Like the mortgage market in the lead-up to the financial crisis, the for-profit college industry may be experiencing misaligned incentives, according to the Consumer Financial Protection Bureau. This week, the CFPB filed a lawsuit against ITT Educational Services Inc., accusing the Indiana-based for-profit college chain of predatory student lending.

In some cases, according to the CFPB, students did not even realize they had a private student loan until they started getting collection calls. For borrowers with credit scores under 600, the costs of the private student loans included 10 percent origination fees and interest rates as high as 16.25 percent, the lawsuit alleges.

The CFPB further claims ITT exploited its students and pushed them into high-cost private student loans that were likely to end in default. The CFPB is seeking restitution for victims, a civil fine and an injunction.

ITT officials fired back on Friday, stating that the complaint should never have been filed.

"The complaint overwhelmingly focuses on issues that are unrelated to consumer finance, and attempts to cast a negative light on aspects of ITT Tech's activities that are extensively regulated by other government agencies. The core claims concern a mere six months of loans, but the Bureau knows that independent third parties provided those loans and the loan programs ended years ago," according to an ITT statement.

"Significantly, ITT Tech did not make any money, in interest or fees, from those third-party programs, which were designed to help students during the recent economic downturn. We are disappointed that the Bureau chose to sue rather than work with ITT Tech to address any legitimate concerns about efforts to help students pay for their education," the statement continued.

ITT Educational Services provides post-secondary technical education. Tens of thousands of students are enrolled online or at one of ITT’s roughly 150 institutions in nearly 40 states. ITT’s tuition costs are among the highest in the country in the for-profit industry. Earning an associate’s degree at ITT can cost more than $44,000. Bachelor’s degree programs can cost $88,000. That is significantly higher than the cost of similar degrees at a community college or a public four-year institution.

The lawsuit is the CFPB's first public enforcement action against a company in the for-profit college industry.
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. 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 was aware that most of its students would not be able to pay back its private student loans, projecting a default rate of 64%.

“ITT marketed itself as improving consumers’ lives but it was really just improving its bottom line,” said CFPB Director Richard Cordray. “We believe ITT used high-pressure tactics to push many consumers into expensive loans destined to default. [This] action should serve as a warning to the for-profit college industry that we will be vigilant about protecting students against predatory lending tactics.”

Nicole Elam, a spokeswoman for ITT, said the college was prepared to defend itself against such claims made by the CFPB.

"We don't comment on pending litigation other than to say we believe that the bureau's claims are without merit and that we intend to vigorously defend ourselves against the charges," said Elam.

The CFPB’s 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.” This loan typically had to be paid in full at the end of the student’s first academic year. But ITT knew from the outset that many students would not be able to repay their Temporary Credit balances or fund their next year’s tuition gap.

The CFPB lawsuit alleges that between July 2011 and December 2011, 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. However, ITT’s CEO revealed in investor calls that converting the temporary loans to long-term loans was the company’s “plan all along.”

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the CFPB has the authority to take action against institutions engaging in unfair, deceptive or abusive practices. Specifically, the lawsuit alleges the following conduct by ITT:

    •    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.

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