For-Profit Education

Are we seeing control fraud taking place at for-profit trade schools? An article from the NY Times raises this issue. Control fraud happens when a person, usually the CEO, of a seemingly legitimate company uses it as a weapon to defraud. The essence behind fraud is deceit, which is when one party in a two-party transaction creates trust with the other party, then breaks that trust (William K. Black).

The Times article discusses how “schools exaggerate the value of their degree programs, selling young people on dreams of middle-class wages while setting them up for default on untenable debts, low-wage work and a struggle to avoid poverty.” Schools are taking advantage of their information asymmetry regarding job placement rates and setting up an environment of adverse selection in which low-wage earners are taking out huge loans to enter trade programs. Additionally, in order to recruit students, some for-profit schools are making false promises that students can earn a lot of money upon completion of a program.

One student recalled how his school told him it had a high job placement rate and that he could earn “$50,000 to $70,000 a year.” That same student paid about $30,000 for the program and went from an $8.00 per hour job to a $12.00 per hour job. His monthly payment to re-pay his loan is $600. Another student entered a $41,000 culinary program. He was told upon completion that he could make as much as $38,000 as a line cook. However, he dropped out of the program upon learning that most of the graduates from the culinary school made as much as $8.00 an hour washing dishes.

We’re also seeing a Gresham’s dynamic in which only financial aid officers and recruiters who lied to prospective students kept their jobs. As one former financial aid officer recounts, she couldn’t talk candidly about possible job prospects and debt obligations. She also said, “If you said anything that went against what the recruiter said, they would threaten to fire you. The representatives would have already conned them into doing it, and you had to just keep your mouth shut.”

It’s not surprising that people are turning towards an education as a means of advancing their careers and as a way of shoring up some job security in these hard economic times. With billions of dollars in Pell Grants at stake, we should also not be surprised that for-profit schools will take advantage of every opportunity to get as many students as possible to enroll in their institution.

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