The Obama administration and state attorneys general have announced that they have settled a massive lawsuit they filed against Education Management Corp. (EDMC) – the parent company of large for-profit college chains such as the Art Institutes (including the New England Institute of Art). The lawsuit against EDMC was filed on the basis that the company defrauded students by using illegal recruitment tactics, providing sub-par education, and exaggerating its career-placement statistics.
Good news? Kinda-sorta.
The Good
This is a big settlement, a big deal, and certainly represents big progress in the ongoing battle between consumer protection advocates and the for-profit college industry, which has been accused of widespread consumer fraud that has left millions of graduates saddled with huge student loan debts and worthless degrees. The settlement will serve as a financial penalty for EDMC ($95.5 million), a fund for student loan forgiveness for certain borrowers who attended its schools ($102.8 million), and a warning to other for-profit college chains that these illegal practices are being scrutinized.
The Bad
The original lawsuit filed against EDMC alleged $11 billion in damages, which is roughly the amount of federal student aid that the company was able to access (and then pass on to its students in the form of student debt) while allegedly violating federal and state consumer protection laws. The roughly $200 million settlement is a very small fraction of those alleged damages. Had the lawsuit gone to trial and had ECMC lost, it could have been liable for over $30 billion.
Furthermore, while approximately half of the total settlement can be used towards student loan forgiveness, the terms under which student loans can be forgiven are extremely limited: it only applies to borrowers who left EDMC schools within 45 days of their first term between 2006 and 2014 and transferred fewer than 24 credit hours to another university. That is an extremely narrow group of students. The average amount of student loans forgiven under the settlement will be around $1,370 per student. That’s not much at all.
Finally, as part of the settlement, EDMC is not admitting to any wrongdoing. This may make it extremely difficult for borrowers ineligible for the loan forgiveness under the settlement agreement to request loan forgiveness through other channels, such as defense to repayment. Such channels may require a showing that the school engaged in illegal practices. Since the settlement allows EDMC to walk away without any determination of wrongdoing, this may be tough.
The Unknown
Under the agreement, EDMC will remain operational, meaning its schools – including the Art Institutes – will stay open. How the settlement will impact its finances and operations over time, however, remains to be seen. EDMC’s stock price has fallen from $28.00 to $0.09 over the last four years. The company is certainly struggling, and we could see another major for-profit college collapse similar to Corinthian Colleges.
Furthermore, despite the “mixed bag” nature of the settlement, this is just the latest in a growing number of legal actions being taken against for-profit colleges that engage in widespread illegal and abusive practices. The totality of these lawsuits may do more harm to the industry than any single lawsuit or settlement. We’ll have to wait and see how this plays out over time, so stay tuned.
Sources: The U.S. Dept. of Justice, The New York Times, The Huffington Post, and various local newspapers.
