Declaring Corinthian Colleges Too Big To Fail: A Terrible Idea
The U.S. Department of Education has blessed a deal under which a non-profit student debt collection company, Minnesota-based Education Credit Management Corporation (ECMC), will pay $24 million to acquire 56 campuses, operating under the brands Everest and WyoTech, owned by collapsing Corinthian Colleges, one of the most abusive and deceptive for-profit college companies. The terms of this deal are extraordinarily unfavorable to students. The agreement creates a remarkable conflict of interest for the Department itself, and it sets terrible precedents for future failing colleges.
The deal is so bad that it seems that the Department is determined to prop up these Corinthian campuses at all costs. In other words, it has concluded that Corinthian Colleges is too big to fail. It is making a terrible mistake.
The Obama Administration has done a great deal of hard work to try to stop the torrent of waste, fraud, and abuse engaged in by many companies in the for-profit college industry, which has been grabbing more than $30 billion a year in taxpayer money, mostly to offer career education programs in fields like medical assisting, criminal justice, and auto repair. The bad institutions in this sector offer poor to middling quality programs, charge sky-high prices, and use deceptive and high-pressure marketing to sign up as many students as possible, and deposit their federal aid checks, regardless of whether they will benefit from the program. Corinthian has been among the worst along those lines. The Administration has been doing some good things to try to target federal aid away from such bad programs and toward those that actually help students build careers. But the ECMC-Corinthian decision puts that progress at risk.
It’s not too late, though, for the Department to change course.
Minutes ago, 46 civil rights, veterans, student, and consumer groups, part of a coalition in which I am a participant, sent a letter to Secretary of Education Arne Duncan, Attorney General Eric Holder, and CFPB director Richard Cordray sharply criticizing the ECMC-Corinthian deal and listing multiple specific problems with the proposed agreement. Our group, which includes the NAACP, League of United Latin American Citizens, Iraq Afghanistan Veterans of America, Student Veterans of America, AFL-CIO, Consumers Union, and many others, did so after extensive discussions between coalition representatives and Department of Education officials, as well as multiple conversations with ECMC executives, during which we expressed our strong concerns.
The deal had already been attacked by advocates for students on Capitol Hill. “I’m puzzled and upset by this outcome,” Senator Dick Durbin (D-IL) told Buzzfeed. “I can’t see how students get a break in this scenario. They’re now stuck in this debt collection university.” In the wake of the proposed sale, Durbin, Elizabeth Warren (D-MA), and eleven more Democratic senators have written to Duncan asking that his Department exercise its authority to discharge federal student loans for students with legal claims against Corinthian. Representatives Steve Cohen (D-TN), Raul Grijalva (D-AZ), and Mark Takano (D-CA-41), issued a statement noting that “ECMC has no prior experience operating institutions of higher learning, but,” as the New York Times reported earlier this year, “it does have a checkered history that includes using ruthless collection tactics against student loan debtors who should have reasonably qualified for bankruptcy relief.”
There are indeed real questions about whether ECMC has the corporate character and capacity to undertake the enormously complicated task of suddenly running one of the nation’s largest school systems. But no less concerning are (1) the nature of assets being acquired and (2) the proposed terms of the deal.
There are good programs and instructors, and many fine students, in the Corinthian chain; I have spoken with scores of well-intentioned teachers and staff in the past few years. But they have complained about a company that has sacrificed student outcomes to the company’s bottom line. Corinthian’s deceptive practices and poor record of student success has given many of its programs a weak reputation and left many of its students — people of color, single parents, veterans, and others struggling to build a future — deep in debt. That tarnished image increases the challenges for graduates in finding jobs in their chosen field. It also increases the challenges for any acquirer to recruit new students without engaging in the kind of deceptive marketing that has delivered students to Corinthian programs. It’s not at all clear that anyone, including ECMC, can turn the quality of programs around fast enough to effectively help enough of the current students, who total about 39,000, 51 percent of them studying exclusively online.
It’s thus doubtful that it makes sense to have a plan that depends on new students enrolling at these Corinthian campuses, as opposed to seeking educational opportunities elsewhere. Why would the Department of Education force taxpayers to invest in a risky scheme to prop up these campuses for perhaps decades to come, mostly just to avoid having to redirect the current students to new educational opportunities, especially at a time when various sectors of higher education have excess capacity?
Closing Corinthian programs and campuses will likely occur in California, where Attorney General Kamala Harris refused to agree, as other regulators have now agreed, to shield ECMC from financial claims for past harm to Corinthian students. Thus ECMC declined to buy those campuses, which operate as Everest schools and also under the brand Heald College (a once higher-quality, independent institution that Corinthian bought and promptly ruined, as Heald’s former president recently charged). Shuttering of campuses would create hardships for those students who like their current Corinthian programs, however overpriced they are. It also, of course, would cost many Corinthian employees their jobs. But Attorney General Harris is right to stand up; current and future students, and the country’s long-term interest, is best served without the current anti-student Corinthian-ECMC deal.
Many of the current Corinthian students were defrauded, and they deserve the option of getting their money refunded, or attending another school.
If the Department is reluctant to spend federal dollars on forgiving the Corinthian students’ loans, and if Corinthian’s collapse was hastened when the Department froze federal aid and the company claimed it was almost out of cash, it’s fair to ask where all the federal tax dollars sent to Corinthian are now. Santa Ana, California-based Corinthian, at its peak, was hauling in more than $1 billion a year in federal student grants and loans.
Corinthian CEO Jack Massimino took home more than $3 million a year. He recently put on the market, listed at $11.5 million, his 10,000-square-foot, mountain-view second home in Park City, Utah; the listing says it is “Simply THE finest home in Kamas Valley and possibly the Intermountain West,” and it offers a heated horse barn, a “Children’s ‘Art Barn,'” and a pond on 61 acres.
The complaint against Corinthian filed by California AG Harris, one of many state and federal law enforcement actions taken against the company, alleges that Massimino and other “senior [Corinthian] executives” had “firsthand knowledge of the misconduct,” i.e., the deceptions at the center of Harris’s lawsuit.
Our coalition letter, the text of which is below, lists many of the glaring problems with the ECMC-Corinthian deal, but I will highlight two particularly bad ones:
First, ECMC has insisted on — and the Department of Education has not rejected — requiring students when they enroll to waive any right to pursue disputes in court; instead they must resolve matters through private arbitration. Such mandatory arbitration agreements, which strongly favor companies over individuals, are common when it comes to anti-consumer business like the credit card industry and — of course — the for-profit college industry. The Department could, and should, demand that all recipients of federal student aid, including for-profit colleges, allow students who have been lied to, assaulted, or otherwise harmed by the institution, the option of a day in court. Instead, with this agreement, the Department appears to be moving in the opposite direction, acquiescing in ECMC forcing harmed students into arbitration, even though it plans to run its school system as a non-profit; few, if any, non-profit colleges currently use mandatory arbitration clauses. Denying students such basic legal rights shields a college from accountability for treating its students fairly. ECMC executives’ insistence on arbitration may be revealing of how they really would operate the schools, however well-intentioned and public-spirited they believe they are now. And the Department of Education’s apparent acceptance of that position is another sign of its desperation to have someone take over these campuses before they fold — regardless of the harms and dangerous precedents.
Second, the agreement builds in an extraordinary conflict of interest for the Department of Education. ECMC has insisted it won’t pay more than $24 million up front. So in order to recoup some of the taxpayer investment, the agreement includes an “Earn Out” provision providing that ECMC’s new college subsidiary, Zenith, will pay the Department “up to $17.25 million … over a seven-year period” based on a still-unspecified “percentage of funds that exceed targets specified by the Department.” In other words, the agreement would essentially give the Department an equity position, dependent on ECMC making a good deal of money. What’s the problem with that? The Department is charged with overseeing ECMC’s conduct — that it is not engaged in predatory marketing, or leaving too many students defaulting on their loans, or lying to the Department itself. How can an oversight body have a financial stake in a company it is charged with regulating? It’s a blatant and unacceptable conflict. It could easily be avoided by ECMC, whose coffers are full of cash, ponying up a bit more money now. But the Department isn’t insisting on that, again suggesting its desperation to prevent these Corinthian campuses from failing.
Right now, at least two other huge for-profit college companies — ITT Tech and Education Management Corporation (EDMC, no relation to ECMC) — may be at serious risk of collapse, with declining enrollments, depleted share prices, and a pile of federal and state law enforcement investigations and lawsuits. Other big industry players are also in trouble. Treating Corinthian as too big to fail, and thus sacrificing students and common sense, simply to find a buyer, any buyer, is a terrible course and a terrible precedent. The time to stop this bad decision is right now.
Here’s the text of our coalition letter:
December 17, 2014
The Honorable Arne Duncan
Secretary of Education
The Honorable Eric H. Holder, Jr.
Attorney General of the United States
The Honorable Richard Cordray
Consumer Financial Protection Bureau
Dear Secretary Duncan, Attorney General Holder, and Director Cordray:
As advocates for students, veterans, consumers, civil rights and college access, we write to express grave concerns about the proposed sale of 56 Corinthian Colleges campuses to ECMC Group, a debt collector and loan servicer. We urge you not to waive liability for any prospective buyer of Corinthian campuses unless the sale provides significant relief for current and former students and contains enforceable safeguards to protect students and taxpayers from future abuse.
Last year, the publicly traded Corinthian Colleges Inc. received more than $1 billion in federal student grants, loans and GI Bill benefits and enrolled more than 70,000 students, 69% of whom are African-American, Hispanic or other minorities. Widespread evidence of fraud has led to multiple pending federal and state investigations of and lawsuits against Corinthian, including by the Justice Department and Consumer Financial Protection Bureau (CFPB). After Corinthian repeatedly failed to address concerns about its practices, including false job placement rates used in marketing claims and allegations of altered grades and attendance, the Education Department placed Corinthian on heightened cash management in June, prompting Corinthian to agree to sell or close all of its campuses.
ECMC’s purchase of 56 Corinthian campuses with a combined enrollment of more than 39,000 students would render it the nation’s largest nonprofit career college chain, yet ECMC is a debt collection and loan servicing entity with no experience running an institution of higher education. Further, in the field where ECMC does have experience, The New York Times reports that its actions have “veered more than occasionally into dubious terrain,” using “ruthless tactics” to “hound” debtors to the point where the company has been sanctioned and reprimanded by judges for abusing the bankruptcy process. ECMC’s track record does not inspire confidence in its ability to provide high-quality educational opportunities under Zenith, its newly created nonprofit entity.
But no less troubling are the terms of the deal. The Education Department, CFPB, and multiple state attorneys general have conducted investigations that document that Corinthian inflated job placement rates and engaged in other fraudulent practices to induce students to enroll and take on federal and private loan debts. The Higher Education Act rightly provides for loan discharges for such students and students at schools that close. Yet, the terms of the proposed sale to ECMC would not give students the choice of completing or a fresh start, while leaving the campuses in the hands of a troubled entity with no educational experience. ECMC’s lack of any experience running an institution of higher education and its reputation for aggressive loan tactics make enforceable safeguards all the more essential.
Students and taxpayers deserve better.
Given the evidence that Corinthian made false representations to secure enrollment, any waiver of liability for a purchaser of Corinthian campuses must ensure adequate relief for past and current students. We applaud the 13 senators who recently urged Secretary Duncan to use his authority under the Higher Education Act to immediately discharge the loans of current and former Corinthian students. We also urge Secretary Duncan to exercise his authority to expand the time period during which students who withdraw before a Corinthian school closure are eligible for closed school discharges. In addition, any waiver of liability must include enforceable safeguards to protect students and taxpayers by preventing further harm and ensuring that poor programs dramatically improve or close. By contrast, the proposed sale would effectively remove an incentive for many of Corinthian’s worst programs to improve because degree programs run by this new nonprofit entity would no longer be subject to the gainful employment rule.
Any transaction involving Corinthian campuses should include standards that federal and state entities and the public can help enforce, including those below. Many are typical of nonprofit colleges or required of all new colleges receiving funding from the Education Department. Given ECMC’s stated commitment to operating a reputable, nonprofit college that offers high-quality programs, it should have no objections to such conditions, including:
- No mandatory arbitration clauses or bans on class action lawsuits in enrollment agreements. Nonprofit colleges do not require mandatory arbitration or ban class action lawsuits as a condition of enrollment.
- Apply the standards required for all new colleges, including that no more than 33 percent of students withdraw in any academic year. ECMC has said it will run the campuses as new schools, not as they had been run under Corinthian ownership, and it should be required to meet the standards for all other new colleges.
- Immediately post all faculty names and credentials on the web. Nonprofit colleges typically make public their faculty names and credentials, enabling prospective students to better evaluate the quality of the programs and faculty.
- Apply gainful employment regulation standards and consequences to all programs for seven years. According to the latest public data, many of Corinthian Colleges’ degree and certificate programs would fail the gainful employment metrics or fall in the “zone,” which requires rapid improvement. The purchase of these programs by ECMC must not eliminate requirements for such poor degree programs to rapidly improve or close. The gainful employment requirements should continue to be applied during the “earn out” period, just as the Department continues to apply the 90/10 rule requirements after a for-profit college is purchased by a non-profit entity to ensure the transaction does not evade the law.
- Require all recruiting calls be recorded and allow state and federal officials to monitor a random sample. Given the history of deceptive recruiting to attract students to overpriced, low-quality programs, all calls should be recorded and subject to federal and state monitoring.
To be clear, these are the minimum standards that should be adopted, and even if they were all adopted, we have serious concerns that the proposed sale is not in the best interest of students and taxpayers and sets a dangerous precedent.
For example, we understand that the Department plans to prohibit ECMC from any involvement with the loans of students at its schools to avoid a conflict of interest. Yet the terms of the proposed sale create a serious conflict of interest by having ECMC share revenue with the Education Department during the “earn out” period. The Department should not benefit from enrollment growth at the ECMC campuses that the Department is charged with overseeing.
We also understand that ECMC plans to establish a separate board for its new educational subsidiary, but that the board may have many of the same highly compensated people who are on ECMC’s current boards, which raises questions about whether the board will provide the necessary independent oversight required of nonprofit college boards.
Finally, ECMC’s commitment to reduce tuition by 20% and close certain programs is not sufficient; its programs will still cost many times more than higher quality programs available at existing colleges, and it does not address many of Corinthian’s worst performing programs, including many failing the gainful employment requirements, that have default rates over 30%, and whose graduates earn less than $17,000 per year.
According to press reports, the California Attorney General has refused to waive liability for ECMC because the proposed terms do not provide adequate relief for past and current students and do not provide enforceable safeguards against future harm. We urge you to stand up for students by insisting on sale terms that provide adequate student relief and protections.
Air Force Sergeants Association (AFSA)
American Association of University Professors Counseling (AAUP)
The American Association of State Colleges and Universities (AASCU)
American Federation of Teachers (AFT)
Center for Responsible Lending
Children’s Advocacy Institute
Consumer Federation of California
East Bay Community Law Center
The Education Trust
Higher Ed, Not Debt
Housing and Economic Rights Advocates
The Institute for College Access & Success
Iraq and Afghanistan Veterans of America
The Leadership Conference on Civil and Human Rights
League of United Latin American Citizens
Military Officers Association of America (MOAA)
National Association for College Admission Counseling
National Association of Consumer Advocates
National Consumer Law Center (on behalf of its low-income clients)
National Consumers League
National Education Association
One Wisconsin Now
Paralyzed Veterans of America
Project on Predatory Student Lending of the Legal Services Center of Harvard Law School
Public Advocates, Inc.
Public Law Center
Service Employees International Union (SEIU)
Student Debt Crisis
Student Veterans of America
United States Student Association
Veterans Education Success
Veterans Student Loan Relief Fund
Vietnam Veterans of America
This article also appears on Huffington Post.