Government

U.S. Tightens Restrictions on ITT’s Access to Federal Student Aid

October 19, 2015

[Updated (10/20/2015, 8 a.m.) to include a statement from ITT.]

The U.S. Department of Education on Monday notified ITT Educational Services Inc. that it was placing the giant for-profit educator under tighter restrictions for access to federal student-aid money, saying the company had failed "to meet its fiduciary obligations."

The department outlined its move in a letter to ITT’s chief executive, Kevin M. Modany, who in May was one of two top company officials whom the U.S. Securities and Exchange Commission accused of fraud, along with the company itself, for allegedly lying to investors about the financial standing of student-loan programs that ITT had guaranteed. The company is one of several large operators of for-profit colleges that are known to be on fragile financial footing.

Last fall the company said the department had placed it under a form of restrictions known as "heightened cash monitoring" for failing to submit certain financial statements by a required deadline. The department’s letter on Monday stated that, since then, the company had been subjected to additional scrutiny.

The department said it had concluded that the company had failed to reconcile its federal student-aid accounts in a timely manner "since at least the 2009-10 award year," among other problems.

As a result, the department imposed the additional restrictions. From now on, it will allow the company to disburse federal funds for student loans and grants only once an academic term has begun, once ITT has confirmed students’ eligibility to receive such funds, and once ITT has provided written confirmation of that eligibility to the department. The company will also face new reporting requirements.

The restrictions appear to be less aggressive than the 21-day hold on funds that the department imposed on Corinthian Colleges Inc. in June 2014, an action that triggered a cascade of events that led ultimately to that company’s selling off a large portion of its colleges, shuttering others, and filing for bankruptcy.

In the case of ITT, the department did demand that the company disclose if any parties had put any conditions on the $80-million letter of credit that the company had been previously ordered to post with the department, but did not require a larger letter of credit. The initial letter of credit was equal to 10 percent of the total in federal student-aid funds the company received in the prior year.

In a statement, Ted Mitchell, the under secretary of education, said the department had taken the actions "as part of our responsibility to protect students and hardworking taxpayers’ dollars."

Sen. Richard J. Durbin, an outspoken critic of for-profit colleges, called for the department to take stronger action.

Mr. Durbin, an Illinois Democrat, said in a written statement that even though the department deemed the company “not financially responsible,” ITT “continues to receive billions” of dollars in federal student aid. “Isn’t it time,” he asked, “to protect students and taxpayers and turn out the lights at ITT?”

In a written statement issued early Tuesday, the company said it was already taking steps to comply with the additional reporting requirements and to correct "certain past procedural deficiencies." ITT said it does not expect that the costs of complying with the new requirements would have a material effect on its finances or affect the timely awarding of financial aid or the operation of its campuses.

As of June, the company said it had 47,000 students in 141 locations in 39 states. Earlier this month a company spokeswoman reported that ITT was halting new enrollments at "a handful of campus locations" after reviewing local market demands. She said the campuses represented less than 3 percent of the company’s overall student population.

Nick DeSantis is an editor who supervises coverage of daily news across all areas of academe. Email him at nicholas.desantis@chronicle.com.

Goldie Blumenstyk writes about the intersection of business and higher education. Check out www.goldieblumenstyk.com for information on her new book about the higher-education crisis; follow her on Twitter @GoldieStandard; or email her at goldie@chronicle.com.