It's Hard to Shut Down a Poorly Performing For-Profit College

California Attorney General Kamala Harris announced the filing of a lawsuit against the for-profit Corinthian Colleges on Oct. 10, 2013 in San Francisco Photograph by Justin Sullivan/Getty Images

Cutting off access to the student aid spigot is probably the most important way the Department of Education can clamp down on poorly performing for-profit colleges, but doing so isn’t easy—as the ongoing saga of Corinthian Colleges shows. Today, Corinthian announced that it missed a deadline to reach an agreement with the government to wind down and sell its programs, although both it and the department expressed optimism that a plan is coming soon.

Corinthian Colleges owns 107 campuses under several for-profit chains, including the Everest Institute, Everest College, WyoTech, and Heald brands, most of them located in California. Questions about the quality of Corinthian’s education have dogged the company for about a decade, and students at several of its schools have had among the highest loan-default rates in the country. California Attorney General Kamala Harris sued Corinthian in October for allegedly targeting vulnerable, low-income students with deceptive marketing that misrepresented job placement rates. Other state AGs have followed suit.

Corinthian has denied these and more recent allegations, telling Bloomberg News that “by any objective standards, our students do very well.”

In January, the department began formally requesting information from Corinthian about its practices, including more details on its job placement results and responses to allegations of altered grades and attendance records. Not happy with the answers it was getting, in mid-June the Department put Corinthian on notice that it was temporarily withholding student aid money for Corinthian. Federal student aid, largely via Pell Grants and student loans, can make up to 90 percent of the revenues for for-profit colleges. Corinthian said without the government disbursement, it would run out of cash and that its existing lenders wouldn’t loan it any more money.

About a week later, the Education Department reached an agreement that gave Corinthian a short-term disbursement of $16 million and a July 1 deadline to create a plan to sell off or unwind its programs by the end of the year. That deadline came and went yesterday with no official agreement. “We are optimistic that further conversations with the company will produce an acceptable plan in the next few days that protects the interests of students and taxpayers,” U.S. Under Secretary of Education Ted Mitchell said in a statement this morning.

There are a few reasons the Department of Education wouldn’t want to force Corinthian to close immediately. First, Corinthian has 72,000 students and 12,000 employees. If the school closed its doors overnight, its students would be stuck scrambling to find other institutions to accept the credits they’ve already earned. Instead, the department gave Corinthian a short period to find buyers, which would keep most of its programs open under new owners. States such as California are also working to get local community colleges to accept credits from Corinthian programs.

There’s also a financial reason not to close the programs abruptly. If a school shuts down, the federal loans its students took out can be forgiven. That would mean that government wouldn’t be able to collect on more than $1.2 billion it lent students to attend Corinthian’s schools, according to Inside Higher Education.

The department says students at for-profit colleges account for about 13 percent of enrollment nationally but nearly half of all loan defaults, and the government agency has slowly been stepping up its enforcement since the financial crisis. Today, another for-profit school, ITT Educational Services, said in a securities filing that it could lose access to student aid because it hasn’t be able to provide audited 2013 financial statements. ITT Vice President Nicole Elam says the company’s financial statements were delayed because it was waiting for accounting guidance from the Securities and Exchange Commission. Elam says ITT is working to complete the audited financials by the end of July.

The Education Department is also in the midst of a multiyear effort to formalize its process of determining which colleges provide such poor education that they should lose federal aid. For-profit colleges are fighting the department’s current proposal. Whatever version of the new rules is ultimately put in place, Corinthian’s example indicates the path ahead for other poorly performing schools.

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