One of the most recognizable brands in the for-profit education industry is now facing fraud charges after the Securities and Exchange Commission (SEC) filed a civil complaint in an Indiana federal court on Tuesday.
The agency claims that ITT Educational Services, Inc. and a pair of executives intentionally misled investors and financial analysts about the failure of ITT’s private student loan programs. The court filing asserts that ITT even went so far as to start secretly making payments on behalf of students who were in default so as to avoid having to make far larger payments to the investors who had backed the loans. It’s an unusual twist on a common story in the for-profit industry, where reliance on federal tax dollars for revenue means that companies have significant incentive to manipulate statistics about how their students fare.
An SEC victory would bring relief to ITT’s investors, who suffered losses when the student loan information eventually came to light and sent the firm’s stock price tumbling. But ITT’s students and graduates, whose inability to repay their loans on time is the prime mover behind the alleged fraud, won’t see their debts alleviated or their job prospects enhanced.
The company disputed the fraud charge in a statement Tuesday, calling it an “unfair case” and welcoming the chance “to have the court clear our reputation that has been unnecessarily endangered by the SEC’s action.”
The case revolves around a pair of lending programs that ITT initiated when private student loan companies stopped providing credit to for-profit students. ITT promised investors who backed its in-house loan system that it would instantly repay their investments should the loan portfolios go sour. When ITT students started defaulting on those loans in large numbers, the school suddenly faced nearly $150 million in such guarantee payments.
Rather than pay the guarantees, the SEC filing alleges, ITT executives decided to simply make loan payments on behalf of students who would otherwise have defaulted. It did not inform the students in question that those payments were being made, according to the complaint.
The SEC further alleges that the company lied about the defaults and payments in multiple corporate financial filings and on a key earnings call with analysts in January 2013. The company’s stock closed up 18 percent on the day of that call, according to the filing, after falling significantly at the beginning of the day.
Whatever harm the company’s actions allegedly caused to investors, many college students and graduates might thrill at the idea of their school deciding to quietly cover their loan payments. A record number of Americans are unable to keep up with payments on their share of a student loan bubble that now far exceeds $1 trillion in total value.
Department of Education data from last summer showed that default rates continued to rise in fiscal year 2014, and that 2.5 million students who borrowed from the department’s direct loan program were in default at that time. Even more are on the brink, having missed enough payments to be labeled “delinquent” but not enough to qualify as being in default. After excluding those who are not expected to make the traditional minimum monthly payment — students who are still in school, in a grace period after graduation, or enrolled in an income-based repayment program — roughly one in every three student loan borrowers who is supposed to be making payments is delinquent.
Defaults can happen for a variety of reasons, but the core driver of a student debtor falling six months behind on her loans is being unable to find a job that pays enough. In severe economic downturns and tight job markets, a jump in defaults doesn’t necessarily mean that schools are failing to produce graduates who will make enough money to repay their loans.
But in the case of the for-profit college sector, where default rates have always been higher than at traditional higher-ed institutions, it’s common for schools to produce more defaulted borrowers than actual graduates. One 2013 study found that 44 percent of for-profit colleges have a default rate higher than its graduation rate. If students are more likely to default on their loans than to ever finish their degree, that’s an indicator of deeper problems at a school than what a poor economy can explain.
For-profit schools get nearly all of their revenue from federal tax dollars. They sometimes take extreme steps to make their student body look more economically viable than it actually is. Corinthian Colleges, the bankrupt for-profit ed giant at the heart of the single biggest student loan repayment crisis that the Department of Education has ever faced, first got into trouble over allegations that it bribed employers to create make-work jobs for graduates so that the school could inflate its statistics on how graduates fair in the job market.