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Federal bureau accuses ITT Educational Services of predatory lending

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ITT Educational Services Inc., which has a campus in Harrisburg, has been accused by the federal Consumer Financial Protection Bureau of exploiting students and pushing them into high-cost private student loans likely to end in default.

The CFPB announced today that it has filed a lawsuit against the for-profit college chain, which, according to its website, has more than 140 locations across more than 35 states.The CFPB is seeking restitution for victims, a civil fine and an injunction against the company.

The CFPB was established by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

ITT has not yet issued a response to the accusations.

CFPB said in a news release that ITT's tuition is among the highest in the country in the for-profit industry: An associate degree can cost more than $44,000 and bachelor's degrees can cost $88,000, "significantly higher than the cost of similar degrees at a community college or a public four-year institution."

"Most of ITT's students borrow large sums to pay the high tuition costs and the majority of this money is borrowed from federal student loan programs," the release said. "But private student loans also provide critical revenue for ITT. Because most ITT students' federal aid does not cover the full cost of an ITT program, most students face a 'tuition gap' requiring them to find other sources of funding."

The lawsuit alleges that ITT encouraged new students to enroll at ITT by providing them funding for this tuition gap with a zero-interest loan called "Temporary Credit," which typically had to be paid in full at the end of the student's first academic year.

Between July 2011 and December 2011, CFPB said, ITT pushed its students into repaying their Temporary Credit and funding their second-year tuition gaps through high-cost private student loan programs. Students were left in the dark about the fact that taking out these high-cost loans would be required to continue their studies, CFPB said. However, ITT's CEO revealed in investor calls that converting the temporary loans to long-term loans was the company's "plan all along."

The CFPB accused ITT of the following:

• "Pressured into predatory loans: 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. The loans were high-cost. For borrowers with credit scores under 600, for example, the costs of the private student loans included 10 percent origination fees and interest rates as high as 16.25 percent.

•"Credits not transferable: ITT was accredited by a national organization that accredits many for-profit schools, but the credits that students earned typically did not transfer to local community colleges or other nonprofit schools such as public or private colleges. ITT used the prospect of expulsion and the loss of the money already spent during the student's first year to coerce students into taking out the private loans.

• "Misleading future job prospects: The bureau believes that ITT's representations led students to think that when they graduated they were likely to land good jobs and enough salary to repay their private student loans. In this way, ITT exploited student expectations while it knew that a majority of students would default.

• "Loans likely to fail: ITT knew that most of its students would ultimately default on their private student loans; it projected a default rate for its students of 64 percent. Defaulting on private student loans can have grave consequences for consumers. It can make it difficult to get any kind of loan for years and even affect a borrower's job prospects. And, because private student loans are difficult to discharge in bankruptcy, the debt can be very difficult to recover from."

Heather Stauffer

Heather Stauffer

Heather Stauffer covers Lancaster County, nonprofits, education and health care. Have a tip or question for her? Email her at heathers@cpbj.com. Follow her on Twitter, @StaufferCPBJ.

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