Education Department Didn’t Set Out to Shut Down Corinthian

July 08, 2014

The U.S. Department of Education didn’t know how shaky the financial ground was under Corinthian Colleges Inc. when it turned off the spigot of federal financial aid to the company in mid-June, according to a "background" briefing an official gave to reporters on Monday.

The department didn’t expect its mid-June move would set off the chain of events that, three weeks later, led to the company’s agreement with the department to sell its 85 United States-based colleges and close down its remaining 12, the department briefer said. "We did not know their cash situation," the official said, and did not expect "that this would be the reaction to our action."

The revelation from the briefer, whom the department insisted be identified only as "a senior education official," could clarify one of the big questions surrounding the sudden demise of Corinthian: Had the department set out to intentionally force Corinthian to this point? Based on the comments from the briefer, it hadn’t.

That understanding also comports with assessments by at least two other sources familiar with activities surrounding Corinthian, including one who noted that the department’s new under secretary of education, Ted Mitchell, had been "very helpful" in resolving the Corinthian situation once he became aware of its gravity.

After the department put Corinthian on "heightened cash monitoring" status and put an extra 21-day hold on disbursements of federal student-aid funds to the company, Corinthian disclosed publicly that the move could force it to shut down. Most of Corinthian’s annual revenue is made up of the $1.4-billion it receives in federal Pell Grants and federally backed student loans.

Within days, the department and the company came up with a compromise that averted the sudden disruption of education for some 75,000 students enrolled by colleges owned by Corinthian. The deal also ensured that the government wouldn’t be on the hook for billions of dollars in federal student loans, which can be discharged in cases when a college abruptly closes.

A ‘Transition’ to New Owners

If the agreement is carried out, most of the Corinthian institutions will continue to operate, but under different owners. Asked if that meant the department was satisfied with the quality of the colleges but not with Corinthian as their owners, the education official giving the briefing stopped short of characterizing Corinthian but did say the department believes a "transition" to new owners would be a more effective way for students to make progress toward their degrees.

On Monday Corinthian released the names of the 85 United States campuses—all 12 of Heald College, 69 of Everest Colleges and Institutes, and four of WyoTech—that it hopes to sell within six months under its agreement with the government. Those institutions collectively enrolled about 68,000 students as of mid-March, the company said in a corporate filing. The company is also selling its 10 colleges in Canada.

The department apparently does not have a plan in place in the event the colleges don’t sell. "We hope to have more visibility into that after three months," the briefer said.

In 2013, when Corinthian disposed of four of its campuses, it had to pay the buyer $2.3-million as part of the deal.

The education official also said that while the department’s "gripe with Corinthian" had been prompted by frustration with what it felt were the company’s delays in producing requested documentation, "it wasn’t simply a bureaucratic frustration about not getting numbers." The briefer said the department was also concerned about the company’s "self-reported fraud" concerning job-placement rates it reported and student-attendance records it recorded in order to obtain federal student aid.

The concerns related to "whether Corinthian students were getting the education they were paying for," and whether taxpayers’ investments in that education were being protected, the briefer said.

A Corinthian spokesman said on Monday that the company had disputed allegations of fraud in a February letter to the department and that it stands by that view. "In a few isolated instances, our internal processes have found issues which we have self-reported to accreditors and regulators," the spokesman, Kent Jenkins, said in an email. "This is evidence of our commitment to compliance and transparency, not the opposite."

About 400 colleges are now under the same "heightened cash monitoring" strictures under which Corinthian was placed, although an additional 21-day delay is more unusual. The official said the department expected that Corinthian would manage its finances the same way those others did. The department requires every college that receives federal financial aid to also meet its "financial responsibility" tests once a year, but the department also aims to keep abreast of colleges’ financial circumstances.

The briefer acknowledged that the department’s gap in knowledge about Corinthian’s precarious financial situation "of course begs the question" of how well those systems for keeping tabs on finances are actually working. The department now plans to reassess its internal systems, the briefer said, to "see what we missed."