September 23, 2023

The Art Institutes, Long-Time Career College Operation, Dead at 103

The Art Institutes, Long-Time Career College Operation, Dead at 103

The Art Institutes, a long-operating career college chain that developed a strong commitment to teaching but later devolved through a series of troublingly opportunistic owners into what the Justice Department called “a diploma mill,” says it has shut down for good.  The school’s website says that effective September 30, the Art Institutes’ remaining eight campuses in Florida, Georgia, Texas, and Virginia “will be permanently closed,” and an email sent to students late on Friday said, “All future classes have been cancelled.”

The website says the school “is working with numerous partners to facilitate student transfers.” But the email sent to students admits the Art Institutes have not reached any agreements with other schools to facilitate students transferring.  Students and staff are telling me that the school is doing little to nothing to help students find new schools or otherwise to assist them. The schools currently have about 1,700 students.

The Art Institutes chain, which came to offer courses ranging from culinary arts to fashion design, audio production to culinary arts, took off when, in 1970, Pennsylvania-based Education Management Corporation (EDMC) acquired the 50-year-old Art Institute of Pittsburgh (founded in 1921). Under EDMC president Robert Knutson, the school initially focused on quality instruction, not reckless expansion.

But, eventually, Knutson presided over repeated acquisitions of other schools — Argosy University, South University, Brown Mackie College — that made the company bigger and bigger, with campuses all over America. Growth ultimately led to a public stock offering and, in 2006, while former Maine governor John McKernan (R) was CEO, a $3.4 billion private takeover of the company by Wall Street giant Goldman Sachs and private equity firms Providence Equity Partners and Leeds Equity Partners.

EDMC’s next CEO, joining in 2007, was Todd S. Nelson, who honed his skills as a predatory college operator while running the even larger University of Phoenix. Nelson had led Phoenix to dramatic growth — tripling annual revenues between 2001 and 2006, to $2.4 billion. But he departed in a hurry in 2006 after Apollo paid $9.8 million to settle a U.S. Department of Education complaint that the company had engaged in systematic recruiting violations.

The Goldman Sachs deal created enormous pressure for EDMC to make money fast. The company’s former chief financial officer, who retired soon after the buyout, told Senate investigators in 2010: “You take on that amount of private-equity debt, you need to earn high rates of return for these investors, I was worried that the quality of the experience for employees and students was going to deteriorate.”

That’s just what happened, as EDMC and the Art Institutes accelerated predatory recruiting, according to numerous government and media investigations. The schools still offered some quality programs and instructors, but it enrolled thousands of students who were unlikely to actually succeed there.

At its peak around 2010, EDMC was bringing in some $1.8 billion a year, eighty percent of that from U.S. Department of Education student grants and loans, and even more taxpayer dollars via the departments of defense and veterans affairs, and enrolled some 258,000 students at once. There were nearly 50 campuses, from Boston to Miami, Kansas City to Denver to Hollywood, plus an online division, of the Art Institutes alone.

Many of those students, including low-income single mothers, and U.S. military veterans like Chris Pantzke and Mike DiGiacomo, fell prey to the Art Institutes’ deceptive and coercive recruiting and financial aid practices, and prices that were higher than Harvard or Stanford, and they ended up dropping out, without degrees or enhanced job prospects but deep in debt. Pantzke, who suffered from brain trauma during combat and severe post-traumatic stress disorder, was recruited for a two-year art degree at an EDMC school with the promise of special disability services. He was then denied assistance after enrolling, had difficulty attending the online classes because of his disability, and found that the school had used all of his $65,000 in GI Bill benefits, while he incurred another $26,000 in student debt.

Taxpayers were left on the hook when many of the Art Institute student loans went into default.

But the deal was working for one group, EDMC’s owners and executives. In search of more cash, EDMC became a public company once again in 2009, raising $330 million in a public stock offering, although Goldman, Providence, and Leeds continued to own 80 percent of the company.

In 2015, EDMC’s abuses started catching up with it. The U.S. Justice Department and state attorneys general reached a $95 million settlement with EDMC over charges that the company deceived students and defrauded the Department of Education by violating recruiting rules. That’s when then-U.S. Attorney General Loretta Lynch tagged EDMC and its Art Institutes as “a high pressure recruitment mill.” Lynch called the settlement “a historic step forward in our collective ongoing fight against fraudulent and abusive practices in the for-profit college industry.”

By then, EDMC’s enrollments and stock price had plummeted. Private equity man Jeffrey Leeds and Goldman Sachs lost control of the collapsing company, which was taken over by its creditors, led by the firm KKR, in 2014.

Wounded, but still intact, and still luring thousands of students across the country, the Art Institutes and its surviving EDMC cousins, Argosy University and South University, took advantage of two developments in order to stay alive. First, for-profit college owners and their clever lawyers had, during the 2010’s, developed schemes to convert their schools t0 non-profit status, allowing them to escape the stigma and regulatory pressures on for-profits that the industry’s bad behavior had created, while still letting the former owners make big profits. Second, in 2017 a new U.S. president, Donald Trump, installed a secretary of education, Betsy DeVos, who in turn hired former for-profit college executives, including Diane Auer Jones, to run her department. Under DeVos and Jones, such phony conversions to non-profit status were mostly approved, predatory college operators were given free rein, and aggrieved students were treated as the real con artists.

Devos and Jones approved the sale of the Art Institutes, Argosy, and South, from collapsing EDMC to Dream Center Education Holdings (DCEH), a non-profit that was associated with a religious charity but was run by Brent Richardson, a former for-profit college CEO. Forty-five Art Institutes campuses, plus the online division, were still in business at this point.

After we were contacted by whistleblowers inside the operation, Republic Report exposed in May 2018 that Dream Center Education Holdings was rife with conflicts of interest, as the non-profit school operations grew intertwined with a network of for-profit companies owned or staffed by Richardson, his close relatives, and long-time associates. We also reported that two Art Institutes campuses were falsely telling students that they remained accredited schools, when their accreditor had suspended that status pending review of the new ownership.

Those revelations, and many more that we published in the following months about dishonesty and disarray at the Art Institutes and DCEH, led to media and congressional scrutiny of abuses at the company and of deceptive conduct by Devos aide Diane Auer Jones, to a class action lawsuit by deceived students, and ultimately to DCEH shuttering, after abruptly announcing in late 2018 that numerous campuses, would close, amid allegations of misused and missing money.

But the Art institutes saga still wasn’t over. DeVos and Jones engineered the January 2019 sale of the Dream Center schools to another operation. Argosy University was shut down, and only nine Art Institutes campuses remained. The new buyer, which now owned South University as well as what was left of the Art Institutes, concealed its hidden profit motives: It was publicly announced that a non-profit, the Education Principle Foundation, would own the surviving former EDMC/DCEH schools. But that foundation, we revealed, was established by Colbeck Capital Management, a Los Angeles investment firm. Colbeck also is financially tied to for-profit Studio Enterprise, the company that was awarded lucrative contracts to service the same schools.

After that deceptive start, many of the remaining schools have struggled under Colbeck. I have repeatedly heard from staff and students about dishonest behavior, poor educational quality, and disarray at both the Art Institutes and South.

In August, South University, which has 11 campus locations plus an online division, announced it had separated from the Education Principle Foundation.

That left only the eight remaining Art Institute campuses for Colbeck. Now those are shut, perhaps for good.

Once again, career college students have been suddenly locked out in the cold. Many of them were right on the verge of graduating, according to multiple television news reports and emails I have received from students.

Regarding the option of students transferring to other schools, the Art Institutes email sent Friday says, “Due to the timing of this decision, The Art Institutes have not had sufficient time to engage with other colleges and universities in their respective markets to sign formal agreements for students to transfer and continue their studies elsewhere. The Art Institutes are working with state agencies and The Art Institutes’ accrediting agency, Commission on Colleges of the Southern Association of Colleges and Schools to identify appropriate academic transfer opportunities for students affected by this closure.”

“Although there are no formal transfer of credit agreements in place,” the email continues, “there will be academic and student financial aid staff available to students at the campus through the end of 2023. We are hopeful that the colleges and universities in each of the Art Institute markets will assist students and allow them to transfer their credits and complete their program of study.”

The email offers this explanation for the school’s demise: “A culmination of events over the past decade, both external and internal to the campus operations, has forced the closure of this system of colleges. Most notably, the colleges, which already were dealing with the legacy challenges that arose under prior ownership, were unable to absorb the impact that the COVID-19 pandemic had on schools teaching hands-on and equipment-intensive programs such as culinary arts and fashion design.”

Like the Dream Center before them, the latest operators of the Art Institutes now seem to be blaming their predecessors, as well as circumstances beyond their control. But sources inside the operation are starting to tell me a different story.

Investigators should focus on Colbeck, which concealed in 2019 that its principals founded the Education Principle Foundation, the non-profit that acquired the schools. Colbeck is styled as a “strategic lending” firm. Studio Enterprise, financially tied to Colbeck, had a contract to provide a range of the services to the schools. I would predict that, when creditors, students, and law enforcement come after the Art Institutes for their money, the Educational Principle Foundation won’t have much money.  If money was made, it likely went to Studio/Colbeck. That was the point. Another basic question is whether Studio still has a servicing contract for the supposedly now independent South University.

Stay tuned.

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