On a hot June morning, 2019, administrators from for profit colleges sat in breakout rooms on floor 2 of the Hyatt Regency in New Orleans. They had arrived for the Career Education Colleges and Universities trade association’s annual convention and were getting ready to choose from dozens of sessions. One offered tips on marketing to Millennials and another gave advice on how students can handle legal threats.
Later that evening, among cocktails and music, exhibitors made direct pitches to administrators in hopes of winning their business. That’s where tuition financing companies set up shop, with the aim of attracting new clients with strategies to help for-profit colleges boost their enrollment numbers and bottom lines.
These companies, such as TFC Tuition Financing and Tuition Options, have positioned themselves as crucial cogs in the for-profit education industry — playing a critical role in powering the sector financially. When students enroll and can’t pay the full tuition right away, these companies help colleges offer payment options, such as installment plans or private loans.
These arrangements create a mutually beneficial relationship. Colleges can enroll more students and make more money while companies can benefit from service fees. These plans can be very affordable for low-income students from thousands of schools across the country. They can even lead to a degree that will land them a good job. But advocates for students warn that they can be exploitative — and nothing more than an instrument that leads to additional debt.
In fact, many of the colleges the companies have worked with, such as Dorsey College in Michigan and Ohio Business College*, have poor graduation rates and leave students earning no more than they would have with just a high school degree. Colleges can charge more for a college education with loans and payment plans. The terms of federal loans can be more difficult than the loans. Colleges may be eligible for federal financial aid if they receive funds that allow them to comply with federal regulations. Despite the fact that these companies facilitate student debt of a staggering amount, they are not subject to any oversight by federal or state regulators.
“They are this critical component that lets the worst-performing and most predatory schools continue to exist,” said Seth Frotman, the former student loan ombudsman for the Consumer Financial Protection Bureau.
The companies say they’re providing a service that allows students to afford college when federal grants and loans aren’t enough to cover tuition, while also relieving schools of the burden of collecting on the debt. What’s more, they add, the colleges they partner with set the terms of any loans or payment plans, and they simply act as third-party servicers or provide technical assistance. “We want to make sure that no student who wants to pursue their dreams and career goals and get their education is turned away,” said Sean Steinmarc, the CEO of TFC Tuition Financing, one of the half-dozen or so companies that provide this service.
One of the dozen for-profit schools that were contacted by The Hechinger Report, just two — Falcon Institute for Health and Science and Cameo College of Essential Beauty — answered questions about why they use these services; both described the same benefits as the companies did.
For-profit colleges have a history of failing to deliver on their promises of a marketable degree at a reasonable price. Many of these colleges have graduation rates below forty percent and their average student earns less that $20,000 per annum after they leave. Numerous former students have filed lawsuits against colleges that are for-profit, accusing them deceptive recruiting practices. Government agencies have also investigated colleges like the Art Institutes for allegedly misleading potential students.
Many colleges that make their money from students now have a long-standing partner in the well-known tuition funding companies.
Although it is difficult to find information about these privately-owned businesses, Tuition Options has provided more than $2 billion in loans and services to more than 450,000 student accounts.
“If we didn’t exist and we didn’t make money, we wouldn’t be able to help students,” Steinmarc of TFC Tuition Financing said.
TFC promises to help more than just students. On its website, the company has encouraged prospective clients to “join thousands of schools like yours that have increased enrollment, retention and profits.”
These payment plans are then promoted by colleges to students to make it easier to afford college. In reality, they can add to a student’s debt load with high interest rates or interest that accrues before a student has even graduated. Not all payment plans have interest.
Utah’s Cameo College of Essential Beauty, for example, contracts with TFC and offers plans with interest rates as high as 12 percent.
High interest rates aren’t the only problem for students. Heather Pearce, a 2016 Art Institute of Pittsburgh grad, enrolled again after discovering that she could make monthly payments to help pay for her education. She recalled that she initially paid $116 in installments to Tuition Options. Pearce estimates that over the next two-years, the school changed the amount she owed five more times.
“That balance kept growing and growing,” she said. The Alabama native was an online student. She claimed that she never received an explanation from Tuition Options nor the Art Institute. Even though the monthly payments exceeded $200, she insisted that she had never been given an adequate explanation.
Pearce, now 37 years old, stated that school officials told her that the payments would be extended up to two more years after she graduates to keep the cost down. Only then would she be able to receive her degree.
Kate Cavataio, Tuition Options’ chief financial officer, said in a written statement that changes to students’ payment plan terms would be made only at the direction of the school or borrower.
Pearce was enrolled in the Art Institute at Dream Center Education Holdings. Education Principle Foundation is currently the owner of the chain. A spokesperson stated that she cannot comment on past events.
“This is a shell game,” said Amy Laitinen, director for higher education at the progressive think tank New America. The colleges intentionally raise tuition above what a student’s federal aid will cover, she said, and then “the companies help them fill the hole. They’re not only increasing tuition, they’re increasing student debt.”
Schools can use tuition financing companies to help them with more than just increasing student enrollment. They can also help with debt collection. Some offer infusions of cash, which allow schools to comply with a federal regulation aimed at ensuring that for-profit colleges don’t make all their money from taxpayer dollars.
Under a federal law known as the 90/10 rule, no more than 90 percent of a for-profit college’s revenue can come from federal financial aid. The remaining 10 percent must come from other sources, including students’ tuition paid out of pocket.
Some colleges receive money upfront either directly from — or with the help of — these tuition financing companies, court records and other documents show. Schools receive funds that count towards the 10 percent requirement to repay balances before students repay them, even if they never repay.
TFC and Tuition Options executives stated that cash advances were only a small part their business model.
Another company, Education Loan Source, in a promotional flyer, asked directly: “Does your school have 90/10 challenges?” It went on to explain that it could help colleges with cash flow.
John Weir, Education Loan Source’s chief operating officer, stated that the company had removed that language from its advertisements because 90/10 compliance was not a primary concern of potential clients. But the program it promoted, TuitionFlexPlus, remains in place; it allows schools to sell their payment plans to a “qualified purchaser,” thereby giving the schools a cash infusion.
“We believe that ELS is providing a valuable service,” Weir said in an email, noting that the company monitors clients’ retention and graduation rates to ensure it is working with “reputable schools.”
Students who sign a loan agreement with a college could later be subject to higher fees and interest from companies that bought their debt. Paramount Capital Group buys contracts from schools and provides them with a lump amount in advance when they require it, according to Mike Fadner. It then sets interest rates that range from 7 to 18% for students. Fadner said he doesn’t think the arrangement conflicts with the intent of the 90/10 regulation. “No company is going to front that money without some strong likelihood of that student paying it back,” he said.
Rarely is there any scrutiny of these arrangements or these companies.
“Unfortunately, what you’re seeing here is really, really the Wild West,” said Frotman, the former student loan ombudsman, who went on to found the nonprofit Student Borrower Protection Center. “The student loan market is, at its very core, extremely lightly regulated. This aspect of the loan market is even worse.”
He believes that the Consumer Financial Protection Bureau should have a greater role in overseeing both for-profit colleges offering these types of financial aid and the companies that provide the money.
Frotman quit the bureau in protest of Trump Administration changes. In his resignation letter, he described the bureau’s leadership as having “abandoned its duty to fairly and robustly enforce the law.” Instead, he argued, CFPB prioritized protecting “the misguided goals of the Trump Administration to the detriment of student loan borrowers.”
The Trump administration was more accommodating to financial institutions than the previous Trump administration. Former Director Richard Corday, an Obama appointee, resigned in 2017 and was replaced by Mick Mulvaney, who had previously been President Trump’s chief of staff. Upon his arrival, he announced that the bureau’s “days of aggressively pushing the envelope are over.” Under the permanent replacement, Kathleen Kraninger, the CFPB continued to scale back its oversight. A House Financial Services Committee report found that in the first six months of Kraninger’s tenure, the bureau recovered just $12 million for consumers, compared to $200 million in the last six months under Cordray.
Both the federal Department of Education and the Bureau declined to answer questions.
Robyn Smith, a lawyer at the National Consumer Law Center, said that state agencies responsible for higher education oversight often fail to investigate the payment plans colleges offer and the companies that help them. She explained that state agencies tend focus more on quality education. “They aren’t really experts when it comes to financial services,” she said.
Smith and Frotman still believe there will be some positive changes at the state level. For example, Colorado and Maine have passed legislation to establish a student finance registry. This would collect data on private student loans in the state, as well as the companies that hold them. Regulators will not be able access such data if there are no such registries, they claim.
Pearce was an Art Institute student who was still paying Tuition Options each month when her campus was shut down by the for profit chain. Only two classes remained before she graduated.
Pearce was unsuccessful in her attempts to get answers from college. Tuition Options brought another surprise to her. “They told me to still make my payments, even though the school was closed,” she said. (Cavataio said the company reviewed all accounts with the court-appointed receiver for the Art Institute’s parent company, which determined all balance adjustments or suspension of accounts.)
After she told Tuition Options that she was refusing to pay for a degree that she never earned, the company agreed to suspend her account and eventually released the student from the obligation.
But Pearce wishes they had done even more: “I think they should be paying me back.”
*Clarification: Ohio Business College uses TFC Tuition financing for student payments plans only for its truck driving course. In recent years, the program has had graduation rates exceeding 90%. The graduation rates for all programs that are eligible for federal financial assistance are much lower.