Best of a Bad Situation?

WASHINGTON -- The U.S. Department of Education last week defended the deal it helped broker for Corinthian Colleges, a disintegrating for-profit chain, to sell 56 of its campuses to a nonprofit student loan guarantee agency, ECMC.

If approved, the proposed $24 million purchase “fends off disastrous consequences,” the department said in a written statement. It averts “disruption and displacement” for roughly 40,000 students, and strengthens their “education prospects.”

Ted Mitchell, the under secretary of education, has praised ECMC’s promise to slash tuition by 20 percent for most new students. And in an interview last week, he said the deal would help many students who are close to earning their credentials.

The guarantee agency is trying to buy campuses and online programs that enroll 11,000 students who are within five months of completion, according to the department, and 8,600 who are within three months.

“Pulling the rug out from under them under any circumstances would be problematic,” Mitchell said of the affected students. “This is a very vulnerable population of learners.”

That argument probably won’t sway consumer and student advocates who have been critical of the purchase, which will not be final until the department and various state agencies sign off on it. Some even doubt that students will be better off if they earn credentials from ECMC-owned Everest and WyoTech campuses, given the relatively poor job market returns for many programs at those institutions.

Selling off Corinthian's campuses is far from the best solution, advocates say. Many have released forceful statements since news of the deal broke last month, revealing an unusually deep fault line between the administration and natural allies.

“You don’t have to have a sale to allow students to complete,” said Robyn Smith, a lawyer at the National Consumer Law Center, which represents low-income student loan borrowers.

For example, academic programs can be closed gradually, through so-called “teachouts,” which allow current students to finish their studies. ECMC will do that for 12 additional campuses and for Corinthian’s associate degree programs in criminal justice, according to the department’s “term sheet," which describes the deal's conditions.

The center and other consumer groups also have pushed for the feds to give Corinthian’s students a choice of a tuition refund or loan disbursement.

That option could get expensive, however, both for a possible buyer of the for-profit’s programs and for the federal government.

If every one of the 40,000 students affected by the purchase were eligible for a full refund, meaning total cost of attendance, not just tuition, department officials said that bill would be roughly $600 million. The buyer would be on the hook for that amount, which obviously dwarfs the proposed sale price of $24 million.

Likewise, the U.S. Treasury would cover loan discharges for Corinthian students at closed campuses. It’s difficult to project those costs, department officials said, given unpredictability around the number of students filing for discharges. But they estimated at least $30 million for discharges (6 percent of slightly less than $600 million in borrowing) at the campuses ECMC instead wants to buy, and maybe much more.

There is also the issue of students' lost time and work. Getting their money back might not keep students from quitting their pursuit of a college credential.

Most of Corinthian’s students are working adults, who Mitchell said already face an uphill battle with family commitments and multiple part-time jobs. They are also among the neediest of student populations in higher education. Fully 35 percent of Corinthian’s students are from households with incomes under $10,000.

In previous cases of colleges shutting down, Mitchell said only 6 percent of students even reached out to the department about having their loans discharged.

“It’s not as easy as just giving them a refund and having them start over,” Mitchell said. “These are students who have been disappointed time and time again, and are likely to just walk away. We don’t think that’s good for the national economy and we don’t think that’s good for these students.”

'Negative Cash Flow'

ECMC is creating a new, nonprofit subsidiary, Zenith Education Group, to run the colleges. About half of the Corinthian students who would be affected by the deal -- 19,224 students -- are enrolled in online programs.

If approved, Zenith would run the nation’s largest nonprofit career college chain.

ECMC may have gotten a bargain price for most of Corinthian. But the ECMC Group’s CEO and president, David Hawn, said he does not expect the troubled campuses to turn a profit anytime soon.

“We expect to operate this negative cash flow for at least two years,” said Hawn. “When it becomes a sustainable program, it remains a nonprofit.”

Under the proposed deal, half of the $24 million from ECMC goes directly to the department. Some portion of that payment could be used to reimburse Corinthian students.

“We will use those $12 million to best serve students,” Mitchell said, “and we’re still discussing the best way to do that.”

ECMC agreed to pay up to an additional $17.25 million to the department over the next seven years. That money would be taken from Zenith earnings that exceed the feds’ targets, according to the terms of the deal.

Mitchell said ECMC also agreed to hire an independent monitor to keep an eye on Zenith. The monitor will scrutinize the chain’s performance, marketing and data disclosures, among other things. Zenith will weed out poor-performing programs, Mitchell said, and put enrollment caps on ones with low job-placement rates.

“I love all of the things that they are doing in preparation for running these places,” he said.

State Agency Hurdles?

California won’t be part of Zenith, even though 20,000 Corinthian students are located there.

The state is home to 10 of 12 Heald College campuses. Many observers say the chain of business colleges is Corinthian’s most attractive asset. Heald holds regional accreditation, something only one other Corinthian campus can boast (the Everest College campus in Phoenix).

The department and Corinthian still are trying to find a buyer for Heald and the remaining Everest properties, Mitchell said.

Kamala Harris, California’s attorney general, has sued Corinthian, accusing the for-profit of false and predatory advertising as well as securities fraud. Concerns about that ongoing legal challenge, ECMC said, kept Corinthian’s California holdings off the table.

Harris’s office would not release ECMC from liability for Corinthian’s alleged violations, according to a report from KQED News. Hawn has said he is hopeful that Zenith will be able to avoid taking on Corinthian’s many legal and regulatory problems.

Even so, other states must sign off on the deal. Experts said that might not be a sure thing, particularly in states where regulators are investigating or suing Corinthian.

Smith, who worked previously in the California attorney general's office, said various state agencies will need to approve the change of ownership and control of Corinthian's campuses. So will accreditors. State attorneys general may have Corinthian investigations in the works that have yet to be revealed publicly. And Smith said the transfer of legal responsibility to the 56 campuses’ new owner remains a possibility.

“It is something for ECMC to be worried about,” she said. “They still might have to fight that battle.”

Illinois could be one state to watch. ECMC is seeking to buy five Everest campuses in Illinois. But U.S. Sen. Dick Durbin, an Illinois Democrat, has been a fierce critic of Corinthian and the for-profit sector. When Corinthian first began to topple, he joined with other Senate Democrats in calling for the chain to freeze new enrollments. The department has not backed that request, in part because it would have made the for-profits’ already-tarnished assets even less attractive.

Earlier this year Durbin was critical of ECMC’s aggressive pursuit of student debtors, particularly those who claim bankruptcy.

U.S. Rep. Steve Cohen, a Tennessee Democrat, joined Durbin in that criticism. Last week Cohen and two other Congressional Democrats wrote to the department to express concern about the pending sale. In addition to ECMC’s “checkered history in student loans,” they questioned the guarantee agency’s lack of experience running colleges.

ECMC has responded to criticism about its loan collection practices by saying its “role is not to determine social policy on student loan repayment, but to present the law fairly and consistently."

As for never running a college, Hawn said Zenith would hire administrators with plenty of higher education experience.

“You’re going to be impressed by who we bring in,” he said. “Give us a little bit of time.”