Summer 2011Vol. 6, No. 2

This article is from TOS Vol. 6, No. 2. The full contents of the issue are listed here.

The Government’s Assault on
Private-Sector Colleges and Universities

Private-sector colleges and universities, also known as career colleges or for-profit colleges, educate more than three million people annually in the United States. These colleges—which include the University of Phoenix, ITT Technical Institutes, Kaplan University, Strayer University, Capella University, and Monroe College—provide vital services to Americans seeking to improve their lives. Programs in career colleges range from information technology and business administration, to commercial art and interior design, to allied health care and nursing, to accounting and finance, to criminal justice and law. These highly focused, career-specific programs enable people to achieve their occupational goals and to become productive, self-supporting, prosperous, and happy. These colleges are, for many people, pathways to the American dream.

College Classroom

Unfortunately, certain individuals and agencies in the U.S. government are seeking to cripple and destroy these schools via an assault that includes fraud, collusion, and defamation. Before turning to the details of this assault, however, let us take a closer look at the enormous life-serving value provided by career colleges.

The Nature and Value of For-Profit Colleges

Career colleges are businesses that provide career-specific educational programs. They cater to “nontraditional” students—those who do not attend traditional postsecondary schools such as state universities (e.g., UCLA) or private nonprofit colleges (e.g., Williams College).

Career-college students have demographics similar to community-college students, but are on average a few years older. They are predominantly working adults seeking to improve their lives through educational programs that are directly related to their career goals. Many are employed full-time while enrolled; most have rent or mortgages to pay; many have families and dependent children to care for; and many have served in the military. These students choose career colleges because these institutions meet their needs better than the alternatives—whether traditional postsecondary schools or community colleges.

Among other factors, whereas state universities and nonprofit colleges offer courses, programs, and degrees that have little or no value in the marketplace (e.g., “Tree Climbing,” “The Joy of Garbage,” “Queer Musicology,” “Feminist Studies”), career colleges provide streamlined, career-focused training that is specifically designed to be of value to employers in the marketplace. Career colleges have no sports teams, fraternities or sororities, or the like, just market-oriented educational programs for people seeking to start, enhance, or change their careers.

In contrast to community colleges, which are not profit driven and rely heavily on direct subsidies from government, career colleges are profit driven and receive no direct subsidies. Thus, whereas budget deficiencies are requiring community colleges to turn away would-be students or place them on waiting lists for as long as three years,1 the profit motive incentivizes career colleges constantly to innovate and expand to meet market demand. Thus, career colleges usually have no waiting lists and can start new students within a month of enrollment. And whereas both traditional schools and community colleges offer what is, for many people, insufficiently flexible scheduling, career colleges provide highly flexible scheduling—days, evenings, and weekends—that enables students to integrate career-enhancing education with their busy adult lives.

For these reasons and more, millions of Americans find career colleges to be crucial, life-serving values. One such student, forty-four-year-old Michelle Stewart, will earn her bachelor of science degree in health care management from Brown Mackie College this fall after a decade of effort.

Along the way she has raised two children, worked fulltime, attended three schools, and earned an Associate of Science degree in Health Care Administration, also at Brown Mackie College. Her day starts at 5:30 AM, when she prepares herself to leave home to work a full eight-hour day at a local hospital. She is there until 4:30 PM, when she leaves for school, which will go until almost 10 PM. She will still have to squeeze in two hours of homework a day, either later that night or early the next morning. Despite all these obligations, Michelle was recently awarded the Guardian Angel Award, recognizing outstanding patient care, at the Fort Wayne hospital where she works. Michelle is the first employee in the Health Administration Services Department to receive this award, which is normally reserved for medical assistants and nurses. She also volunteers her time to help out students at school. Michelle’s success in entry-level programs at Brown Mackie College has spurred her to set her sights higher; she hopes to pursue study to become a physician’s assistant in the future. An adult-oriented, flexible career college schedule that was not available at local public institutions . . . has allowed Michelle to pursue higher education and a better life.2

Another career-college student, Jean Marie Falk, reflects on the crucial value of such career colleges in general and to her life in particular:

Career schools offer [people] the opportunity to achieve their dreams no matter their background or station in life. The chance to further one’s education through these institutions of higher learning is critical in today’s society as many four-year universities and community colleges limit the curriculum available at their campuses and fail to offer the flexibility many working adults require. I am one of those people who can personally attest to the important, positive impact career colleges and universities have on people’s lives.

In 2001, at the age of 53, I faced a life-threatening heart condition and surgery, with less than a zero percent chance of recovery according to my cardiologist at the University of Iowa Hospitals and Clinics. . . . I had hopes of one day studying to become an attorney, until those dreams were dashed due to my declining health. Death was staring me in my face. I have been diagnosed with cystic fibrosis, a hereditary condition that took the life of my older sister in 1952 and complicated matters to beyond the reach of a miracle.

Nearly ten years later, after a grueling recovery process, here I am achieving my lifelong ambition at Herzing University Online, [pursuing] a Bachelor’s degree in legal studies and headed to law school. If it were not for such a caring staff and both their support and understanding, I would probably just be another number in a large university. Attending the legal studies program at Herzing was a dream come true, and a truly precious opportunity. . . .

Without [access to career colleges], many students like me, who would not be comfortable in a massive, impersonal four-year university, as well as students from lower-income and minority communities, would lose out on opportunities we so desperately want and need. Career colleges serve our needs well, and they are a perfect alternative for those who need extra attention, who need flexible schedules and who need an affordable education and real-world skills. . . .

Some of the best years of my life are being part of the Herzing family, with two accelerated classes in eight-week terms. Surely, there are tears and fears along the way when doing something new, yet every hour I spend at my computer interacting with my wonderful instructors and classmates, participating in group discussions, listening to online presentations, preparing weekly homework assignments, my life is enriched. At every crossroad, the administration at Herzing has been clear with me about the outlook for my future. . . . I have valued their honesty and personal commitment to my success—a commitment that I might not have received somewhere else.3

There are millions of stories such as those of Michelle Stewart and Jean Marie Falk, and they illustrate a beautiful and benevolent fact. Career colleges, the opportunities they provide, and the lives they change represent all that is great about America: free markets, the profit motive, innovation, self-improvement, and the pursuit of happiness.4

With this in mind, let us turn to the U.S. government’s effort to cripple these all-American institutions.

The “Gainful Employment” Rules

In July 2010, the Obama administration’s Department of Education (DoE) released proposed regulations called “gainful employment” rules, which, if passed into law, would cripple and close many career colleges, dramatically reduce students’ options, and substantially increase the cost of a college education (by restricting competition) for those who could still afford to pursue one.

The “gainful employment” rules would prohibit students from obtaining federal student loans for use at career colleges if a certain debt-to-income ratio or loan repayment rates of prior students of those colleges were deemed by the government to be unacceptable. As the Heritage Foundation explains, under the proposed rules, “programs with federal loan repayment rates below 35 percent and median debt-to-earnings ratios above 30 percent of discretionary income and 12 percent of total income would be ineligible for [federal student loan] funding.”5 This would affect “33 percent of all students enrolled in for-profit higher education”; it would block them from “18 percent of for-profit programs”; and it could “shut out 5.4 million would-be students by 2020.”6 If adopted, “these rules would put many programs out of business, thus restricting competition in higher education, damaging student options, and further raising college costs.”7

Importantly, the rules would not only eliminate myriad programs, they would also force entire colleges out of business. Some colleges have only one program (say, information technology) or a primary program (say, allied health care) that supports the entire school; if one of these programs were to fold, so too would the entire college. As the Coalition for Educational Success reports, these rules could “eliminate in excess of a hundred thousand jobs in the higher education sector, destroy education opportunities, and block a critical pathway to employment for millions of students.”8

In short, the “gainful employment” rules would seriously damage or close private-sector colleges and universities across the country, thus harming everyone who works in them, everyone who invests in them, and everyone who attends or might one day benefit from attending a career college.

So why does the Department of Education seek to pass such rules?

Advocates of the rules claim, among other things, that (1) private-sector colleges and universities profit by receiving billions of dollars annually via federally funded student grants and loans; (2) their students take on too much debt and default too frequently; (3) their graduation rates are too low; and (4) given the foregoing, career colleges and their students represent an undue burden on U.S. taxpayers.9 Let us examine the validity and significance of these claims in order.

1. “Private-sector colleges and universities profit by receiving billions of dollars annually via federally funded student grants and loans.”

It is true that the government issues billions of dollars annually in federal grants and loans to students who choose to attend career colleges. It is also true that in a fully moral, fully rights-respecting society this would not be the case, because in such a society the government would not be involved in education or grants or lending at all; the government would do only one thing: protect individual rights by banning force and fraud from social relationships. But given the lay of the land today—including the fact that the government has granted itself a monopoly on the issuance of student loans10—for students to spend government-issued grants and loans at career colleges rather than at traditional schools or community colleges is perfectly moral and properly legal. (As we’ll see, it is even arguably preferable.)

Existing laws and regulations provide the government with enormous advantages over private lenders. The government acquires its funds by taxing citizens, borrowing at below-market rates, or printing money; insures its loans on the backs of taxpayers; and ultimately uses the Internal Revenue Service as its collection agency. Private lenders, in contrast, must borrow their funds at market rates, insure their loans at market rates, and outsource collections at market rates. These coerced differences (among others) make it impossible for private lenders to compete with the government in providing student loans.

This fact makes private-sector colleges and universities dependent on their students having access to federally funded loans. If the government were to forbid students from receiving government loans for use at career colleges, taxpayer funds would be spent even less equitably, increasing the amount of funds flowing to state-owned and nonprofit schools and starving the postsecondary private sector of students who otherwise would choose to attend career colleges.11

Given the government’s legally enforced monopoly on low-price, taxpayer-funded student loans, the government cannot morally exclude students of private-sector universities and colleges from receiving these funds.

2. “Career-college students take on too much debt and default too frequently on their loans.”

Part of the government’s “justification” for excluding private-sector students from receiving government-funded student loans is the claim that these students have, on average, excessively high debt levels and default rates. But this claim does not withstand scrutiny.

To begin, note that in a fully moral, fully free market, with exclusively private funding, debt levels and default rates would be determined by voluntary agreements among private lenders, insurers, and borrowers. Government would be out of the picture. But given that the government has monopolized the student-loan industry, we have to analyze the situation and establish policy that makes moral sense within this improper, coercive context.

Although many students at private-sector colleges and universities take on substantial debt, so do many students at traditional schools and community colleges. In fact, the highest average debt levels are those of students attending four-year nonprofit colleges and universities.12 Yet the government is not seeking to apply the “gainful employment” rules to these students and their schools. Why? The government has no rational answer.

It is not surprising but worth noting that career-college graduates are, on average, substantially better off financially after graduation than they were before graduation. As the Apollo Group explains:

The average borrowing of students in proprietary bachelor’s degree programs is $24,635, which equates to a monthly loan payment of $283.50 over ten years (assuming the current 6.8% interest rate associated with most student loans, as set by Congress). The net monthly cost to the student is even lower when taking into consideration the personal income tax benefit they receive on deductible student loan expenses.

According to the Bureau of Labor Statistics (Current Population Study), the difference in weekly earnings between a high school graduate and a person with a bachelor’s degree is $399 per week, or $1,729 per month, well in excess of the cost of the average loan repayment. Furthermore, this higher level of earnings for a college graduate continues beyond just the ten-year loan repayment period.13

What about the government’s claim that career-college students have, on average, an excessively high rate of default on their loans?

It is true that the average default rate of students at career colleges (11.6 percent) is substantially higher than that of students at traditional state schools (4.4 percent) and nonprofit colleges (3.8 percent).14 But this is both unsurprising and irrelevant to the debate at hand.

Of course students who attend elite colleges (e.g., Williams, Harvard, MIT) are going to have, on average, lower default rates than students who attend career colleges. The former generally come from wealthier, more-educated families than the latter, and such factors make a difference in this regard. As the Government Accountability Office explains:

[H]igher default rates at proprietary schools [i.e., career colleges] are linked to the characteristics of the students who attend these schools. Specifically, students who come from low income backgrounds and from families who lack higher education are more likely to default on their loans, and data shows that students from proprietary schools are more likely to come from low income families and have parents who do not hold a college degree.15

This should not surprise anyone, but—contrary to the emphasis placed on this comparison by the enemies of career colleges—it is not the relevant comparison.

The relevant comparison is the average default rate between students attending career colleges and those attending community colleges, whose demographics are similar. Here we find a negligible difference: a default rate of 11.6 percent for career-college students compared to 10.1 percent for community-college students.16 And this small difference is more than offset by the following facts (which opponents of career colleges routinely ignore): Whereas community colleges pay no taxes, receive huge subsidies directly from government, and therefore have comparatively (and artificially) low tuition; career colleges pay huge taxes—as much as 40 percent of their revenue—receive no subsidies directly from government, and therefore have comparatively high tuition. Accordingly, whereas community-college students pay a fraction (if any) of the actual cost of their education, career-college students pay all (or most) of the actual cost of theirs. Given community-college students’ correspondingly lower debt levels, it is remarkable that their default rates are as high as they are. Likewise, given career-college students’ correspondingly higher debt levels, it is remarkable that their default rates are as low as they are.

In light of these frequently ignored facts, although community-college students have, on average, lower debt levels and slightly lower default rates than do career-college students, the former cost taxpayers much more money per student than do the latter (more on this below). Yet the government is not seeking to impose the same “gainful employment” rules on students attending community colleges. Why? Again, the government has no good reason.

Dealing with defaults is part and parcel of the lending business. If the government takes over (as it has) and lends money to students (as it does), then it must deal with default rates—and it morally must do so in the most equitable way possible given the improper, coercive context.

Given that the government refuses to relinquish its monopoly on student loans, it could at least allow colleges to limit the amount of money their students borrow. Career colleges want to limit loan amounts based on relevant factors such as the actual cost of the college and actual needs of particular students. But the government forbids them to do so and then complains about the resulting debt levels and default rates.

In any event, the solution to the problem is not to withhold government financing from some students on the basis of the debt levels or default rates of other students. Students are not cogs in a collective but individuals who morally deserve to be treated as such. For the government to penalize future students because of the debt levels or default rates of prior students is simply unjust.

3. “The graduation rates of career-college students are too low.”

Another claim made by the government and other advocates of the “gainful employment” rules is that the graduation rates of students attending career colleges are too low. Again, although it is true that the graduation rates of students at career colleges are, on average, lower than those of students at state universities and nonprofit colleges, this is not comparing apples to apples.

The relevant comparison here is: How do graduation rates of career-college students compare with those of community-college students? And, once again, the answer is telling. Graduation rates of students at career colleges are substantially higher—in fact, more than two times higher—than those of students at community colleges.17 Yet the government is not seeking to apply the “gainful employment” rules to community colleges and their students. Why? Again, the government has no good reason.

4. “Career colleges and their students represent an undue burden on U.S. taxpayers.”

The final claim offered by the government in support of the “gainful employment” rules is that career colleges and their students represent an undue burden on taxpayers. But, on examination, this claim backfires.

If the relative cost to taxpayers is to be the criterion for determining which students should or shouldn’t receive student loans, then students attending career colleges are the most deserving of all. The simple fact is that career colleges and their students receive a substantially smaller amount of taxpayer money per student than do other colleges and their students. As the Competitive Enterprise Institute (CEI) reports, if we include the frequently ignored fact that career colleges pay enormous taxes to federal, state, and local governments—along with the fact that state universities, nonprofit colleges, and community colleges pay no taxes at all—we find that “Career colleges and their students receive substantially less support from all levels of government on a per-student basis, directly and indirectly, than public and private not-for-profit institutions. . . . Across the board, combined annual government support per enrolled student is greatest for public institutions and smallest for career colleges.”18

The CEI report shows that whereas government financing indirectly provides four-year career colleges with an average of $2,394 per student (net of taxes paid), it provides four-year private nonprofit schools with an average of $7,065 per student (about 200 percent more) and four-year public institutions with an average of $15,540 per student (more than 500 percent more). Likewise for two-year schools: Whereas government financing indirectly provides two-year career colleges with an average of $3,628 per student (net of taxes paid), it provides two-year private nonprofits with an average of $5,244 per student and two-year public institutions with an average of $6,919 per student.19

Moreover, the government is making money on student loans. Although the DoE claims not to have the data on this, the logic is straightforward. The government has taken over an industry in which private lenders were running profitable businesses buying money at wholesale and lending it at retail. The government now lends money at roughly those same retail rates but buys it well below wholesale—or simply manufactures it.

The bottom line is that the government’s “argument” against funding the grants and loans of students who attend career colleges is baseless. Although this is well documented, certain government officials and agencies are evading these facts and persisting with “gainful employment” regulations that would block students from attending career colleges. How can they persist in light of the foregoing facts?

By getting creative.

The Government’s “Investigation,” Fraudulent Report, and Collusion with Short-Sellers

In August 2010, the Government Accountability Office (GAO)—which is supposed to provide Congress with factual data for use in the legislative process—produced a report in which it smeared the entire career-college sector, destroying billions of dollars of stockholders’ wealth in a matter of days. The report was the culmination of an “investigation” ordered and orchestrated by Senator Tom Harkin (D-IA) and executed by the GAO.

The alleged goal of the “investigation” was to determine whether career colleges were engaging in fraudulent or otherwise questionable marketing practices. Harkin sought this information for use in his then forthcoming hearings to be held by the Senate Health, Education, Labor, and Pension (HELP) committee concerning federal student-aid funds being issued to students at career colleges.

Over two months, the GAO sent undercover agents posing as prospective applicants to fifteen career colleges, which it selected specifically because they had previously been accused of deceptive or fraudulent marketing practices.20 During the sting operation, GAO agents collected more than eighty hours of recordings, which allegedly would serve as the basis for the August Report.

In that report, the GAO claimed, among other things, that “four of the career colleges encouraged fraudulent practices” and that “all 15 colleges made deceptive or otherwise questionable statements” to the undercover applicants regarding matters such as “graduation rates, salaries of its graduates, and the expected length and cost of the program.”21 The GAO described these alleged statements in detail in its report to the HELP committee.

Unfortunately for the GAO and Senator Harkin, it soon became clear that the report was substantially if not wholly fraudulent—full of altered statements, fabricated “facts,” and unsubstantiated conclusions. Unfortunately for the career-college sector, however, this discovery did not stop the report from wreaking financial havoc on the schools and their stockholders—including, but not limited to, an immediate drop of 14 percent ($4.4 billion) in the sector’s stocks.22

In November 2010—having already destroyed enormous amounts of wealth and damaged the reputations of countless schools and businessmen—the GAO posted to its website a “Revised Report,” and did so with no announcement, not even a press release. Why the stealth posting? The Revised Report (although still riddled with false data) was so grossly at odds with the August Report that it amounted to a confession on the part of the GAO that it had intentionally misrepresented the facts.

The August Report included myriad allegations of “encouragement of fraud, and engagement in deceptive, or otherwise questionable behavior” on the part of career-college representatives. The Revised Report changed more than half of these “findings.” And as the Coalition for Educational Success writes in its lawsuit filed against the GAO, these changes demonstrate that “the August Report inaccurately and unfairly summarized the actual exchanges between the undercover applicants and the college representatives in order to create or enhance a negative impression of the career colleges.”23 Might that be hyperbole on the part of the Coalition? Judge for yourself. Here are a few indications of the nature and extent of the admitted “errors” in the August Report:

  1. Whereas the August Report claimed that a college representative told an undercover applicant that the applicant “should” take out the maximum amount of federal loans even if he did not need all of the money, the Revised Report corrected this statement and confirmed that the college representative actually told the undercover applicant that he “could” take out the full amount of federal loans even if he did not need all of the money. This latter statement is precisely in compliance with the mandates of the DoE.

  2. Whereas the August Report claimed that a college representative estimated the undercover applicant’s federal aid eligibility without including the applicant’s reported $250,000 in savings to see whether the applicant qualified for more aid thereby, the Revised Report added that this calculation was made not out of curiosity on the part of the college representative but “Upon request by the applicant.”

  3. Whereas the August Report claimed that college representatives at two different schools failed to provide their schools’ graduation rates after being directly asked by the undercover applicants, the Revised Report corrected this allegation with respect to one school—by acknowledging that the college representative gave some general figures and stated that she would have to talk to career services to obtain specific numbers—and dropped the allegation altogether with respect to the other school.

  4. Whereas the August Report claimed that a college representative failed to provide the undercover applicant with a “specific number” for the cost of the program, the Revised Report acknowledged that this was false by adding that the representative later brought the applicant to the financial aid office and the “specific costs of attendance were provided.”

  5. Whereas the August Report, in a table of supposed “Fraudulent Actions Encouraged by For-Profit Colleges,” claimed that a college representative “told the undercover applicant that by the time the college would be required by [the] Education [Department] to verify any information about the applicant, the applicant would have already graduated from the 7-month program”; the Revised Report revealed that this statement was made not by the college representative, but by “the undercover applicant.”

  6. Whereas the August Report claimed that a college representative told an undercover applicant that getting a job “was a piece of cake” and that graduates from this school are making $120,000 to $130,000 per year; in the recording that has since been released, there is no evidence of this conversation at all.

  7. Whereas the August Report claims that “the college representative did not tell the graduation rate when asked directly,” in the recording that has been released, the question of graduation rate is never raised.

  8. Whereas the August Report claims that an undercover applicant was told that as a massage therapist he could make as much as $100 an hour, the Revised Report adjusts this down to $30 an hour. Moreover, the recording that has been released reveals that later in the discussion the admissions representative provides the undercover applicant with a data sheet and states that the minimum average rate per hour for massage therapists in their area is $22. The GAO failed to include this last piece of information in either report.24

The foregoing is just an indication of some of what is known to date about the GAO’s clearly doctored and malicious report. The full extent of the GAO’s malfeasance remains unknown, because “the GAO has refused to release to the public (or even to the Coalition and the colleges that were investigated) the GAO’s full, unabridged recordings from its investigation or other documents that it claims support its findings.”25 The GAO is withholding, among other things, more than forty of the eighty hours of recordings.26

What has been the effect of this concerted assault on the career-college sector? Was the fallout limited to the fifteen schools included in the fraudulent sting operation? Was it supposed to be limited to them?

On the day the GAO released its August Report, Senator Harkin announced that the “GAO’s findings make it disturbingly clear that abuses in for-profit recruiting are not limited to a few rogue recruiters or even a few schools with lax oversight. To the contrary, the evidence points to a problem that is systemic to the for-profit industry.”27 As you can imagine, the fallout from the fraudulent report, from Harkin’s emphatic statement made in his capacity as a lawmaker, and from the countless press releases, articles, and media reports that followed them, has been devastating to the entire career-college sector. According to the Coalition’s suit against the GAO:

In the days following the release of the error-ridden August Report, the market capitalization of the publicly traded organizations that own and operate career colleges dropped nearly $4.4 billion—or about 14%. The career college industry was forced to spend substantial sums to respond to the negligent GAO investigation, in an attempt to set the record straight and show how the investigation was unsubstantiated and unfair. The damages suffered by the career college industry continue to accrue because the GAO refuses to withdraw its Revised Report.28

Could this assault get uglier? Unfortunately, yes.

Mounting evidence strongly indicates that officials in the DoE colluded with a few unscrupulous short-sellers on Wall Street to bolster the case for the “gainful employment” regulations, sink the stock of the career-college sector, and line the pockets of the short-sellers. Evidence shows that Antal R. Desai and R. Kent McGaughy Jr. of CPMG Investments and Steven Eisman of FrontPoint Financial Services Fund substantially influenced the DoE’s rulemaking process, and that members of the DoE provided them with previews of both the content and timing of the proposed regulations.29

As Mark Hyman reports in the American Spectator, in late 2009, Desai and McGaughy “met with Deputy Assistant Secretary of Education David Bergeron and senior Ed Dept official Ann Manheimer.”

Desai and McGaughy presented the two government officials with a 17-page document that severely criticized the career college sector. The document outlined recommended steps to be taken against career colleges to include actions by specific Congressional committees and an investigation to be conducted by the Government Accountability Office.

Neither Desai nor McGaughy were known for having expertise on the subject of post-secondary education. They brought little to the discussion aside from a game plan that, if implemented, could significantly degrade the value of publicly-traded stocks of for-profit colleges.

By the following year the key objectives outlined in the Desai/McGaughy document were met. The Senate Health, Education, Labor and Pensions Committee chaired by Senator Tom Harkin (D-IA) held hearings that slammed career colleges.

As for Steven Eisman, on June 24, 2010, he provided testimony before the HELP committee, during which he described the career-college industry as “fundamentally unsound.” What motive could Eisman, a short-seller, possibly have for influencing Congress on this education matter? Citizens for Responsibility and Ethics in Washington (CREW) provides a clue: “After Mr. Eisman’s congressional testimony, stocks of for-profit companies fell significantly.” Was Eisman’s congressional testimony the full extent of his influence? Hardly.

Documents CREW obtained from a lawsuit brought to compel the Department of Education to comply with its FOIA [Freedom of Information Act] obligations reveal that beyond his congressional testimony, Mr. Eisman worked actively behind the scenes to affect the outcome of Education’s regulatory process. Not only did Mr. Eisman meet with top Education Department officials leading the regulatory charge (by telephone and in-person) in early April 2010, including then Deputy Undersecretary Robert Shireman, he also circulated widely within the Education Department analyses he and his firm prepared of the for-profit education industry. This was all part of his lobbying effort for specific and more stringent gainful employment regulations that, if adopted, are likely to have a substantial negative effect on the market price of shares in for-profit education companies. As someone who is neither regulated by nor affected directly by the for-profit regulations, Mr. Eisman appears to have injected himself into the agency’s process for the sole purpose of causing a specific outcome to advance his own financial interests. . . .

The for-profit education industry, although a discrete segment of the financial market, generates substantial revenue. Correspondingly, stocks in for-profit education companies have suffered substantial losses dating back to Mr. Eisman’s June 24, 2010 congressional testimony. One financial services firm that invests in the for-profit industry has calculated that stocks fell by $7.9 billion from June 21 through December 17, 2010, a loss of 27 percent. Some in the for-profit industry were particularly hard hit: Corinthian College, for example experienced a 60% drop in its stock price during that period.30

And it gets even uglier.

On October 15, 2010, the Coalition for Educational Success filed a FOIA request for the DoE to release all documents related to the department and short-sellers as well as those pertaining to the GAO’s August Report. By law, the DoE is required to comply within twenty days, but it refused to do so. On December 9, 2010, the Coalition filed a lawsuit against the DoE for failing to respond to the FOIA request; in response to this suit, the DoE saw fit to provide a smidgen of the data. As of this writing—almost eight months after the original request—the DoE has released a mere 5 percent of the documentation in question; it continues to withhold some 37,000 pages.31

But even in the 5 percent of documentation that the DoE has released, there is strong evidence of collusion between the DoE and short-sellers. Consider the following revelations.

In August of 2009, short-sellers Desai and McGaughy met with Bergeron and Manheimer. Desai presented them with a document condemning career colleges and laying out a game plan for how to proceed. At the end of the presentation he showed a slide titled “What to Do?” This slide included these four bullet points:

  • Congressional education committees and congressional investigative committees should investigate and increase oversight of the for-profit sector.

  • Legislative safeguards should be analyzed and reinstated.

  • Regional and national accreditation agencies should be audited to determine effectiveness.

  • The GAO should revisit the for-profit sector with a focus on sales and marketing practices, advertising claims, recruiter compensation practices, drop-out/graduation rates, gainful employment claims, default rate management practices, lifetime default rates and total defaults.32

On October 28, 2009, Desai emailed Bergeron, Manheimer, and several other DoE officials, saying, “Thank you for making time to meet with us last Wednesday and also including Tony and Brian in our discussion. As with our first meeting a couple of months ago, we are encouraged by your deep understanding of the issues at hand and your commitment to reform.”33

On December 8, 2009, Desai emailed ten Senate and House staffers, copying Manheimer and Bergeron, and asking the recipients to actively support DoE staffers in their effort to regulate the for-profit sector.34

On January 6, 2010, Desai and McGaughy emailed Bergeron, Manheimer, and several other DoE officials, saying, “In light of the upcoming negotiated rulemaking session concerning program integrity, we wanted to share with you a few specific suggestions that address Title IV [i.e., federal student aid] loopholes currently being exploited by these Title IV recruiting machines.” They end the email with “we hope you will consider our suggestions as the process moves forward.”35

On January 27, 2010, Desai and McGaughy emailed Bergeron, Manheimer, and several other DOE officials, saying that they have been following the new proposed rulemaking process and “hear that it is progressing well.”36

On February 23, 2010, Desai emailed Bergeron, Manheimer, and several other DoE officials, commending the department on the progress achieved during the most recent negotiating session. He attached a memo outlining CPMG’s perspective on and argument for the gainful employment rules.37

On April 1, 2010, Kathleen Smith of the Department of Education emailed a lobbyist for CPMG about a meeting, and she copied Bergeron and Manheimer. In her email, she said, “As we discussed David [Bergeron] will not be able to attend but members of his staff will be there on his behalf.” Manheimer forwarded the email to Lee Godown, another lobbyist for CPMG, with the following message: “Forwarding—looks like progress—not sure I will be there.” Godown responded, “Thanks, Ann! Much appreciated. Have a great weekend. Looks like a goodie . . .”38

On April 7, 2010, Manheimer emailed Desai, saying, “The latest on timing for the NPRM [i.e., new proposed rulemaking] is May.”39 (Bear in mind that in short-selling timing is crucial; this information could be worth millions, if not billions of dollars to a trader such as Desai.)

On April 19, 2010, Bergeron met with Desai to discuss the gainful employment proposal. Bergeron previously claimed that there was no discussion of gainful employment in his meetings with short-sellers. As indicated above, the available emails and documents tell a different story.40

On July 19, 2010—one week before the DoE released its second notice of new proposed rulemaking—short-seller Steven Eisman emailed Bergeron, saying, “I know you cannot respond. But just fyi. Education stocks are running [up] because people are hearing DoE is backing down on gainful employment.” Moments later, Bergeron forwarded Eisman’s email with “high” importance to other DoE officials, one of whom, Deputy Undersecretary James Kvaal, forwarded the email to Phil Martin, the confidential assistant to Education Secretary Arne Duncan, writing, “Let’s discuss.”41 (Bear in mind that when stocks are “running up,” short-sellers are losing money.)

There is much more, but the foregoing is enough to indicate the nature of the situation.

Could it be mere coincidence that the DoE’s second round of rulemaking included everything Desai, McGaughy, and Eisman suggested? Might these short-sellers’ efforts to steer the rulemaking process have been for the sake of “saving the students” and not for the sake of shorting the for-profit education market and lining their pockets? And is it possible that all these highly educated officials at the DoE were somehow genuinely ignorant about who these men were and what they might have been up to?

Fortunately, some people in Washington agree with you and are doing something about it.

For instance, on February 9, 2011, Anne Weisman, chief council for CREW, wrote a letter to the Securities and Exchange Commission (SEC) requesting that the SEC “open an investigation into the short-selling activities of hedge fund managers to determine if they have been illegally manipulating the market price of stock in the for-profit education industry.” Weisman informed the SEC that “Publicly available data as well as documents CREW obtained through a Freedom of Information Act (FOIA) request to the U.S. Department of Education suggest substantial and highly suspicious market activity in the for-profit industry and behind-the scenes efforts by short-sellers to manipulate the market.” (As of June 6, 2011, although the SEC has acknowledged receipt of Ms. Weisman’s letter, it has not indicated publicly whether it has opened an investigation.)

On March 3, 2011, at a Homeland Security and Government Affairs Committee hearing, Senator Tom Coburn (R-OK) condemned the “very significant inappropriate behavior in tipping hedge funds on short selling private education” and pointed out that “the utilization of facts in the Department of Education in advantaging investors in one segment to make significant dollars over something the government’s thinking about doing is highly unethical; and if proven to be the case, some people [in the DoE] ought to be going to jail.”42

On April 28, 2011, Senator Mike Enzi (R-WY), who heads the Senate education committee, wrote Arne Duncan requesting all documents from the rulemaking process. Enzi’s letter reads, in part:

Since issuing the proposed regulation, allegations have been made that DoE officials may have engaged in inappropriate communications with some investors with a financial interest in the outcome of the rulemaking process. These allegations have been bolstered by DoE documents released in response to several FOIA requests. In particular, the documents indicate that several investors contacted the DoE and met with officials involved in the development of the proposed rule while the rulemaking process was ongoing. . . .

While the released documents represent emails received or sent by officials directly involved in the development of the proposed rule, very few of the documents include communications received or sent by individuals with the Office of the Secretary. Consequently, questions about the propriety and extent of the Department’s interactions with these individuals will persist until we are able to review all of the documents maintained by the Department. Therefore, I request that you make public all Department of Education written correspondence, email or otherwise regarding the development of the proposed gainful employment regulation, and waive any deliberative process exemptions to ensure complete transparency. In compiling these documents, your search should include, but not be limited to, all individuals in the Office of the Secretary.

What will become of these inquiries and demands is yet to be seen.

As for the “gainful employment” rules, on June 2, 2011, the DoE released a 436-page document spelling out the details of its newly crafted regulations. The good news is that the vigilance of the career-college sector and its supporters has had some positive effect: The regulations are not as devastating as they otherwise would have been. The bad news is that the rules are still an extremely damaging assault on private-sector colleges and their students. The net effect on the career-college sector is that the “final rules” will destroy “only” 5 percent of existing programs (instead of 18 percent under the previously proposed rules).43 This is morally unacceptable. Any destruction of this sector is morally unacceptable.

And the assault on career colleges is not over. As Senator Harkin said after the “final rules” were announced, this is “a modest and important first step.” We should take Harkin at his word.

We who recognize the moral rights of businessmen, stockholders, teachers, and students to produce and trade values according to their own judgment—we who recognize the moral rectitude of private-sector colleges that prepare students for success in the marketplace and happiness in life—we must speak up in defense of these moral rights and these noble schools, and we must condemn any and all further assaults on them.

Yes, some individuals and businesses in the career-college sector engage in fraud, false advertising, breach of contract, and the like—just as some individuals and businesses in every sector of the marketplace do. The solution to this problem, however, is not to cripple or kill the sector; rather, the solution is to identify the specific individuals and businesses engaged in such rights violations and prosecute them.

I urge you to write your elected officials and tell them you are appalled at the patent evil of this concerted assault against private-sector colleges and universities. Demand that the government get to the bottom of the clearly corrupt GAO “investigation” and fraudulent reports that are severely damaging these businesses. Demand that the government investigate the apparent collusion between the DoE and the unscrupulous short-sellers. And demand that the government hold hearings on the unjust nature of the DoE’s “final” gainful employment rules—which, although not as evil as they could have been, are still plainly immoral.

The injustice here pertains not only to those directly involved with the career-college sector, but to every American who seeks education, works for a living, or cares about his future or the future of his loved ones. If government officials and bureaucrats are permitted to get away with what they have done to career colleges, what is to stop them when they use the same government power and creative tactics to assault other sectors of the economy?

We know the answer.

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Endnotes

Acknowledgment: I wish to thank Alan Germani for his helpful comments on an earlier draft of this article.

1 For example, “In California, with a budget cut of 8 percent across the board, the community colleges turned away 140,000 students last year [i.e., 2009]. In Colorado, the waiting lists for nursing programs at some of the state’s community colleges have grown to as long as 3.5 years. In May, New York’s community colleges stopped accepting applications for the fall semester and added students instead to a waiting list.” Peter Whoriskey, “Community Colleges Are Getting an Education in Tough Economics,” Washington Post, November 27, 2010, http://www.washingtonpost.com/wp-dyn/content/article/2010/11/26/AR2010112605035.html. And: “California’s Community Colleges Will Enroll 400,000 Fewer Students Next Fall and Slash Thousands of Classes to Contend with Budget Shortfalls”; Carla Rivera, “California Community Colleges to Slash Enrollment, Classes,” Los Angeles Times, March 31, 2011. http://www.latimes.com/news/local/la-me-0331-community-colleges-20110331,0,7036490.story.

2 Kara M. Cheseby, “Class Conflict: Gainful Employment Proposal Penalizes At-Risk Student Populations and Hurts the Economy,” Competitive Enterprise Institute, March 2011, http://cei.org/sites/default/files/Kara%20Cheseby%20-%20Class%20Conflict%20Gainful%20Employment%20Proposal.pdf.

3 Jean Marie Falk, “‘Gainful Employment’ Rule Would Punish Students,” http://savestudentchoice.org/blogs/gainful-employment-rule-would-punish-students.

4 Obviously career colleges do not enjoy a fully free market; the government improperly and coercively imposes itself on this sector, as it does to varying degrees on all sectors of the economy today. The government also uses taxpayer money to indirectly fund this sector, as it does to fund the sectors of medicine, insurance, investing, and so on. But the government’s coercion is not what makes career colleges a value. What makes them a value are the educational services they voluntarily produce and trade with those who seek to improve their lives.

5 Matthew Denhart, “Federal Overreach into American Higher Education,” Heritage Foundation, November 4, 2010, http://thf_media.s3.amazonaws.com/2010/pdf/bg2486.pdf.

6 Denhart, “Federal Overreach.”

7 Denhart, “Federal Overreach.”

8 Coalition for Educational Success press release, May 3, 2011, http://www.ed-success.org/press-release-coalition-statement-on-gainful-employment-regulation-delivery-to-omb.php.

9 See “Proposed Rule Links Federal Student Aid to Loan Repayment Rates and Debt-to-Earnings Levels for Career College Graduates,” July 23, 2010, http://www.ed.gov/news/press-releases/proposed-rule-links-federal-student-aid-loan-repayment-rates-and-debt-earnings.

10 See Daniel de Vise, “House Approves Huge Changes to Student Loan Program,” Washington Post, March 22, 2010, http://www.washingtonpost.com/wp-dyn/content/article/2010/03/21/AR2010032103548.html.

11 If taxpayers disapprove of the government issuing grants and loans to college students (and they should), then taxpayers should demand that the government get out of the student grant and loan business. But so long as the government does issue student grants and loans, there is no moral justification for forcing taxpayers to support students attending traditional or community colleges but not those attending career colleges. Insofar as the government continues to offer student grants and loans, it morally must permit students to use the funds at schools of the students’ choice.

12 “Higher Education at a Crossroads,” Apollo Group, Inc., August 2010, http://www.apollogrp.edu/Investor/Reports/Higher_Education_at_a_Crossroads_FINALv2%5B1%5D.pdf.

13 “Higher Education at a Crossroads,” Apollo Group.

14 “Background Questions and Answers,” Association of Private Sector Colleges and Universities, http://www.career.org/iMISPublic/AM/Template.cfm?Section=About_Career_Education&Template=/CM/HTMLDisplay.cfm&ContentID=23196.

15 “Proprietary Schools: Stronger Department of Education Oversight Needed to Help Ensure Only Eligible Students Receive Federal Student Aid,” U.S. Government Accountability Office, August 17, 2009, http://www.gao.gov/new.items/d09600.pdf.

16 Background Questions and Answers,” APSCU.

17 “Higher Education at a Crossroads,” Apollo Group.

18 Cheseby, “Class Conflict,” (emphasis added).

19 Cheseby, “Class Conflict.”

20; Mark Hyman, “Assault on Career Colleges,” American Spectator, October 6, 2010, http://spectator.org/archives/2010/10/06/assault-on-career-colleges#.

21 Coalition for Educational Success v. United States of America, lawsuit filed February 2, 2011, http://ed-success.org/pdf/CES_GAO_Complaint.pdf.

22 Coalition v. United States of America.

23 Coalition v. United States of America.

24 Coalition v. United States of America.

25 Coalition v. United States of America.

26 See “Timeline of the ‘Gainful Employment’ Rule,” Coalition for Educational Success, http://www.ed-success.org/timeline.php.

27 “U.S. Senator Lashes Out at For-Profit Education,” Reuters, August 4, 2010, http://www.reuters.com/article/idUSN0421762120100804.

28 Coalition v. United States of America.

29 Although insider trading should not be illegal unless it involves fraud, breach of contract, or the like, insider trading that involves the government providing short-sellers with advance notice of regulations that will cripple a particular industry is patently immoral and properly illegal. This case appears beyond any reasonable doubt to be a conspiracy to use government regulations to thwart a market and line the pockets of short-sellers who helped craft the regulations, substantially dictated their content, and were provided by government agents with advance notice of their timing.

30 Letter available at http://www.intered.com/storage/deptofed/CREW_RobertKhuzamiSECLetter2-9-11.pdf.

31 Coalition for Educational Success press release, March 24, 2011, http://www.ed-success.org/FOIA-release.php.

32 PDF of slide available at http://www.ed-success.org/pdf/3.pdf.

33 PDF of email available at http://www.ed-success.org/pdf/5.pdf.

34 PDF of email available at http://www.ed-success.org/pdf/5.pdf.

35 PDF of email available at http://www.ed-success.org/pdf/7.pdf.

36 PDF of email available at http://www.ed-success.org/pdf/8.pdf.

37 See http://www.ed-success.org/FOIA.php.

38 Email available at http://www.ed-success.org/pdf/12.pdf.

39 Coalition for Educational Success press release, May 9, 2011, http://www.ed-success.org/press-release-coalition-urges-sec-to-investigate-possible-insider-trading-by-short-sellers-who-obtained-material-non-public-information-from-us-department-of-education-officials-in-violation-of-department-ethics-rules.php.

40 Coalition for Educational Success press release, March 24, 2011, http://www.ed-success.org/FOIA-release.php.

41 Coalition for Educational Success press release, May 9, 2011, http://www.ed-success.org/press-release-coalition-urges-sec-to-investigate-possible-insider-trading-by-short-sellers-who-obtained-material-non-public-information-from-us-department-of-education-officials-in-violation-of-department-ethics-rules.php.

42 Jonathan Strong, “Coburn: Education Department ‘Tipping Hedge Funds’ on For-Profit Colleges,” Daily Caller, March 3, 2011, http://dailycaller.com/2011/03/03/coburn-education-department-tipping-hedge-funds-on-for-profit-colleges/.

43 Mark Kantrowitz, “Summary and Analysis of Gainful Employment Final Rule,” June 2, 2011, http://www.intered.com/storage/deptofed/Kantrowitz_20110602gainfulemployment.pdf.