Corinthian to Sell Half Its Schools to Loan Servicer ECMCChris Staiti and Michael McDonald
Corinthian Colleges Inc., the for-profit career schools operator preparing to shut down, agreed to sell about half its 107 campuses to student-loan servicing company Educational Credit Management Corp. for $24 million.
Corinthian, which had a peak market value of $3 billion in 2004, will sell 56 schools under its Everest and WyoTech brands, the Santa Ana, California-based company said today in a statement. The sale to nonprofit ECMC will affect 39,000 students.
Corinthian said in July it would close or sell campuses after the U.S. Education Department imposed a 21-day delay on its access to federal aid, creating a cash crisis. Twenty state attorneys general are investigating the company for its recruiting, lending and marketing practices. It was sued by the Consumer Financial Protection Bureau and is the subject of federal criminal probes in three states.
“We are not a successor to Corinthian,” ECMC Chief Executive Officer David Hawn said in a phone interview. “We’re a nonprofit company that has a very different model in mind on how to deliver career education to students.”
While the deal allows students to continue their educations without interruption, it also saves the government from having to rebate tuition, which it does when schools shut down.
ECMC makes most of its money collecting on defaulted federal student loans and has drawn attention for its fees and collections practices. The company has said it’s saving money for taxpayers by recovering debts owed to the government.
ECMC, based in Oakdale, Minnesota, is making the purchase under the name Zenith Education Group Inc. ECMC, which has worked with the Education Department for two decades on student loans, said it will cut tuition 20 percent and add strict accountability standards for program completion and job placement rates.
ECMC is one of a number of so-called guaranty companies that oversee student loans for the department, which began its lending program in 1965. The groups also guarantee loans made by banks and other private lenders and promise to repay lenders if borrowers don’t. If the agencies can’t recover the money, the federal government takes over the loan, shifting the risk to taxpayers.
ECMC won’t assume liabilities related to litigation or private student loans, according to the agreement. The purchase includes 12 schools that are in the process of being closed as well as online programs.
The agreement with ECMC doesn’t include Corinthian’s Heald brand or 13 Everest and WyoTech schools in California, which sued Corinthian last year for false advertising.
Hawn, who became CEO in February, said ECMC had a number of talks with the office of California Attorney General Kamala Harris and couldn’t win support for the deal.
The attorney general’s office will continue to “act aggressively” to obtain relief and restitution for “the many Corinthian students in California who have suffered as a result of Corinthian’s alleged wrongdoing,” David Beltran, a spokesman for the office, said in a statement.
ECMC manages a $39 billion portfolio of federal student loans. It had revenue of $426 million in 2012, including $379 million from collecting on student loans, according to tax filings. Hawn said Congress changed the commission structure earlier this year, cutting what it makes from collecting debt in half.
The Education Department has been criticized for its relationship with debt collection companies. The National Consumer Law Center published a report in September that said the system favors high-pressure collection tactics while fueling “widespread violations of consumer protection laws and prevents borrowers from assessing their rights.” The report cites Premiere Credit of North America, an affiliate of ECMC.
ECMC said its sister company is a “highly compliant” accounts receivables management company and has a “strong record” of following national and state laws and regulations.
“ECMC has no experience running a college, let alone one of this scale, and is instead known for ruthless and abusive student loan operations,” Lauren Asher, president of The Institute for College Access & Success, an advocacy group, said in a statement. “The agreement provides virtually no relief to the Corinthian students.”
The purchase of a college by a debt collection company represents a conflict of interest, said Robyn Smith, an attorney with the Legal Aid Foundation of Los Angeles who works with the NCLC.
“It’s just unbelievable,” Smith said. “I’m deeply saddened by what is happening.”
The company’s main business is collecting on federal family education loans from a government program that ended in 2010, and that poses no conflict of interest, Hawn said. ECMC’s parent owns a for-profit subsidiary called Premiere Credit of North America whose debt collection clients include the Education Department.
“The businesses are very unrelated,” Hawn said. “An Everest or WyoTech student that receives a federal student loan would not flow to us in our capacity as a guarantee agency. We’re uninvolved in the collection of those loans.”
The fees that ECMC charged have sparked criticism that the company and similar agencies are reaping a bonanza from former students’ pain, Bloomberg News reported in 2012. Its former chief executive officer made $1.1 million in 2010 and its top-paid debt collector was paid $454,000.
At the time, the company said it benefited taxpayers by helping keep the federal loan program solvent. It also said that it changed its bonus policy, making it difficult for collectors to earn more than $150,000 a year.
“We pay market rates and are competitive with the rest of the industry,” Hawn said today of its compensation.
The acquisition is expected to close in January 2015, Corinthian said.
ECMC will review all programs at the schools it’s buying and eliminate those that underperform, giving students options that include refunds. The company will work with local employers to ensure its programs can meet advertised job placement rates, the Education Department said.
Corinthian also agreed to retire Genesis loans, private loans it extended to students, the department said.
Of the sale proceeds, $12 million of the $24 million total will be paid to the Education Department while $8.5 million will be placed in escrow, Corinthian said in a regulatory filing. The for-profit company got $1.4 billion in federal aid last year.
The money the Education Department receives related to the deal will be used “to support students,” it said in a statement.