ITT Educational Services Inc. projected a default rate of 64 percent on the loans it provided, some of which had interest rates as high as 16 percent, the bureau said. The Carmel, Ind.-based company has about 150 institutions in nearly 40 states, operating as ITT Tech, Daniel Webster College and other entities.
Tuition at the chain's colleges can go as high as $88,000 for a bachelor's degree and $44,000 for an associate's degree, according to the bureau.
The lawsuit, filed in federal court in Indiana, is the bureau's first action against a for-profit college. It seeks restitution for victims, an injunction against the company and a civil fine.
Nicole Elam, a vice president with ITT, said in an email that the bureau's claims are without merit, but she wouldn't comment further on pending litigation.
The bureau said that because federal student loans don't cover all tuition costs for most ITT students, most of the students attending the chain's institutions face a "tuition gap." ITT provided a temporary, zero-interest loan to these students that typically had to be paid back during the first year — even though the company knew it was unlikely many students would be able to do so, according to the lawsuit.
Between July and December 2011, ITT then pushed students into repaying the first-year loan money and funding their second-year gap with high-cost private loan programs, the lawsuit alleged.
"Students were left in the dark about the fact that taking out these high-cost loans would be required to continue their studies," according to a statement from the bureau. "However, ITT's CEO revealed in investor calls that converting the temporary loans to long-term loans was the company's, 'plan all along.'"
The lawsuit is the latest in a string of actions targeting the for-profit college industry, which has among the highest student loan default rates and lowest graduation rates in higher education and has faced criticism for its recruitment tactics. Attorney generals in California, Massachusetts, Colorado, New York, and Illinois also are pursuing action against various for-profit institutions, Richard Cordray, director of the bureau, told reporters on a conference call Wednesday.
For-profit colleges could also be hurt by "gainful employment" regulations expected to be proposed soon by the Education Department that would measure the ability of students to get a job or repay their loans after attending job training programs. Federal student aid could be revoked from programs deemed ineffective.
On Capitol Hill, Sen. Tom Harkin, D-Iowa, chairman of the Senate Health, Education, Labor and Pensions Committee and other Democrats have pushed for more oversight of the industry, which Republicans object to. An investigation by Harkin's committee found that between 2008 and 2009, more than a million students started college attending companies reviewed by the committee, but by 2010, half had left school without a certificate or degree.
For-profit colleges saw an explosion in growth last decade but their enrollments have since declined. Proponents of these programs say they provide valuable job training and flexibility through distance learning and by other means that many students like— particularly those who are nontraditional.