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On a muggy June morning in 2019, administrators from for-profit colleges took their seats in breakout rooms on the second floor of the Hyatt Regency in downtown 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 promised tips on how to market to Millennials, another offered advice on how to handle legal threats from disgruntled students.
Later that evening, amid cocktails and music, exhibitors made their direct pitches to administrators, hoping to earn 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.
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The arrangements create a mutually-beneficial relationship: The colleges can enroll more students and make more money, while the companies can profit from service fees. Moreover, for tens of thousands of low-income students at thousands of schools nationwide, these plans can seem like the only affordable way to earn a degree that leads to 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. The loans and payment plans help colleges charge more for an already expensive education, and the terms can be much more onerous than those of a federal loan. In some cases, colleges get the funds that help them stay in compliance with federal regulations, keeping them eligible for continued federal financial aid. Meanwhile, the companies facilitate billions of dollars of often burdensome private student debt, yet they face almost no oversight from state or federal 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.
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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.
Of the dozen for-profit schools 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 long history of not living up to the promise of a marketable degree at an affordable price. Many have graduation rates below 40 percent, and their typical student earns less than $20,000 a year after leaving. Indeed, scores of former students have filed lawsuits against for-profit colleges accusing them of deceptive recruitment; government agencies also have investigated colleges such as the Art Institutes for allegedly misleading prospective students.
Now, it turns out, many of these colleges that make money off students have an abiding partner in the little-known tuition financing companies.
Information on these privately-owned companies is hard to come by, but one of them, Tuition Options, has originated and serviced more than $2 billion in loans to more than 450,000 student accounts since 2008 alone.
“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.
But TFC has promised to help more than students. On its website, the company has encouraged prospective clients to “join thousands of schools like yours that have increased enrollment, retention and profits.”
The colleges, in turn, market these payment plans to students as a convenient way to afford school. 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 the payment plans accrue 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. In 2016, Heather Pearce reenrolled in the Art Institute of Pittsburgh after learning that she would be able to make monthly payments to finance her education while she studied. At first, she paid installments of $116 directly to Tuition Options, she recalled. Over the next two years, however, Pearce estimates the school changed the amount she owed five times.
Related: Public colleges shock students by sending them to costly debt collection agencies
“That balance kept growing and growing,” she said. The Alabama native, who was an online student, insisted that she never received an adequate explanation from Tuition Options or the Art Institute, even as the monthly payments surpassed $200.
Pearce, now 37, said school officials told her that, to keep the amount from climbing further, the payments would be extended for up to two years after she graduated. Only then could she receive her degree.
“We want to make sure that no student who wants to pursue their dreams and career goals and get their education is turned away.”
Sean Steinmarc, the CEO of TFC Tuition Financing
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.
Dream Center Education Holdings owned the Art Institute when Pearce was enrolled. The chain is currently owned by Education Principle Foundation; a spokesperson said she could not comment on anything that happened under previous ownership.
“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.”
The tuition financing companies can help schools with more than just increasing student enrollment and easing debt collection paperwork. 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. That means schools get funds to count toward their 10 percent requirement before students repay their balances, or even if they never repay.
TFC and Tuition Options executives said that such cash advances were a small part of their business model.
Related: Why does New York State sue its college students?
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, chief operating officer of Education Loan Source, said it had removed that language from its advertising, because 90/10 compliance was not a primary concern for 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.”
Still, students who sign a loan contract with a college may later face increased fees and interest from the company that purchased their debt. Paramount Capital Group purchases contracts from schools, providing them with a lump sum in advance when they need it, said Mike Fadner, its chief financial officer. It then sets interest rates for the students that range from about 7 to 18 percent. 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.
Scrutiny of such arrangements and these companies is rare.
“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 argues that the Consumer Financial Protection Bureau should play a larger role in overseeing both the for-profit colleges that offer these types of financial aid products and the companies that provide them with the money to do so.
Frotman left the bureau in 2018, in protest over changes to the agency under the Trump Administration. 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.”
Indeed, under the Trump administration, the agency was more lenient with financial institutions. 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 bureau and the federal Department of Education declined to answer questions.
Related: Colleges are withholding transcripts and degrees from millions over unpaid bills
State agencies in charge of higher education oversight also often fail to look into the payment plans that colleges are offering and the companies helping them, according to Robyn Smith, a lawyer with the National Consumer Law Center. The problem, she said, is that state agencies tend to focus more on educational quality. “They aren’t really experts when it comes to financial services,” she said.
Still, Smith and Frotman are hopeful about signs of change at the state level. Colorado and Maine, for instance, have passed legislation to create a student finance registry, which would gather data on private student loans issued in the state, including the companies that hold loans. Without such registries, they say, regulators will remain in the dark.
Pearce, the Art Institute student, was still making monthly payments to Tuition Options when her campus abruptly shut down as part of sweeping closures by the for-profit chain. She had just two classes left before graduating.
As she tried, and failed, to get answers from the college, Pearce faced another unhappy surprise from Tuition Options. “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 wrote Tuition Options saying she refused to keep paying for a degree she would never earn, the company agreed to pause her account and eventually released her from the obligation.
But Pearce wishes they had done even more: “I think they should be paying me back.”
This story about college payment plans was produced by The Hechinger Report, a nonprofit, independent news organization focused on inequality and innovation in education.