For-profit education fraud and other types of education fraud not only deprive federal programs of much-needed funding but also almost universally harm students.
Unlike most other types of False Claims Act cases, education funding often involves loans that the government expects students to pay back over time. If the student fails to receive any real value from the loan, such as better career opportunities, then the for-profit university reaps the benefits while the government and students face the consequences.
Victims of predatory student lending suffer crippling debt. For example, in one case brought by thousands of students seeking relief from unpaid federal student loans to attend for-profit colleges, 96% of the 900 students who testified said that their lives were worse off than before they went to the school. Ninety-two percent reported experiencing physical or emotional harm.
Most of these students did not receive the education that was promised to them by for-profit institutions. As explained below, for-profit universities routinely engage in improper hard-sell recruiting tactics. They consistently misrepresent what the school will cost, the quality of the education provided, and employment outcomes.
The result is that the federal government lends money to students who are not put in a position to pay it back.
Federal Funding for For-Profit Education
Much of the tuition paid by students at for-profit colleges and universities comes from federal programs, such as Title IV funding, the Federal Family Educational Loan program, VA Loans, and the GI Bill.
Title IV funds are federal student aid funds administered by the U.S. Department of Education. Title IV funds include Pell Grants, Direct Subsidized/Unsubsidized Loans, Direct Graduate PLUS Loans, Direct PLUS Loans, Supplemental Educational Opportunity Grants (SEOG), Perkins Loans, and TEACH grants.
The Federal Pell Grant program provides financial aid to low-income students for postsecondary education. It is the largest need-based post-secondary student grant program in the country, with an annual operating budget of about $30 billion. Every year, thousands of students attend for-profit undergraduate institutions with their tuition paid for by federal Pell Grants.
An extension of the Pell Grant program is the Iraq and Afghanistan Service Grant (IASG) program, which provides non-need-based grants to students whose parent or guardian died while performing military service in Iraq or Afghanistan.
When applying for eligibility to receive Title IV funds, institutions must certify compliance with different statutes and regulations. For example, an institution that is to receive Pell Grants must certify compliance with the Higher Education Act. Failure to then comply with these regulations can form the basis for False Claims Act liability.
Although there are many potential theories of liability, four in particular have been the focal point of many False Claims Act cases and settlements with for-profit universities.
Incentive Compensation Ban
For-profit universities in receipt of federal funding are intended to provide a service, not sell a product. For this reason, the Higher Education Act prohibits paying recruiters, marketers, or admissions staff salaries or bonuses based on the volume of students they enroll.
For-profit institutions certify compliance with this rule as part of the Program Participation Agreement (PPA) required to be eligible to receive Pell Grant funds. Of course, the for-profit universities themselves are out to make money. It is in their name: “for-profit”.
If they sign the PPA with an intent to violate it by paying higher salaries, benefits, and incentives to staff based on increased enrollment numbers, then they may be in violation of the False Claims Act.
Violations of the incentive compensation ban have resulted in massive False Claims Act settlements, such as against the University of Phoenix for $67.5 million in 2009 and Education Management Corp. for $97.5 million in 2015.
Falsifying Applications for Unqualified Students
Only students who can be expected to benefit from the education being offered are eligible for federal grants and loans that pay for their tuition. Again, the government is not in the business of paying for free college; rather, it is lending money so that students can learn the skills to pursue a career that will enable them to succeed (and pay the money back) in the future.
For-profit colleges have violated the False Claims Act by helping unqualified students – such as individuals without high school diplomas or who don’t speak English – falsify their Pell Grant applications.
False Grades, Attendance Records, and Job Placement Rates
There is an expectation that students will advance through a program, graduate, find a job, and be able to repay the government loans. Therefore, their continuing eligibility for funding is based on them attending and passing the classes being offered.
Of course, once a student is enrolled in a program, an institution is disincentivized to report that the student stopped attending class or isn’t doing well because it wants to continue receiving the payments from the government. Thus, rather than tell the government that the student has essentially dropped or flunked out, the institution falsifies attendance records and grades.
These false reports fraudulently induce the government to continue lending to the student (often without the student’s knowledge, and of course the student will owe that money back later).
Similarly, schools advertise internship/externship programs and job placement rates to incentivize students to attend their programs. If the goal is to find a career, this is vital information for students choosing where to matriculate and what program to attend. VCR repair may have been the career of the 80s, but in this century, it is not likely to place many students.
Accordingly, it is unsurprising that for-profit institutions inflate their numbers to make their programs seem more successful than they are. Few are placing over 90% in job opportunities straight out of school, but they can twist the numbers to make it seem like they do.
However, if the numbers are fabricated from whole cloth, that is a potential False Claims Act violation.
The Higher Education Act requires that only 90% of a for-profit college’s revenues come from federal financial aid sources. The other 10% of revenue must come from private pay sources. The VA has a similar rule limiting VA beneficiary enrollment to 85 percent.
The purpose of this rule is to weed out underperforming institutions. If a school is entirely funded by the federal government, it can be difficult to tell whether the school is offering a worthwhile program.
So, the government relies on the market to tell it whether the program is any good – if it can’t get at least 10% of its student population to pay out of pocket to attend the institution, then it probably does not deserve the federal funding.
If a school is lying to the government about having a certain number of private-pay students (such as, for example, it is providing “scholarships” to its non-financial aid students to change the ratios), then it could be in violation of the False Claims Act.
CARES Act Education Fraud
In addition to these “classic” areas of for-profit education fraud, the CARES Act created a $14 billion higher education emergency relief fund (HEERF) for the Department of Education, of which $1.1 billion went to for-profit schools.
These funds address COVID-19-related hardships and have many requirements regarding how they can be used. Violation of these requirements may also result in False Claims Act liability.
State and Local Education Fraud
The federal government also provides funding to state and local educational school districts for programs such as magnet and charter schools, as well as Title I Grants to Local Educational Agencies for supplemental education programs in high-poverty areas. Misuse or improper claims against these funds may be subject to the federal False Claims Act or, if the state has its own False Claims Act that covers more than just Medicaid, they may form the basis for a state False Claims Act case.
For example, states provide considerable funding to elementary and secondary schools for “extra” programs such as special education, gifted education, joint enrollment programs, and after-school programs. If the school were to lie to the state about the number of enrollees in these programs to receive additional funding, that could be a violation of a state False Claims Act.
Non-Academic Student Benefits
Non-academic student benefit programs may also fall under the umbrella of education fraud. For example, the Department of Agriculture funds the National School Lunch Program, a federally-assisted meal program established in 1946 that operates in public and nonprofit private schools as well as certain residential childcare institutions.
Its goal is to provide nutritionally balanced, low-cost, or no-cost lunches to children each school day. Misuse of these funds for purposes other than what the government intends would be a violation of the False Claims Act.