Stamping out Fraud in Higher Education through the False Claims Act: “Material” Should Mean Something

By Sabita J. Soneji | October 21, 2019

When choosing a college, training, or certificate program, students often look for the best program they can find. But too often, students are faced with limited data to inform their decision-making, or what is available is confusing. So instead, students make important decisions based on factors that suggest a program is worthwhile, including courses offered, faculty bios, and job placement statistics. Students also look at the total cost of the program and determine whether they qualify for financial aid and student loans. In doing their homework, students generally trust the information they get from these schools or programs because they assume some government agency is making sure schools tell the truth.

But maybe they shouldn’t.

Unfortunately, not all schools are honest about the strength of the programs they offer. Schools have been caught blurring the lines around the actual cost of the education by telling prospective students they are taking on less debt than they really will. Worse, schools may engage in fraud and misrepresent their accreditation, faculty pedigree, job placement numbers, or availability of necessary training. These schools know that students trust what they say, and they exploit that trust. 

Of course, there are laws that prohibit these kinds of unfair, deceptive, and abusive practices to prevent students from being taken advantage of. And when schools’ lies lead to students taking out costly federal loans that they cannot repay, there are some back-end protections to cancel these debts.

But waiting for schools to deceive students into taking on a ton of debt, and then suing for scraps on the back end is unsatisfying to the students hurt by that deception.

There is a better way to protect borrowers—and it can be available now.

Before schools can qualify for federal funding, including through federal student loans, schools must sign contracts with the Department of Education (ED) known as Program Participation Agreements (PPAs). PPAs are designed to ensure that federal taxpayer money only flows to schools that follow the rules of the road. By signing these contracts, schools agree to comply with the statutory and regulatory requirements of the Higher Education Act (HEA), the law governing federal education programs and funding.

If schools make false representations about accreditation and job placement numbers, they are violating the terms of their PPA. ED has the ability to exercise accountability provisions included in PPAs to deny these schools future access to federal funding. 

Additionally, the government, private individuals, and whistleblowers can protect taxpayers under the federal False Claims Act—holding these schools accountable in court when they take federal dollars they were never meant to receive. When schools break the terms of their PPAs by deceiving students and illegally accept federal funds, they should have to return the money.

That’s not how it usually goes, however. Although it could be a powerful tool to protect students from these predatory schools, the False Claims Act is not being used to its full potential.

That is because, in order to successfully hold schools accountable in court for lying to students and taxpayers about important factors like job placement rates, accreditation, or paying their recruiters to bring in new students, the federal government and victimized students must show that any false statements made were actually “material” to the government’s decision to give them money. In other words, the government has to show evidence that they would have cut off a school’s access to federal aid based on a false claim. That has historically been very hard to prove.

“Material” is a legal term that is so vague as to be almost useless. If, for example, a school tells prospective students that it is accredited when it is not, does a court know if ED would continue to provide that school funding and loans? 

For that reason, courts have been debating what that materiality standard means for decades. And in the meantime, schools engaged in fraud have been watching from the sidelines, continuing to get funding, and taking advantage of taxpayer dollars and students trying to make a better life for themselves.

Today, ED rarely takes action to cut off federal aid to predatory schools, even when those schools have lied egregiously. So, when schools are caught lying, judges generally disregard the whistleblowers because even if ED knew about these false representations, the judges do not believe ED would have done anything about it.

Protecting students must be a priority in order to end the current cycle of abuse that has plagued tens of thousands of students and families. It is a vicious cycle—one we must break. 

Lawmakers have successfully cracked down on these types of practices in other markets. For example, the Affordable Care Act expanded False Claims Act tools available to crackdown on healthcare fraud. As a result, we have seen a spike in recoveries by the government in this space in recent years, including huge settlements from a Medicare Advantage provider. Drug companies paid hundreds of millions of dollars in penalties for making false representations that prioritized revenue over vulnerable patients, including ignoring federal safeguards for repackaging cancer drugs and providing kickbacks to doctors for writing prescriptions. Lawmakers should take similar actions in the student loan market to ensure predatory schools do not mislead prospective students to get their student loan funds.

To make a real difference in the student loan market, the PPA agreements between schools and ED must lay out in clear detail the requirements of candor for these schools. Schools should be on notice that when they lie, misrepresent, or omit critical information about their programs to students—like Career Education Corporation did about the accreditation of its programs or like DeVry did about its job placement rates, the spigot through which federal dollars flow will be shut off. Because this information is crucial to students’ decisions about what school or program in which to enroll, it is equally crucial to ED’s decision whether or not to dole out funding and loan eligibility. In sum, these agreements must let schools know that false statements and critical omissions about any of these topics on which students rely will be deemed material to the government’s funding decisions. Schools engaged in fraud should not receive federal funding.

But the Department of Education is not the only entity that can protect students—states also have a critical role to play. In order for schools to enroll students who are eligible for federal student loans, they must become licensed in the states in which they operate. Like the contracts with ED, these licenses come with conditions defined by each state, and they should be strengthened to include affirmative requirements of candor and truth in marketing that, if violated, would trigger that state’s False Claims Act.

Strengthening state and federal contracts with schools is an important first step toward better protecting students. It could be as simple as expanding language to clearly state that failure to meet these basic requirements is deemed material to a government funding decision. For example, contract language could include language such as: “Any violations [as defined under this contract] by the institution of higher education is a breach of the terms of the program participation agreement [or similar contract], and is material to the government’s decision to make payment. Any claim for services that are related to any violation of the subsection constitutes a false or fraudulent claim for purposes of [the False Claims Act].”

By strengthening these agreements to ensure false statements about critical issues on which students rely in making enrollment decisions are “material,” we can empower whistleblowers, governments, and borrowers, to truly hold predatory schools accountable for the misrepresentations they make when recruiting potential students. 

Sabita J. Soneji is a Partner with the law firm Tycko & Zavareei LLP. She specializes in fighting consumer financial fraud and bringing whistleblower suits. She is a Student Loan Justice Fellow with SBPC.