Yesterday, United States Attorney General Loretta E. Lynch, together with Department of Education Secretary Arne Duncan; U.S. Attorney David Hickton of the Western District of Pennsylvania; and Attorney General Tom Miller of the state of Iowa, announced a major settlement with Education Management Corp., the second-largest for-profit education company in the United States.  Also known as EDMC, the company operates chains of schools around the U.S. under the brand names Argosy University, the Art Institutes, Brown-Mackie College and South University.  EDMC enrolls more than 100,000 students and approximately 90 percent of EDMC’s revenue comes from taxpayers in the form of federal education funding for EDMC students.

According to Lynch, the case not only highlights the abuses in EDMC’s recruitment system; it also highlights the brave actions of EDMC employees who refused to go along with the institution’s deceptive practices.  Beginning in 2007, two EDMC employees blew the whistle on EDMC by alleging that it was running a high-pressure recruitment mill. Essentially, the more students a recruiter induced to enroll, the more money that recruiter would receive.  These employees alleged that EDMC’s recruitment practices violated the Incentive Compensation Ban of Title IV of the Higher Education Act, which prohibits schools from basing recruiters’ pay on their success in securing new enrollees.  That ban is in place so that schools will account for the unique qualities and needs of potential students, rather than simply treating them as a vehicle for tapping into federal student aid funds.

Despite their alleged conduct, EDMC has certified its compliance with the ban to the Department of Education for over a decade.  Falsely claiming federal grant and loan money is a violation of the False Claims Act – and in 2011, the United States intervened in the case alongside five individual states: California, Florida, Illinois, Indiana and Minnesota.

Under the deal announced yesterday, EDMC has agreed to pay a $95.5 million civil settlement to resolve claims that it falsely obtained federal and state education funds, and will forgive loans totaling $102.8 million for about 80,000 students. Lynch called this the largest False Claims Act settlement with a for-profit educational institution in American history.

insideARM Perspective

This is the second massive instance of debt forgiveness in the student loan space this year. Student loan debt collector and guarantor ECMC Group (not to be confused with EDMC, the subject of the case above)closed on its purchase of the Corinthian College chain in February of this year. As part of the deal, a large portion of the private student loans owed by Corinthian students were forgiven. In a deal brokered by the CFPB, ECMC agreed to forgive some $480 million in private student loan debt initiated by a Corinthian subsidiary.

In that deal, ECMC agreed to not offer its own private student loans to current and future students for a period of seven years. In addition, ECMC agreed to refrain from certain debt collection practices, including the threat of lawsuit, on Corinthian loans it now owns; and also agreed to remove negative information from student borrowers’ credit reports.

One must wonder whether this pattern will open the door for non-fraudulent loan forgiveness, given the student loan crisis we’ve all seen coming.

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