August 3, 2010 / 10:02 PM / 10 years ago

UPDATE 2-Some for-profit colleges encouraged fraud - US GAO

* GAO finds deceptive practices at for-profit schools

* Investigators found tuition substantially higher

* Industry group says findings “troubling”

* Index that tracks industry shares falls 4.5 percent (Adds industry group reaction)

By Emma Ashburn

WASHINGTON, Aug 3 (Reuters) - U.S. government investigators found that for-profit colleges encouraged fraudulent practices and made deceptive statements to prospective students, according to a study released on Tuesday.

Investigators from the Government Accountability Office posed as students and applied for admission at 15 for-profit colleges across the United States. School personnel encouraged GAO staff to falsify financial aid forms, misled them about costs and gave false information about accreditation.

Shares of U.S. education companies fell on news of the report. The S&P 1500 education services sub industry index .15GSPEDUS closed down 4.5 percent, with bellwether Apollo Group APOL.O finished down 4.9 percent at $44.81 on Nasdaq.

A GAO investigator is due to testify Wednesday before the U.S. Senate Committee on Health, Education, Labor, and Pensions at a hearing on for-profit schools.

The report, without identifying any schools, cited examples where financial aid representatives suggested investigators falsely not report $250,000 of savings, thus making the investigator eligible for federally subsidized loans or grants.

GAO’s investigators also found that tuition at the for-profit colleges was “substantially more” than for comparable programs at nearby public colleges, but often misled prospective students about total costs.

The study found that a massage therapy program certificate cost $14,000 at a for-profit college but was just $520 at a local community college.

The Career College Association, an organization of mostly for-profit occupational colleges, said in a statement that the GAO report “is deeply troubling” and vowed to strengthen its members’ compliance with regulations.

Its recommendations included expanding compliance training and a voluntary “zero tolerance” standard for employees at member companies. Association members include DeVry Inc DV.N, Career Education Corp CECO.O, ITT Educational Services Inc (ESI.N) and Corinthian Colleges Inc COCO.O.

Investigators found that on average, tuition for an associate’s degree was between 6 and 13 times as much at a for-profit school than at a nearby public college. The average of the for-profit schools investigated was $33,467, compared to just over $4,000 for public schools.

A bachelor’s degree at a for-profit college averaged $55,000, almost twice as expensive as local public institutions.

A spokesman for the Apollo Group, which includes the University of Phoenix, said the company had not been informed whether or not its schools were involved in the study, but it took very seriously the issues raised by the GAO. “We have clear policies in place to protect students.”

The GAO findings add to pressure the industry, which has already faced a crackdown by the Obama administration.

The U.S. Department of Education proposed rules on July 22 that would force for-profit schools to show their former students are either paying off their loans or are capable of doing so.

The rules would limit access to federal loans for schools where more than 65 percent of former students fail to pay the principal on federal loans and had education debt that was more than 30 percent of discretionary income and 12 percent of total income. (Reporting by Emma Ashburn; Editing by Susan Heavey, Steve Orlofsky and Tim Dobbyn)

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