt several congressional committees to launch investigations of the for-profit sector. In the Senate, a Veterans’ Affairs subcommittee headed by Senator Vance Hartke (D-IN) held a hearing in 1972 on correspondence school abuses of veterans. A far more extensive set of hearings was held in the House, where the Government Operations committee appointed a special subcommittee to examine abuses by proprietary vocational schools. The subcommittee’s report concluded that a “great many students are being enrolled in courses that they do not complete, especially in home study schools, and some students are the victim of outright fraud.” The report recommended that schools “disclose to prospective students the completion rate for the course being considered… [and] placement data on individuals who have completed the course.”6 Two Republican congressmen, as the lead-off witnesses for the subcommittee’s hearings, laced into the for-profit sector, accusing it of having “violated the most minimal standards of decency and professional ethics” and calling shady for-profit owners a “curse” on American society.7

In 1974, in the aftermath of its hearings, Congress attempted to take the crackdown on correspondence schools several steps further, including tightening restrictions on misleading advertising. The Senate Committee on Veterans’ Affairs had grown increasingly concerned both about the deceptive and misleading advertising that some for-profit schools used to attract veterans and the question of whether correspondence courses were actually helping veterans and active duty servicemembers train for new jobs. Accredited correspondence schools were then running two-page color ads in national magazines promoting “home entertainment electronic” courses, ads in which veterans were told, among other promises, that they could take the courses “for fun”—appearing to violate the 1950 legislative ban on using VA educational benefits to pay for recreational or avocational courses, and resurrecting the scam from a quarter-century earlier in which some GIs used their educational benefits to get black-and-white television sets for free, under the pretext of training to be TV repairmen. A 1974 report from the Senate Committee on Veterans’ Affairs warned that the correspondence school advertisements “suggest in a variety of subtle and not so subtle ways that enrollment in the course (which typically costs about $1,500) will enable the veteran to obtain valuable merchandise such as a 25-inch color television set which the veteran can assemble in his spare leisure time.”8

Box 3

Advance Schools, Inc.

Many of the troubling trends in the home study industry—the lack of quality control and accountability; the enrollment of unprepared students; high dropout rates; the exploitation of veterans; the use of misleading sales tactics; and the perverse incentive for correspondence schools to expand by acting as lenders—coalesced in the bankruptcy of the giant home study company Advance Schools, Inc. (ASI), in April 1975.

ASI was founded in Chicago by an itinerant appliance repairman in 1950 and still was of relatively modest scope two decades later. In 1969, it had just 2,700 students enrolled in a variety of correspondence courses in auto repair, bookkeeping, radio and television repair, drafting, and the like, and took in about $450,000 a year. That controlled expansion abruptly ended with the introduction of the guaranteed federal student loan program. By 1974, ASI’s enrollment had exploded 30-fold, to 80,000 students, and the company had grown into a $200 million-a-year business behemoth ($1 billion today) that gorged on federal student aid.9 Some 1,400 ASI salespeople roamed 40 states to sell the school’s 21 courses.10 By 1973, one out of seven veterans nationwide who used their GI benefits for home study courses was enrolled in an ASI course, and the school had more than 51,000 GI Bill students alone.11 When Advance finally collapsed in 1975, 90 percent of its students were financing their courses either through federal student loans or GI Bill benefits.

Despite its humble origins, Advance Schools, in the words of the Boston Globe, lay claim to being the “Lone Ranger” of correspondence education and “the self-proclaimed savior of the home-study industry.” School sales managers claimed to a Globe reporter posing as a prospective student that Advance Schools was working with the FTC to “clean up the home study industry.” The school’s president, Sherman Christensen, told the New York Times that ASI ran credit checks on applicants, administered not one, but two admission tests to establish the persistence of applicants, and turned away one in five prospective students.12

Yet for all of Advance Schools’ aspirations to be a different correspondence program, it replicated a number of the abuses it sought to avoid. Like the Famous Writers School, ASI had a small number of instructors but a giant sales force. While the school at its peak had 1,400 salespeople, it only had about 35 instructors—meaning that each instructor was responsible for 1,800 students,13 a ratio even worse than at the Famous Writers School. A Chicago Tribune reporter who posed as a prospective student discovered that ASI was luring veterans to sign up for courses by telling them they could “bank” their GI benefits, draw interest on them, but pay for the course with FISL funds, which wouldn’t have to be repaid until 33 months after enrollment.14

ASI went into business as a lender, and soon became the biggest educational lender in the country for the guaranteed student loan program. But Advance Schools, Inc., fell prey to the trap of artificially driving up enrollment and profits by expanding its own lending program to students. To raise working capital and boost its cash flow, ASI sold the FISL student loans it made to banks at their full face value—and banks bought in, both because the loans were guaranteed by the federal government, and because ASI promised to repurchase the loans for the full amount when they came due for repayment.

ASI’s financial model proved to be a disaster waiting to happen. By December 1974, its government-funded cash machine had stopped churning. Interest rates rose, prompting banks to lose their willingness to purchase lower-interest FISL loans for new ASI students. As ASI’s incoming cash flow dwindled, banks became concerned that Advance would be unable to repurchase the FISL loans when they started to become due. The coup de grâce for ASI was the federal government’s policy, announced in January 1975, that it would not guarantee repayment of a student loan when a school abruptly closed.15 Banks, fearing that the cash-starved ASI might close, and having discovered that they would no longer have the protection of a full federal guarantee on defaulted loans when schools closed, stopped purchasing FISL loans from ASI altogether. A few months later, Advance Schools filed for bankruptcy. At the time ASI collapsed, it had 72,000 students and was in debt for $100 million in outstanding FISL loans (roughly $450 million in today’s dollars) to no fewer than 47 Chicago banks.16

Advance’s abrupt collapse spurred Congress to act as well. The following year, Congress enacted the 1976 Education Amendments, which barred home study schools from serving as lenders in the FISL program. The Ford administration advanced legislation to ban all proprietary schools from serving as lenders,17 but considered the ban on correspondence schools to be a step in the right direction—especially since the 1976 law also restricted proprietary school lenders to making loans to no more than 50 percent of their undergraduate students and terminated proprietary schools from lending when their default rates exceeded 15 percent.

In many ways, the central regulatory challenge for Congress was ensuring that correspondence courses served their core statutory purpose—enabling students to find employment in their field of training. GI Bill educational grants for veterans and servicemembers, the 1965 creation of federally-guaranteed student loans, and the 1972 establishment of Pell Grants had collectively created a vast voucher-like expansion of educational opportunity in higher education that enabled students and veterans to choose between a wide range of postsecondary institutions and programs. But the problem with providing unfettered educational choice at correspondence schools was that it repeatedly led to widespread abuses of students, veterans, and taxpayers.

In 1974, the Senate Veteran Affairs Committee decided it was time to put more strings on unrestricted student grants by setting minimum job placement standards for all postsecondary vocational programs, including correspondence courses. Recall that under the 1965 Higher Education Act, students could pay for their correspondence courses with federal student loans only if the home study school provided a “program of training to prepare students for gainful employment in a recognized occupation.” Similarly, veterans and servicemembers could only use their GI Bill benefits to pay for correspondence courses if the courses had an employment-related objective and were not avocational or recreational in nature. Yet neither Congress nor the executive branch had ever meaningfully enforced those employment requirements by setting minimum job placement standards for postsecondary vocational programs. In 1974 that changed when Congress passed legislation requiring career programs to demonstrate to the Veterans Administration that at least half of veterans completing their courses in the previous two years had found jobs in their field of training.

The problem with providing unfettered educational choice at correspondence schools was that it repeatedly led to widespread abuses of students, veterans, and taxpayers.

Unfortunately, lawmakers’ efforts to require career programs to demonstrate they were in fact preparing students for careers proved largely toothless in practice.18 The VA rarely, if ever, used its new statutory authority to bar proprietary schools from receiving GI bill benefits when they used deceptive or misleading ads and sales tactics.19 And the job placement data submitted by schools to show that they were placing 50 percent of their graduates in jobs in their field of training soon appeared to be unreliable. In November 1974, nearly 26,000 for-profit and correspondence school programs reported to the VA that they had sterling job placement records for the 9,000 graduates of their courses, with just 2.7 percent of programs failing to meet the 50 percent job placement requirement. Yet more than 10,000 programs, with an unknown number of graduates, had not reported any job placement data to the VA, and the Senate Veterans’ Affairs Committee found neither states nor the VA had reviewed or verified the data.

Still, the fatal undoing of the 1974 law was not the unverified or missing job placement data from correspondence schools and trade schools. Instead, the problem was that the VA issued lax guidance, creating an abundance of loopholes, which correspondence schools and other vocational programs used to evade the 50 percent job placement requirement altogether. As a 1976 FTC report detailed at length, the VA failed to set clear job placement standards or establish difficult-to-game safeguards to protect veterans. The VA largely allowed correspondence and trade schools themselves to determine what counted as a job placement, effectively eviscerating the value of the job placement requirement. The FTC report found that the VA had decided that “only those graduates who are available for [job] placement be included within the final computation [of the 50 percent placement figure]. Moreover, schools are free to remove from the data any student who did not possess the requisite vocational intention, was on active duty, pregnant, changed marital status, was unwilling to move to a new locality, or who for other ‘valid’ reasons was not included within the [school’s] survey. Each school freely defines for itself what each of these exclusions should entail, and it is little wonder that the surveys have resulted in many schools eliminating the majority of their students from the final computations.”20

The VA largely allowed correspondence and trade schools themselves to determine what counted as a job placement, effectively eviscerating the value of the job placement requirement.

By 1976, the Ford administration had largely despaired of reforming correspondence programs for veterans. In February 1976, it sent legislation to Congress, S. 3109, to terminate the use of all GI benefits for correspondence courses. In a letter transmitting the draft bill to Vice President Nelson Rockefeller (who served as president of the U.S. Senate), VA Administrator Richard Roudebush wrote that “our years of experience in administering education programs for veterans and their survivors convince us that…correspondence courses have not fulfilled their intended purpose,” and “there is ample evidence that the training does not lead to jobs for the majority of trainees and that the courses tend to serve avocational, recreational, and/or personal enrichment.”21 The administrator asserted that “correspondence training is by far the weakest major part of the GI Bill, since it does the least for veterans and in-service personnel toward providing vocational readjustment and restoring lost education opportunities.”

Roudebush was not the only Republican appointee to recommend eliminating federal support for correspondence courses. Fifteen years later, in 1991, then-U.S. Secretary of Education Lamar Alexander would reach the same conclusion about his department’s federal student aid program, telling Congress: “The Department generally supports the idea of prohibiting students from receiving Title IV, HEA assistance for correspondence courses, and eliminating the eligibility of schools that offer 50 percent or more of their courses by correspondence. There have been many instances of student aid abuse involving correspondence courses.”22

Citations
  1. Paul Starr, The Discarded Army, 254–255. Starr noted that Olin Teague (D-TX), then still chairman of the House Veterans Affairs Committee, succeeded in watering down a strict pro rata refund policy.
  2. Reducing Abuses in Proprietary Vocational Education, 27th Report by the House Committee on Government Operations, Special Studies Subcommittee, 93rd Cong., 2nd Sess., December 30, 1974, 35.
  3. George Eberl, “A Multi-Million Dollar Market,” Stars and Stripes, November 13, 1973, A3; and George Eberl, “Getting on Base: No Great Hurdle,” Stars and Stripes, November 13, 1973, A6.
  4. See the testimony of Odell Vaughn, chief benefits director, Veterans Administration in Proprietary Vocational Schools, Special Studies Subcommittee of the House Committee on Government Operations, July 1974, 272.
  5. Vietnam Era Veterans' Readjustment Assistance Act of 1974, Report of the Senate Committee on Veterans' Affairs to accompany S. 2784, 93rd Cong., 2nd Sess., Report No. 93-907, June 10, 1974, 49.
  6. Reducing Abuses in Proprietary Vocational Education, 27th Report by the House Committee on Government Operations, Special Studies Subcommittee, 93rd Cong., 2nd Sess., December 30, 1974, 9, 12.
  7. The two Republican congressmen were Alphonzo Bell and Jerry Pettis, both from the Los Angeles area where the West Coast Schools trade school chain had abruptly closed its doors in May 1973, leaving hundreds of students stranded in the midst of their training and a trail of more than $6 million in outstanding guaranteed loans. See Proprietary Vocational Schools, Special Studies Subcommittee of the House Committee on Government Operations, 93rd Cong., 2nd Sess., July 1974, 4, 8.
  8. Ibid., 69.
  9. Paul Delaney, “U.S. Officials Study Correspondence Schools for Possible Fraud in Federally Guaranteed Student Loans,” New York Times, May 19, 1975, 17.
  10. Michael Edgerton, “After U.S. Student-Loan Debacle, Home-Study School Springs Back,” Chicago Tribune, February 4, 1981, 1.
  11. Eric Wentworth, “Schools Lure Veterans With Tools and TV’s,” Washington Post, June 25, 1974.
  12. Walter Rugaber, “Boom in Mail-Order Schooling Marked by Dubious Practices,” New York Times, May 31, 1970, 1, 39.
  13. In re Advance Schools, Inc., a Delaware Corporation, a/k/a Advance Schools Debtor, California State of Equalization, Claimant v. Advance Schools, Inc, Debtor, 2. B.R. 231(1980), Bankruptcy No. 75 B 4169, U.S. Bankruptcy Court, N.D., Illinois, E.D., January 16, 1980.
  14. Tribune Task Force, “Fast Talkers Sell Dotted Line and Little Else,” Chicago Tribune, June 11, 1975, 1, 8.
  15. See Kenneth Kohl’s January 17, 1975 letter to Sherman C. Christensen, president, Advance Schools, Inc., 4. Kohl’s letter is contained in Box 1 in the folder “Advance Schools, Inc.” of the Richard B. Cheyney files in the Gerald R. Ford Presidential Library. The letter is available at source.
  16. Paul Delaney, “U.S. Officials Study Correspondence Schools for Possible Fraud in Federally Guaranteed Student Loans,” New York Times, May 19, 1975, 17.
  17. The Ford administration’s bill to bar proprietary schools from serving as lenders was introduced in the House in March 1975 by Edwin Eshleman (R-PA) and in the Senate by John Beall (R-MD). See Congressional Record—House, March 6, 1975, 5549–5550, and Congressional Record—Senate, March 18, 1975, 7125–7128.
  18. Ibid., 9. Also see 24, 67–69, 86, 88–89.
  19. Erin Baldwin, Corey Meyer, and Rachel Tuchman, "Re: VA's Failure to Protect Veterans from Deceptive Recruiting Practices," memorandum, Veterans Legal Services Clinic, Yale Law School, February 26, 2016, 6–7.
  20. Proprietary Vocational and Home Study Schools, Final Report to the Federal Trade Commission and Proposed Trade Regulation Rule (16 CFR Part 438), Federal Trade Commission, Bureau of Consumer Protection, December 10, 1976, 280.
  21. VA Administrator Roudebush’s February 26, 1976 letter to Vice President Rockefeller is reprinted in Senate Committee on Veterans’ Affairs, Veterans’ Education and Employment Assistance Act of 1976: Report of the Committee on Veterans’ Affairs to Accompany S. 969, S. Rpt. No. 94-1243, September 16, 1976, 275–276.
  22. Letter from U.S. Secretary of Education Lamar Alexander to Congressman William D. Ford on H.R. 3553, October 21, 1991, Appendix A, 13. Alexander’s letter contained the George H. W. Bush administration’s recommendations for HEA reauthorization.

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The Cautionary Tale of Correspondence Schools