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Corinthian takedown signals tougher enforcement

First Published Jul 07 2014 11:06AM      Last Updated Jul 07 2014 11:06 am

For four years, the Education Department has threatened to rein in for-profit colleges and their soaring student debt. Now it has found a way.

The department has taken its toughest regulatory action ever against a for-profit college: putting Corinthian Colleges Inc., with more than 70,000 students, on the path to going out of business. At least two other large players, ITT Educational Services and Education Management, are also at some risk of stricter enforcement, analysts said.

"It’s a big deal, and people who want to isolate it and say that it only applies to Corinthian are kidding themselves," said Trace Urdan, an analyst with Wells Fargo Securities in San Francisco who follows the education industry. "Everyone has to be more careful with their cash and take their interactions with the department more seriously."



In June 2010, the Obama administration released a package of proposed rules that the Association of Private Sector Colleges and Universities, an industry group, said would force hundreds of programs to close, eliminating skill-building opportunities for thousands of students. While that proposal, which would limit government funding for schools whose students struggle to repay loans, resurfaced after a court challenge from APSCU, it still awaits approval and would take years, perhaps until 2017, to be used to close any programs.

ITT Educational said Thursday it’s in discussions with the department. Education Management said Thursday it’s in talk with lenders to resolve any issues related to its debt.

While many for-profit colleges have been able to make changes in order to withstand increased scrutiny and regulation, others haven’t, said Carl Salas, a vice president at Moody’s Investors Service in New York. The concern now is that there are more regulations coming, he said.

"You have a situation where the best it can be is neutral while it’s more likely it’s going to be more stringent," Salas said regarding so-called gainful employment rules that the education department is revising. "That’s the unknown but that’s the concern."

Now, simply by enforcing existing rules more strictly, the department has found a way to quickly force the dissolution of a for-profit college, Urdan said. The agency had demanded documents related to job placement, and Corinthian was late in producing them. Rather than negotiating, the department put a three-week hold on tuition payments that normally take a maximum of three days to fulfill.

Like many for-profit colleges, Santa Ana, Calif.-based Corinthian’s student enrollments and finances have suffered under the scrutiny of state attorneys general, Congress and the Consumer Financial Protection Bureau. The educator’s debt tripled to $100.8 million as of March 31 from a year earlier. According to a company filing, its programs depended on the Education Department for at least 57 percent and as much as 93 percent of their revenue in fiscal 2013.

With $28 million in cash as of May 6, the company couldn’t wait an additional three weeks for its tuition payments. Corinthian said July 3 that it has worked out a deal with the Education Department under which it will put up for sale 85 of its U.S. schools as well as those in Canada and gradually shut down 12 other U.S. locations as students complete their programs. The company operates schools under the names Everest, Heald and WyoTech.

"This agreement allows our students to continue their education and helps minimize the personal and financial issues that affect our 12,000 employees and their families," Corinthian Chief Executive Officer Jack Massimino said in a statement.

The department’s action on Corinthian indicates a "chilling and aggressive new level of oversight" that makes it difficult for companies to defend themselves against sanctions, Urdan said in a note to clients last week.

Regulations allow the department to alter its method of funding or place an institution under increased financial oversight while serious allegations are reviewed, said Denise Horn, a spokeswoman for the agency, in an e-mailed statement.

"It wasn’t until CCI disclosed their financial weakness that we had to take additional steps to protect students and taxpayers," she said in the statement.

"It’s the first time we’ve seen a publicly traded for- profit college of this size go through this," said Michael Tarkan, an analyst at Compass Point Research & Trading.

Kent Jenkins, a spokesman for Corinthian, declined to comment.

 

 

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