Feds Sue For-Profit College Chain With Local Campus

WASHINGTON (February 26, 2014) The Consumer Financial Protection Bureau is suing Indiana-based ITT Educational Services, which operates ITT Technical Institute in Waco, alleging that the company pushed students into high-cost private student loans knowing they would likely end in default.

An ITT company spokeswoman says the bureau's claims are without merit, but she wouldn't comment further on pending litigation

The agency says ITT’s tuition rates are among the highest charged by for-profit institutions in the U.S., ranging from as much as $44,000 for an associate’s degree to $88,000 for a bachelor’s degree.

Most ITT students borrow money to pay the tuition and most of the money comes from federal student loan programs, the agency says, but federal aid doesn’t cover the full cost.

That leaves most of ITT’s students facing what the agency called a “tuition gap,” which requires them to find other sources of funding.

The lawsuit alleges ITT encouraged new students to cover the gap with a zero-interest loan called Temporary Credit that had to be paid in full by the end of a student’s first academic year.

“We believe ITT knew from the outset that many students would not be able to repay their Temporary Credit balances or fund the next year’s tuition gap. ITT knew students would have to take out one of the high-cost private student loans it had set up for just this purpose,” CFPB Director Richard Cordray said Wednesday.

“But ITT kept students in the dark about its lending model that it freely shared with investors,” he said.

The suit alleges that from July 2011 to December 2012, ITT pushed students to repay their Temporary Credit and fund second-year “tuition gaps” through the private loan program it set up.

“For some borrowers, these loans came with interest rates of more than 16 percent over ten years, which is like financing your college education on your credit card,” Corday said.

“These expensive loans were often destined to default, and ITT knew that. In fact, its own analysis projected a default rate of 64 percent on these loans, key information that was never shared with the borrowers,” he said.

The agency also says that ITT didn’t live up to promises that graduates would land good jobs and increasing their earning potential.

“So although ITT marketed itself as improving consumers’ lives, it was really just improving its bottom line. The result was that while many of the students got poorer, the investors and shareholders got richer,” Corday said.

ITT Educational Services has about 150 institutions in nearly 40 states, according to the bureau.