WASHINGTON, D.C. – As student advocates protest outside ITT Educational Services’ annual shareholder meeting today, U.S. Sen. Sherrod Brown (D-OH) is calling on the Department of Education (ED) to take a proactive role in protecting students attending for-profit colleges. In a letter to ED Secretary Arne Duncan, Brown urged the Department to develop a more effective strategy for dealing with the bad actors in the for-profit education industry and minimizing the potential harm to taxpayers.
“When certain for-profit education companies are forced to shut down, it unfairly leaves students and taxpayers paying for their mistakes,” Brown said. “Several for-profit education companies, including ITT Technical Institute, have engaged in deceptive practices and are in a financially precarious position. The Department of Education must take steps to limit student and taxpayer exposure to predatory and unstable for-profit colleges.”
In May, Corinthian Colleges, Inc., a for-profit education company subject to multiple state and federal investigations regarding fraud and misconduct shuttered after declaring bankruptcy. This left Corinthian Colleges, Inc. students with billions of dollars in loans from an institution that granted degrees of questionable value. In his letter, Brown noted that ITT Educational Services, along with several other for-profit education companies, is also experiencing financial struggles and is subject to state and federal investigations.
Brown continues to work to protect students from predatory practices. Brown joined a letter to the VA in June, asking it to investigate ITT and take action to protect veterans attending the school. ITT was the third largest recipient of Post-9/11 GI Bill benefits in 2012-13 despite scrutiny by various state and federal agencies for misconduct surrounding marketing and recruiting practices, job placement rates, and other misleading and deceptive practices. Last month, Brown also called on the U.S. Department of Veterans Affairs (VA) to include a “risk index” in the GI Bill Comparison Tool, an online application that would highlight bad actors in the for-profit industry and give veterans the resources needed to make informed decisions about their education.
A full copy of the letter is below:
July 27, 2015
The Honorable Arne Duncan
Department of Education
400 Maryland Avenue, SW
Washington, DC 20202
Dear Secretary Duncan:
We write to express our concern regarding the precarious financial standing of a number of for-profit colleges and urge the Department of Education to prepare for potential closures of any of these institutions. As you said when you announced the Department of Education’s defense to repayment plan, “sadly we think this will not be the last domino to fall, and that there may be more.” Given the high likelihood of such a scenario, it is incumbent that the Department take proactive and public steps to limit student and taxpayer exposure to predatory and unstable for-profit colleges.
As you know, Corinthian Colleges is not the only financially unstable for-profit education companies that has been accused of a wide range of misconduct. Now is the time for the Department of Education to take steps to alleviate potential damage to students that are attending or are being urged to attend for-profit schools on the brink of collapse. Concerns that taking action against a company committing fraud or engaged in misrepresentation would exacerbate their financial issues or precipitate closures are not reasons for the Department to delay action. The Department of Education should not prop up bad actors to delay their failure – an approach that harms students and taxpayers.
The parallels between Corinthian Colleges and a number of for-profit education companies provides reason for concern and underscores the need for the Department to take prompt preparatory action. As was the case with Corinthian, federal regulators and multiple state Attorneys General have sued and/or are investigating a number of for-profit colleges including: ITT Educational Services, Education Management Corporation, and Career Education Corporation. According to Securities and Exchange Commission (SEC) filings and state and local government authorities, at least 27 for-profit colleges are under investigation with charges ranging from fraud to deceptive and misleading recruiting. Students who attended those 27 colleges have borrowed more than $57 billion in federal loans over the past five years.
The 51,201 students attending and being recruited to attend ITT would appear to be at particular risk. Last month, the SEC filed fraud charges against ITT, its chief executive officer Kevin Modany, and its chief financial officer Daniel Fitzpatrick. These charges are the latest in growing list of litigation and scrutiny brought against the company by a variety of government and regulatory agencies. In addition to the lawsuit filed by the SEC, the company has also been sued by the Consumer Financial Protection Bureau (CFPB) and the Attorney General of New Mexico. ITT is also under investigation by 18 other state attorneys general for deceptive and misleading practices.
According to the SEC’s complaint, after traditional sources of private loans disappeared in early 2008, the company established two private loan programs funded by outside parties and made certain guarantees to mitigate the risk of loss. When the performance of these loans became so poor that, “the default rates have far exceeded anything we modeled or observed in available historical data for similar student loans” company executives allegedly took drastic steps to fraudulently conceal the financial impact of these student loan programs. This had the effect of delaying defaults and temporarily avoiding tens of millions of dollars in guarantee payments. In 2014 alone, ITT was forced to make $170 million in payments to satisfy its guarantee obligations under these two loan programs.
Partly driven by losses from these two programs, ITT has faced myriad financial difficulties and has been forced to amend its creditor agreements. A number provisions included in these agreements have the potential to trigger a default by the company. For instance, ITT’s financing agreement provides that the commencement of a civil proceeding by a governmental authority in which the penalties sought are more than $25 million and which remains undismissed or unstayed for a period of 120 days would constitute a default. This provision was triggered by the commencement of the SEC’s lawsuit and would lead to a default on September 12, 2015 should this case remain undismissed or unstayed until that date.
ITT will be also be considered to be in default by its creditors if the Department of Education freezes its financial aid payments for five days or more. As you know it was the Department of Education’s decision to place a 21 day hold on Corinthian’s ability to receive federal aid payments for failing to address concerns about its practices that led to the company’s failure. ITT has already been placed on level 1 heightened cash monitoring by the Department due to its failure to timely submit their 2013 financial statements, and could potentially face the same issues that necessitated the Department delaying Corinthian’s ability to receive federal aid payments.
According to the company, if there were to be a delay in the receipt of Title IV funds “we cannot assure you that we would be able to continue to operate our business.” One analyst who follows the sector has stated that ITT has in his view, “taken all of the obvious steps they can take [to turn themselves around]. There’s not an obvious next step for them.” He went on to add if ITT’s enrollments, “don’t get better in any meaningful way, and they can’t shake off the lawsuits, then they’re stuck — they can’t sell themselves, they can’t retire.” And yet prospective students around the country continue to enroll each day and the Department is lending them the money to do so.
Financial struggles in the for-profit college industry have not been limited to ITT. Following the collapse of the Corinthian Colleges, Education Management Corporation announced it was phasing out some of its Art Institutes locations, and Career Education Corporation is closing or selling off most of its campuses. Based on the most recent data available from the Department of Education, 119 for-profit colleges are not considered financially responsible and 323 are subject to heightened cash monitoring by the Department.
Given the high risk that there are likely to be more failures within the for-profit education industry, it is incumbent upon the Department to prepare a risk based strategy for addressing these issues. This means that once signs of difficulties emerge the Department should begin to utilize the tools at its disposal and take additional action should these problems persist. Such a strategy must include:
- Use of Triggers: There are number of characteristics, or “triggers”, which indicate a school’s failing financial health. Triggers that warrant action include but are not limited to a failing financial responsibility score, multiple federal or state investigations, lawsuits or settlements alleging illegal and deceptive practices, high cohort default rates, or troubling program reviews.
- Informing Students About Failing Institutional Health: If there is a possibility that a company’s continued eligibility to receive federal financial aid funds could be threatened, the Department must take steps make sure that current and prospective students are aware of any looming financial instability and of any allegations of wrongdoing by state or federal authorities.
- Examining Letters of Credit: The Department must examine any letters of credit posted by a financially struggling for-profit education companies to determine whether they are sufficient to lessen the disruption that would occur in the event of a company’s failure.
- Identifying High-Quality Alternatives: The Department must preemptively identify quality educational alternatives exist for students who want to continue their education at should their institution close. High quality educational opportunities however, should not include other for-profit colleges who are financially struggling or under investigation for misleading and deceptive practices.
- Loan Discharge: Once it is clear that a for-profit education company has no other path available other than failure, students must have access to accurate and accessible information about their right to have their loan discharged. It also must be made clear to students that transferring to another college or university will bar them from having their student loans discharged.
- Sales of Failed Institutions: The Department should only facilitate sales to institutions of higher education with a proven record of success. If a school’s creditors are forced to take over the institution as part of a debt restructuring agreement, the Department should closely examine their qualifications to operate an institution of higher education.
As documented in the 2012 HELP Committee report, Corinthian Colleges was one of the worst actors in the for-profit college sector and was found to have committed multiple instances of fraud and other misconduct. The problem with Corinthian, however, was not that the company was forced to declare bankruptcy, but that its wrongdoing went unchecked for so long. The result was that the company continued enroll more students and consume an ever increasing amount of taxpayer dollars – at little benefit to the public.
In the aftermath of Corinthian’s collapse, the Department was criticized for not having the proper controls in place to monitor the finances of large, publicly traded for-profit education companies. The Department now has an opportunity to correct this perception and develop a more effective strategy for dealing with the bad actors in the for-profit college industry and minimizing the potential harm to taxpayers and students. We ask that your Department take steps to identify problem institutions and develop a plan that best serves the needs of students and taxpayers.
Thank you for your consideration of this matter. We look forward to discussing this matter with you.