Corinthian sued in latest for-profit college crackdown

The Consumer Financial Protection Bureau is suing Corinthian Colleges (COCO) for a slew of predatory practices, including inflating students’ job prospects and tuition.

In its complaint, the CFPB says Corinthian – which runs Everest, WyoTech, Heald College – paid employers to temporarily hire graduates and classified just one day of work as job “placement.”

The complaint also includes quotes from internal Corinthian documents instructing employees to target prospective students with “low self-esteem” and with “[m]inimal to non-existent understanding of basic financial concepts.”

The document goes on to say that Corinthan encouraged students to take out so-called Genesis loans to cover the funding gap between federal student loans and cost of tuition. Corinthian then reportedly purchased the Genesis loans and took “aggressive” actions to collect from students who were overdue, including pulling students out of class to talk money.

The for-profit college industry “has been under regulatory attack for some time,” points out Yahoo Finance Senior Columnist Michael Santoli. “One thing that we can really interpret from a lot of these investigations is that [these schools] were first marketing organizations and by far second an educational institution.”

A spokesman for Corinthian told the Wall Street Journal that the company disputes the allegations, and that the complaint is highlighting isolated incidents.

The CFPB lawsuit comes on the heels of a Department of Education lawsuit that Corinthian settled by agreeing to essentially sell and shutter its schools. States like Illinois banned Corinthian’s schools from accepting students during the wind down, but the Department of Education did not.

The problem may run deeper than the practices of these colleges as their actions seem to exploit the basic structure of higher education in the U.S.

“By utilizing whatever maximum federal loan guarantees [students] might be able to grab, [for-profit schools] are completely incentivized to overstate the benefits of this education,” said Santoli.

“These guys were basically laundering federal student loan money,” he added. “In a legal way, but that’s what these guys were doing.”

That’s a big deal, since for-profit colleges are gaining in popularity. Attendance at these schools has surged… up 225 percent in the past two decades. In the 2010-2011 school year 2.4 million students were enrolled; about 12% of the postsecondary population. These schools also receive upwards of $30 billion in taxpayer funded federal student loan money.

It’s important to note, though, that not all for-profit schools are engaging in scrutinized practices.

“That doesn’t’ mean the entire for-profit education industry should be painted with the same brush,” said Santoli. Certain schools, specifically the for-profit colleges that focus on trade skills, have met with some success. Similarly, studies have shown that students at for-profit schools are more likely to obtain a short-term degree than students at community college and are more likely to stay in school past their first year.

But overall, graduation rates and career success for far-profit graduates lag far behind graduates of traditional schools, and that means they’re likely to remain in the crosshairs of politicians and regulators.

“[With] the regulatory impetus from the Obama administration, and you even have a Democratic Senate that’s interested here, I do think the pressure is going to stay on this business,” said Santoli.

Democratic Senators have been particularly vocal about the fight against these schools. Iowa’s Tom Harkin, who leads the Senate committee on Health, Education, Labor, and Pensions (HELP) has spearheaded several investigations. Senate Majority Whip Dick Durbin responded to the CFPB suit against Corinthian by reprimanding the Department of Education for allowing Corinthian to continue accepting students after settling with the agency.

On the flipside, the game could change if Republicans win the Senate in November. The GOP has been less consistent with its stance on these schools, and the regulatory landscape could shift in a Republican-controlled Congress.

“It could cause a pop in in these for-profit stocks because it could mean the pressure will come off,” Santoli said. Corinthian could use the boost. As of Tuesday’s close the stock was worth just a dime after dropping some 95 percent in the past year.