At the national level, the cycle of access and fraud began decades ago with one of the American education system’s high points: the passage of the Servicemen’s Readjustment Act of 1944, popularly known as the GI Bill, which made federal funds available for higher education. Both the non-profit and for-profit sectors saw a sharp increase in attendance in the immediate postwar years. The bill was also the cause of the for-profit education industry’s first national scandal.
With new access to federal subsidies, the for-profit industry enrolled nearly 1.7 million veterans under the GI Bill. A 1950 federal investigation found that nearly two-thirds of the 8,900 for-profit schools that received GI Bill funding had been established after the $14 billion bill’s passage. The New York Times wrote that many of the schools were “simply living off ‘the fat of the land’ and will cease operations when the veteran enrollment ends.” A congressional investigation found that some of the for-profit schools had falsified cost and attendance information and billed the government for students who had never enrolled. Congress voted to increase oversight of the for-profit sector.
So began what would become the de facto model of federal regulation of for-profit colleges: an ebb and flow of oversight as the government loosens regulations to make higher education more accessible, some schools abuse this laxity and the government responds with new regulations.
Regulations passed in the 1950s could not prevent further abuse after Congress passed the 1972 Higher Education Act Amendment. Also known as the Student Aid Bill, it extended access to federal grants and tuition subsidies to students enrolled in higher education programs. The amendment also created the Student Loan Marketing Association, widely known as Sallie Mae, to provide federally insured higher education student loans.
The amendment extended equal access to federal subsidies to students at non-profit and for-profit institutions – but not without objections. One report said that “students attracted by sophisticated advertising and unfillable promises may enroll in schools which do not offer the quality of education which the schools claim is available.”
As with the GI Bill, this access to new federal subsidies once again led to abuses and fraud in the for-profit college sector.
In 1976 the Federal Trade Commission concluded an extensive investigation into reported abuses at for-profit schools. The Commission’s 600-page final report concluded that the for-profit college system engaged in “false, deceptive, and unfair acts and practices that have been and are causing serious harm to consumers,” and that if the industry was left unchecked fraud would continue.
The report’s recommendations for reform would have gone into effect four years later, but a group of for-profit schools successfully challenged the FTC in court and prevented the rule from being enacted.
In New York State, for-profit schools faced civil penalties and the repayment of state grants and, in the most extreme cases, imprisonment. In 1979, the president of Careerco School for Paraprofessionals received a four-year prison sentence for mail fraud and conspiracy charges, including faking student records to prevent refunds for uncompleted courses. The school folded due to bankruptcy, with more than $1.6 million in unpaid debt.
In the late 1980s and 1990s, skyrocketing student loan default rates prompted another round of federal action against for-profit schools. A 1989 report by the U.S. General Accounting Office found that the amount of student loans defaulted on increased from $14 million in 1987 to $247 million in 1989 for all students. In 1987, students at for-profit schools accounted for 12 percent of all defaults. By 1989, that figure had risen to 86 percent.