What Happens When a For-Profit College Is on the Brink of Collapse?

For those in need of an angry read, I highly recommend Molly Hensley-Clancy’s piece in Buzzfeed on the ignominious fall of Corinthian Colleges, the first publicly-traded for-profit education company to shut down. It’s chock full of infuriating anecdotes about how a college used advanced marketing practices and outright deception to lure students into attending college, taking on mountains of student debt, all while providing minimal value in the job market. 

Reading this article, one might (as I did) become curious as to what happens to a college when it's in limbo—its reputation and finances in tatters, but still technically open for business. One might also wonder how an institution that's primarily financed through taxpayer money could provide such horror stories.

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Corinthian Colleges is essentially a chain of for-profit colleges (sometimes called “career colleges”) that has enrolled over half a million students in its history (through campuses like Everest College, or WyoTech) – including over 110,000 in the fall of 2010 alone. For reference, that’s a bigger educational footprint than Ohio State and the University of Texas combined.

But due to all manner of alleged malfeasance, the chain came under extra scrutiny by the U.S. Department of Education, which put a hold on federal aid money—in essence, refusing to disburse taxpayer money to Corinthian for 21 days while they investigated whether or not Corinthian fudged its job placement numbers and complied with marketing practices. If you’re wondering how a 21-day delay in receiving taxpayer funding could send a publicly-traded company into a death spiral, well, more on this in a moment.

In addition to the extra scrutiny from the Department of ED, Corinthian is also being sued by the CFPB and state attorneys general in California, Massachusetts, and Wisconsin, as well as being investigated by the SEC to cap off what I like to call “hitting for the cycle.”

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Out of sheer curiosity, I wanted to see what it looks like when a school is on life support. So I visited the website of Corinthian-owned Everest College and requested information on admission to their criminal justice program, providing my full name and contact information to avoid misrepresenting myself in any way.

Literally within two minutes my phone rang, and a friendly voice from Everest’s admissions department thanked me for my interest in the school. I was peppered with questions about my educational background, whether I’d served in the military, what I might be thinking of studying, and why. Again, I gave my full name and contact information, educational background, and I mentioned that I was interested in more information about the criminal justice program (mostly out of a sense of irony), and was told that there are A.A., B.A., and Master’s degree options available.1  At this point, I mentioned that I’d read stories about various campuses closing, and asked what the impact might be on Everest or its online programs.

I was told the following from the admissions representative:

• Some of Everest’s ground campuses may be closing, but that it should not have an impact on its students at all. It was unclear if the admissions representatives meant that it wouldn’t impact online students.
• They are likely to go through a sale, which may result in the school changing the name.
• There is likely to be no impact on the online program, which I was told is a great option for students who are working while in school.
• I would be provided with a disclosure statement about the program and school. It is unclear what this disclosure statement includes, as I have yet to receive it.

I was also provided with a quasi-personalized online packet of information about Everest, none of which mentioned its potential legal issues or shutdown of any of its campuses. In fact, the information provides an F.A.Q. about Everest, its accreditation information, degree and curriculum information, and and a virtual tour of online classrooms. There is no information in the online packet about a potential closing or sale of Everest campuses, or any information about pending litigation against their parent company.

In short, given the response time from Everest when I requested information (less than two minutes) and the information provided to me, it seems that the campus has yet to make an effort to disclose to prospective students that they are in the midst of a financial and legal meltdown. This may be because I was discussing their online program and not a program at a brick-and-mortar campus, but again, I was also told that they are “undergoing a sale,” and should not expect students to be impacted at all.

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For those who did apply and attend, Hensley-Clancy’s piece paints an infuriating story—including tales of students being duped by sophisticated marketing and enrollment practices, and subtle defrauding of students who were led to believe all of their expenses were paid for, only to find tens of thousands of debt upon graduation.

But it’s even more maddening when you realize that companies like Corinthian are free to operate in a system that backstops up to 90% of their revenue with taxpayer funding. In Corinthian’s case, according to a widely-discussed 2012 Senate investigation, 83.1% of revenue comes from federal financial aid and veteran’s benefits. In other words, only about one-sixth of Corinthian’s revenue is coming from sources outside of federal taxpayer support. This is a company that is still publicly traded on the NASDAQ (though, admittedly, shares are down to a cool $0.15 as of this afternoon). And they can do this, primarily, because the U.S. higher education system is voucherized (meaning, you get your aid money from the federal government and can take it to any eligible school), but has maddeningly little accountability for colleges.

In effect, colleges pass muster with the federal government so long as fewer than 30 percent of student borrowers default on their loans (which results from making no payments for nine months) within three years of leaving school—for three years in a row.2  To pull that out a bit – because it truly is amazing—a school can stay on the federal gravy train if it has at least one year in a three year period where more than 7-in-10 borrowers make a payment on their student loans every nine months, for three years. Beyond that, there are few, if any, consequences.

There are no accountability measures based on graduation rates, labor market value, or even the rate at which students are repaying principle on loans. In fact, it’s difficult to get good information on graduation rates of Corinthian’s campuses at all, because the graduation rates reported to the federal government only include full-time students who are attending school for the first time. Needless to say, this doesn’t cover most students at most for-profit schools. But official measures have Everest College graduating fewer than 30% of bachelor's degree-seeking students within six years.

The Obama Administration has tried to create new accountability (or "gainful employment") measures for career programs, and after being slapped back in court they finally seem to be on course to have new measures implemented. Essentially, the Department of Education plans to hold schools accountable for the debt incurred by graduates relative to their income. There are no new measures that look at the repayment situation of students who didn't graduate, and as New America's Stephen Burd noted a few years ago, the vast majority of Corinthian's programs would pass under an earlier version of the regulations. 

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It goes without saying that even mildly-sensible regulation should be able to stop companies like this from fisking the American taxpayer. And there have been plenty of proposals to do just that. But while Corinthian and its campuses may downsize or disappear completely, we should be concerned the students who attended its campuses and are currently in no man’s land.

The Department of Education quickly posted resources for Corinthian students to walk through what could happen if their school closes. But the recourses available to them are minimal. Federal rules provide students with a chance to have loans forgiven if they are prevented from receiving a degree because of a school closure, or if they’ve withdrawn within 120 days of a school closing. But in the case of Corinthian students, their school may instead be sold to another for-profit chain or private equity firm. In this case, students are unlikely to see any of their loans forgiven if their piece of Corinthian is sold, no matter if that sale brings different degree requirements or curricula.

Most Corinthian campuses are indeed going to be sold, likely to another private equity firm. In short, the admissions marketer with whom I spoke was absolutely right.

Moreover, students who attended as recently as 2013 are unlikely to see any relief, despite lawsuits claiming that illegal practices stretched back years.

The damage is beyond financial too. Why would a student who attended a campus that saddled them with debt, only to effectively shut down, trust the system of higher education at all? Why trust any school when the one that provided no value came with a seal of approval from accreditors and the federal government? Why trust that your kids will receive a different treatment? These are real questions, and until we provide a modicum of accountability in a system that is heavily financed by federal funds, we can expect more heartbreaking stories.

In the meantime, there is an effort from the Higher Ed, Not Debt Coalition to demand relief for all Corinthian students. You can check that out here.

• 1For full disclosure, in the course of our conversation, I told the admissions officer, when asked, that I was potentially interested in a career change, which is untrue. Otherwise, I attempted to represent myself honestly and forthrightly, and was fully prepared to answer any questions about my professional background and current employer. I was honest about my profession and college major (Political Science), and age.
• 2Schools are also subject to sanction if their 3-year default rate exceeds 40% in a given year.