In last week’s report from The Century Foundation (TCF) analyzing fraud complaints from student loan borrowers, Yan Cao and Tariq Habash identify the companies and colleges that have generated the most borrower requests for loan cancellation based on fraud by the school. Most of the complaints—more than 98 percent of them—are about for-profit colleges. And the schools with the most complaints are the for-profit colleges that have been on the radar screen of law enforcement and consumer advocates for some time, including Corinthian Colleges, ITT Tech, DeVry, the Art Institutes, University of Phoenix, Westwood, and Kaplan University.
Among the fifty-two companies with twenty complaints or more, there are five nonprofit institutions (no public ones). Some of those nonprofit schools were known bad actors, too, like Everglades College and Remington College, which were both featured in TCF’s 2015 report, “The Covert For-Profit.” Covert for-profit colleges claim to be nonprofit but continue to be controlled by people with a direct or indirect financial interest in maximizing the school’s revenues. Remington College, for example, is controlled by an Arkansas investment firm, Stephens Inc., which uses offshore trusts and shell companies to dodge taxes, as the New York Times revealed last week as part of its ongoing investigation of the Paradise Papers.
But Wright Career College—the nonprofit with the most borrower defense claims as of August 15, 2017—was a sleeper until it emerged in the complaint data.
Wright Career College was the business name of Mission Group Kansas, Inc., a nonprofit corporation. Wright enrolled three thousands students at five campuses in Kansas, Nebraska, and Oklahoma in the 2014–15 academic year. By October 2014, 199 of its former students had come forward to sue the school, alleging that Wright “entices prospective students to enroll and apply for student loans they cannot pay back through a systematic, deceptive marketing scheme.” Wright initially denied wrongdoing, pointing to its accreditation by Accrediting Council for Independent Colleges and Schools (ACICS), which was then a government-recognized accreditor. But then, in April 2016, the college shut its doors and sought bankruptcy protection. Insurers for Wright and Mission Group Kansas eventually paid $3 million to settle the former students’ claims.
Our post-mortem research on the school reveals that while Wright claimed to be operating as a nonprofit, it may have actually been one of the earliest covert for-profit colleges participating in the federal student aid program.
While Wright claimed to be operating as a nonprofit, it may have actually been one of the earliest covert for-profit colleges participating in the federal student aid program.
Wright Career College got its start in 1989, when James Miller, Jr. gained a controlling interest in a school based in Kansas City, Missouri that he re-named Wright Business College, and later Wright Career College. The environment for for-profit higher education at the time was hostile; the Ronald Reagan administration had sounded the alarm over the outsized role that for-profit schools had played in the dramatic rise in defaults on student loans in the 1980s. Calling the behavior of for-profit schools shameful and tragic, Secretary of Education William Bennett wrote in a letter to Senator Edward Kennedy that investigations revealed stories of “semi-literate high school dropouts lured to enroll in expensive training programs with false promises of lucrative jobs, only to have their hopes for a better future cruelly dashed,” as well as “falsified scores on entrance exams, poor quality training, and harsh refund policies.” The scandals eventually led to reforms adopted by Congress and signed into law by George H. W. Bush in 1992.
Among the 1992 reforms was a requirement aimed at ensuring that for-profit schools had at least some students who were affirming the value of the education by paying school costs out of pocket or with the help of employers. The so-called “85–15 Rule” required for-profit schools to show that at least 15 percent of their revenue came from sources other than federally funded Higher Education Act programs. Just before the 85–15 rule was about to take effect in 1994, Miller, the owner of Wright Career College, filed an application with the IRS to convert the school—which relied heavily on federal grants and loans—into a nonprofit that would not be subject to the requirement. In its application for tax-exempt status, the owners describe the impending 85–15 rule as the reason for their rush to convert. Word of this regulatory evasion tactic must have spread quickly, because Wright’s lawyers noted, in the school’s nonprofit application to the IRS, that they knew of “several other schools that recently converted.”
A good-faith conversion to nonprofit control can be a good development for students and the public. Nonprofits commit all of their revenue to their educational or charitable purpose, and the adoption of nonprofit accountability is designed to eliminate the conflicts of interest that incentivize some for-profit school owners to overcharge students or under-invest in a school’s educational programs. In a legitimate nonprofit, the controlling board lacks ownership-like financial interests. But from its earliest years, rather than a having a financially disinterested board of trustees, much of Wright Career College’s board consisted of paid staff members, including James Miller himself, his former wife Gayle Miller, and John Mucci, all of whom continued to sit on the school’s governing body until it closed last year. James Miller served as CEO, Gayle Miller as vice president and then trustee, and John Mucci as president. Tax filings from 2014, uncovered in Mucci’s petition to reduce his alimony obligations, revealed that James Miller, Jr. ($743,295), Gayle Miller ($122,283), and John Mucci ($241,719) collectively paid themselves over $1 million from the budgets of Wright-related organizations, even as legal challenges mounted against the bankruptcy-bound school.
Ronald Holt—a Missouri-based attorney who represents for-profit colleges and works closely with the national for-profit college lobbying organization—also sat on the board continuously since 1997 and, in 1999, began intermittently receiving payment for both his time and legal guidance to Wright. As board members and employees, the Millers and other Wright affiliates could direct institutional funds into their own salaries while claiming tax-exempt status for the organizations they closely controlled.
Wright Career College also contracted extensively with for-profit corporations owned by the college’s trustees. Between 2007 and 2013, Wright paid $14 million to the Miller-owned corporation Media Resources Inc. reportedly for advertising expenses, on top of the over $2.6 million paid directly to the couple as salaries during this period. In 2012, approximately 10 percent of Wright’s $37 million operating budget went into bank accounts the Millers controlled. In response to an inquiry from TCF, Wright’s attorney insisted that these expenditures were at or below market rates.
In the 1994 back-and-forth between the IRS and Wright over the conversion, there was plenty of evidence that the owners were intent on maintaining ownership-like control. In three letters sent to Miller between September and November, specialist Rita Zasuly in the Dallas, Texas office of the IRS questioned the fairness of the financial appraisal Wright provided, pushed Miller to expand the nonprofit’s four-person board, and inquired about the independence of Wright’s outside contractors.
In response to the IRS’s questions, Miller and his team made some changes to the organization’s proposal and promised to improve, especially concerning independent oversight. In particular, Miller’s team said in 1994 that the bylaws had been changed to expand the board to at least nine members, and that the organization “was attempting to fill” the five vacancies on the board. After this promise, as well as additional letters and phone calls, the IRS approved the group’s tax-exempt status. But it was not until 2011—seventeen years later—that Wright actually got around to meeting this promise.
Conversion to nonprofit status accomplished Wright’s goal of skirting the 85–15 Rule, which would have limited the school’s reliance on federal aid, and the school took maximum advantage of this freedom. During the 2013–14 school year, a whopping 95 percent of first-time, full-time Wright students received federal Pell grants, compared to just a third on average at nonprofit institutions, 38 percent at public ones, and 74 percent at for-profits. Wright’s student loan default rate of 21 percent reported last year far exceeds both the national average of 12 percent, as well as the 16 percent average among for-profit institutions.
The experience of Brian Wroten, a former student, illustrates why Wright’s default rates are high. Brian saw a television ad for Wright while he was recovering from cancer treatment. He enrolled after a recruiter told him that students graduated to starting salaries in the $60,000–$70,000 range, and that Brian would soon be making over $100,000. At Wright, Brian, who had worked as a certified electrician and in sales prior to enrolling, observed that many fellow students “couldn’t write legibly or do basic math.” After completing his courses, Brian learned that Wright recruiters had lied about his earning potential: medical employers were wary of Wright graduates, and even if he could find a medical technician job, starting salaries were actually in the range of $40,000—barely enough for Brian to stay current on his ballooning student debt. Brian fell back on his skills as a handyman, and describes Wright as “the biggest mistake of my life.” Based on data from the Department of Education and published by TCF, former Wright students like Brian filed forty-four fraud-based claims for debt relief as of August 15, 2017, making it the nonprofit school that has garnered the highest number of such claims. Humphrey, Farrington & McClain, the law firm that represented Wright students in a case against the school, is preparing material for an additional 182 students’ borrower defense claims, including Brian’s.
Based on data from the Department of Education and published by TCF, former Wright students like Brian filed forty-four fraud-based claims for debt relief as of August 15, 2017, making it the nonprofit school that has garnered the highest number of such claims.
When Wright closed in spring 2016, it left staff members suddenly unemployed and it stranded students in the midst of finals, unsure whether they would be able to transfer their credits to another institution, and uncertain whether they would be able to continue their educations. Before closing, Wright appeared on the U.S. Department of Education’s list of colleges under scrutiny for financial reasons, but the department’s heightened monitoring of Wright’s cash flow did not protect unsuspecting students. Neither did Wright’s accreditor, ACICS, which subsequently lost recognition as a gatekeeper of federal funds in August 2016 after the Department of Education found that it consistently failed to protect students and taxpayers from problem schools.
Now, as former Wright students seek relief in numbers that are unsurpassed among other nonprofit institutions, regulators should maintain a watchful eye on other known bad actors seeking to cloak themselves with nonprofit status.
Click here to view and download the full data received in response to TCF’s public records request.
Editors’ Note: In our original version of this article, we mistakenly referred to an alimony modification as James Miller’s. The petition was John Mucci’s. This has been corrected in the text. Furthermore, we have added new information that Brian Woten is among 182 Wright students currently working with Humphrey, Farrington & McClain to file additional borrower defense claims in the near future.
Tags: higher education, covert for-profit, for profit college
Was Wright Wrong? Early Warnings of Covert For-Profit Colleges
In last week’s report from The Century Foundation (TCF) analyzing fraud complaints from student loan borrowers, Yan Cao and Tariq Habash identify the companies and colleges that have generated the most borrower requests for loan cancellation based on fraud by the school. Most of the complaints—more than 98 percent of them—are about for-profit colleges. And the schools with the most complaints are the for-profit colleges that have been on the radar screen of law enforcement and consumer advocates for some time, including Corinthian Colleges, ITT Tech, DeVry, the Art Institutes, University of Phoenix, Westwood, and Kaplan University.
Among the fifty-two companies with twenty complaints or more, there are five nonprofit institutions (no public ones). Some of those nonprofit schools were known bad actors, too, like Everglades College and Remington College, which were both featured in TCF’s 2015 report, “The Covert For-Profit.” Covert for-profit colleges claim to be nonprofit but continue to be controlled by people with a direct or indirect financial interest in maximizing the school’s revenues. Remington College, for example, is controlled by an Arkansas investment firm, Stephens Inc., which uses offshore trusts and shell companies to dodge taxes, as the New York Times revealed last week as part of its ongoing investigation of the Paradise Papers.1
But Wright Career College—the nonprofit with the most borrower defense claims as of August 15, 2017—was a sleeper until it emerged in the complaint data.2
Wright Career College was the business name of Mission Group Kansas, Inc., a nonprofit corporation. Wright enrolled three thousands students at five campuses in Kansas, Nebraska, and Oklahoma in the 2014–15 academic year.3 By October 2014, 199 of its former students had come forward to sue the school, alleging that Wright “entices prospective students to enroll and apply for student loans they cannot pay back through a systematic, deceptive marketing scheme.”4 Wright initially denied wrongdoing, pointing to its accreditation by Accrediting Council for Independent Colleges and Schools (ACICS), which was then a government-recognized accreditor.5 But then, in April 2016, the college shut its doors and sought bankruptcy protection.6 Insurers for Wright and Mission Group Kansas eventually paid $3 million to settle the former students’ claims.7
Our post-mortem research on the school reveals that while Wright claimed to be operating as a nonprofit, it may have actually been one of the earliest covert for-profit colleges participating in the federal student aid program.
Wright Career College got its start in 1989, when James Miller, Jr. gained a controlling interest in a school based in Kansas City, Missouri that he re-named Wright Business College, and later Wright Career College.8 The environment for for-profit higher education at the time was hostile; the Ronald Reagan administration had sounded the alarm over the outsized role that for-profit schools had played in the dramatic rise in defaults on student loans in the 1980s. Calling the behavior of for-profit schools shameful and tragic, Secretary of Education William Bennett wrote in a letter to Senator Edward Kennedy that investigations revealed stories of “semi-literate high school dropouts lured to enroll in expensive training programs with false promises of lucrative jobs, only to have their hopes for a better future cruelly dashed,” as well as “falsified scores on entrance exams, poor quality training, and harsh refund policies.”9 The scandals eventually led to reforms adopted by Congress and signed into law by George H. W. Bush in 1992.
Among the 1992 reforms was a requirement aimed at ensuring that for-profit schools had at least some students who were affirming the value of the education by paying school costs out of pocket or with the help of employers. The so-called “85–15 Rule” required for-profit schools to show that at least 15 percent of their revenue came from sources other than federally funded Higher Education Act programs.10 Just before the 85–15 rule was about to take effect in 1994, Miller, the owner of Wright Career College, filed an application with the IRS to convert the school—which relied heavily on federal grants and loans—into a nonprofit that would not be subject to the requirement.11 In its application for tax-exempt status, the owners describe the impending 85–15 rule as the reason for their rush to convert. Word of this regulatory evasion tactic must have spread quickly, because Wright’s lawyers noted, in the school’s nonprofit application to the IRS, that they knew of “several other schools that recently converted.”
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A good-faith conversion to nonprofit control can be a good development for students and the public. Nonprofits commit all of their revenue to their educational or charitable purpose, and the adoption of nonprofit accountability is designed to eliminate the conflicts of interest that incentivize some for-profit school owners to overcharge students or under-invest in a school’s educational programs. In a legitimate nonprofit, the controlling board lacks ownership-like financial interests. But from its earliest years, rather than a having a financially disinterested board of trustees, much of Wright Career College’s board consisted of paid staff members, including James Miller himself, his former wife Gayle Miller, and John Mucci, all of whom continued to sit on the school’s governing body until it closed last year. James Miller served as CEO, Gayle Miller as vice president and then trustee, and John Mucci as president. Tax filings from 2014, uncovered in Mucci’s petition to reduce his alimony obligations, revealed that James Miller, Jr. ($743,295), Gayle Miller ($122,283), and John Mucci ($241,719) collectively paid themselves over $1 million from the budgets of Wright-related organizations, even as legal challenges mounted against the bankruptcy-bound school.12
Ronald Holt—a Missouri-based attorney who represents for-profit colleges and works closely with the national for-profit college lobbying organization13—also sat on the board continuously since 1997 and, in 1999, began intermittently receiving payment for both his time and legal guidance to Wright.14 As board members and employees, the Millers and other Wright affiliates could direct institutional funds into their own salaries while claiming tax-exempt status for the organizations they closely controlled.
Wright Career College also contracted extensively with for-profit corporations owned by the college’s trustees. Between 2007 and 2013, Wright paid $14 million to the Miller-owned corporation Media Resources Inc. reportedly for advertising expenses, on top of the over $2.6 million paid directly to the couple as salaries during this period. In 2012, approximately 10 percent of Wright’s $37 million operating budget went into bank accounts the Millers controlled. In response to an inquiry from TCF, Wright’s attorney insisted that these expenditures were at or below market rates.
In the 1994 back-and-forth between the IRS and Wright over the conversion, there was plenty of evidence that the owners were intent on maintaining ownership-like control. In three letters sent to Miller between September and November, specialist Rita Zasuly in the Dallas, Texas office of the IRS questioned the fairness of the financial appraisal Wright provided, pushed Miller to expand the nonprofit’s four-person board, and inquired about the independence of Wright’s outside contractors.
In response to the IRS’s questions, Miller and his team made some changes to the organization’s proposal and promised to improve, especially concerning independent oversight.15 In particular, Miller’s team said in 1994 that the bylaws had been changed to expand the board to at least nine members, and that the organization “was attempting to fill” the five vacancies on the board. After this promise, as well as additional letters and phone calls, the IRS approved the group’s tax-exempt status. But it was not until 2011—seventeen years later—that Wright actually got around to meeting this promise.
Conversion to nonprofit status accomplished Wright’s goal of skirting the 85–15 Rule, which would have limited the school’s reliance on federal aid, and the school took maximum advantage of this freedom. During the 2013–14 school year, a whopping 95 percent of first-time, full-time Wright students received federal Pell grants, compared to just a third on average at nonprofit institutions, 38 percent at public ones, and 74 percent at for-profits.16 Wright’s student loan default rate of 21 percent reported last year far exceeds both the national average of 12 percent, as well as the 16 percent average among for-profit institutions.17
The experience of Brian Wroten, a former student, illustrates why Wright’s default rates are high. Brian saw a television ad for Wright while he was recovering from cancer treatment. He enrolled after a recruiter told him that students graduated to starting salaries in the $60,000–$70,000 range, and that Brian would soon be making over $100,000. At Wright, Brian, who had worked as a certified electrician and in sales prior to enrolling, observed that many fellow students “couldn’t write legibly or do basic math.” After completing his courses, Brian learned that Wright recruiters had lied about his earning potential: medical employers were wary of Wright graduates, and even if he could find a medical technician job, starting salaries were actually in the range of $40,000—barely enough for Brian to stay current on his ballooning student debt. Brian fell back on his skills as a handyman, and describes Wright as “the biggest mistake of my life.”18 Based on data from the Department of Education and published by TCF, former Wright students like Brian filed forty-four fraud-based claims for debt relief as of August 15, 2017, making it the nonprofit school that has garnered the highest number of such claims. Humphrey, Farrington & McClain, the law firm that represented Wright students in a case against the school, is preparing material for an additional 182 students’ borrower defense claims, including Brian’s.
When Wright closed in spring 2016, it left staff members suddenly unemployed and it stranded students in the midst of finals, unsure whether they would be able to transfer their credits to another institution, and uncertain whether they would be able to continue their educations. Before closing, Wright appeared on the U.S. Department of Education’s list of colleges under scrutiny for financial reasons, but the department’s heightened monitoring of Wright’s cash flow did not protect unsuspecting students.19 Neither did Wright’s accreditor, ACICS, which subsequently lost recognition as a gatekeeper of federal funds in August 201620 after the Department of Education found that it consistently failed to protect students and taxpayers from problem schools.21
Now, as former Wright students seek relief in numbers that are unsurpassed among other nonprofit institutions, regulators should maintain a watchful eye on other known bad actors seeking to cloak themselves with nonprofit status.
Click here to view and download the full data received in response to TCF’s public records request.
Editors’ Note: In our original version of this article, we mistakenly referred to an alimony modification as James Miller’s. The petition was John Mucci’s. This has been corrected in the text. Furthermore, we have added new information that Brian Woten is among 182 Wright students currently working with Humphrey, Farrington & McClain to file additional borrower defense claims in the near future.
Notes
Tags: higher education, covert for-profit, for profit college