Photographer: Victor J. Blue/Bloomberg

The Obama Administration Could Cause the Next Big For-Profit College Collapse

A government demand could cause a cash crunch at a company already under financial pressure.

The Obama administration is at risk of repeating the mistakes that led to the expensive collapse of for-profit chain Corinthian Colleges Inc.

In that case, the Department of Education failed to address years of allegations that the company’s schools swindled its students and warning signs that Corinthian was facing financial difficulty. When the department finally took action by delaying the delivery of federal student aid to the schools, officials were “surprised” by the cash crunch the delay caused. That set off a series of events that culminated in Corinthian filing for bankruptcy protection less than a year later. The increasing cost to taxpayers of Corinthian's collapse was at least $90 million as of March.

Now the department's recent demand that cash-strapped ITT Educational Services Inc., owner of the eponymous career schools, stump up additional money to cover the cost of a potential collapse could unwittingly exacerbate ITT’s financial woes.

“The Education Department hasn’t been a good analyst of corporate balance sheets. I haven’t seen any evidence that anyone at [the department] reads the papers or engages in the most minimal due diligence,” said Barmak Nassirian, director of federal relations and policy analysis at the American Association of State Colleges & Universities.

On Monday, the department sent a letter to ITT’s chief executive, Kevin M. Modany, giving the company 45 days to increase its existing guaranty with the department from $79.7 million to $123.6 million.

The jump is necessary to protect taxpayers, the department said, because ITT’s schools are at risk of losing accreditation amid an avalanche of government lawsuits and investigations into its practices. Without accreditation, schools can’t get a slice of the nearly $130 billion in loans and grants the federal government annually doles out to college students. About 80 percent of ITT’s cash revenue last year came from the Education Department. Its schools collectively enroll nearly 45,000 students who annually receive more than $600 million in federal student aid.

But it’s not clear whether the department’s demand took into consideration the terms governing a $100 million loan ITT received in 2014 from private equity firm Cerberus Capital Management LP. Cerberus caps the amount of Education Department-related debt ITT can owe at $120 million.

Monday’s demand risks placing the company in default on the loan, said Bradley Safalow, founder and chief executive of PAA Research.

ITT disagrees, pointing to a separate clause in its agreement with Cerberus allowing the career-school chain to take on an additional $17.5 million in undefined debt. Two analysts who follow the company and a lawyer active in commercial finance matters said Cerberus could interpret that clause differently but nonetheless said they expected Cerberus and ITT to strike a deal to avert default. Peter Duda, a Cerberus spokesman at Weber Shandwick, said the private equity firm declined to comment.

The Education Department made its demand after a review of the company’s finances and recent securities filings, concluding that the increase was “in the interest of students and taxpayers,” Kelly Leon, an Education Department spokeswoman, said Monday. For the past year ITT has been providing the department with projections of its 13-week cash flows every two weeks.

On Wednesday, Leon said the department was “further researching” the apparent $120 million cap detailed in ITT’s loan agreement with Cerberus. She declined further comment.

ITT has no shortage of woes. It’s battling a steep drop in enrollment, three separate government lawsuits alleging fraud filed by the federal consumer and securities regulators and the Massachusetts attorney general, and a dwindling cash pile.

Its net income last year fell to $23.3 million, a 92 percent drop compared with 2011. The company reckons it has enough cash to finance itself and meet its obligations, but the Education Department’s recent surety demand could “negatively affect” its standing with the department, various state education and professional licensing boards, and its accreditor.

The accreditor, the Accrediting Council of Independent Colleges & Schools, told the company in April that its schools would have to prove by August why they deserve to maintain accreditation. It also has asked the career-school chain to prepare a plan for its students in the event that it fails.

ITT executives have said that they’ve done nothing wrong and that they do right by their students. “Many of ITT's critics are Washington insiders and the media and political allies who have an ideological bias against the for-profit higher education sector,” Modany said on April 29.

Few schools in the U.S. saddle their students with more debt than ITT. Some 191,000 former ITT students cumulatively owed more than $4.6 billion on their federal loans as of 2014, according to a study based on federal data published last year by a Treasury Department economist and a former Treasury intern.

Recent ITT students are struggling with their federal debt. About 51 percent of former ITT students whose loans came due in 2009 had defaulted in the following five years. The 2009 cohort also saw their cumulative balances rise 1 percent by 2014. By comparison, former New York University students whose federal loans came due in 2009 had paid down 34 percent of their debt after five years.

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