Agencies fixing regulatory gaze on Career Education Corp.

One of the largest for-profit providers of postsecondary education increasingly is drawing the attention of regulators for a long list of questionable financial and educational practices.

Career Education Corp., a multi-billion dollar company which operates some 90 campuses across the country and overseas that grant associate and other degrees, has come under fire for, among other things, violating rules governing federal student loans.

Founded in 1994, Career Education has grown quickly. Its institutions operate under familiar names such as Gibbs College, the International Academy of Design & Technology, Sanford-Brown Institute, Colorado Technical University and Le Cordon Bleu College of Culinary Arts.

According to the company's Web site, it currently enrolls more than 95,000 students around the world. Last June, the company reported more than $2.03 billion in net sales and $1.4 billion in profits for 2005.

On its Web site, the publicly-traded company calls itself "a dynamic educational services company committed to quality, career-focused learning led by passionate individuals who inspire individual worth and lifelong achievement."

But the company has been embroiled in controversy. One of the main charges against the company is that it has enrolled large numbers of students and helped them secure federal students loans that are never repaid, leaving taxpayers responsible for millions of dollars in bad debt.

Federal officials have been so concerned with the company's practices that in June of 2005, the U.S. Department of Education suspended its ability to open new campuses while federal officials pore over company financial statements and compliance audits and conduct program reviews at several campuses.

Asked about the moratorium, Lynne Baker, a company spokeswoman wrote in an e-mail message to Community College Week, that "we continue to work with the department to address these matters."

Still, a long list of state and federal officials have taken issue with the corporation's campuses.

Disorder by Default

A review of federal Department of Education data show that students enrolled at the corporation's campuses default on loans at a rate far higher than almost any other institution. For example:

* At the International Academy of Design & Technology in Chicago, 18.1 percent of students defaulted in 2001, 24.2 percent in 2002, 21.9 percent in 2003 and 20 percent in 2004.

* At the Katharine Gibbs School in New York City, default rates for the same three years totaled 18.3 percent, 19.4 percent and 16.1 percent, respectively. The campus enrolled 653 defaulters in 2004 and 1,462 over the past three years, more than any other two-year college in the nation.

* At Gibbs College in Boston, the default rates are rising, from 14.7 percent of students in 2002, 16.2 percent in 2003 and 18.4 percent in 2004.

By comparison, the average default rate per institution on federal student loan programs nationwide was 4.5 percent of students in 2003 and 5.1 percent in 2004, the latest year for which statistics are available.

Federal rules call for disqualifying institutions from student aid programs if they score a default rate of 25 percent or higher for three consecutive years, or 40 percent in one year. Neither Career Education's campuses nor any other college has reached that threshold in recent years.

The Education Department, however, will investigate or assist institutions with high default rates. So while education officials have disqualified none of the corporation's campuses, it has taken notice of their poor performance.

The department's Office of Inspector General has also launched a series of audits into whether Career Education's campuses were complying with the "90-10" rule, requiring proprietary colleges to receive at least 10 percent of revenue from sources other than Title IV.

The company's latest financial statement says that for the first nine months of 2006, it received 58.7 percent of its tuition payments from federal Title IV student loan programs.

But in November 2005, the inspector general's office reported that Sanford-Brown Institute--a division with a main campus in Atlanta and other locations in Florida, Maryland, New York, Ohio, Pennsylvania and Texas--"did not have sufficient, reliable accounting records to support a precise 90-10 Rule calculation in accordance with regulations. As a result [the corporation] reported inaccurate 90-10 Rule information in its 2003 financial statements."

The inspector general's office concluded that Sanford-Brown's "90-10 rule calculation was not prepared in accordance with federal regulations." The company blamed the problems on a new employee who didn't understand the proper calculation methodology and manual coding errors a new computer system would correct.

While the corporation pledged to change its bookkeeping, the inspector general's office stated it does "not believe the procedures will ensure that CEC calculates a precise 90-10 Rule percentage."

In her prepared statement, Baker, the company spokeswoman, pointed out that the 90 percent threshold was never exceeded at any of Sanford-Brown's campuses.

But in a written response to the inspector general's 2005 report, John Larson, then the company's chairman and chief executive officer, acknowledged that Sanford-Brown's Houston campus accepted Title IV funds in fiscal year 2003, even though it didn't offer any classes until January 2004.

Baker responded that student application lees that were paid in advance of classes had been mistakenly included when calculating the 90-10 percentage.

She added that "Career Education has never taken student funds when it did not offer classes."

Bad Credit

The corporation has given other federal investigators years of headaches.

In 2004, the Office of Student Financial Aid investigated Collins College, which offers associate degree programs in media arts, technology and visual communication in Tempe, Ariz. The investigation uncovered "serious findings regarding the institution's administration of the Title IV student assistance programs."

The 147-page report documented numerous abuses, including giving credit for courses that didn't meet the required minimum numbers of hours of attendance.

Baker noted that the matter was settled with the Department of Education for $23,000 "with no admission of wrongdoing error, or mistake either by Collins College or the Department of Education." She said the payment amount represented only .04 percent of the Title IV funds the college received during the investigation's time frame and acknowledged that it was partly due to late Title IV refunds and some student files that could not be located.

That same year, Almich and Associates, an accounting firm hired by the student aid office, found that the Pennsylvania Institute of Culinary Arts in Pittsburgh sometimes missed the 30-day deadline to return Title IV money when a student withdrew. The college ended up having to repay about 1 percent of the Title IV funds it received during the 2002-03 and 2003-04 academic years, according to Baker.

In 2005, the financial aid office and its outside auditors found that Gibbs College, in Norwalk, Conn., did not properly report its Pell Grant funding for the 2002-03 academic year or establish a system to catch errors. The college routinely did not return payments on time when students withdrew, auditors found.

"Failures to report timely adjustments of federal Pell Grant Program awards may cause former students to experience unnecessary financial hardship upon enrolling in another eligible program or institution," the audit report said. "The institution's recurring failure to reconcile its federal program expenditures timely and accurately in six successive audit cycles suggests a serious weakness in its administrative capability and calls into question its fitness as a fiduciary."

Continuing Investigations

The Education Department isn't the only federal agency that has confronted the company. Two years ago, the Securities and Exchange Commission's Midwest Regional Office launched an investigation into whether the company was enrolling unqualified students in Title IV programs. The company stated in a report to shareholders last fall that SEC's staff recommended not to take action against the company, but officials are still examining the matter. A SEC spokesman declined comment.

Also, the U.S. Department of Justice's Civil Rights Division is investigating whether officials with the company's institutions made false statements to the Department of Education. The division is examining possible false representations made to students regarding job placement rates and costs of attendance. Justice Department spokesman Charles Miller declined to comment on the probe.

Additionally, the company has caught the attention of state investigators.

In Pennsylvania, the consumer protection division of the attorney general's office has been investigating Lehigh Valley College for alleged violations of consumer protection laws, said deputy press secretary Nils Fredrickson. The state is responding to dozens of complaints from students that they were misled about financial aid terms and interest rates on student loans. Baker said that Lehigh Valley and company officials are cooperating with the investigation.

In California, the Bureau for Private Postsecondary Education--which regulates private colleges in the state--last year put the Brooks Institute of Photography in Santa Barbara on a two-year notice of conditional approval, limiting its right to enroll students. The bureau found that admissions representatives were routinely providing false and misleading information about potential placement and salaries to students. Baker questioned the accuracy of the investigation's findings, saying that the probe was conducted by "unqualified people." The bureau, however, has not dropped its pursuit of the allegations and is redoing the investigation.

In New York, the State Education Department's Bureau of Proprietary School Supervision settled a case in 2005 with the White Plains, N.Y., campus of Sanford-Brown Institute. The college paid a fine for violating state regulations on unlicensed teachers, attendance records, and curriculum approval procedures.

Baker acknowledged the missteps but pointed out that instructors did have proper licenses but proper documentation was not sent in the appropriate time frame. The matter has been cleared with the department.

Accrediting commissions also are finding flaws in the company's practices.

The Accrediting Commission for Community and Junior Colleges of the Western Association of Schools and Colleges put Brooks College in Long Beach, Calif., on probation in June 2004. Brooks' first effort to get off probation failed but in 2005, the commission removed the college from probation.

New York's Accrediting Bureau of Health Education Schools directed the Sanford-Brown campus in White Plains to "show cause as to why its current grant of accreditation should not be withdrawn" based on site visits in 2004. The accreditor wasn't satisfied with responses it got in 2005 and continued the probationary status. It later granted the program regular accreditation through 2007, said Nicholas Smith, the bureau's accrediting coordinator.

The Commission on Colleges of the Southern Association of Colleges and Schools placed American InterContinental University in Atlanta on warning status in 2002 and has been watching it ever since. In December, the probationary status was continued for another year for failure to comply with accreditation standards concerning program content, faculty, governance and administration and institutional effectiveness.

The corporation said it is addressing the problems in Atlanta and elsewhere. In a press release issued after the college learned it would continue on probation, George Miller, CEO of American International, said: "We are pleased with the recognition of the important steps we have taken in the past twelve months and our commitment to clear and continuous improvement."

In its 2005 annual report, the latest available, the company said it takes "great pride in the quality. of our brands.... These brands and this kind of heritage make us unique in our industry and demonstrate our commitment to quality."

The report went on to say that "we continue to strengthen our compliance infrastructure to promote a strong compliance culture throughout our organization. We are dedicated to working cooperatively with applicable federal and state agencies and accrediting bodies to resolve existing regulatory matters."

Baker added that none of the regulatory issues "relate in any way to the quality of education Students receive at Career Education's schools."

THE RULES

Federal rules call for disqualifying institutions from federal student aid programs if they score a default rate of 25 percent or higher for three consecutive years, or 40 percent in one year.