Hedge Funds and Fraud in Education

By: Tonya Mead, CFE, CHFI,  PI, MBA, MA Educational Psychology

Finally! Some good news from Chicago. Former students of the defunct Corinthian College(s) may be eligible for $11.6 million in student loan debt relief.

The other good news is that the hedge fund investing in Corinthian Colleges, Aequitas, is being investigated by the Securities Exchange Commission for facilitating student loans that were “high-priced debt with a high likelihood of default,” [1, para 6].

Broken Record: Fraud at the Front end and Back end

This fraud story sounds like a broken record. Particularly the one played about mortgage industry, mortgage loan fraud and predatory lending practices. Here is a review:

Front End.  Mortgage fraud, for instance occurs when a potential borrower makes a “material misstatement, misrepresentation, or omission in relation to a mortgage loan.” The lender takes this information into consideration and “approve[s] a loan, accept a reduced payoff amount, or agree to certain repayment terms.” This type of fraud impacts the entire economy and was one of the reasons for the 2008 financial crisis. At present, total mortgage debt stands at $8.09 trillion (see Zibel below). From 1997 to 2005, financial institutions reported to enforcement authorities a 1,411% increase in suspicious activities relating to possible mortgage fraud.

Back EndPredatory lending practices are ” any lending practice that imposes unfair or abusive loan terms on a borrower. The subprime mortgage industry targeted low income, first time home buyers and minorities salivating at the chance to get their slice of American pie. According to the FBI, “It is also any practice that convinces a borrower to accept unfair terms through deceptive, coercive, exploitative or unscrupulous actions for a loan that a borrower doesn’t need, doesn’t want or can’t afford.”

In both instances, here are a few observations:

Observations

(1) Some for profit schools took advantage of the euphoria students felt. They were none too eager to fill a need that many first time students would pay (sign the loan agreement) at any cost, interest rate or payback period. Many of these eager students would serve as first time, first generation college goers for their family.

(2) Some students may have (due to lack of job prospects, international transient mobility, and naivete)  fraudulently signed student financial aid loan documents and misrepresented their intention to repay their obligations.

(3) Some students may have used college acceptance, student enrollment, and student financial aid to fraudulently obtain student residency visas (student visa fraud).

(4) Some non-students and criminals may have recognized the (a) need by the schools to drive up enrollment to substantiate income earned,  the (b) need by prospective students to obtain admission, (c) the need for cash and income by the groups of unemployed and/or other criminal gangs. All of these disparate needs coalesced to the benefit of student financial aid crime rings.

(5) Some hedge fund companies, according to Business Insider and the NY Times  short the for profit education industry as it is “education’s version of the subprime crisis.”

(6) Other hedge fund companies similar to Aequitas (as alleged by Attorney General Lisa Madigan), may practice a Ponzi-like scheme. For instance,” by March 31, 2017, Aequitas held a portfolio of student loans with an unpaid balance of about $190.5 million. More than 46,000 loans had been made to 41,000 individual borrowers.” The income generated from the student loans on the Corinthian Colleges’ books ” made it appear as though Corinthian was meeting federal regulations to operate and allowed its schools to gain access to federal student loan dollars.” [1, para 7].

These observations make it clear that fraud in education, particularly student financial aid fraud is multi-dimensional and may represent a system infested with criminal enterprises (individuals, schools, investment funds) who are only participating in the education sector to make a quick buck. It is so eerily similar to the mortgage crisis (potential for collusion on the part of real estate agents, brokers, appraisers, loan officers, banks, regulatory authorities, politicians) that is it surreal.

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How pervasive is this problem?

In my book, I write that the U.S. Department of Education,under Title IV (student financial aid program) provides financial support to low income students. Researchers found that 80% (see Smith and Parrish below) of undergraduate students attending for-profit colleges and universities qualified for federal financial aid. Fifty-seven percent (see Heller below) of students attending traditional private and publicly funded colleges qualify.

Thanks Attorney General Lisa Madigan for keeping this issue in the forefront of enforcement actions. The US does not need another financial crisis that could have been prevented had we enforced the laws already written in the US Code. Let’s catch it before the dam breaks!

Tonya J. Mead, CFE, CHFI, PI, MBA, MA, Certified K-12 Administrator and School Psychologist is author of Fraud in Education: Beyond the Wrong Answer and president of Shared Knowledge, LLC http://ishareknowledge.com

Sources (non-hyperlinked)

J. Smith and L. Parrish, “Do Students of Color Profit from For Profit College?” Center for Responsible Lending, Washington,  DC, October 2014. Available:http://www.responsiblelending.org/student-loans/research-policy/CRL-For-Profit-Univ-FINAL.pdf

D.E. Heller, “Does Federal Aid Drive Up College Prices?” American Council on Education, Washington, DC, 2013.

Zibel, “Americans Borrow for Cars, Less so for Homes,”. Wall Street Journal, 14 August, 2014. Available: http://www.wsj.com/articles/u-s-household-debt-sinks-18-billion-to-11-63-trillion-1408028756

Silvestrini, “Student financial aid fraud growing; feds haven’t fully addressed serious vulnerability,” Tampa Tribune. 12 September, 2015. Available: http://www.tbo.com/news/crime/student-aid-fraud-growing-feds-havent-fully-addressed-serious-vulnerability-20150912/

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