Steven Eisman, the hedge-fund manager whose bet against the housing market was chronicled in a best- selling book, will testify before the U.S. Senate after saying for-profit colleges are pushing students to take on government loans they can’t repay.
Eisman will be a witness in a June 24 hearing on the industry, according to a list released today by the Senate Health, Education, Labor and Pensions Committee. Eisman is shorting, or betting against, shares of higher-education companies because of parallels he sees to subprime borrowers in the housing market. In both mortgages and educational loans, customers take on debts they can’t repay, Eisman said in a presentation at a May 26 investment conference.
Senator Tom Harkin, the Iowa Democrat who chairs the committee, is holding hearings to examine the surge in federal grants and loans flowing to Apollo Group Inc.’s University of Phoenix, Career Education Corp., Corinthian Colleges Inc. and other for-profit higher-education companies.
“With students, families and taxpayers investing so heavily in for-profit institutions through large loan debt and billions of dollars in federal student aid, we must ensure that student are actually getting the knowledge and skills they need to pay off the debt,” Harkin said in a statement.
The number of students attending for-profit colleges in the U.S. rose to 1.8 million in 2008, from 550,000 in 1998, according to Harkin. One in five students who left a for-profit college with educational debt in 2007 defaulted on the loan within three years, Harkin said, citing U.S. Department of Education data. President Barack Obama’s administration proposed rules on June 16 to tighten regulation of the industry.
Margaret Reiter, former supervising California deputy attorney general, is also scheduled to testify at the hearing. In 2007, Reiter’s agency reached an agreement with Corinthian in which the company consented to pay $6.5 million, resolving prosecutors’ allegations that it misled students about graduates’ salary and employment prospects, according to the attorney general’s office. Corinthian, based in Santa Ana, California, didn’t admit fault.
Another witness will be U.S. Department of Education Inspector General Kathleen S. Tighe, whose office has criticized the way accrediting agencies police for-profit colleges, Harkin’s office said.
In a December report, the inspector general said Career Education’s American Intercontinental University shouldn’t have been accredited. Career Education, in a statement at the time, disputed the inspector general’s findings.
Apollo, based in Phoenix, rose 47 cents, or less than 1 percent, to $48.86 at 12:25 p.m. New York time in Nasdaq Stock Market composite trading.
Apollo’s University of Phoenix received a letter from the education department resolving a February 2009 review, after completing corrective action, the company said today in a statement. The review focused partly on the company’s practices for returning federal aid when students withdraw from programs. Apollo reimbursed $660,000 in aid related to the agency’s review, the company said.
Career Education, based in Hoffman Estates, Illinois, rose 15 cents, or less than 1 percent, to $27.15. Corinthian fell 16 cents, to $11.39.
Eisman is one of the hedge-fund managers featured in “The Big Short: Inside the Doomsday Machine” (Norton, 2010), Michael Lewis’s book about investors who anticipated the housing bust. Without new government regulation, students at for-profit colleges will default on $275 billion of federal student loans in the next decade, Eisman said in his May 26 presentation.
A comparison of higher-education companies to the subprime- mortgage industry is “absolute nonsense,” Harris Miller, president of the Career College Association, the Washington- based trade group that represents more than 1,400 for-profit colleges, said in response to Eisman after his presentation.
The industry welcomes Harkin’s hearings to showcase its contribution toward improving access to higher education, Miller in a statement on June 10.