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The key to the lawsuit against Education Management Corp., also known as EDMC, is that the company's recruiters received incentive payments for enrolling students, which Swanson says makes them ineligible for state financial aid.
EDMC's schools in Minnesota include Argosy University in Eagan and Art Institutes International in downtown Minneapolis. Since the summer of 2010, the state has provided students at those schools $1.3 million in loans and grants, Swanson said.
Incentive payments for recruiters "are illegal because they can lead to a hard-sell atmosphere where students are sometimes hustled to enroll in expensive programs paid for by taxpayer-backed student loans," Swanson said.
Federal regulations from 2002 "permitted companies to consider enrollments in admission officer compensation, so long as enrollments were not the sole factor considered," Bonnie Campbell, a spokeswoman for EDMC and a former Iowa state attorney general, said Thursday. The company put together a five-point plan to determine salaries to ensure compliance with the federal regulation, she said.
Swanson's action Thursday has Minnesota joining five other states and the U.S. Department of Justice in the lawsuit against EDMC. The case was originally filed in August.
In an interview, Swanson noted that for-profit schools have higher loan default rates than other types of colleges. Government data released earlier this month showed the default rate at for-profit schools was 15 percent last year, compared with 7.2 percent for public institutions and 4.6 percent at private not-for-profit schools.
Some students and their parents who have been recruited to one of EDMC's Minnesota schools say the process felt rushed.
When Susan Smart took her daughter to Arts Institutes International in Minneapolis in 2006 for a campus tour of the school's culinary program, a recruiter asked to see her daughter alone for a few minutes to get information and do some quick paperwork.
When Smart later looked at the material that the school had sent home and that her daughter had signed, she was shocked.
"It was a legal contract to start school in three weeks," Smart, of Lakeville, said Thursday. The contract did provide an "out" if her daughter changed her mind within five days.
Upset by the contract, Smart contacted the state attorney general's office and the Better Business Bureau. The school "left us alone after that," she said. Her daughter never enrolled at the school.
Hearing about Swanson's lawsuit, Smart said she was "thrilled. This is very satisfying."
Dustin McIntyre, 19, of Inver Grove Heights, said he was aggressively recruited at the Art Institutes International after he visited the school last year.
"They laid out two financial plans before I had ever applied or been accepted," he said.
He enrolled in the fall to get an undergraduate degree focused on digital video production.
The classes were good, he said, but staying there with the financial package the school put together would have buried him in debt. He owes $13,000 in loans for the three quarters he was enrolled.
McIntyre is not currently in college and plans to enroll somewhere else in the spring.
Other states participating in the lawsuit are California, Florida, Illinois, Indiana and Kentucky. The case is filed in federal court in Pennsylvania, where EDMC is based.
EDMC, with 14,500 employees, offers campus-based and online instruction for undergraduate and graduate degrees, with 105 schools in the United States and Canada.
EDMC is also a publicly traded company, and its single largest shareholder is the investment bank Goldman Sachs, which owns 41 percent of the company.
Shares of EDMC closed at $16 Thursday, down 1 cent.