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A for-profit college falters as federal cash wanes
A decade ago, Corinthian Colleges was a Wall Street darling — a company that seemed to be able to coin money from the federal government and from desperate students. Now it is on the brink of collapse.
You may have never heard of Corinthian, but it is a principal beneficiary of federal student loans, taking in $1.4 billion a year from the government. It operates schools under the names Heald, Everest and WyoTech.
Everest has a campus in Salt Lake City.
A week ago it said it would be unable to finance its operations past the end of this month and disclosed that the Education Department had slowed the flow of federal money, pointing to what it said was admitted fraud at Corinthian in reporting both grades and job placements. But Corinthian persuaded the department to keep pumping in federal money, at least temporarily.
The department initially said it would hold up funding of student loans for as long as 21 days to give it time to check on whether the students were eligible for the loans. Corinthian responded that such a delay would be fatal and damage its 72,000 students on 107 campuses. It said its finances were so perilous that it could not operate for more than a few days without an inflow of cash.
Even before the government action, Corinthian had violated covenants on loans from Bank of America, leading the bank to reduce the amount it could borrow and to demand faster repayment. While the company's financial statements showed it had a sizable net worth, a chief asset was the money it would save on taxes on future profits because of past losses, and it has been forced to write off much of that asset. Other assets included money owed by students who had already defaulted on their loans.
Confronted with warnings it would be responsible for hurting so many students, the department blinked. In negotiations over the last weekend, it agreed to pump in an immediate $16 million, with more expected to follow, even though Corinthian has not provided many of the documents the department demanded months ago.
Corinthian is supposed to pick campuses that it plans to sell to others and those that it will close. That latter group will go into "teach out," meaning the schools will continue to operate for students already enrolled, but no new students will be admitted. Details are supposed to be ironed out by Tuesday.
If that is carried out, it appears that Corinthian, which at its peak was valued by Wall Street at more than $3.4 billion, will vanish. But many of those campuses may just change names and continue to operate under other owners.
A suit filed by the California attorney general last year contended that Corinthian lied about the success of its former students as it focused on single mothers whose income was at or near the poverty line. The suit quoted internal Corinthian documents as describing its target audience as "isolated" and "impatient" individuals with "low self-esteem." It said the company used high-pressure sales tactics and advertised on the Jerry Springer television show.
Defenders of for-profit colleges say that they are to be applauded for serving students who would not otherwise be able to obtain an education and that complaints about their record are unfair because community colleges are not held to the same standards.
When I asked Steve Gunderson, the president of the Association of Private Sector Colleges and Universities, about Corinthian, he immediately brought up the City College of San Francisco. Accreditors threatened to put the school out of business, but after a lot of political pressure was applied, a way was found to let it stay open for two years while it tries to improve.
"There is a very inconsistent approach," he said. He said Corinthian had a much higher graduation rate than the San Francisco school or many other junior colleges.
But when I asked Gunderson, a former Republican congressman from Wisconsin, whether he thought students were receiving good educations at Corinthian, he sidestepped the question repeatedly.
Larry Barton, who was president of Heald College before it became part of Corinthian, was not so hesitant to voice an opinion. The decision "to essentially strip Corinthian of its ability to access federal funds is prudent, overdue and incredibly important," he wrote in SFGate, a San Francisco newspaper. "It is a signal to other for-profit and even not-for-profit institutions that a promise made - a degree that should lead to tangible employment - requires a hefty curriculum, high-impact faculty and robust placement so that students can become gainfully employed and then repay their loans."
By and large, Corinthian and its competitors are able to exist only because of federal student aid programs, which provide the bulk of their revenue. Many of them prospered during the financial crisis as enrollments grew and student aid programs were expanded. Corinthian says the economic recovery has reduced enrollment.
One regulation that has tripped up Corinthian in recent years has been the so-called 90-10 rule, which prohibits college students from receiving more than 90 percent of their funding from the federal government. Finding sources for the other 10 percent has proved difficult for Corinthian and its competitors. They have offered private loans, accepting that many of them will default.
One rival, ITT Educational Services, came up with an innovative solution, according to the Consumer Financial Protection Bureau. It provided loans with zero interest rates to first-year students. But, the bureau said in a suit against ITT earlier this year, the students did not understand that they would be unable to continue their education if they failed to repay the loans within a year. It said ITT then forced them to take out loans at high interest rates to repay the first ones.