Thank you all for joining us today. And thank you to Attorney General King, Attorney General Madigan, Attorney General Miller, and Attorney General Conway for being with us.
Financial products can be a way for Americans to achieve dreams: to buy a home, to start a small business, and importantly, to go to school. People from all walks of life go to college to climb the economic ladder and it is important that markets work properly to allow them the opportunity to realize their dreams.
But as we all know from the financial crisis, normal market forces do not always work. In those heady years, we saw how some lenders made money by setting up borrowers to fail with mortgages they could not afford. Recently, we are finding some of those same mismatched incentives when it comes to the for-profit college market, which saw huge gains in the lead-up to the financial crisis, with enrollment more than tripling between 1998 and 2008.
What kinds of people are these for-profit colleges recruiting? They seek aspiring leaders who are eager to be one of the first in their families with a college degree. They recruit single mothers in the midst of their careers looking to better their lives. And they recruit the newly unemployed who are looking to rejuvenate their employment prospects in a tough job market.
These consumers are exactly the types of people who might gain the most from quality programs in higher education. But the corporations that own these colleges often seem to care more about dollar signs than diplomas.
At the Bureau, we believe many for-profit colleges may be saying one thing to students as they load them up with debt but saying another thing to investors as they sell their business model. In the end, the outcomes for many of these students do not live up to the promises the schools made to them. According to the National Center for Education Statistics, for bachelor’s degree students starting a four-year program in 2004, just 28 percent of students attending for-profit institutions graduated within six years. This was half the rate for students at four-year public institutions.
This is truly an American tragedy. Students may think they are climbing a ladder to success when instead they are getting knocked down, crushed by student debt that does not help them gain a better job or a better life. Because of these distorted incentives, we believe there may be significant consumer protection risks.
So we are looking at a wide range of the risks facing students, who are often pressured to use up valuable government benefits and then take out substantial federal and private loans. We have even heard troubling stories in this sector about high-pressure tactics that are employed to coax veterans to hand over their GI Bill benefits.
Today, we are taking our first public enforcement action against a for-profit college. We have filed a lawsuit against ITT Educational Services, one of the largest and most expensive for-profit chains in the country. Its schools are known by various names, such as ITT Tech and Daniel Webster College, and they have enrolled tens of thousands of students online or at about 150 institutions in nearly 40 states.
We believe this company misled students by overstating their job prospects and likely salaries upon graduation. Then it pushed them into high-cost private loans that were likely to end in default. Most of ITT’s students borrow large sums of money from the federal government to pay its high tuition costs. For many, though, federal loans do not cover the full costs. Students face a “tuition gap” that requires them to find other sources of funding.
To fill this gap, ITT set up its own private student loan programs. But these private loans were not available to students until their second year at ITT. To encourage new students to enroll and to bridge that tuition gap, ITT provided students with a zero-interest loan typically payable in full at the end of their first academic year through a program that it called “Temporary Credit.”
We believe ITT knew from the outset that many students would not be able to repay their Temporary Credit balances or fund the next year’s tuition gap. ITT knew students would have to take out one of the high-cost private student loans it had set up for just this purpose. But ITT kept students in the dark about its lending model that it freely shared with investors.
In fact, we found that ITT used its financial aid staff to rush students through an automated application process without affording them a fair opportunity to understand the loan obligations involved. In some cases, students did not even know they had a private student loan until they started getting collection calls.
For some borrowers, these loans came with interest rates of more than 16 percent over ten years, which is like financing your college education on your credit card. These expensive loans were often destined to default, and ITT knew that. In fact, its own analysis projected a default rate of 64 percent on these loans – key information that was never shared with the borrowers.
ITT students who wanted to transfer to a more affordable public or not-for-profit school would have found it very challenging to do so, as their ITT credits would not transfer.
Upon graduation, ITT students faced another sobering reality. ITT promised an education that would land students in a good job and increase their potential earnings. In reality, many students spent their time and money on programs that did not live up to those promises. So although ITT marketed itself as improving consumers’ lives, it was really just improving its bottom line. The result was that while many of the students got poorer, the investors and shareholders got richer.
Our action today is just the first step the Consumer Bureau is taking to address consumer issues in the for-profit college market. It builds on work that is already underway by a number of state attorneys general, and which we are undertaking in close partnership with them. California, Massachusetts, Colorado, New York, and Illinois are also litigating against various for-profit institutions, and I encourage you to take a closer look at their cases. As my colleagues from New Mexico, Illinois, Kentucky, and Iowa will be telling you today, they also have grave concerns about many of the schools operating in this sector.
Moving forward, the Consumer Bureau will subject the financial products and services offered by for-profit colleges and their partners to the same standards as any other consumer financial product or service. Consumers need to know what they are paying for and they need accurate and transparent terms. Unfair, deceptive, or abusive acts and practices will not be tolerated.
I would now like to turn it over to Attorney General King from New Mexico. Thank you.
The Consumer Financial Protection Bureau (CFPB) is a 21st century agency that helps consumer finance markets work by making rules more effective, by consistently and fairly enforcing those rules, and by empowering consumers to take more control over their economic lives. For more information, visit www.consumerfinance.gov.