Shares of ITT Educational Services, one of the largest operators of for-profit technical schools, plummeted 35 percent to an all-time low Thursday on news of the Department of Education decision to curtail the company’s access to millions of dollars in federal loans and grants, a critical source of revenue.
ITT is no longer allow to new enroll students who rely on federal loans and grants, nor can the company award raises, pay bonuses or make severance payments to its executives without the department’s approval. The company must now inform the government agency of any significant financial or oversight events, including violations of existing loan agreements or substantial financial losses.
“It’s pretty bad,” said Trace Urdan, a research analyst at Credit Suisse. “ITT had already announced that they were cutting back on marketing and that new student enrollment was down, so they were already marching in this direction. But this decision, when you add all of the components together, it looks like the department wants them to go out of business.”
Department officials say they are acting out of concerns raised by the for-profit chain’s accreditor, the Accrediting Council for Independent Colleges and Schools, that ITT is not living up to the demands of its accreditation. ITT is under threat of having its accreditation revoked, which could lead its 137 campuses to close and result in tens of thousands of students seeking loan forgiveness. That potential outcome led the department to request ITT to set aside more money to cover losses in the event of its collapse two months ago. The company complied, but now the government wants more.
In addition to the litany of restrictions, ITT must provide a letter of credit from a bank assuring the availability of as much as $247 million, up from the $124 million letter of credit the company already had on file. The letter is meant to protect students and taxpayers if the school is unable to cover federal student-aid liabilities. ITT was place on an installment plan to meet the last increase, leaving some wondering whether the company is capable of covering the latest request.
ITT has roughly $78 million in available cash and a few hundred million dollars in other assets, according to its most recent quarterly filing. Raising equity would be challenging, especially after investors fled before the company halted trading late Thursday. The company could put campuses up for sale, but may have a difficult time finding a buyer in the current regulatory climate, analysts say.
ITT did not respond to requests for comment. The company, as with other for-profit colleges, is contending with dwindling enrollment. New-student enrollment at ITT as of the end of June was down 22 percent over the previous year, while total enrollment was down 16 percent year over year. The company has stopped accepting new students at 10 campuses and has closed 10 locations in the past two years. ITT told investors in its latest quarterly report that the company thinks new enrollment will decline by as much as 60 percent compared with 2015. The company also plans to close another campus before the end of the year.
If the company were to shut down, hundreds of millions of dollars in federal financial aid would be on the line. ITT reported almost $850 million in total revenue in 2015, roughly $580 million of which was sourced from federal aid dollars, according to the department. Students are entitled to federal loan forgiveness when colleges close. Department officials are requiring ITT to develop agreements with other colleges to ensure students can complete their education in the event of a shutdown.
“Looking at all of the risk factors, it’s clear that we need increased financial protection and that it simply would not be responsible or in the best interest of students to allow ITT to continue enrolling new students who rely on federal aid funds,” Education Secretary John B. King Jr. said, on a call with reporters Thursday. “We will do everything in our power to ensure that current ITT students don’t shoulder the burden of the school’s bad behavior.”
ITT has spent much of the past two years clouded by allegations of fraud, deceptive marketing and steering students into predatory loans. The company is being investigated by more than a dozen state attorneys general and two federal agencies. Those cases led the accreditation council, the gatekeeper between colleges and billions of dollars in federal financial aid, to ask ITT in April to show why it is worthy of accreditation.
The council said the string of state and federal investigations, lawsuits and regulatory actions against the company call into question ITT’s integrity, financial viability and ability to serve students. In a regulatory filing last week, ITT said the council is requesting more information addressing various allegations ahead of an accreditation meeting, to be held in December. The loss of accreditation would make ITT ineligible for federal financial aid, but the department’s actions against the company has put it on the road to that reality.
“It is unprecedented for the department to take this action such a large educational institution,” said Terry W. Hartle, senior vice president of the American Council on Education. “ITT is a deeply troubled network of schools, so this does not come completely out of the blue. The department is saying its principle role is to ensure that institutions are financially stable and administratively capable so they don’t suddenly close, harming students and taxpayers.”
Tensions between the department and ITT have been building. The agency placed additional restrictions on the company’s use of federal grants and loans in October, after ITT failed to account for millions of dollars in aid that was disbursed to students in the past five years. The company originally landed on the department’s watch list, known as “heightened cash monitoring,” a year ago for missing the deadline for filing financial statements.
Other federal regulators have sounded alarms about ITT. Last May, the Securities and Exchange Commission filed civil fraud charges against the company, chief executive Kevin Modany and chief financial officer Daniel Fitzpatrick for allegedly making false and misleading statements about the failure of two in-house student-loan programs. Rather than disclose the tens of millions of dollars in impending losses to investors, the SEC said the company made secret payments on delinquent accounts to delay defaults. Executives assured investors in conference calls that the programs were performing well, while ITT’s obligations to pay out on soured loans began to balloon.
The loan programs in that case are also at the heart of a Consumer Financial Protection Bureau lawsuit that was filed in 2014. The consumer watchdog has accused the company of providing zero-interest loans to students but failing to tell them that they would be kicked out of school if they didn’t repay in a year. When students could not pay up, ITT allegedly forced them to take out high-interest loans to repay the first ones, the CFPB said.
Both of those cases are still wending their way through the courts, with the SEC trial set to get underway in October 2017.
The loan allegations against ITT are similar to ones the CFPB made against Corinthian Colleges, which ran an in-house student-loan program known as Genesis. The bureau said the for-profit chain set tuition and fees for bachelor’s degrees at $60,000 to $75,000 to force students to borrow from the program and then received a slice of the lender’s fees.
Charges that Corinthian trapped students in predatory loans and lied about the success of its programs ultimately led to government lawsuits and loss of its access to federal funding and bankruptcy. Now some are wondering whether ITT will meet the same fate.
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