Student loans: Secret shoppers used to help sniff out predatory schools

·3 min read

The Education Department plans to use secret shoppers to determine if schools are engaging in practices that violate rules around federal student aid programs.

The Federal Student Aid shoppers will assess recruitment, enrollment, financial aid, and other practices of higher education institutions to help spot potentially misleading or predatory practices, the Education Department said.

The initiative is part of a broader effort by the Biden administration to increase oversight of schools, improve student experiences, and hold low-performing and predatory schools accountable.

“Building the secret shopper program is a good investment that will return dividends towards protecting students and taxpayer dollars,” Kyra Taylor, a staff attorney at National Consumer Law Center, told Yahoo Finance. “But this is just the first step [and] investigation alone is not enough. The Department must take bold steps to shut poorly performing schools down and to provide all borrowers who attended those schools with relief.”

Rear view of young woman with backpack walking in corridor at university
(Photo: Getty Creative)

Shoppers will specifically be on the lookout for misrepresentations related to the following:

  • Transferability of credits

  • Job placement rates

  • Completion and withdrawal rates

  • Graduates’ future earning potential

  • Career services

  • Cost of attendance

  • Amount of federal student aid

  • Accreditation status

  • Other practices that could violate regulations that govern participation in the federal student aid programs

If any misrepresentations are found, they can be used as evidence to support the enforcement division of the department or the Office of Inspector General’s investigations.

“Secret shopping is another tool in FSA’s toolbox as we expand our oversight work to hold predatory schools accountable,” Richard Cordray, chief operating officer at Federal Student Aid (FSA), said in a press release. “Our focus — as always — is to ensure that students, borrowers, families, and taxpayers are not being preyed upon to make a quick buck.”

Close up of two female students talking about a book in the library
(Photo: Getty Creative)

Predatory and low-value schools have been a focus of the Biden administration and contribute to the student debt crisis, leading to debt discharges related to the closed school loan discharge and borrower loan defense discharge programs.

If a school closes while students are enrolled, federal student loan borrowers can have their loans discharged. If a school made fraudulent misrepresentations that caused a student to enroll, they can use the borrower loan defense to get their federal student loans discharged.

Borrower defense applications surged after the Obama administration cracked down on predatory for-profit colleges in 2015 and created new regulations, like borrowers’ defense and the gainful employment requirement. But the mechanism for defrauded borrowers seeking debt relief broke down during the Trump administration under then Education Secretary Betsy DeVos, with the department systematically denying relief claims in form denials.

Under the Biden administration, the Department has discharged $11.4 billion in student loan debt related to the borrower loan defense discharge for students at ITT Tech, DeVry University, Corinthian College, and Westwood College.

Credits that students earned at ITT weren’t transferable, and many ITT campuses lacked internet and training equipment, according to ED findings. Corinthian College was accused of misrepresentations about finances and job placement rates.

Westwood College made "substantial misrepresentations" about job placement rates, including “misleading guarantees” about getting jobs in their field of study, “assurances of unrealistic post-graduation salaries,” and exaggerations about “the transferability of its credits” when the institution knew those credits “would rarely transfer,” according to ED findings.

In addition to the secret shoppers, last year FSA released two bulletins to protect veterans and service members from schools making misrepresentations on the GI Bill and to set up a tip hotline so consumers can report any potential violations of laws for federal student aid programs.

In 2021, the administration also reinstated the Office of Enforcement within Federal Student Aid in charge of school oversight and accountability efforts.

“Schools that engage in fraud or misconduct are on notice that we may be listening and they should clean up accordingly,” Kristen Donoghue, chief enforcement officer at FSA, said in the press release. “But schools that treat current and prospective students fairly and act lawfully have nothing to fear from secret shopping.”

Ronda is a personal finance senior reporter for Yahoo Finance and attorney with experience in law, insurance, education, and government. Follow her on Twitter @writesronda

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