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EDMC accused in GI Bill scheme

| Monday, Dec. 15, 2014, 11:06 p.m.

Education Management Corp. is being accused in a whistle-blower lawsuit of lying on student financial aid applications to collect more money under the GI Bill, adding to the legal problems mounting against the for-profit education provider as it fights for survival.

The lawsuit was filed in federal court in Pittsburgh by a group that included six EDMC admissions officers — two of whom were former members of the military — and a former paratrooper who attended online classes with financial aid set aside for veterans.

The company is accused of using deceptive recruiting practices to target students who qualified for aid under the GI Bill. The aid for veterans helped the company circumvent limits on the amount of federal funds that can be used for post-secondary education.

“It's a tremendous fraud being made on the American taxpayers, the public and students all to benefit a for-profit school,” said attorney Alan Perer of the Downtown firm Swensen, Perer & Kontos, which represents the plaintiffs. “It's just an absolute travesty.”

The lawsuit, which has been under seal since 2011 and was obtained by the Tribune-Review, retreads some of the ground of another whistle-blower case against EDMC in Pittsburgh that alleges illegal recruiting practices. That lawsuit, which includes the Justice Department, alleged EDMC pays recruiters based on the number of students they enroll — a violation of federal law.

The latest case alleges EDMC recruited vets by overpromising on the post-graduate employment prospects. It alleged EDMC lowered income and assets on financial aid applications to boost the amount of money students received and charged that EDMC misled students about the cost of their education.

An EDMC spokesman said the company denies the allegations.

“We think the suit is without merit, and we will defend ourselves,” said Chris Hardman, EDMC spokesman.

Perer said the veterans' lawsuit could cost EDMC as much as $1 billion in damages. The other case, which was filed in 2007 by former employees, seeks to recover $11 billion in federal and state student aid.

The latest lawsuit further complicates EDMC's efforts to regain financial health as it comes under intense regulatory scrutiny and adjusts to declining enrollment and revenue. The company has a plan to restructure $1.1 billion in debt, but a lawsuit brought in October by two hedge funds that own $20 million in EDMC debt is threatening to derail that deal. That suit was filed as it is in mediation with federal prosecutors over the whistle-blower lawsuit alleging illegal recruiting practices that could cost it $11 billion in federal and state student aid. Neither case has been settled.

The civil suit brought by the veterans accuses EDMC of using deceptive tactics to recruit ex-military members to its online colleges. It alleged EDMC lowered income and assets on students' applications for financial aid to boost the amount of money they received.

Under federal law, for-profit education companies cannot receive more than 90 percent of their revenue from Title IV funds, the primary source of federal student financial aid. The money guaranteed to veterans under the GI Bill is not counted against the 90 percent.

Admissions staff and financial aid representatives “aggressively” targeted military students for that reason, and lied to them in the process, the lawsuit says. The whistle-blowers contend that recruiters overstated graduation rates and job prospects for graduates of the online schools, and falsely promised students that a degree would guarantee an increase in rank and pay.

“At its most basic level, (EDMC's) business is not that of an educational institution. It is a sales company,” the lawsuit said. “Defendants place virtually no stock in providing students with quality educational services and therefore are not entitled to participate in the federal financial aid program.”

EDMC has 125,560 students on campuses in 32 states and in Canada, and employs 20,800 people, including 2,000 in Pittsburgh. Its schools include The Art Institutes, Argosy University and Brown Mackie College.

EDMC reported a $664 million loss last year and voluntarily delisted itself from the Nasdaq stock exchange as its stock plunged 90 percent this year. The company has slashed more than 600 workers nationwide, nearly half of them in Pittsburgh, and restructured its operations to cut costs.

The company is not alone in its problems, as the entire for-profit education industry has struggled with declining enrollment and drawn fire for alleged recruiting violations. Amid scrutiny from the federal Department of Education, Corinthian Colleges said this summer that it was selling 85 of its 107 campuses and online programs.

Chris Fleisher is a staff writer for Trib Total Media.

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