Education Management Corporation (EDMC) Settles Largest-Ever For-Profit Education Fraud Case for $95.5 Million, Forgives $103 Million in Student Loans

The United States Department of Justice and attorneys general from 38 states and the District of Columbia reached a landmark $95.5 million settlement with Education Management Corporation (EDMC) on November 16, 2015, resolving allegations that the nation’s second-largest for-profit education company violated federal and state False Claims Acts by falsely certifying compliance with Title IV of the Higher Education Act while operating an illegal “boiler room” style recruitment system that paid recruiters based on the number of students enrolled. In a parallel settlement, EDMC agreed to forgive $102.8 million in private student loans owed by over 80,000 former students who attended the company’s schools—including the Art Institutes, Argosy University, Brown Mackie College, and South University—between 2006 and 2014. The combined settlements totaling nearly $200 million represented the largest enforcement action against a for-profit education company in U.S. history at the time, exposing systematic fraud in a sector that had grown explosively during the 2000s by aggressively recruiting students into high-cost programs while relying on federal student aid for approximately 90 percent of revenue.

The case originated in 2007 when two EDMC whistleblowers filed a qui tam lawsuit under the False Claims Act, alleging that the corporation systematically violated the Higher Education Act’s “incentive compensation ban” by paying recruiters based primarily or exclusively on the number of students they enrolled, then fraudulently certified compliance with federal regulations to obtain access to billions of dollars in federal student aid. The incentive compensation ban, enacted by Congress in 1992, prohibits institutions participating in federal student aid programs from paying any commission, bonus, or other incentive payment to recruiters based directly or indirectly on success in securing enrollments. The ban was designed to prevent high-pressure sales tactics and enrollment of unqualified students who would be likely to drop out or default on federal student loans, protecting both students and taxpayers from exploitation by schools more interested in maximizing enrollment than in educational quality or student success.

Despite this clear statutory prohibition, the whistleblowers alleged that EDMC created and maintained what the Department of Justice characterized as a “boiler room style sales culture” where the “relentless and exclusive focus” was “the number of new students” each recruiter could sign up. Internal EDMC documents obtained during the investigation revealed that recruiters were evaluated primarily on enrollment numbers, with those who met or exceeded enrollment targets receiving substantial bonuses, extra paid time off, lavish vacations, gifts, and public recognition as top performers, while recruiters who failed to meet enrollment quotas faced termination. The system created intense pressure on recruiters to enroll as many students as possible regardless of whether the students were academically qualified, financially prepared for the cost of the programs, or likely to benefit from the credentials offered.

The Department of Justice investigation substantiated the whistleblowers’ allegations, finding that EDMC trained recruiters to exploit prospective students’ vulnerabilities, employed manipulative sales tactics designed to pressure immediate enrollment decisions, and maintained detailed tracking systems that monitored each recruiter’s enrollment numbers and conversion rates. Recruiters were taught to identify prospective students’ “pain points”—financial struggles, career dissatisfaction, family pressures—and to position EDMC programs as solutions to these problems while downplaying or misrepresenting costs, time commitments, academic requirements, and employment prospects. The high-pressure tactics were explicitly designed to generate immediate enrollment commitments before prospective students could research alternatives, compare costs, or carefully consider whether the programs were appropriate for their circumstances.

The settlement revealed that EDMC’s illegal recruitment system was not the result of isolated misconduct by individual recruiters but rather a corporate policy implemented from the highest levels of the organization. Internal communications showed that senior executives established enrollment targets, designed the compensation systems that rewarded enrollment numbers, approved the training materials that taught manipulative sales tactics, and monitored performance metrics that tracked recruiter success at converting prospective students into enrolled students. This top-down implementation of illegal practices demonstrated that fraud was integral to EDMC’s business model rather than an aberration from company policy.

In parallel with the federal False Claims Act settlement, the 38 state attorneys general reached a separate $102.8 million settlement resolving state consumer protection law violations. The states alleged that EDMC engaged in deceptive and misleading student solicitations by making false or unsubstantiated claims about educational benefits, employment prospects, accreditation, credit transferability, and costs; targeting prospective students for high-pressure recruitment without regard to their likelihood of benefiting from the programs; inaccurately claiming that certain programs were accredited when they were not; and misrepresenting job placement rates and graduation rates to make programs appear more successful than they actually were.

The state consumer protection allegations documented specific deceptive practices including: recruiters telling prospective students that credits from EDMC schools would transfer to other institutions when EDMC knew that most universities would not accept the credits; recruiters making claims about job placement rates that were inflated or based on methodologies that counted any employment including jobs unrelated to the student’s program of study; and marketing materials suggesting that graduates would obtain high-paying positions in their fields of study when EDMC had no reliable data supporting such claims and knew that many graduates struggled to find any employment related to their credentials.

The state settlements included significant loan forgiveness provisions designed to provide relief to students harmed by EDMC’s deceptive practices. Under the agreement, EDMC would forgive $102.8 million in private loans owed by approximately 80,000 former students who had enrolled between 2006 and 2014 and who withdrew from EDMC schools within 45 days of their first term. The loan forgiveness averaged approximately $1,370 per student. Students eligible for loan forgiveness would be contacted by EDMC and would automatically receive forgiveness without needing to apply or take any action, with their credit reports corrected to remove the debt.

However, the loan forgiveness provision covered only a small subset of students harmed by EDMC’s fraud. The 45-day withdrawal window meant that students who completed a term or two before realizing the program was not what recruiters had promised received no loan relief, even though they had been enrolled through the same illegal and deceptive practices. Students who completed EDMC programs but found that the credentials did not lead to employment or that employers did not value EDMC degrees received no relief, even though they had been misled about employment prospects and market value of credentials. The loan forgiveness also applied only to EDMC’s own private loans, not to federal student loans which comprised the majority of student debt at EDMC schools. This limited relief structure meant that the vast majority of students who were harmed by EDMC’s fraud received no compensation and remained saddled with student debt from credentials obtained through illegal recruitment and deceptive marketing.

Critically, EDMC did not admit any wrongdoing as part of either settlement. The settlement agreements allowed EDMC to pay the financial penalties and loan forgiveness while publicly denying that it had violated any laws or engaged in any fraudulent practices. This no-admission-of-wrongdoing provision allowed EDMC to continue operating and recruiting students without having to acknowledge that its business model was fundamentally fraudulent or that it had systematically exploited students and defrauded taxpayers. EDMC issued a public statement saying it was “pleased to have resolved the civil claims raised by the Department of Justice and state attorneys general” and that “though we continue to believe the allegations in the cases were without merit, putting these matters behind us returns our focus to educating students.”

The ability to settle massive fraud cases without admitting wrongdoing represents a significant limitation in the effectiveness of False Claims Act and consumer protection enforcement against for-profit colleges. Without admissions of fraud, the schools can continue to market themselves as legitimate educational institutions, can argue that settlements represent routine business disputes rather than evidence of systematic fraud, and face minimal reputational consequences that might affect future enrollment or investor confidence. Prospective students researching EDMC schools after the settlement might find news of the settlement but would also find EDMC’s denials of wrongdoing and claims that the settlement allowed the company to focus on education rather than litigation.

The financial impact of the combined settlements on EDMC was substantial but not crippling. EDMC was owned primarily by Goldman Sachs and other private equity investors who had acquired the company in a 2006 leveraged buyout. The private equity ownership model created incentives for aggressive growth and revenue maximization to generate returns for investors, with less emphasis on educational quality or student outcomes. The $95.5 million federal settlement and $102.8 million in loan forgiveness totaling nearly $200 million represented a significant cost, but EDMC had generated billions in federal student aid revenue during the years of fraudulent operations, meaning the settlement recovered only a small fraction of the federal aid obtained through false certifications.

The settlement also revealed the extent to which the for-profit education industry had built business models dependent on systematic violations of federal law. EDMC operated more than 100 campuses across the United States enrolling more than 100,000 students, making it one of the largest educational institutions in the country by enrollment. The Art Institutes chain alone operated dozens of locations offering programs in culinary arts, design, media arts, and fashion. For such a large operation to be based fundamentally on illegal recruitment practices demonstrated that fraud was not a peripheral issue in for-profit education but rather central to how major industry players operated at scale.

The Department of Justice emphasized that the settlement represented a strong statement that for-profit colleges would be held accountable for violations of student aid program requirements. However, the effectiveness of this accountability was limited by the time required to investigate and litigate cases, by the settlements’ failure to provide relief to most harmed students, and by the absence of criminal prosecutions or individual accountability for executives who designed and implemented the fraudulent systems. EDMC senior executives who created the illegal compensation systems, approved the deceptive marketing, and oversaw the boiler room culture faced no personal legal consequences, were not required to repay bonuses or compensation earned from the fraud, and in many cases moved on to other positions in the for-profit education industry or in private equity firms investing in education companies.

The EDMC settlement came at a time of increased scrutiny of the for-profit higher education sector. By 2015, multiple major for-profit college chains had faced significant enforcement actions, including the University of Phoenix $78.5 million settlement in 2009, and Corinthian Colleges was in the process of collapse following regulatory actions and fraud findings. The accumulating evidence of systematic fraud across multiple major for-profit operators demonstrated that the problems were industry-wide rather than confined to a few bad actors, and that the for-profit sector’s explosive growth during the 2000s had been fueled substantially by illegal and deceptive practices rather than by delivery of genuine educational value.

Data from EDMC’s schools illustrated the systematic problems with the for-profit education model. EDMC charged significantly higher tuition than community colleges or public universities for similar programs—often $40,000-$60,000 for associate degrees in fields like culinary arts or graphic design that community colleges offered for $5,000-$10,000. Despite the higher costs, EDMC graduates had lower employment rates and lower earnings than community college graduates in comparable programs, meaning students were paying more for worse outcomes. The combination of high tuition, heavy reliance on student loans, and poor employment outcomes created a debt trap where graduates could not earn enough to repay their loans and faced default, wage garnishment, and long-term financial hardship.

Student loan default rates at EDMC schools were substantially higher than at community colleges, with some EDMC programs experiencing three-year cohort default rates above 30 percent—a threshold that should trigger loss of federal aid eligibility under Department of Education regulations. High default rates impose costs on both students, who suffer credit damage and collection actions, and on taxpayers, who absorb losses when borrowers default on federal loans. The systematic pattern of high defaults across EDMC schools indicated that the company’s business model was based on enrolling students who could not afford the programs and who would likely default, with EDMC capturing tuition revenue upfront through federal aid while leaving students and taxpayers to bear the costs of unpayable debt.

For the two whistleblowers who filed the original 2007 qui tam lawsuit, the settlement represented vindication after eight years of litigation. Under the False Claims Act’s qui tam provisions, whistleblowers receive a percentage of recovered funds as a reward for exposing fraud, typically 15-25 percent when the government intervenes in the case. The whistleblowers in the EDMC case received approximately $14-24 million (the exact amount was not publicly disclosed) from the $95.5 million federal settlement. This substantial reward reflected both the massive scale of fraud they exposed and the personal and professional risks they took in challenging a major corporation. Whistleblowers often face retaliation, difficulty finding future employment in their industries, and years of uncertainty as cases proceed through investigation and litigation.

The EDMC case established important precedents for False Claims Act enforcement against for-profit colleges, demonstrating that systematic violations of the incentive compensation ban could support large-scale fraud liability when schools falsely certified compliance to obtain federal student aid. The case also demonstrated the value of whistleblower litigation in exposing fraud that regulatory oversight had failed to detect or address, since EDMC had been operating its illegal recruitment system for years while passing Education Department program reviews and maintaining federal aid eligibility.

However, the settlement’s ultimate impact on reforming EDMC’s practices or protecting future students was limited. EDMC continued to struggle financially in the years following the settlement, eventually selling the Art Institutes and other assets to the Dream Center Education Holdings, a California nonprofit, in 2017. The Dream Center acquisition would itself collapse within two years amid financial problems and accreditation issues, leaving thousands of students stranded at closed campuses. This trajectory suggested that EDMC’s business model was not sustainable when subjected to regulatory scrutiny and enforcement, but that the settlement did not actually reform the company’s practices or ensure student protection—it merely delayed collapse until the company could be sold to a new owner that would continue operating low-quality high-cost programs under different ownership.

The EDMC settlement represented a high-water mark in Obama Administration enforcement against for-profit college fraud. When the Trump Administration took office in 2017, enforcement priorities shifted dramatically, with Secretary of Education Betsy DeVos hiring multiple former for-profit college executives to senior Education Department positions, repealing Obama-era regulations designed to protect students, and blocking borrower defense claims from students defrauded by for-profit colleges. This regulatory capture effectively ended meaningful federal enforcement against for-profit education fraud for four years, allowing the industry to continue predatory practices with minimal accountability until enforcement resumed under the Biden Administration in 2021.

For the 80,000 students who received loan forgiveness under the state settlements, the relief was significant but came too late to prevent years of financial hardship from debt incurred through fraud. Many of these students had already suffered credit damage, had been subjected to collection actions, and had experienced the stress and financial strain of unpayable debt. The loan forgiveness removed the debt but did not compensate students for the opportunity costs of time spent in EDMC programs that did not lead to career advancement, the economic hardship of struggling with debt, or the psychological harm of believing they had failed when in fact they had been systematically defrauded.

The EDMC case demonstrated that the largest for-profit education companies operated through systematic fraud rather than through delivery of educational value, that private equity ownership incentivized predatory practices focused on revenue extraction rather than student success, and that enforcement actions even when successful provided limited relief to harmed students and imposed costs on companies that were small relative to the revenue generated through fraud. The case illustrated the need for structural reforms to the for-profit education sector beyond case-by-case enforcement, including tighter restrictions on federal aid eligibility, stronger regulations on recruitment practices and compensation, enhanced accountability for student outcomes, and meaningful remedies for students harmed by fraud including automatic loan forgiveness rather than limited settlement relief.