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Here’s how a debt collector plans to turn around failing for-profit colleges

Corinthian Colleges, which owns Everest, Heald College and WyoTech schools, has sold more than half its campuses to ECMC Group, a student debt collector, which has promised to turn around failing schools. (AP Photo/Jose Luis Magana, File)

Student debt collector ECMC Group on Monday completed its controversial purchase of more than half the campuses of Corinthian Colleges, the embattled for-profit education company that was once one of the biggest in the country.

The $24 million sale has been met with resistance from lawmakers and student advocates since it was first announced in November. Critics have questioned whether a company with no experience teaching is qualified to take over schools serving nearly 40,000 students.

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

But ECMC has lofty ambitions of turning the for-profit campuses into premier nonprofit schools, creating the country’s largest nonprofit system of career education.

In its first year of operation, ECMC chief executive David Hawn projects the company will spend more than $200 million on a series of initiatives and programs to largely gain the trust of students, and ultimately regulators.

“This is a sustainable business. It’s going to take a while to make it sustainable, but…we’ve made it our mission to help students succeed and we have the financial wherewithal to help students in a meaningful way,” Hawn said.

Most of the money will be used to widen a promise to cut tuition by 20 percent at Everest campuses. Existing students who continue and complete their course of study will now also be eligible for a 20 percent reduction that will be prorated for the remaining time in the program.

In another step to improve affordability, ECMC is establishing a $87 million grant program that will offer up to $10,000 a year to poor students whose financial aid awards don’t cover all of their expenses. The grants are meant to replace a notorious loan program, called Genesis, that landed Corinthian in hot water with the Consumer Financial Protection Bureau last September.

Back then, the federal agency accused Corinthian of steering thousands of students into private loans that had interest rates as high as 15 percent. CFPB said 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 Corinthian 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. The company has long maintained that it has been quick to fix any problems that are brought to its attention.

In an act of good faith and to avoid being enveloped in that litigation, ECMC has reached a settlement with a company that bought a majority of the Genesis portfolio to write down $480 million of the debt. That means that thousands of current and former Corinthian students struggling to repay their loans will have the debt forgiven. Students will see an immediate 40 percent reduction in the principal balances on their loans, with the remainder forgiven over the next few years.

Although ECMC said it would forgive many of the Genesis loans as a part of the sale, the settlement goes beyond the scope of the original agreement and will wipe out a larger percentage of debt. The Education Department ponied up nearly two thirds of the $12 million it received from ECMC to cover any penalties that could arise out of the government’s ongoing probe of Corinthian.

The expanded loan forgiveness addresses concerns raised in December by a group of 13 Senate Democrats, led by Sen. Elizabeth Warren (D-Mass.), who urged the department to discharge the loans of former Corinthian students who are battling the company in court.

Policymakers and advocacy groups have been critical of the Education Department for blessing the sale of dozens of underperforming schools to a company with no background in teaching. Some argued that the department should have just closed the Corinthian campuses, which would have made borrowers eligible for a discharge of their federal loans.

Education undersecretary Ted Mitchell, the person charged with overseeing the country’s higher education policy, insisted that shutting down the schools would have been a detriment to students who were close to completing their program.

In an email on Monday, Mitchell commended ECMC for “sharing our commitment that students are provided the opportunity to pursue their career goals by receiving quality education and training that leads to good outcomes.”

He said the department was confident in ECMC’s plan to turn around the campuses, which includes ending programs with low completion and job placement rates. Education has in the past accused Corinthian of misrepresenting graduation and job placement rates to the government.

ECMC will close three programs with poor completion and job placement rates, and cap enrollment at 70 others that are teetering on the edge. Students in the these programs will be given a choice: continue the program to completion, get a refund of educational expenses or get a voucher for use in another program. About 40 percent of current students will be affected by the changes.

“I could care less what our enrollment growth looks like, unless the growth is because word is getting around that you come to an Everest or WyoTech school you’re going to be placed in a well paying jobs or field,” Hawn said. “Until then, we’re going to limit enrollment until we can demonstrate that we have the jobs ready for people when they finish their program.”

In a move to placate consumer groups, ECMC removed binding, mandatory arbitration clauses from its enrollment contracts—a common feature in for-profit college agreements. But the company has decided to keep in place a ban on class action lawsuits.

Hawn said “students have an unquestioned right to seek redress for grievances” and ECMC “will not stand in the way of any student who wants to pursue litigation.”

Advocacy groups are cautiously optimistic over the details of the ECMC deal. Maggie Thompson, the Center for American Progress’ Higher Ed Not Debt campaign manager, said the group is “disappointed” that ECMC upheld the class action ban, but “pleased” about the debt forgiveness.

“It is clear that ECMC and the Department of Education responded to students’ call to improve the terms of the sale,” she said. “The fact remains that thousands of students were left worse off by Corinthian Colleges, just one of many for-profit colleges that drain education funding and take advantage of students’ aspirations.”

ECMC plans to run the schools under Zenith Education Group, a subsidiary separate from its debt collection practice. The company has appointed former Howard University chief operating officer Troy A. Stovall as interim president of Zenith.

With the beleaguered for-profit college industry in jeopardy, the transition of the Corinthian schools into career colleges could serve as a model for reinvention. Several other for-profit schools are also trying to turn into nonprofits, yet none quite on the scale of ECMC.