ABC News Investigates For-Profit Education: Recruiters at the University of Phoenix

Aug. 19, 2010— -- Ads for online schools are all over the Internet, plastered on billboards in subway cars and on television. The University of Phoenix, with nearly 500,000 students, is the biggest for-profit college. But some former students said they were duped into paying big bucks and going deeply in debt by slick and misleading recruiters.

"I don't want anyone else to be sucked in," said Melissa Dalmier, 30, of Noble, Ill.

The mother of three had big dreams to be an elementary school teacher, so when she saw ads for the University of Phoenix pop-up on her computer, she e-mailed them for more information. A few minutes later, Dalmier said she got a call from one of the school's recruiters, who she said told her that enrolling in the associate's degree in education program at the University of Phoenix would put her on the fast-track to reaching her dream.

"[The recruiter said] they had an agreement with Illinois State Board of Education and that as soon as I finished their program I'd be ready to start working," she recalled.

Within 15 minutes, Dalmier was enrolled. Since she didn't have enough money to pay for tuition, she said the recruiter helped her get federal student aid. In total, she took out about $8,000 in federally-guaranteed student loans.

But just a few months after Dalmier started, she said she learned the horrible truth: the degree program she was enrolled in would not qualify her to become a public school teacher upon graduation in Illinois.

"It was an outright lie. A bold faced lie," she said.

It's not the first time that the controversial school, which obtains almost 90 percent of its revenues from students paying tuition from federal aid, has come under fire for its recruiting methods.

The University of Phoenix was one of 15 for-profit schools whose aggressive recruiting practices were the subject of hearings held by Sen. Tom Harkin, D-Iowa. The Government Accountability Office sent investigators to for-profit schools across the country and found that all of them were misleading potential students.

In 2004, the University of Phoenix paid nearly $10 million to the Department of Education to settle allegations that it had violated rules about its recruiting practices. The school did not admit any wrongdoing.

"I think maybe the whole orchard is contaminated," Harkin said. "There's a systemic problem with the system itself that needs to be addressed."

University of Phoenix Recruiter's False Promise

ABC News wanted to know firsthand whether what Dalmier said happened to her, would happen to us, so we sent one of our producers undercover to meet with a University of Phoenix recruiter.

Our producer told the recruiter, who was working out of an office in Houston, Texas, that he aspired to be a teacher and planned to live in either Texas or New York. The recruiter told him to enroll in the Bachelor's of Science in Education program, and with that degree and some student teaching, he would be set.

Producer: I just want to understand clearly. I can go to University of Phoenix, do my bachelor's degree, and 100 percent for sure I can go back to either Texas, or New York and I can sit for those exams and once I finish those exams...I can teach.

Recruiter: Then you can become a teacher. Yes. That is true. What's your e-mail address?

Despite her assurances, the recruiter's claim was not true. Even with successful completion of the required certification testing, a degree from the University of Phoenix does not guarantee a teaching certificate in either of those states.

When we confronted Dr. William Pepicello, president of the University of Phoenix, about the recruiter's false promise, he said it was "indefensible."

"It's wrong. Can we do better? Absolutely. Do we train our people to give that kind of misadvice? Absolutely not. And we can do better, we will do better, you know, we already have some initiatives that we talked about that we're putting in place because at the end of the day, we have to get it right."

But this was not the first time that the university's recruiting practices have come under scrutiny. In December 2009, after two former employees came forward and accused the university of violating federal financial aid regulations with its recruiting practices, without admitting wrongdoing the school agreed to pay $67.5 million to resolve the accusations. The two whistleblowers received $19 million in the settlement.

When asked if the 2009 settlement was a sign that "we got caught," Pepicello disagreed.

"No, I wouldn't say it's proof that we got caught. I mean, it's certainly proof that we weren't doing as well as we could. We could do better," he said.

Recruiter Tells Student to Borrow to the Max

The recruiter also told our undercover producer he could take out as much as $35,000 in federal financial aid to pay for school. She also said that there might even be some money left over after tuition was paid.

Recruiter: I tell students to take out the max and whatever you don't need or you don't use then use it [for whatever]. But it's easier to take out more than you need and send back the excess versus you didn't take out enough.

Producer: What are the kinds of things though? I mean in terms of like that I could use it for? I mean, what if I just...because you're going to have to have money to walk around.

Recruiter: They don't care. Right. They don't. They just tell you use it for educational purposes.

Producer: And they don't ...They don't what?

Recruiter: No one follows up. No one says, What happened to this money? You received a check for $562, where did you spend it?

Producer: It's your business.

The university president said that there was no excuse for a recruiter to push someone to borrow to the max.

'It's absolutely indefensible. It is not the way that I intend to run this university," Pepicello said.

For-Profit Universities Contributing to Financial Crisis?

Experts say recruiters who are misleading students may only be the tip of the iceberg. Students who have attended for-profit schools are defaulting on their loans at an alarming rate, which experts say may be contributing to the next big financial crisis.

At the University of Phoenix's headquarters, the loan repayment rate was 44 percent, according to data from 2009 provided by the Department of Education; students at their Nellis Air Force location had a repayment rate of 36 percent. At the headquarters of Brown Mackie College, another for-profit school, the repayment rate was 27 percent.

Harris Miller, who heads the for-profit industry's lobby group, told Chris Cuomo that default rates at for profit schools are comparable to other schools which service similar student populations.

Recruiters from for-profit schools obtained $24 billion in student loan and grant money for the 2008-2009 school year, according to Government Accountability Office and Senate reports.

"These schools are marketing machines masquerading as universities," said Steve Eisman, a renowned hedge fund investor who made billions betting against the housing market, at a recent conference and during his testimony before the Senate on the for-profit sector. "I thought there would never again be an opportunity to be involved in the short side as an industry as social destructive and morally bankrupt as the sub-prime mortgage industry...Unfortunately, I was wrong."

Though for-profits get the lion's share of their tuition from financial aid, the default rates on loans for students who attended for profit schools are alarming. About 50 percent of the students at for-profits drop out, according to Eisman, so schools need to keep adding new students, and have to try to recruit just about anyone -- even those most vulnerable in society, he says.

Eisman's comments sparked controversy, and Miller lashed out at Eisman, calling his comparison of the career college sector to the subprime mortgage industry "silly" and "simplistic."

Miller also said Eisman's remarks must be considered in light of his alleged intentions as a short seller.

"It is no secret that the career education sector is under attack by short sellers, trial lawyers, self-styled consumer advocates, and some traditional academics. Although they should know better, these critics use anecdotes to generalize and to make sweeping condemnations of our sector," Miller said. "They seize on admittedly flawed government data to make the most extreme statistical arguments. They exploit the same small cadre of so-called third party experts to generate critical comments. And they recycle old news to give currency to new allegations. In short, they twist the truth to serve their self-interest."

But Eisman is not the only one leveling criticism at the for-profit education industry.

University of Phoenix Recruiter Goes to Homeless Shelter

Benson Rawlins was considered homeless last year when he met two recruiters from the University of Phoenix, who gave three seminars at Y-Haven, a shelter for transitional men in Cleveland, Ohio, or in effect, a homeless shelter.

Rawlins doesn't have a GED, but said the recruiters had no qualms trying to sell him an expensive associate's degree.

"It seems like it is just too much all about money," he said, "Instead of helping someone get an education."

The university told ABC News it does not tolerate recruitment at facilities like Y-Haven.

"We can assure you that anyone who participated in the recruitment of residents from homeless facilities in Cleveland no longer works for the University," said Alex Clark, a spokesperson for the University of Phoenix. "Any such activity is strictly forbidden by our Code of Business Conduct and Ethics, and employees who violate this policy face disciplinary action up to and including termination."

Harris Miller said even though the schools serve an important role by providing higher education to students who wouldn't ordinarily get one, many schools' recruiting practices need to be changed.

Miller claimed that universities began to change even before the GAO's report on their misleading practices, including changing how recruiters are compensated (so they do not receive bonuses or prizes for recruiting students), offering "test drive" programs to help people figure out if higher education is for them and focusing more on consumer protection.

When asked why for-profit universities don't return money back to those who have been misled by their solicitations, Miller said: "There are other countries in the world like Canada which have a different system and it's something we're going to look at."

But Miller admitted that the industry has no plan in place to pay back those who are carrying a debt from for-profit schools.

Whatever the industry's plans for future, Dalmier said it won't help heal what happened.

"If they tell you something, investigate it before you enroll in their program. You really need to find out the truth and how to further your passion or your dream," she said. "That way, you don't end up like me."

After ABC News' interview with Pepicello, the University of Phoenix offered Dalmier a scholarship for a bachelor's degree of her choosing. Dalmier said she is considering their proposal.

Pepicello also said he plans to change the school's recruiting practices, especially the current model of compensation, and will be offering students a "test drive."

Click HERE to read a letter to ABC News from William Pepicello.