New students won’t be able to use federal student loans and grants to enroll at nearly all schools owned by giant for-profit college chain ITT Educational Services Inc., as part of a crackdown announced on Thursday by the U.S. Department of Education that threatens the cash-strapped company’s survival. “It’s too risky,” the department said.
ITT is one of the nation’s biggest for-profit college companies. Its 137 ITT Technical Institute and Daniel Webster College campuses and online programs collectively enroll some 40,000 students across at least 39 states, according to its most recent quarterly filing with the U.S. Securities and Exchange Commission. The Education Department’s attempt to penalize the company follows fraud lawsuits filed by the SEC and the Consumer Financial Protection Bureau. Other government agencies are also investigating ITT, according to the Education Department.
The feds are clearly concerned that ITT may collapse. As part of the punishment, the company will be required to develop agreements with other colleges that would allow its existing students to complete their education elsewhere. ITT’s access to student loans and grants for existing students will be delayed; raises and bonuses for its executives will be banned; and the company must come up with an additional $152.9 million1 in collateral to protect taxpayers from the cost of a sudden collapse.
ITT had only $78 million in cash and cash equivalents as of June 30, according to its most recent quarterly SEC filing. The Education Department’s demand is nearly double the company’s current cash holdings.
Prominent ITT investors and creditors include Warburg Pincus Asset Management, Providence Equity Partners, and Cerberus Capital Management LP.
The department’s move echoes its 2014 response to allegations that Corinthian Colleges Inc. faced financial difficulties and had been misleading students with false graduation and job placement rates. Back then, the department delayed Corinthian's normally quick access to federal student aid funds, causing a cash crunch at the for-profit college chain that culminated in a government-brokered sale of dozens of its campuses, as well as a bankruptcy filing for the rest of the company, in 2015.
“Hard to imagine ITT can provide a doubling of required surety without new federally aided students,” Ben Miller, senior director for postsecondary education at the Washington policy group Center for American Progress, said on Twitter. “This is probably the end.”
Nicole Elam, an ITT spokeswoman, didn’t immediately respond to a request for comment.
Investors swiftly reacted to the news. The company’s shares fell nearly 35 percent Thursday before trading was halted around 2:30 in New York.
ITT faces the prospect of further pain in the coming days. The Education Department’s demand “is in no uncertain terms an event of default” under a financing deal ITT struck with private equity firm Cerberus, said Bradley Safalow, founder and chief executive of PAA Research. Education Secretary John King Jr. declined to say if he were confident ITT could afford the collateral demand.
The loss of federal funding for new students marks a serious blow to the company's finances. Last year, the federal student loan program provided 79 percent of its cash receipts, according to ITT's most recent annual report. The company said in July that it expected new student enrollment to drop by as much as 60 percent compared to last year during the six-month period ending in December.
And the escalation in the Education Department’s oversight represents a reversal of its position from just a few weeks ago, when it relaxed a previous collateral demand. The Obama administration faces growing criticism for its lax policing of for-profit colleges.
If the company were to abruptly shut down, still-enrolled ITT students who don’t transfer their credits elsewhere would be eligible to have their related federal student loans canceled. The feds have forgiven close to $100 million in debt incurred by former Corinthian students left stranded by that company’s 2015 closure. The Education Department's collateral demand is meant to fund any potential future debt cancellations.
Millions of students have flocked to campuses and online programs in search of credentials of questionable value in recent years. State and federal investigators have alleged that many schools deceived these students about their future job prospects. The CFPB alleges that ITT also misled its students—a charge the company strongly denies. But ITT’s schools in recent years have collectively received billions of dollars in taxpayer-funded student loans and grants. Borrowers have defaulted on much of that debt.
If the Education Department follows the CFPB and determines that the company duped students into enrolling, borrowers would be eligible to have their federal debt canceled. Taxpayers would pay the price.