Blog: Consumer Financial Protection Bureau
April 29, 2015
Corinthian Colleges (“Corinthian”) announced this past Sunday, April 26 that Corinthian was ceasing operations at its remaining physical campuses. This April 26 announcement specifically refers to the remaining 30 or so physical campuses that Corinthian continued to operate subsequent to the sale of over 50 of its campuses to ECMC Group last fall. The campuses sold to ECMC Group are not impacted by this announcement and continue to operate.
The Federal Student Aid Office of the U.S. Department of Education posted the following on its website: “On April 27, 2015, Corinthian Colleges announced that effective immediately, they were ceasing operations and instruction at their remaining 30 locations—including two satellite campuses—across the country. As a result of this precipitous closure, all remaining Everest, Heald, and Wyotech locations under the Corinthian brand have lost their eligibility to receive federal student aid funds from the Department. Students impacted by this closure may have the option of applying for a closed school loan discharge or transferring their earned credits to another institution and continuing their education.”1
Make no mistake about it, this shuttering of its remaining physical campuses by Corinthian is huge news. 16,000 students are left in limbo. As noted in journalist M. Alex Johnson’s April 27, 2015 CNBC article, “[i]n what's believed to be the biggest shutdown in the history of higher education in the U.S., Corinthian Colleges said Sunday it's closing its remaining 28 for-profit schools effective immediately, kicking about 16,000 students out of school.”2
Prior to Corinthian’s announcement on April 26, I was working on a new blog entry to follow up my March 12 entry about the Consumer Financial Protection Bureau’s enforcement case against Corinthian. In the new blog entry, I was planning to summarize where things stood or appeared to stand in the wake of the US Dept. of Education putting Corinthian on increased financial oversight last June, which was followed in short order by Corinthian’s agreement with the Dept. of Education for Corinthian to put a majority of Corinthian’s campuses up for sale, followed by the CFPB’s enforcement action in September, followed by Corinthian’s sale of 50 plus campuses to ECMC Group. The subtitle for the new blog entry was going to be “Loose Ends” which sounds inappropriately frivolous in light of the April 26 announcement.
This April 26 announcement tells us exactly where things stand with respect to the remaining 30 or so physical campuses that Corinthian continued to operate into the spring of this year; up until this point--and subsequent to the sale of the other campuses toECMC Group lastyear—the future for the campuses that Corinthian retained had been a big question mark. (As a quick aside, before we go on further, for any of the students who were studying at the campuses that Corinthian just ceased operating, the following is a link to a FAQ page that the U.S. Department of Education [Federal Student Aid office] just posted for students impacted by Corinthian’s closure: https://studentaid.ed.gov/about/announcements/corinthian/faq).
So let’s look at where things stood for Corinthian before the April 26 announcement. In my March 12 posting, I discussed how ECMC Group – which is a student loan management / collection / guaranty agency – acquired a number of Corinthian’ schools last fall. ECMC Group created Zenith Education Group, Inc. to take over these campuses. Prior to this point, ECMC Group had never operated an institution of higher education.
As of last year, before Corinthian sold half its campuses to ECMC Group, Corinthian had over 100 campuses across the country, operating its schools under the names Heald, Everest, and WyoTech.3 Its schools enrolled 72,000 students nationwide who received $1.4 billion in federal financial aid annually.4 However, and this is a critical “however,” on June 19 of last year, the U.S. Department of Education posted an announcement that it had placed Corinthian “on an increased level of financial oversight after the company failed to address concerns about its practices, including falsifying job placement data used in marketing claims to prospective students and allegations of altered grades and attendance.”5
Then, on September 16, the CFPB brought its action against Corinthian in U.S. District Court for the Northern District of Illinois (Case No. 14-7194).6 My March 12 blog entry summarizes the more salient allegations in the Complaint, including the following [paraphrased]:
• “[Corinthian’s students] relied on private loans and aid provided by the federal government under Title IV to pay Corinthian’s tuition and fees.
• Corinthian’s business model is predicated on convincing consumers to obtain student financial aid to pay the high cost of tuition to enroll in its programs.
• Corinthian referred internally to its students as having “[m]inimal to non-existent understanding of basic financial concepts,” as well as poor or no credit history. Corinthian assisted these students in applying for federal financial aid, but even with the maximum amount of available federal aid, many prospective Corinthian students were not able to afford Corinthian’s tuition. Corinthian referred to this shortfall as a “funding gap.”
• Rather than reduce tuition to eliminate this gap, Corinthian marketed and promoted private student loans, known as Genesis loans, to its students. During the time period material to this complaint, Corinthian represented to its students that the Genesis loans were made by an independent third-party entity and that Corinthian did not have a financial interest in the loans.
• When Corinthian marketed, promoted, and facilitated these student loans, Corinthian expected that most student-borrowers would default.
• Despite the high default rate, Corinthian marketed, promoted, and facilitated the Genesis loan program because it could not rely solely on federal funding for 100% of its revenue. Federal law requires that no more than 90% of its revenue may come from federal financial aid provided under Title IV of the Higher Education Act of 1965, 20 U.S.C. §§ 1070 et seq. (Title IV aid). Every Genesis loan dollar that Corinthian induced its students to borrow, in effect, allowed Corinthian to receive up to an additional nine dollars in Title IV aid. As a result, Corinthian had strong financial incentives to induce its students into taking out Genesis loans, even given students borrowers’ high default rates.”7
OK, does everyone understand this? Corinthian could not operate its colleges without its students obtaining financial aid—its business model specifically depended upon its students getting financial aid. However, as noted above, federal law requires that no more than 90% of a college’s revenue may come from federal financial aid. Therefore, to address this 10% gap, Corinthian got its students to take out private loans from Corinthian – the so called Genesis loans – so that Corinthian could get around the federal law requirement that no more than 90% of its revenue come from federal financial aid. That’s what the CFPB meant in its Complaint when it alleged that “[e]very Genesis loan dollar that Corinthian induced its students to borrow, in effect, allowed Corinthian to receive up to an additional nine dollars in Title IV aid.” And all the while, according to the Complaint, “[w]hen Corinthian marketed, promoted, and facilitated these student loans, Corinthian expected that most student-borrowers would default.” Which, if true, is pretty stunning when you stop and think about it. But upon default by a Corinthian student, Corinthian would still have already received the financial aid for that particular student.
The allegations in the Complaint relating to student loans were bad enough. But there were other allegations about Corinthian falsifying job placement data to prospective students, such as the following:
• “So when Corinthian advertises on its website, www.mycareercounts.org/outcomes, “In 2012, over 69 percent of our 38,721 graduates found careers in their field of study,” this really meant that 69 percent of Corinthian graduates found a job that lasted as little as one day.
• At Everest College’s Decatur, Georgia campus, school employees created fictitious employers and reported students as having been placed with those fake employers. The school employees then had friends falsely verify the employment. This resulted in increasing placement rates by as much as 37% per program on reports that Corinthian gave to accreditors in 2009 and 2010.
• In another example, at Everest Institute’s Mid-Cities, Texas campus in 2010, two career services employees coordinated with employers to improperly verify 251 placements, only 7 of which were confirmed upon later review.”8
So as of last fall, we have this convergence of problems, or “perfect storm” as it were, as follows:
(1) Corinthian had been misrepresenting job placement data to prospective students to get them to enroll;
(2) Corinthian was getting students to take out private loans and qualify for financial aid knowing and, according to the CFPB’s Complaint, expecting that many would default on both types of loans;
(3) many of these students were subsequently having difficulty getting jobs in the fields they had studied for; and
(4) as a result, many of these students were in fact defaulting on their student loans.
Meanwhile, as of last fall, the CFPB had instituted its enforcement action against Corinthian while, at the same time, Corinthian was facing action by state attorneys general in several states. And keep in mind that, under the Higher Education Act, it’s the U.S. Department of Education which is responsible for ensuring the administration and oversight of billions of dollars in federal student aid that’s disbursed each and every year.9 Something had to give.
On November 20, 2014, the U.S. Department of Education posted an announcement about its support of ECMC Group’s intent to purchase a majority of Corinthian Colleges.10 In this announcement, the Department of Education noted that it had previously placed Corinthian “on an increased level of financial oversight” and, significantly, noted the Department of Education’s “responsibility, under the Higher Education Act, to ensure the “effective administration and oversight of the approximately $150 billion in federal student aid that is disbursed each year.”11 Prior to ECMC Group getting involved, I imagine the Department of Education was indeed wondering how they were going to deal with the Corinthian situation given that, at the time, we were talking about a system with 72,000 students scattered across the country on over 100 campuses. With a few exceptions, that’s larger than any public institution of higher learning in the country.
ButECMC Group did get involved and they did end up acquiring roughly half ofCorinthian’s campuses. Yet I wonder how that happened, howECMCGroup—a loan management / collection / guaranty company--is suddenly in the business of operating colleges when it has no prior experience doing that sort of thing. I certainly get it that the Department of Education, having the mandate to ensure the effective administration and oversight of all federal student aid, had to come up with a solution quickly to deal with and account for the over $1 billion in federal financial aid annually that Corinthian was getting (we are talking about taxpayer dollars after all). In an April 15, 2015 article for BloombergBusiness, journalists Janet Lorin and Chris Staiti noted the following: “Corinthian, owner of the Everest, Heald and WyoTech for-profit schools, collapsed last summer after the Education Department delayed its access to federal student aid. In November, the company agreed to sell half of its 107 campuses to Education Credit Management Corp., a nonprofit company specializing in debt collection, amid allegations that its schools falsified grades, attendance and job-placement rates. The sale effectively kept the schools open, so the government didn’t have to reimburse students. Corinthian received $1.4 billion in federal aid in 2013 alone.”12 I have to wonder whether, before agreement was reached on the sale to ECMC, the Department of Education first went to other private, for-profit college operating companies such as Bridgepoint Education, Inc. or Kaplan, Inc. to see whether they could or would take over Corinthian’s campuses. These companies have experience running far flung, for-profit institutions of higher learning after all —experience that ECMC presumably didn’t have. Or, did anyone consider creating a company to be managed by a consortium of other for-profit college companies? Was ECMC Group, through its new entity, Zenith Education Group, Inc., really the best fit for this job? Again, we’re talking about taking over dozens of campuses with thousands of students. Needless to say, no question ECMC Group was an improvement over Corinthian’s management—certainly in light of the April 26 announcement.
But the purchase by ECMC Group has not been without controversy. In a February 3, 2015 article for the Washington Post under the headline “Here’s how a debt collector plans to turn around failing for-profit colleges,” journalist Danielle Douglas-Gabriel noted that “[p]olicymakers and advocacy groups have been critical of the Education Department for blessing the sale of dozens of underperforming schools to a company with no background in teaching. Some argued that the department should have just closed the Corinthian campuses, which would have made borrowers eligible for a discharge of their federal loans.”13 But until recently, the Department of Education’s position has been “right the ship” and keep the campuses open so the students enrolled can complete their studies. Of course a major motivation for the Department of Education in taking this position relates to the very large sums at stake when considering the potential discharge of thousands of federal student loans.
In its November 20, 2014 announcement, the Department of Education Under Secretary, Ted Mitchell, was quoted as saying “[t]housands of students can now rest assured that they will be able to pursue their education and have more stability in the midst of this school year…we are glad that Corinthian has reached an agreement with ECMC Group and believe that this transition will allow students to maintain progress toward achieving their educational and career goals and protect taxpayers’ investment, while Corinthian moves out of the business. We are pleased to help students transition from a problematic for-profit company to a nonprofit that is committed to giving students a new start and more opportunities for success.”14 My guess is, in the fall of last year, the Department of Education was simply looking for someone to step up to the plate to help alleviate the huge problem that Corinthian had become. And ECMC stepped up to the plate. When you’re talking about trying to keep dozens of campuses open and thousands of students in school, not to mention trying to avoid having to reimburse students huge sums, having someone step up to the plate—whether they’re an ideal fit or not, may be all that matters in a pinch.