A letter calling for U.S. Education Secretary Arne Duncan to strengthen regulation of for-profit colleges that recruit students in homeless shelters was drafted by a researcher working for an investor betting against the publicly traded education companies.
Johnette Early drafted the letter with input from shelter workers and enlisted 20 workers, administrators and advocates to sign it, she said in an e-mail on July 9. Early’s role in writing the letter, which said for-profit colleges were “preying” on the homeless, was reported July 9 by ProPublica, a New York-based nonprofit news outlet. The Education Department responded to the letter without knowing of Early’s involvement or her connection to a short-seller, saying that it was working to punish recruiting abuses at education companies.
Short-sellers seek to profit by selling borrowed shares with the expectation of replacing them later at a cheaper price. Steven Eisman, a hedge-fund manager also betting against education companies, last month testified in a Congressional hearing last month that a situation similar to the recent housing-market crash is developing as for-profit colleges extend federally guaranteed loans to students with little ability to repay them. Early said she had no personal interest in seeing education companies’ shares decline.
“I have never felt any pressure to be for or against for-profit education,” Early said in the e-mail. “My client has provided me with complete freedom to pursue my own research initiatives and reach my own conclusions.”
Early, 48, of Dallas, said she has been studying recruitment of the homeless by for-profit colleges for about a year. She said she typically worked with shelter staffers who forwarded the letter to their superiors for a decision about whether to sign.
Early said it was her “regular practice” to disclose her position to shelter workers or managers as an independent researcher for an investment firm.
In her dealings with Community Voice Mail, a Seattle-based group that provides poor and homeless people with services, Early disclosed her role “from the beginning” said Jennifer Brandon, executive director, who was one of the signers of the letter.
Neil Donovan, executive director of the Washington-based National Coalition for the Homeless, also a signer of the letter, said in a telephone interview that if he had known of Early’s links to investors “that would have been a very different picture -- I would not have signed the letter.”
Early’s work is part of a “systematic attempt by short sellers” to persuade the news media and policy makers of widespread violation of the Department of Education’s rules, said Harris Miller, president of the Career College Association, a Washington-based industry group. Early’s letter was an attempt to make it appear that isolated examples of recruitment in shelters represent a national problem, he said.
Early said her client, whom she declined to name, told her last week that her research contributed to its decision to sell short education companies. She said her own compensation is “based solely on the quality and accuracy of my research.”
The letter to Duncan, signed by 20 people, said that companies use “predatory” recruiting tactics to entice the homeless into taking on loans to pay for training programs that frequently don’t lead to jobs.
“Saddled with a mountain of debt that is unsupportable by educational outcomes promised but not delivered, our clients all-too-often default on their debts and fall into a downward spiral of recidivism,” said the letter, dated June 17.
“University of Phoenix does not condone the recruitment of residents from homeless shelters or transitional housing,” Manny Rivera, a spokesman for Phoenix-based Apollo Group Inc., which operates the University of Phoenix, said in an e-mail. “University of Phoenix is committed to providing access to a quality education, while better identifying and enrolling only those students who have a reasonable chance of success in our rigorous degree programs.”
Bloomberg News reported, on April 30, that three for-profit colleges recruited in homeless shelters in the past year in Cleveland and New Jersey. Homeless students generally qualify for federal grants and loans, which account for most of the revenue of for-profit colleges.
Federal aid to students at for-profit colleges jumped to $26.5 billion in 2009 from $4.6 billion in 2000. Among borrowers who were to start repaying their federal student loans in the year ended Sept. 30, 2008, for-profit colleges had a default rate of almost 12 percent, compared with a national average of 7.2 percent, according to federal data.
The Education Department is developing regulations that will penalize companies that misrepresent their programs in recruitment, said David Bergeron, acting deputy assistant education secretary for policy, planning and innovation in the Office of Postsecondary Education, in a June 28 letter responding to the homeless-shelter officers and advocates.
“These regulations will result in improved protections for both prospective students and the taxpayer and significant penalties for schools that fail to comply,” the department’s letter said.
The Education Department remains concerned about “overzealous” recruiting practices by for-profit colleges, regardless of the origin of the letter, said Justin Hamilton, a department spokesman.
“We welcome an open discussion and public input on these issues as we continue working to ensure the interests of students and taxpayers are protected,” he said in an e-mail.
Eisman, manager of the financial-services fund at New York-based Frontpoint Partners, a hedge-fund unit of New York-based Morgan Stanley, predicted in May that earnings at Apollo, ITT Educational Services Inc. and Corinthian Colleges Inc. would be hurt by federal regulations forcing the companies to reduce tuition and curb enrollment growth.
Apollo fell 33 percent over the past 12 months in Nasdaq Stock Market composite trading. Corinthian Colleges, based in Santa Ana, California, dropped 34 percent in the same period in Nasdaq trading, and ITT Educational, based in Carmel, Indiana, declined 7.1 percent over the past 12 months in New York Stock Exchange composite trading.