Carrianne Howard dreamed of designing video games, so she enrolled in a program at the Art Institute of Fort Lauderdale, a for-profit college part-owned by Goldman Sachs Group Inc. Her bachelor’s degree in game art and design cost $70,000 in tuition and fees. After she graduated in December 2007, she found a job that paid $12 an hour recruiting employees for video game companies. She lost that job a year later when her department was shuttered.
These days, Howard, 26, makes her living in a way that doesn’t require a college diploma: by stripping at the Lido Cabaret, a topless club in Cocoa Beach, Florida. “I didn’t know what else to do,” she says. “I’ve got a worthless degree. It’s like I didn’t attend school at all.”
Like many investors, Goldman, owner of 38 percent of the Art Institute’s parent, Education Management Corp., was drawn to for-profit colleges by their rapid growth and soaring stock prices, reports Bloomberg Businessweek in its Aug. 9 issue. Now Goldman, which recently agreed to pay $550 million to settle U.S. civil-fraud charges related to the subprime mortgage meltdown, is invested in an industry under attack from Congress, the Obama Administration and dissatisfied students.
The Senate held a hearing Aug. 4 featuring a Government Accountability Office undercover probe that found recruiters at EDMC’s Argosy University in Chicago and 14 other for-profit colleges misled investigators posing as potential students about the cost and quality of their programs. Near their peak in April, Goldman’s shares in EDMC were worth $1.39 billion. Since then they’ve fallen by 49 percent to about $708 million. EDMC dropped $1.14, or 8 percent, to $13.04 at 4 p.m. New York time in Nasdaq Stock Market trading.
A proposed government crackdown may have a disproportionate effect on EDMC. The U.S. Department of Education may restrict taxpayer-funded grants and loans to for-profit colleges like EDMC that offer $50,000 associate’s and $100,000 bachelor’s degrees in such low-paying fields as cooking, art and design.
Until recently the education business looked like a bonanza for Goldman. Pittsburgh-based EDMC, the second-largest U.S. chain of for-profit colleges after Apollo Group Inc.’s University of Phoenix, has 136,000 students -- more than three times as many as the University of Michigan. Its annual revenue doubled over the last five years, to $2.4 billion. Goldman and two other firms bought EDMC in 2006 and took it public in 2009. Along the way they shared at least $70 million in advisory, management and other fees, according to securities filings. Goldman also became EDMC’s biggest stockholder.
Government grants and loans to students, combined with booming enrollment, have made for-profit colleges a rewarding investment. Federal aid to for-profit colleges jumped to $26.5 billion in 2009 from $4.6 billion in 2000, according to the Education Dept. EDMC currently receives almost 82 percent of its revenue from federal financial aid programs.
On July 23, the Obama Administration proposed restricting - - and in extreme cases, cutting off entirely -- programs whose graduates end up with the highest debts relative to their salaries and have the most trouble repaying their student loans. EDMC will be affected more than most other for-profit companies because of its focus on “passion” fields, such as art and cooking, rather than more practical accounting or business degrees, says Jeffrey M. Silber, an analyst with BMO Capital Markets in New York.
Cooking, fashion, and arts jobs tend to have low starting salaries: A beginning cook, for example, earns an average of $18,000 a year, according to U.S. Bureau of Labor Statistics data, while a two-year culinary degree can cost $40,000 to $50,000. EDMC spokeswoman Jacquelyn P. Muller says Art Institute students tend to earn more, with those holding culinary degrees starting at $28,000.
EDMC also faces complaints from its own graduates and employees. A lawsuit filed in Texas state court by 18 students alleges they were misled about the accreditation status of their program, diminishing their degrees’ value and leaving them with debts they can’t repay. In another suit a former admissions officer claims the company engaged in high-pressure sales tactics, paying staff to sign up students. In July, dozens of faculty who tried, unsuccessfully, to form a union at one Art Institute campus complained that unqualified students were being let into their classes.
Goldman spokeswoman Andrea Raphael said in a statement that the company invested in EDMC “because of its leading position in the private higher-education space, its successful track record, and its demonstrated commitment to its students.”
Raphael referred other questions to EDMC, which said that the student complaints don’t reflect the quality of EDMC’s academic programs or the success of its graduates. EDMC says it takes seriously any alleged shortcomings uncovered by the GAO. Declining to discuss individual students, EDMC denies the allegations in the lawsuits.
“The vast majority of our students” are “satisfied with their experience and go on to successful careers after graduation,” Muller said in a statement. She also said EDMC’s chain of institutes has illustrious alumni, including tennis star Venus Williams, who graduated with a fashion design degree from Fort Lauderdale in December 2007, on the same day as Howard; Logan Neitzel, a 2005 graduate of the Art Institute of Seattle and a 2009 contestant on television’s Project Runway; and Carol Guzy, a 1980 graduate from Fort Lauderdale who is now a Pulitzer Prize-winning photographer at The Washington Post.
Over the last two years, Muller says, students have found work at companies such as Electronic Arts, Neiman Marcus, and Sony. The company cites students such as David Suppe, who graduated in 2005 from the Art Institute of Las Vegas and now works as a chef at the MGM Resorts International’s Excalibur Hotel.
“I got so much out of my education,” says Suppe, 41. “I never would have advanced in this career without it.”
As evidence that EDMC’s students are succeeding, Muller notes that the company’s latest government student-loan default rate -- which measures loans that go bust in the first two years students owe money -- is 7.5 percent, vs. an average of almost 12 percent at all for-profit schools. EDMC’s rate is twice that of four-year nonprofit universities -- though many graduates of traditional schools find themselves with heavy debts and low-paying jobs as well.
Like some of its students, EDMC has substantial debt. In 2006, Goldman Sachs, Providence Equity Partners, and Leeds Equity Partners borrowed $2 billion when the group purchased the company for $3.4 billion, taking it private in a leveraged buyout. Goldman, which made the investment through GS Capital Partners, a private-equity fund that uses money from Goldman and outside clients, took EDMC public again last October. The company has reduced its debt to $1.53 billion.
The debt from the acquisition changed the culture of EDMC, according to Robert T. McDowell, who retired as EDMC’s chief financial officer shortly after the buyout. Before the acquisition, McDowell says he and other executives resisted calls from Wall Street analysts to pursue growth opportunities that could undermine academic quality.
“You take on that amount of private-equity debt, you need to earn high rates of return for these investors,” says McDowell, who worked at the company for 18 years. “I was worried that the quality of the experience for employees and students was going to deteriorate.”
Muller says the borrowing hasn’t hurt employees, faculty, students, or programs. EDMC has invested more than $1 billion in campus buildings, technology, and other capital projects over the last 10 years -- more than half over the last four years, she says.
At the New England Institute of Art in Brookline, Massachusetts, administrators show off classes averaging 16 students using new computers and the latest software in the animation program. The school has a $500,000 sound studio, a 14,000-volume library, and a student-run art gallery.
In its promotional materials, EDMC highlights graduates such as Jonathan Lukason, who received his bachelor’s in audio and media technology in 2008 from New England and has worked as a freelance audio engineer for NBC and ESPN. In an interview, Lukason calls the institute’s program “the best one around.” Still, Lukason complains, he earned $25,000 in his first year out of school, and he is struggling with $55,000 in student loans.
“At this rate, I’ll be dead before I pay it off,” he says.
To sell students on degrees, EDMC de-emphasized their costs and offered sales incentives to employees for signing up prospects, says Brian Buchanan, a former admissions officer whose lawsuit against EDMC was unsealed in May. Top producers won spots in the “President Club,” which entitled them to trips to foreign beach resorts, gift cards, and iPods, according to Buchanan’s suit, which was filed in 2007 in U.S. District Court in Pittsburgh. Buchanan, a former waiter, worked as an admissions representative for EDMC’s South University online from December 2005 until May 2007.
In an interview, Buchanan said EDMC gave admissions staff a matrix showing them how much money they would make for each enrollment. Generally, each student was worth $800, he said. To recruit students, EDMC told employees to use the “bring the pain” sales tactic, according to his lawsuit.
For example, a single mother would be told, “How are you going to explain to your children that you cannot buy them the things they need because you couldn’t be bothered to finish your education?” the complaint says.
Buchanan’s case is a whistle-blower suit that seeks to recover damages on behalf of the federal government with the plaintiff keeping a share. In a Securities & Exchange Commission filing, EDMC said the claims are “without merit.”
In July, instructors at the Art Institute of Seattle raised questions about EDMC when they tried to join the American Federation of Teachers. The union lost in a 48 to 64 vote. Instructors objected to high-pressure marketing to students to take out loans they couldn’t afford, says Sandra Schroeder, president of the AFT in Washington State.
The institute encourages faculty to give passing grades to students who aren’t making progress, she says, so the school can keep collecting federal aid money. EDMC administrators take the allegations seriously and “respect and promote the principles of academic freedom without fear of repercussion or interference,” Muller says.
Students also object to EDMC practices. Argosy University in Dallas falsely told applicants to the clinical psychology doctoral program that the institution would get accredited by the American Psychological Association, 18 former students claim in a lawsuit filed in Dallas County District Court last year.
Stephanie Capalbo, one plaintiff, moved from suburban New York City to go to the Texas university. In an interview, Capalbo, who got her doctorate in 2008, says officials told her the school was in the process of getting accreditation, which it still hasn’t achieved.
Capalbo says she now owes about $130,000 in government loans for Argosy tuition and fees and another $150,000 in private loans for living expenses. Her payments are $1,500 a month, draining the $60,000 the 29-year-old makes each year working for a nonprofit that evaluates children for foster care in New York. Many employers turned her down for higher-paying jobs because she lacks a degree with APA accreditation, she says.
“I love being a psychologist, but I have a family,” she says. “I’ll be working the rest of my life to pay off these student loans. It’s an unbearable debt.”
EDMC spokeswoman Muller says the allegations in the lawsuit against Argosy are “unfounded” and that APA accreditation isn’t required for graduates to become licensed as clinical psychologists in most jurisdictions, including Texas. Argosy hasn’t submitted an application to the APA and continues to prepare for the accreditation process, which takes time because of the data required, Muller says. She adds that colleges can’t control the amount of debt that a student takes on.
Carrianne Howard, the Florida student, didn’t borrow for her education. Instead her parents paid roughly $70,000 in tuition bills. Her mother, an airline data analyst, and her father, a computer engineer, sold their California home and moved to Virginia after her father lost his job and her mother retired. They used money from the sale to pay for tuition, and her parents are now struggling financially, Howard and her mother say.
Howard grew up in Valencia, California, a suburb of Los Angeles, and became drawn to video gaming during high school. One afternoon in 2004, an Art Institute ad popped up on her PC.
“I was as excited as can be,” she says. “I thought it was a dream come true.”
She and her mother toured the Fort Lauderdale campus, a bright, modern three-story building flanked by reflecting pools and palm trees. Her tour guide “just made it sound really exciting and a lot of fun, like I was going to make hundreds of thousands of dollars,” Howard says.
EDMC schools train representatives to make “no promise, implication, or guarantee” about employment, Muller says.
A couple of years into her studies, Howard says she grew disenchanted. Some classes consisted largely of playing video games, she says. She wanted to drop out but her mother insisted she finish because the family had spent so much already. She graduated in December 2007; in March 2009 she lost her first job, at GameRecruiter, a Fort Lauderdale-based gaming industry employment agency where she was making $12 an hour. Marc Mencher, GameRecruiter’s president and CEO, says she was let go only because he closed down her entire department, and calls her “an exceptional performer.”
She may be struggling to find work in part because of inadequate preparation from the Art Institute’s gaming department, Mencher says.
“It’s a weak program because it’s understaffed,” says Mencher, who serves on the Art Institute’s national advisory board for gaming programs. “I personally feel the students aren’t getting their money’s worth.”
After Bloomberg Businessweek asked EDMC for comment, Mencher sent a follow-up e-mail, saying that although the Art Institute is “not perfect and they have issues like any organization,” it is “an excellent program built on input from respected industry professionals along with local employers.” It has an “outstanding placement” record for graduates, he said.
Howard applied for dozens of jobs, not only in gaming but also in grocery stores and nursing homes, mostly for minimum wage, she says. In October 2009, Howard turned to adult entertainment by doing paid Web chats. In March she started dancing at Lido Cabaret, earning $400 to $1,000 a week, she says.
She now hopes to save enough to go back to college and get a business degree. As she considers returning to school, Howard also helps run an anti-Art Institute website, where she has collected more than 70 names in a petition to send to the U.S. Education Dept.
The private, nonprofit Florida Institute of Technology, where Howard would like to enroll, won’t accept any of her credits from EDMC, according to spokeswoman Karen Rhine, because the Art Institute doesn’t have the kind of accreditation the traditional college requires. In its school catalog and other documents, the Art Institute “does not imply or guarantee” that credits will transfer to other universities, says EDMC’s Muller.
At 1 a.m. on a recent weeknight, Howard finished a shift at Lido. “This is what I do,” she says. “When I’m in here, I try not to think about the Art Institute.”