21 Mar New Hope for Claims Against For-Profit Diploma Mills
If the Department of Education proves a college systematically used fraud to certify students for federally-insured loans, those same students should have a valid claim for a false certification discharge. This reinforces the points made by Craig Andresen in his recent post . In an earlier article: “Are subprime educators encouraging predatory lending?” I pointed to parallels between subprime mortgage loans and loans to students at the University of Phoenix, a private for-profit degree-granting institution emphasizing online programs. A recent Federal Court decision awarding $280 million dollars to shareholders in UOP’s parent corporation for securities fraud, and a pending lawsuit by the U.S. Department of Education to recover several billion dollars in Federal student aid obtained through fraud, add further comment on the matter.
Bay Area attorney Nancy Kropp, who is representing the Department of Education, has a wealth of documentation concerning the second case on her website . Regardless of how it is decided, it offers valuable lessons for the consumer and may provide ammunition for bringing actions for student loan discharge based on false certification claims. A 47 page report detailing the University of Phoenix’s aggressive and unethical recruitment policies lies at the heart of the Department of Education’s case for recovery of disbursed tuition loans. According to well-documented allegations in the report, the University paid recruiters on a commission basis, in violation of its contract with the U.S. guaranteed loan program. They purportedly engaged in aggressive, high-pressure telemarketing, delayed processing loan applications until after students had begun classes and then presented them with loan contracts substantially different from what had been promised, fabricated data on Federal FAFSA forms, and in some cases even forged signatures on loan applications.
The net result defrauded both the government and student borrowers. If the allegations are true, this University circumvented the system’s already weak legal safeguards against using Federal money to underwrite an education from which a student cannot possibly benefit, either because the student does not meet the minimum requirements for completing the program, or because the program itself is incapable of delivering meaningful educational benefits to anyone.
To date, the false certification discharge provision of the Higher Education Act has been interpreted as applying only to proprietary trade schools, and has seldom been invoked. As a statutory provision, it applies even outside of bankruptcy and does not require a determination of hardship. Demonstrating in court how the rules apply to a private degree-granting institution has the potential for greatly expanding protection to student borrowers in bankruptcy. The University of Phoenix is the largest of online for-profit “Universities”, but it is by no means the only one. This is a huge growth industry, inadequately regulated, which survives on student loan debt.
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