Tracy DeLorey was only three months away from graduation in January when she learned, via Facebook, that her college, American Career Institute, had closed. The news, she said, “was a kick in the face.”
“I wasted a year and a half,” said Ms. DeLorey, a single mother of three who works at the commissary at Hanscom Air Force Base, in Massachusetts. More than 2,200 students and 200 employees in Massachusetts and Maryland were displaced by ACI’s closure.
Seven months later, many former students are still awaiting refunds on loans they took out to pay for their programs. Others have transferred to nearby colleges but find themselves spending more, or taking longer to complete their programs.
The abrupt closure of ACI, a for-profit institution that offered certificate programs in medical and dental fields, information technology, and digital media, came just over a week after Academic Enterprises Inc., the parent company of Sawyer Schools and Butler Business School, announced that it was shutting down campuses in Connecticut and Rhode Island that served more than 650 students.
In both cases, regulators and accreditors were as surprised as the students. They said they hadn’t received any complaints from students about the colleges, and saw no red flags in their annual audits.
“This just dropped on us like a bomb,” said Michael F. Trainor, special assistant to the commissioner for Rhode Island’s Office of Higher Education, who learned of the Sawyer and Butler closings when a television reporter called him at home.
Maryland regulators said that ACI, which blamed its closure on a loss of credit, had just upgraded the equipment on one of its Maryland campuses and was operating at a profit.
The closures have gotten the attention of that state’s senators, who wrote to the U.S. Department of Education to ask why oversight agencies missed the problems that led to the colleges’ closures and how the “triad” of state and federal regulators and accrediting agencies could be improved to prevent future closures.
“One would expect that information indicating imminent closure would be easily identifiable, and we believe that situations like ACI’s are absolutely preventable,” wrote Sens. Barbara A. Mikulski and Benjamin L. Cardin, both Democrats.
In a response, James W. Runcie, chief operating officer of the department’s Office of Federal Student Aid, argued that the triad “routinely” uncovers problems, but said the department would work to “improve the results of the triad’s monitoring and oversight activities.”
So why didn’t anyone see these closures coming? In large part, it has to do with what the oversight bodies are looking at, and when.
A Lagging Indicator
State regulators and accreditors monitor colleges’ financial stability largely through annual financial audits. If a college shows signs of financial distress, its regulator or accreditor may require it to post a larger bond, file more frequent financial statements, or provide an improvement plan. If the situation looks dire, an accreditor may place the institution on “show cause” status, compelling it to submit a plan for students to continue their education at other institutions.
The U.S. Education Department uses audits to assign colleges “financial responsibility scores.” Colleges that score poorly are subject to tighter monitoring for their federal student-aid funds and can be required to post costly letters of credit to remain eligible for financial-aid programs. Colleges that consistently fail the test can lose the right to issue federal aid to their students, though that rarely happens.
Yet colleges typically have several months after the close of their fiscal year to submit their audits, and some colleges conduct their audits before the end of the year. By the time regulators and accreditors receive an audit, it is often several months out of date. The Education Department just released the fiscal-responsibility scores for 2011, more than two years after the end of that fiscal year.
Both ACI and the Academic Enterprises schools received clean audits and passing financial-responsibility scores in their most recent reviews.
In the case of the Butler and Sawyer schools, enrollment abruptly fell by more than 50 percent, according to the states’ regulators and senators. While the company’s owners haven’t explained their reasons for closing (and didn’t respond to a request for comment), regulators say the college relied heavily on students without high-school diplomas or GEDs. Until recently, such students could qualify for federal aid by passing a test demonstrating their “ability to benefit” from higher education. Congress withdrew their eligibility as of July 1, 2012.
In Connecticut, 40 percent of the students attending Butler and Sawyer schools were ability-to-benefit students; a majority of the students attending the Rhode Island campuses were, Mr. Trainor said. Neither state realized how many such students the campuses enrolled until after the closure. The last time regulators received enrollment data, in the fall of 2011, the numbers were holding relatively steady.
The colleges closed on December 30, two days before their audits were due to the Accrediting Council for Independent Colleges and Schools. But the commission hadn’t seen anything in its 2010-11 data “that would raise your eyebrows,” said Albert C. Gray, the council’s president.
Red Flags
Still, there were indications that the company was having financial difficulties. In 2007 the Education Department placed both Sawyer and Butler on “heightened cash monitoring,” restricting the colleges’ ability to draw down federal aid, after they failed the financial-responsibility test. The department lifted the sanctions in 2009 for Butler and in 2012 for Sawyer. In 2008, both institutions were required to post letters of credit for making late refunds of federal aid to students.
In the decade before they closed, the two colleges were subject to five program reviews, a clear sign that the department was concerned. The department conducts only about 300 reviews a year, so it focuses on colleges with known or suspected problems. At the time of its closure, Sawyer Schools was contesting a $1.4-million liability from a 2010 program review.
With ACI, the warning signs were subtler but not invisible. In late 2011, an Education Department program review found that ACI had inaccurately calculated the amount of federal aid due back to the government, was late in paying a credit balance to a student, and made loans to ineligible students. It had also failed to document its students’ “satisfactory academic progress,” a requisite for receiving continued aid. The department directed the college to review and revise its policies, and the college complied. The department closed the review on July 9, exactly six months before ACI’s closure.
While the department’s findings alone wouldn’t necessarily have indicated that the college was on the verge of collapse, any of them could have been “indicators of financial troubles,” said Patricia V. Edelson, a former program reviewer. But the reviewer’s focus would have been on determining the monies due to the federal government and not on the underlying causes, she said.
Moreover, the department tends to approach program reviews as a partner, rather than an enforcer. The focus is on identifying risk in order to “get schools back on track,” not on shutting them down, said Kay Jacks, who oversaw the department’s program-review division until five years ago.
The Fallout
ACI announced its closure on January 9, with a note posted on the doors of its eight campuses in Massachusetts and Maryland.
By mid-March, the Framingham campus that Ms. DeLorey had attended, still decorated for Christmas, looked like a scene from the rapture, where students and staff had ascended and left their belongings behind. Browning garlands hung from the bannisters outside the squat brick building, red bows still attached. Inside, a white star shone behind the reception desk, which was covered in papers.
Seven months after the college’s closure, only 330 of the more than 2,200 students who attended ACI have continued their education through formal “teach-outs” with other colleges, according to the state regulators who arranged them; others are still awaiting tuition and loan refunds promised by their states and the federal government. To date, Maryland has issued 84 tuition refunds totaling over $115,000; Massachusetts has yet to issue any.
Ms. DeLorey said the Education Department forgave her federal loans, but she’s awaiting reimbursement from the state for $1,000 in exam fees she paid to the school.
At Sawyer and Butler, there were no organized teach-outs. Patricia Santoro, director of academic affairs for Connecticut’s Office of Higher Education, said the state approached several colleges suggested by the accrediting council about a teach-out, but their curricula didn’t mesh with Butler and Sawyer’s. However, the state did arrange final externships for 32 students who were close to completing their programs. Only two out of 355 displaced students have sought tuition reimbursement from the state.
Rhode Island regulators have no idea what became of that state’s students. The company had claimed it had a teach-out with Lincoln Technical Institute, but that agreement was no longer in effect, Mr. Trainor said. He said two-thirds of the colleges’ students showed up for a transfer fair the state held in January, but he doesn’t know how many ultimately transferred. Rhode Island doesn’t reimburse students for nonfederal loan costs.
Dean Kendall, associate director for career and work-force education in Maryland, said he worried about the hundreds of students who hadn’t responded to e-mails, letters, and calls. “The worst case is that they don’t do anything, and then they’re saddled with this financial burden” and no degree, he said.
Checking Boxes
State regulators and accreditors say they’re considering requiring more frequent financial reporting to prevent future closures, but are quick to add that they’re wary of burdening the “good actors” under their oversight.
Others are calling for better collaboration among state and federal regulators and accrediting agencies, saying regulators often learn after the fact of actions taken by other agencies.
Privately, some former Education Department employees say there needs to be a cultural shift at the agency, so reviewers are rewarded for digging deeper when they encounter potential problems. They described the current system as too process-driven—"checking boxes,” as two former employees put it—and worry that the department, which has been under pressure to ramp up its oversight of for-profit colleges, is emphasizing quantity over quality in its reviews.
A spokesman for the Education Department said the agency takes the number of reviews conducted into account in its employee evaluations, but also considers the complexity of the reviews conducted, among other factors.
Meanwhile, some Democrats in Congress want to make program reviews mandatory for colleges with certain “risk factors.” Legislation introduced in the Senate in February would require the department to review colleges that are heavily dependent on federal financial aid or that have a history of compliance problems, for example. The “Students First Act,” would also direct the department to coordinate its reviews with other state and federal agencies and to share review results with state agencies and institutional accreditors.
But Ms. Jacks, who now consults for colleges undergoing program reviews, said the solution lies not in legislation but in the earlier detection of problems. The Education Department stores its information about colleges in multiple databases, most of which don’t communicate with each other. The agency has been trying to integrate them for years, but the project is still at least a couple years from completion, officials said.
In the meantime, the department may be missing patterns that could help it identify troubled institutions before they collapse, Ms. Jacks said.
With the current system, “you’re always looking backwards,” she said. “The taxpayer would be better served if we had the ability to look at things happening in real time.”
