The recent law enforcement crackdown on for-profit colleges is well documented. These schools mislead students by promising a fast track to a brighter future and then loaded students up with mountains of debt for worthless degrees—a form of consumer fraud that stretches back for decades.

But the public may be unaware of exactly how these schools operate. What occurs behind the scenes is ugly—a number of unscrupulous companies aid and abet the worst abuses by the for-profit college industry. These niche companies, also known as ‘third-party servicers’ in the wonky circles of higher education, provide specific services to schools. But far too often, they take their cut in exchange for propping up the most predatory schools—by generating leads to prospective students through any means necessary, by providing private loans and other financing, and by helping for-profit colleges manipulate their default statistics to conceal abuses from regulators and investors.

The following piece is the first in a series that will explore the ecosystem of private companies that enable the for-profit college industry and empower the worst actors in higher education to saddle families with unaffordable debt.

IN recent years, federal and state law enforcement officials—including the United States Federal Trade Commission (FTC)—have cracked down on lead generation firms that drive servicemembers, veterans, and their families into the open arms of the worst actors in American higher education. These firms are often the first interaction prospective students have with the for-profit college industry—the first step on a path that has left millions drowning in debt.

  • What information has ED collected about these companies?
  • Does ED notify schools when a lead generator is the target of an enforcement action by federal or state officials?
  • Does ED cross-reference its existing knowledge of third-party servicer contracts with various lead generators that have been investigated by federal and state officials?
  • What actions does ED take if a school fails to provide information about its contract with a lead generator—or any other third-party servicer—when complying with these federal disclosure rules?

Each of these companies systematically exploited servicemembers, veterans, and other consumers looking for new opportunities. Instead of providing accurate information to potential students, these lead generators elevated predatory colleges that were willing to pay, or, even worse, directly handed these veterans and servicemembers to bad actor colleges by masquerading as “education advisors.” In every case, law enforcement took action against these companies for unfair or deceptive business practices—illegal acts banned by federal and state law.

If these were just general run-of-the-mill scams, this would be an outrage. But what we see here is bigger: while these companies are grifting their money from consumers, they are also propping up the schools that pay to play. And while the FTC has repeatedly taken action against these predatory firms, the Department of Education (ED) sits on the sidelines in silence, despite already having regulations on the books that could cover the relationship between schools and lead generators.

Hear No Evil, See No Evil, Speak No Evil

Institutions of higher education often contract with outside entities for services ranging from pre-enrollment activities like recruiting and advising students, determining eligibility for federal aid, to delivering the Title IV funds. These contractors are considered third-party servicers if they manage or operate any aspect of the school’s participation in the federal student loan program. And, when an institution of higher education enters into a contract with a third-party servicer, Congress requires that the third-party servicer follow the same laws that apply to the school. Furthermore, schools are required to notify the Secretary of their relationship with a third-party servicer. At any time, the Secretary has the authority to request a copy of the contract between the school and the third-party servicer.

Lead generators enter into contracts with schools all the time, and their role in pre-enrollment activities with prospective students would suggest that they fall squarely under the third-party servicer classification—and this raises some important questions:

  • What information has ED collected about these companies?
  • Does ED notify schools when a lead generator is the target of an enforcement action by federal or state officials?
  • Does ED cross-reference its existing knowledge of third-party servicer contracts with various lead generators that have been investigated by federal and state officials?
  • What actions does ED take if a school fails to provide information about its contract with a lead generator—or any other third-party servicer—when complying with these federal disclosure rules?

These are not idle questions. Evidence uncovered through an investigation by the Student Borrower Protection Center shows that the Department’s approach to information collection and enforcement is haphazard and wholly inadequate.

From this newly uncovered information, we now know ED does not compile information on lead generators as part of its inventory of third-party servicers and has not proactively taken steps to learn which schools are contracting with these companies. In fact, ED appears to know very little about the relationships between lead generators and schools.

By failing to inventory lead generators as third-party servicers, ED’s purported oversight of college recruitment activities is hampered by a lack of critical information—the terms of contracts between these schools and lead generators. Without demanding this information from schools, ED effectively provides schools with an open lane to violate the incentive compensation rule and other requirements under the Higher Education Act. [1]

The implementing regulations were designed to ensure that when a school outsources important jobs, consumer protections would not be ignored. In fact, ED built in joint and several liability—putting schools on the hook for the performance of their contractors—so that schools would ensure that their contractors would operate above board. And if the third-party servicer failed to follow the law, the school would be responsible.

A Path Forward

Servicemembers, veterans, and other consumers deserve a higher education system free from bad actors. While this requires reform on many fronts, reining in abusive lead generation firms is a critical first step to a larger effort to clean up the higher education sector and protect military families. To this end, we recommend stakeholders across the federal government take immediate action.

  • ED must immediately follow the law. Congress already requires independent, annual compliance audits for third-party servicers, ensuring contractors follow the law when they administer services to schools. But, when schools fail to disclose contracts to ED, these audits cannot occur. Further, when ED fails to provide the proper oversight of schools and their contractors, it becomes easier for these companies to engage in illegal practices—and students suffer because the system designed to protect them has failed.
  • Congress and the Education Department’s Inspector General should find out the truth. It is time for Congress and ED’s Inspector General to ask ED the tough questions about why it has failed to hold these lead generators and the schools that use them accountable. Why has ED sat on the sidelines when states and the FTC have taken action against lead generators? Why doesn’t ED compile information on contracts between schools and lead generators?
  • Congress should amend the Higher Education Act to ensure greater accountability. Most importantly, it is time to update the Higher Education Act to demand schools report their use of lead generators and other contractors that prop up bad actors in the higher education sector. Further, federal higher education law should require ED to notify all schools when a lead generation firm is the target of an enforcement action by a state or federal law enforcement agency. It is inexcusable that the government would have knowledge of potential bad actors and fail to give all schools the information necessary to protect their students. Additionally, when lead generators are found to have violated the law, the public has a right to know about the schools who have used the company, and those harmed should have the opportunity to directly seek relief. Lastly, rather than give the Secretary discretion on which contracts to request, ED should be required to proactively collect all contracts between institutions and their contractors, and to actually hold them accountable when they break the law.

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Mike Saunders serves as Director of Military and Consumer Policy at Veterans Education Success, and previously spent nearly a decade advocating for veterans at The Retired Enlisted Association. Mike is a 3rd generation member of the Army. Tariq Habash is Head of Investigations at the Student Borrower Protection Center.

[1] The incentive compensation rule bans incentive payments to college recruiters based on their enrollment success, because such payments might lead recruiters to mislead students in order to earn the bonus.