A Colorado court recently issued a blockbuster decision in favor of students, represented by the State Attorney General’s Office, and against college operators who got rich by tricking low-income students into taking out loans to attend CollegeAmerica, Independence University, and other profit-driven schools associated with an umbrella corporation, the Center for Excellence in Higher Education (CEHE). During the period when the court found ongoing consumer fraud, which extends back to 2006, CEHE took in at least $232,918,669 from student tuition and fees, the vast majority of which consisted of federal aid and loan dollars from the Department of Education.
In effect, taxpayers paid CEHE’s owners richly to perpetuate an ongoing scheme to defraud students. In return, CEHE evaded paying corporate taxes by taking advantage of lax IRS oversight to convert from for-profit to nonprofit tax exempt status in 2013, even while CEHE continued to divert revenue for owners’ private benefit: a trick that has now spread to other covert for-profit colleges.
Senator Elizabeth Warren has recently called on the U.S. Department of Education to hold the owners and executives of predatory colleges personally responsible for the harm they cause when they defraud students. And in fact, a new report from former Department of Education attorneys describes the secretary’s broad authority to recover ill-gotten gains, such as those accrued by CEHE’s owners while they were defrauding students. According to the report, Secretary DeVos could use the federal government’s extensive debt collection powers to claw back millions in federal aid dollars that were pocketed by CEHE’s effective owner Carl Barney and CEHE CEO Eric Juhlin as the “architect” and principal enabler, respectively, of CEHE’s lengthy consumer fraud.
At a minimum, Secretary DeVos must now provide relief for students defrauded by CEHE, and cut CEHE’s owners off from further enriching themselves with federal funds. This call for action is not a request, but rather is required by law: a letter just released by education advocates details how and why the Department of Education must act, now that a court has issued findings of fact and conclusions of law against CEHE as an institution, and against Barney and Juhlin as individuals.
CEHE’s False Promises
CEHE disproportionately enrolled low-income women, mothers, and minority students with marketing campaigns that focused on false promises of higher salaries and better jobs. To convince disadvantaged students to take on debt and enroll in CEHE’s programs, advertising campaigns falsely promised the school would provide “solutions to the recession, to unemployment, to job insecurity” and executives saw salary-related promises as “the most important and compelling” part of CEHE’s pitch.
As good as CEHE’s promises sounded, they were false, and executives knew it. For two decades, CEHE’s leaders tracked, analyzed, and buried data that conclusively revealed that enrolling at CEHE was a terrible economic decision for students and did not lift their salaries as promised. But instead of correcting false advertising claims and improving CEHE’s educational services, CEO Eric Juhlin and board chairman Carl Barney doubled down on fraud. They showed prospective students future salaries that were double what graduates actually earned. They pushed a high-pressure sales process designed to sign up students and package their federal loans all within two and a half hours. They used quota systems to ensure that sales staff had no job security unless they ignored all morals and focused on numbers. They trained admissions staff to “gain the trust” of prospective students, in order to better violate that trust later on in the sales process. Ultimately, the court found Juhlin and Barney personally responsible for perpetrating “unconscionable” acts of fraud.
The Students Harmed
CEHE’s marketing machine targeted Stacey Potts in 2009, when she was struggling to find work during a recession. The ads Potts saw claimed that graduates from CEHE-affiliated medical programs were highly employable, and a CEHE sales agent (who has to meet enrollment quotas) assured her that CEHE could help her earn $35,000 a year to provide more financial stability for her family.
When Potts graduated with a “medical specialties” degree, however, she owed $28,000 in student loans, and the only job she could find was a cashier position paying $8 an hour—$3 an hour less than she earned before enrolling with a CEHE school. The kicker? The program that she had enrolled in was CEHE’s best seller, and CEHE executives knew that graduates earn less than a high-school degree-holder.
Altogether, the court reviewed evidence of fraud that spanned two decades across four schools: CollegeAmerica, Independence University, Stevens-Henager College, and California College San Diego. In a single year, these schools collectively enrolled about 13,000 students. CEHE’s enrollment statistics indicate that its fraud disproportionately impacted low-income students (80 percent qualify for Pell grants), students from underrepresented minority groups (40 percent identify as minority students, primarily African American and Hispanic), and female students (68 percent are women, many of whom are single mothers).
Across decades of abuse, CEHE’s fraud harmed hundreds of thousands of disadvantaged students and diverted millions of taxpayer dollars away from more worthy higher education programs—such as Pell Grants and Federal Family Education Loans—and into the pockets of CEHE executives.
Relief for Students and Taxpayers
Ultimately, federal intervention is needed to cancel the student loans that enriched CEHE executives while imposing a life-long debt sentence on the victims of their fraud. Secretary Betsy DeVos so far has nickel-and-dimed students by reducing the relief available to them under the federal borrower defense program. However, CEHE’s fraud has been so long-lasting that DeVos is bound by a 1995 rule that requires the federal government to cancel loans when they are based on violations of state law. DeVos met a sharp rebuke in an earlier case, Vara v. DeVos, when she tried to ignore a Massachusetts court finding that opened a path to borrower defense relief for students.
Defrauded students undoubtedly deserve loan relief. Once this is granted, the next question is, who will pay for it—taxpayers, or the wrongdoers who enriched themselves by ripping off students? Whenever the secretary grants borrower defense relief, she has the authority to recoup the cost of discharged loans from the schools that broke the law. In the past, borrower defense has only been granted to students whose schools have already shut down and filed for bankruptcy. CEHE is still in business, and so with prompt action, the secretary could ensure that CEHE and its owners foot the bill for loan relief, instead of sticking taxpayers with the cost.
Cutting Off the Flow of Federal Aid
The mechanism for shutting the spigot of federal funds for CEHE and its partners already exists. In order for schools to be eligible to receive funds under Title IV of the Higher Education Act, they must follow a set of rules designed to limit waste, fraud, and abuse. Among these rules: don’t engage in fraudulent practices or affiliate with known perpetrators of fraud. In light of the Colorado decision, any school that continues to employ or contract with Barney, Juhlin, or CEHE is in violation of their agreement to receive federal funds.
CEHE’s contractual affiliations run deep through the ecosystem of for-profit higher education. In addition to the four CEHE schools—CollegeAmerica, Independence University, Stevens-Henager College, and California College San Diego—the anti-fraud rule implicates the federal aid eligibility of National American University, a financially troubled for-profit chain which last year entered into a $8.5 million loan contract with CEHE.
CEHE’s decades of fraud have come to light at a time when many actors in the for-profit college sector seem to be following a similar playbook. Unscrupulous tactics deployed by Barney and Juhlin—misrepresenting outcomes, feigning nonprofit status, pressuring admissions representatives to sell prospective students by any means necessary—have become increasingly commonplace as enforcement has shriveled. The Colorado attorney general should be commended for doggedly pursuing justice and obtaining a victory in court. But the real value of the victory will be determined not by the court, but rather by the actions that follow from the Department of Education.