AIU - American InterContinental - Career Education -- Career Education Required to Repay Financial Aid Funds to U.S. Hoffman Estates Illinois

Career Education Required to Repay Aid Funds to U.S.
8 May 2006
The Wall Street Journal

Career Education Corp., a big operator of for-profit colleges, has paid the U.S. Education Department nearly half a million dollars to resolve government findings of financial-aid violations at campuses in Pennsylvania and Arizona, documents show.

In February, the Education Department ordered the company to return about $469,000 in federal money because it lacked proper documentation for aid provided to certain students at the company's Pennsylvania Culinary Institute in Pittsburgh, agency and company officials said. In April, the agency reached a settlement with the company's Collins College in Tempe, Ariz., in which Career Education paid $23,000 without acknowledging wrongdoing.

The disclosures, which come from documents released under the U.S. Freedom of Information Act, add to the litany of Career Education's woes. The company is facing government investigations, including one by the Justice Department, probation of a university by an accreditor and lawsuits alleging poor instruction, high-pressure sales practices and financial-aid fraud. Amid those problems will come a proxy fight next week. Shares have lost more than half their value since their peak in 2004.

Last year, the Hoffman Estates, Ill., company disclosed that the Education Department was reviewing Career Education's overall management of financial-aid programs, but released few details. In June, the agency told Career Education it wouldn't approve any campus expansions or acquisitions until it was satisfied with the reviews' outcome.

Those restrictions are "substantially still in place today," Education Department spokeswoman Jane Glickman said in a prepared statement.

Leslie T. Thornton, a Career Education director and former chief of staff to the U.S. secretary of education, said the department's complaints about Collins and Pennsylvania Culinary have been "fully resolved." The company says the department has agreed to consider an application for expanding two campuses.

Career Education, with 97,000 students, runs more than 80 colleges, trade schools and universities across the country, including the Katharine Gibbs Schools. The Education Department oversees the federal grants and loans that its students need for tuition -- and on which Career Education relies for much of its revenue, which totaled $2 billion in 2005.

Meanwhile, Steven Bostic, who sold a chain of colleges to Career Education in 2001, is leading a proxy fight. One of three candidates running to unseat directors at the May 18 annual meeting, Mr. Bostic succeeded last year in getting investors to withhold almost two-thirds of votes from management's slate of directors. Mr. Bostic, who owns 1.1 million shares, or 1%, of Career Education, cites the company's regulatory problems for his challenge. Friday, Institutional Shareholder Services, which advises big investors on how to vote in such proxy fights, backed Mr. Bostic's slate.

Now, a previously undisclosed 2003 Education Department report said Career Education manipulated Collins College's financials "to effectively distort" the true proportion of money it received from federal financial-aid programs. In a measure designed to prevent fraud, for-profit schools may receive no more than 90% of their money from federal aid programs or their students will be cut off from government aid.

The Education Department report noted "evidence suggesting a coordinated subterfuge to under-report the effect" of federal financial-aid revenues at Collins. The report said the school "improperly inflated" its nonfederal revenues by issuing federal-aid checks to some students. The student would then endorse the check back to the college. That amount would then be counted as money toward nonfederal revenue.

Career Education called the report's conclusions "wholly unwarranted," telling the agency that the school was merely returning federal-aid balances owed to students, who were then properly using the money for expenses.

The company says the $23,000 it paid to settle with the Education Department pales in comparison with the $55 million in federal-aid money that flowed to Collins from July 2000 through February 2003 -- the period reviewed. The company said the department didn't find any violation of the 90% rule. Another Education Department report, dated May 2005, said Pennsylvania Culinary Institute failed to establish student eligibility for financial-aid funds for 26 of 30 students whose files were reviewed by federal examiners for the 2002-03 and 2003-04 school years.

The department also found that the school received federal financial-aid funds even though students had withdrawn from the institution, were on a leave of absence or otherwise not enrolled. Career Education spokeswoman Lynne Baker said that the $469,000 returned to the government represented only 1.3% of the $36.8 million the school received in financial-aid money over the two school years examined.

In another regulatory problem, last December, the body that accredits Career Education's fast-growing online American InterContinental University placed the school on one-year probation, citing concerns about admissions practices, accuracy of recruitment materials and program content. If the accreditor takes the next step of withdrawing its seals of approval, students wouldn't any longer be eligible for financial aid.

Career Education executives say the company is making progress satisfying the accreditor's concerns.

In late April, a dozen students of the company's Sanford-Brown Institute in Landover, Md., sued Career Education in Prince George's County Circuit Court in Maryland. The students, studying for medical programs for which they paid about $30,000 each in tuition, claimed the company misrepresented availability of clinical externships required to get an important credential. The company declined to comment on the suit.

Jakelarceny
Hoffman Estates, Illinois
U.S.A.