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Why the Obama administration is letting a debt collector run failing for-profit schools

Corinthian Colleges, which owns Everest, Heald College and WyoTech schools, made a deal with the ECMC Group to sell half its campuses. (AP Photo/Jose Luis Magana)
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The fall of for-profit giant Corinthian College has raised questions about the future of the industry and the role the government plays in supporting these controversial schools.

Clouded by allegations of deceptive marketing and lying to the government about its graduation rates, Corinthian lost its access to federal funds earlier this year, forcing the company to sell or close its schools.

Then in November, an unlikely savior appeared. ECMC Group, a company that collects student debt for the government, agreed to pay $24 million to take over half of Corinthian’s 107 campuses.

The deal–unprecedented in scope and nature–drew a huge cry from lawmakers and student advocates, who questioned why a company with no experience teaching was taking over troubled campuses serving nearly 40,000 students. In addition, the Education Department, which blessed the deal, is saying that the new schools will not have to follow one of the biggest regulations applied to for-profit schools, the so-called 90/10 rule, which prohibits for-profit colleges from getting more than 90 percent of their operating revenue from federal student aid money.

After our story on this came out, undersecretary Ted Mitchell, the third-highest ranking official at the Education Department and the person charged with overseeing the country’s higher education policy, called to defend the government’s decision. Here’s an edited version of our conversation:

Why is the department supporting ECMC’s acquisition of the Corinthian campuses?

When we created the operating agreement with Corinthian, they agreed to either sell their schools or close them. We had stipulated from the beginning that we’re interested in a sale only in so far as it puts the students involved into the hands of an operator who is committed to great outcomes for those students.

We have been working with ECMC, after they emerged from the sales process, which we didn’t have anything to do with. They came to us and have been talking to them about their aspirations and plans. We’re confident that ECMC’s plans for the students will put them into better performing programs that are more accountable to the public and will get them the boost in their employment that they are aspiring to. So we’re quite pleased with ECMC’s plans.

There are a couple of things that are notable about the plan. They intend to reduce the tuition price by 20 percent immediately. They’re already looking at programs that they believe are not serving students well under Corinthian’s management. And they’re aiming to close those programs.

When they close those programs they are going to give students three options: continue program to completion, get a refund of educational expenses or get a voucher for use in another Zenith program. We think that that immediately will start to address some of the issues and some of the failing Corinthian programs.

They know this is a big job, that this is going to be a hard turn around. And they have volunteered to bring a monitor in to monitor the performance of the campuses they’re buying, everything from advertising strategies, promotional materials and disclosures, through to placement rates. And the monitor will report to the department on the conduct of those campuses.

We think that they understand the difficulty of the job and they are coming out of the box with some very pro-student changes. We’re hopeful that the deal goes through. One of the reasons that we kept the sale option on the table is these are very vulnerable students. These are students who are trying to squeeze higher education into the spaces between already complicated lives, whether it’s raising a family or having a couple of part-time jobs. These are students for whom starting over is not welcomed news. We have always believed that if we could find a better operator, who could provide outstanding outcomes to these students that that would be better than almost any start over scenario that we could imagine.

What happens if the monitor finds problems with the way ECMC is running the campuses?

The department continues to have all of the regulatory and enforcement tools that we have today. If we find, for example, that there are falsifications in placement rates, which is what got us into this place, then we will have the authority to take action to remove those campuses from access to title four funding.

Critics say a Corinthian degree has little value because of the legacy of the company, so why bother to keep the schools open when there is a good chance that graduates will have a hard time finding a job?

This is why we’re encouraged by ECMC’s aggressive attitude toward closing under-performing programs and giving student choices. ECMC has also committed to looking at programs on an ongoing basis and looking at placement rates. They’ve committed to capping enrollments in programs whose placement rates are trending downward. And that could either be a quality issue or a mismatch between the labor market in a local community and the program mix being offered at the campus. Their commitment to using placement rate and employment rates as a key metric for their organizational behavior is the mark of a new day for students.

There are people who are concerned that ECMC has no experience running schools. What do you say to them?

Everybody acknowledges that.

Indeed, but given the size of the campuses, is it the wisest decision to support a novice coming in and taking over such a major institution?

We and ECMC have had long conversations about that. Again, it’s not a gimme. This is going to be a massive, difficult, messy turnaround. And they are coming into it with their eyes open and we think that they’re putting in place the architecture to get the job done.

David Hawn [the president of ECMC] and his team know that they have to find an executive team that can carry this off. Frankly, I think it will be interesting to see the mix of that team. They are absolutely committed to cleaning house, so the executive team in place at Corinthian will not be a part of running these operations going forward.

This sale has raised concerns about for-profits switching to nonprofits to avoid the gainful employment rule (which requires programs to show their graduates have loan burdens that don’t exceed certain levels of their pay). Is there anything the department can do to stop that kind of regulatory arbitrage?

Gainful is a broad gauged tool to make sure that all career and technical programs, not just for-profit schools, are preparing people for gainful employment. In the meantime, we will continue to use our program reviews and regulatory authority to examine the practices of individual institutions both in the normal course and as we become suspicious of behavior.

Is the Corinthian deal a harbinger of things to come in the for-profit space? Should we expect more deals like this considering the regulatory and enrollment pressures that for-profits are facing?

There is increasing pressure on for-profit institutions around outcomes and we support that as a part of our agenda for all institutions of higher education to focus more on outcomes. [For?] Those institutions that have shaky or bad outcomes the writing is on the wall that they can’t continue with those practices.

There are likely to be other examples of large for-profit institutions needing to change their base of operations and we would like to make sure that we keep the interest of students success at the heart of our interactions with those institutions. We like the model of the ECMC transaction because we think that one of the pathways forward is transitioning from for-profit status to nonprofit status and to operate at a very different cost basis and business model.