It was once among the country’s most successful public companies, beloved by Wall Street for its simple, lucrative model: offering degrees to low-income students who borrowed heavily from the government to pay their tuition.
But the for-profit college giant Corinthian Colleges has spent much of the year in a tailspin. Investigations found the school used deceptive marketing to lure students into loans they had no hope of paying back, and the federal government suspended the schools’ access to federal aid.
Corinthian’s schools looked like they were toast. And then an unlikely savior swooped in.
The ECMC Group, which runs one of the biggest debt collectors used by the Education Department and has no experience teaching students, agreed last week to pay $24 million for more than half of Corinthian’s 107 campuses. The company plans to turn the for-profit campuses into nonprofit schools serving nearly 40,000 students.
The deal will create the country’s largest nonprofit system of career education and is the biggest sign yet that the beleaguered for-profit college industry, which currently has 2 million students enrolled, is trying to reinvent itself. Several other for-profit schools are also trying to turn into nonprofit institutions.
Critics say the Corinthian deal, which is unprecedented in scope, could put more taxpayer dollars and students at risk at a time when there is already $1 trillion in federal student debt.
“I find it ironic that a company whose history is in student debt collection is now going to run a set of colleges that excelled at sending students into default,” said Ben Miller, a senior policy analyst at the New America Foundation.
And there’s another striking detail about the arrangement: the U.S. government’s role. The Education Department has touted its efforts to crack down on abuse in the for-profit system. But it has blessed the Corinthian deal, arguing that it will save thousands of students from being tossed out of classrooms while also giving the schools a chance to reform themselves.
Critics say the administration is bailing out severely failing schools when it should let them shut down — part of a pattern of the administration failing to live up to its promise to reform the industry.
“What we are seeing is an unprecedented attempt on the part of a regulator to prop up one of the very worst companies in the industry,” said Barmak Nassirian, director of federal relations and policy analysis for the American Association of State Colleges and Universities. “You could debate which is better — allowing a predatory operation to collapse, or keeping it on life support so that it could victimize more people. That is what the federal government has done.”
Rep. Steve Cohen (D-Tenn.) said he was “shocked” that the Education Department would support the deal and questioned whether keeping Corinthian open under any management was in the best interest of students or taxpayers.
“To prop up a school whose main purpose seems to be to get federal money is a misguided use of federal funds,” Cohen said. “When a school like [Corinthian] that has a checkered history is on the mat, throw in the towel. It’s over.”
Corinthian, which operates Everest Institute, Wyotech and Heald College, has become the poster child for the worst practices in the for-profit education sector, including high loan defaults and dubious programs.
Problems at the California-based company came to light four years ago in a Government Accountability Office report that identified Corinthian as one of 15 for-profit colleges where recruiters encouraged students to commit fraud on financial aid applications. (At the time, The Washington Post Co., then the owner of The Washington Post, owned a major stake in Corinthian.) Evidence of malfeasance at Corinthian continued to surface through litigation and state probes.
Yet tens of thousands of students continued to enroll in criminal justice, health-care and business programs that frequently required them to take on five-figure debt. And the government kept funneling $1.4 billion in federal financial aid to the company every year. Corinthian receives more than 80 percent of its revenue annually from the government.
It wasn’t until six months ago that the Education Department decided to withhold federal funds from Corinthian, a move that crippled the company. Within a month’s time, Corinthian pleaded with the department for a lifeline to keep the doors open. The department gave the company $16 million in federal student aid funds under the condition that it would sell or close its schools.
“There was a de facto federal takeover and the pumping of federal student aid dollars to which Corinthian, given its financials, would not otherwise be entitled,” Nassirian said. The Education Department “made an exception basically because they determined that it was too big to fail, that they were in no position to allow market forces to run their course.”
Meanwhile, the Education Department has tried to follow through on its promise to police the for-profit industry, unveiling final rules in October aimed at limiting the amount of debt students amass in career-training programs.
“Career colleges must be a stepping stone to the middle class,” Secretary of Education Arne Duncan said last month. “But too many hard-working students find themselves buried in debt with little to show for it. That is simply unacceptable.”
Defenders of the industry say that the administration has gone too far, limiting educational opportunities for students who have limited options.
A trade group representing 1,400 for-profit colleges has filed a lawsuit against the government over the rule. The suit says regulators are overstepping their authority and cutting off access to education to students who desperately need degrees.
Trace Urdan, a higher education analyst at Wells Fargo Securities, says Corinthian has faced the same pressures as other for-profit schools but failed to handle them well.
“Corinthian faced enrollment challenges and regulatory scrutiny common to other for-profits, but the thing that did them in at the end of the day was plain old mismanagement,” Urdan said. “They failed to cut costs like they needed to, operating under the assumption that next year would be better — and it never was.”
The ECMC Group, Corinthian’s buyer, has a checkered history.
The company operates Premiere Credit, which collects delinquent student debt for the Education Department. ECMC also runs Educational Credit Management Corp., a firm that guarantees about $30 billion in federal student loans and collects on the ones that default. A New York Times story published this year detailed the subsidiary’s relentless pursuit of debtors seeking bankruptcy relief, including a woman whom the firm chastised for buying her dying husband a $12 meal at McDonald’s.
“ECMC doesn’t have any experience operating an educational institution. And it’s buying an institution that is having major problems and offering a very questionable education. Is [ECMC] in a position, without any kind of experience, to improve a failing school?” said Robyn Smith, a lawyer at the National Consumer Law Center, which represents student borrowers.
ECMC plans to run the schools under Zenith Education Group, a subsidiary separate from its debt collection practice.
Asked whether his company was a suitable choice to acquire Corinthian campuses, ECMC President David Hawn said its experience collecting defaulted loans has given the company “firsthand understanding what coming out of school with high debt and low job prospects does to a student. It bothers me. And I see an opportunity for us to now make a difference.”
Hawn said that ECMC is committed to improving the schools’ affordability and will cut tuition prices by 20 percent at a majority of the campuses it is purchasing. He said the schools will provide millions in grant aid to help students avoid taking out private loans and will offer academic counseling to make sure they graduate.
“Our focus is not going to be on how many enrollments we have, but how many students complete their studies and end up in well-paying jobs,” Hawn said.
But critics say the Corinthian deal will allow the company to avoid fully complying with the government’s new gainful employment rules. Urdan of Wells Fargo said several schools, including Keiser University and Remington College, have converted into nonprofit outfits to avoid the government’s new rules.
As part of the sale, the Education Department is slated to receive $12 million and another possible $17 million over the next seven years. A spokeswoman said the money will be set aside to cover any fines or penalties that could arise out of the government’s ongoing investigation of Corinthian.
“We are glad that Corinthian has reached an agreement with ECMC Group and believe that this transition will allow students to maintain progress toward achieving their educational and career goals and protect taxpayers’ investment, while Corinthian moves out of the business,” Undersecretary of Education Ted Mitchell said in a statement.
Despite the government’s efforts, default rates are still high among graduates of and dropouts from for-profit colleges.
Default rates at for-profit colleges were about 19.1 percent this year, down from 21.8 percent in 2013 but well above the national student default rate of 13.7 percent, according to the Education Department. In September, the government threatened sanctions against 21 schools, most of them for-profits, that had default rates of at least 30 percent for three years in a row.
But the government has been reluctant to let such schools as Corinthian’s go bankrupt.
In September, Corinthian ran afoul of the Consumer Financial Protection Bureau, which accused it of steering thousands of students into private loans, known as “Genesis loans,” that had interest rates as high as 15 percent. The consumer watchdog said that Corinthian set its tuition and fees for bachelor’s degrees at $60,000 to $75,000 to force students to borrow from the program and that Corinthinian then received a slice of the lender’s fees. CFPB is suing Corinthian for $500 million.
When the CFPB lawsuit was announced, officials at Corinthian “strongly” disputed the allegations. In a statement, the company said that fewer than 40 percent of its students took out Genesis loans and that the average interest rate was 9 percent, similar to other private student loans. Corinthian has long maintained that it has been quick to fix any problems that are brought to its attention.
As part of the ECMC transaction, all of the loans in the Genesis program will be forgiven. But thousands of students struggling with federal debt will not see any help; neither will any of the students attending the 12 Corinthian colleges that are slated to close. Because of the way the ECMC deal is structured, these borrowers will be ineligible for a discharge of their loans.
“If the schools had closed as result of bankruptcy, those students could have had their loans forgiven,” said Smith of the consumer law center. “They could have gotten a fresh start, so they could reapply for federal student loans at a community college or another institution.”