ITT Executives Have Only Themselves to Blame for the Company’s Demise
Wikimedia Commons/Dwight Burdette
Sept. 6, 2016
Don’t cry for ITT. Judging from all the accusations that have been made against the ITT in recent years, its leaders have only themselves to blame for the company’s collapse.
Unsurprisingly, ITT officials and other apologists for the company, such as the editorial writers at The Wall St. Journal, don’t like that explanation. They would like to portray ITT as being another victim of the Obama’s “regulatory assault” on the for-profit higher education industry. But they don’t explain why American taxpayers should continue to support a company that appears to have deliberately defrauded students, shareholders, and the federal government, while raking in billions of dollars in federal financial aid every year.
In preparation for the all the blowback the White House and the U.S. Department of Education are likely to get now that ITT has officially shut down, I thought it would be helpful to provide brief summaries of the allegations that federal and state regulators and former employees have made against ITT over the last several years. They paint a disturbing picture of a company that enriched its leaders at the same time that it harmed students, misled investors, and put itself on a crash course to financial collapse.
The New Mexico Attorney General’s Lawsuit Against ITT
In February 2014, Gary King, New Mexico’s Attorney General, sued ITT over recruiting and financial aid abuses that allegedly occurred at ITT Technical Institute in Albuquerque.
Most Disturbing Allegations
- The school lured students into its associate-degree nursing program by misrepresenting the program’s accreditation status. ITT recruiters told prospective students that the program was accredited by the Accreditation Commission for Education in Nursing, the organization that accredits associate degree nursing programs, or was in the process of being accredited by the commission, despite the fact that neither claim was true. As a result, students were misled into believing that they would be able to transfer the credits they earned at the school into a B.S. Degree in Nursing or other advanced degree. But other colleges didn’t accept credits from an unaccredited program. As a result, students went heavily into debt to enroll in a program that ended up being a dead end for most of them.
- The institution changed its nursing curriculum in midstream, forcing many of its students to go deeper in debt in order to retake courses that they had already passed. In addition, the school misled the New Mexico Board of Nursing by saying that these curricular changes would only affect new students, when in fact they applied to all students, including those who had already taken the classes.
- The school signed students up for high-cost private loans through its PEAKS Loan program without fully informing them of “the loan terms or informing students that the loans were not federal student loans.” For many of these students, the interest rates on the loans exceeded 14.5 percent. In addition, the institution signed some students up for these loans without telling them. Financial aid administrators “e-signed student loan documents without fully-informed consent and authorization from the student,” the lawsuit says.
Consumer Financial Protection Bureau Lawsuit Against ITT
The Consumer Financial Protection Bureau (CFPB) also sued ITT in February 2014, accusing the company of engaging in an elaborate scheme to “coerce” the generally low-income students who enrolled into taking out institutional private loans that “included 10 percent origination fees and interest rates as high as 16.25 percent” to fill the gap between what students owed and the federal financial aid they received. According to the lawsuit, company officials knew that the majority of students who took out these loans would never be able to repay them.
How This Scheme Allegedly Worked
Because ITT’s programs were so expensive, students were generally left with a funding gap even after maxing out their federal loans. To fill this gap, ITT provided students with what appeared to be a generous offering – short-term loans that were interest free. But there was a catch. These loans had to be fully repaid within nine months. Knowing that most students wouldn’t be able to meet this requirement, ITT essentially gave students a choice once the temporary loans came due: drop out or pay off this debt by taking out much more expensive and onerous private loans through its institutional PEAKS Loan program. ITT made these loans even though it projected that more than 60% of them would end up in default. If that wasn’t bad enough, the schools’ financial aid administrators weren’t always upfront with students about the terms of the loans. “As a result of being pressured into do so by ITT, approximately 8,600 consumers entered into loans they could not afford, did not want, did not understand, or didn’t even know they had,” the CFPB’s lawsuit states. Unsurprisingly, at least two-thirds of these loans have not yet been repaid. Meanwhile, collection agencies have been pursuing these students, whose credit records have been ruined.
U.S. Securities and Exchange Commission Lawsuit Against ITT and its Leaders
In May 2015, the U.S. Securities and Exchange Commission (SEC) filed a lawsuit against ITT and two of its leaders, accusing them of engaging “in a fraudulent scheme to defraud ITT investors by concealing the extraordinary failure” of its institutional private loan program, and the harm it was doing to the company’s finances.
How This Scheme Allegedly Worked
In order to get banks to make PEAKS Loans to its students, ITT had to guarantee the loans against default. As a result, the amount that ITT had to pay to these lenders grew as more and more of these loans defaulted. To avoid having to make these massive payments, company officials came up with a plan: they would secretly make the minimum payments on the loans of students who were in danger of defaulting without disclosing that they were doing so to investors. While this strategy paid off in the short term by at least temporarily preventing these loans from going into default, it actually made things much worse for the company over the long haul because interest continued to accrue on these loans. The added interest “increased ITT’s overall PEAKS liability,” the lawsuit states, and “these effects compounded each period that ITT continued the practice.” Because ITT left them in the dark, ITT’s shareholders didn’t have any idea about how poorly these loans were performing. But eventually, the loan companies that held the PEAKs Loans forced ITT to come clean and abandon the practice. At that point, ITT’s stock price plunged, “falling by approximately two-thirds,” the lawsuit states.
Former ITT Official’s False Claims Lawsuit
In January, a federal district court in Tallahassee, FL unsealed a False Claims lawsuit that Rodney Lipscomb, who was the dean of academic affairs at ITT’s Tallahassee campus from 2011 to 2015, filed against the school, accusing it of engaging in a variety of recruiting and financial aid abuses.
Most Disturbing Allegations
- The school routinely enrolled students who couldn’t benefit from its programs. For example, the institution admitted a blind student into a computer networking program that required students “to read codes, and identify various plugs and wires by color in order to repair technical issues with computers.” When Lipscomb heard that the school was pressuring an admissions representative to enroll the student, he brought his objections to the director of recruiting, who told him “that it was not ITT’s problem or place to dissuade the student from enrolling in the program.” Predictably, this student dropped out of the school within four weeks, but not before he had taken out “an entire quarter’s worth of student loan debt” that he would have to repay even though he hadn’t received any benefit from the program.
- Recruiters for the school regularly misled prospective students about “the programs they offer, and the training they provide.” For instance, admissions representatives were told to deceive prospective students by telling them that the institution’s criminal justice program prepared students for “jobs doing forensic science work like they see in CSI Miami.” In reality, students need to take advanced chemistry and other science courses, which were not offered at the school, to become “a crime scene investigator or forensic scientist.”
- Financial aid administrators at the school routinely encouraged students to lie on their federal student aid application forms about their income and the number of dependents in their household so that they could receive larger financial aid awards from the government. They were also instructed to tell prospective students who were nervous about taking on debt to attend the school that “nobody pays back the loans anyways.”
The Massachusetts Attorney General’s Lawsuit Against ITT
In April, Maura Healey, Massachusetts’ Attorney General, sued ITT’s schools in the state “for engaging in unfair and harassing sales tactics and misleading students about the quality of its Computer Network Systems program, and the success of the program’s graduates in finding jobs.”
Most Disturbing Allegations
- The schools routinely misled prospective students about their success in placing graduates of the Computer Network Systems program into jobs related to their fields of study. While the institutions’ recruiters claimed that 80 to 100 percent of program’s graduates were employed in jobs in or related to their field of study, “the real placement rates were actually 50 percent or less at each campus.” The schools appeared to count any job involving computers as being a successful placement. For example, the company “claimed that jobs simply selling computers at big box stores counted as placements.” They also credited the schools for graduates who had internships or short-term jobs lasting less than a week.
- The schools regularly enrolled students who were unlikely to benefit from the programs being offered. Former recruiters told the AG of “prospective students who had fourth grade reading levels or learning disabilities that would have prevented them from succeeding at ITT, who were nevertheless enrolled.” Predictably, these students were left off worse than before they enrolled – with “substantial debt” but without the training they needed to get jobs that would help them pay it off.
- These schools routinely deceived prospective students about the quality of the programs they offered. While the institutions promised that they would provide “practical, hands-on experience,” students told the AG that the “hands-on instruction was nonexistent or involved the use of outdated technology.” Instructors often didn’t know much about the subjects they were teaching. Some would read straight from the text book, while others would tell students to “google the answers.” A few didn’t bother showing up for class at all.