The pressures that led ITT Educational Services Inc. to shut down its chain of for-profit technical colleges last week are still in play and could affect other institutions in the sector. (Above, an ITT campus in Vista, Calif.)Sandy Huffaker, The New York Times, REDUX
The closure last week of 130 ITT Technical Institute campuses, sending more than 30,000 students scrambling to figure out their next steps, is probably not the end of trouble for the already reeling for-profit education sector. In the weeks and months to come, look for more pressure from the Obama administration, the economy, and, indirectly, maybe even the American electorate.
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The pressures that led ITT Educational Services Inc. to shut down its chain of for-profit technical colleges last week are still in play and could affect other institutions in the sector. (Above, an ITT campus in Vista, Calif.)Sandy Huffaker, The New York Times, REDUX
The closure last week of 130 ITT Technical Institute campuses, sending more than 30,000 students scrambling to figure out their next steps, is probably not the end of trouble for the already reeling for-profit education sector. In the weeks and months to come, look for more pressure from the Obama administration, the economy, and, indirectly, maybe even the American electorate.
As with the recent collapse of Corinthian Colleges Inc., the cause of the ITT Institutes’ demise is likely to be disputed in political and policy circles for years to come. Leaders of the institutes’ parent company, ITT Educational Services Inc., have painted the company as a victim of government overreach — what they call “a complete disregard by the U.S. Department of Education for due process” — after the agency cut off the institutes’ access to federal student aid for new students and ordered the company to increase the value of a surety bond it had posted with the department from $94 million to $247 million. ITT had only $78 million of cash on hand.
But ITT’s assertion ignores the numerous educational concerns that had been raised by its accreditor, and allegations by the Consumer Financial Protection Bureau and the U.S. Securities and Exchange Commission that the company and its executives had misled students and investors with a private loan program, and continuing investigations into the company’s recruiting tactics by the attorneys general in 20 states and the District of Columbia.
The Wall Street Journal’s editorial board called the department’s crackdown “Obama’s for-profit execution,” noting that none of the allegations had been proved. But that critique failed to reflect that ITT could have been in better shape to weather the department’s financial demands had it not spent $2.1 billion of its cash over the past 15 years buying back its own stock, a tactic typically used to bolster stock prices, or paying out more than $22.7 million in salary and bonuses to its chief executive, Kevin M. Modany from 2011 through 2015.
The ITT closure is notable for its scale, abruptness, and visibility. Another major for-profit college company, Education Management Corporation, has halted new enrollments at 19 of its 51 Art Institutes campuses and 22 of its 26 Brown Mackie campuses, but since delisting its stock, it has not reported on its enrollments for more than a year.
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But the ITT shutdown reflects a continuing trend. At the height of the recession in 2010-11, enrollment in the for-profit college sector was about 3.9 million, according to Steve Gunderson, president of Career Education Colleges and Universities, as the sector’s main trade association is now known. Today, he says, it has fallen to about 2.8 million.
The for-profit sector is not monolithic. While it’s become known for the once-high-flying college companies owned by Wall Street investors (the Apollo Education Group, DeVry, Graham Holdings, Grand Canyon Education) and private equity firms (Quad Partners and Sterling Partners), it also includes thousands of smaller, career-focused colleges that train people for “middle-skill jobs” in technology, business, and the trades.
Although the economic recovery has put a dent in college enrollment generally, the for-profit sector has taken the biggest hit. Mr. Gunderson blames the Obama administration and its allies for much of that decline, citing a series of new regulations, like the gainful-employment rule, that student and consumer advocates have welcomed but the industry opposed. “I cannot overestimate the impact of a seven-year assault on our sector,” Mr. Gunderson said in an interview last week.
Whether that record is seen as an “assault” or justifiable oversight, it’s not likely to be the last of the effects. Here’s what else could be coming down the pike that could have ramifications for all or parts of the sector.
A decision on whether the Apollo Education Group, the publicly traded parent company of the University of Phoenix, will be taken over by private investors.
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Three private investment companies — Apollo Global Management of New York (no relation to the Phoenix parent company), the Vistria Group of Chicago, and Najafi Companies of Phoenix — have won shareholder approval to take Apollo Education private at a price of $1.14 billion, or $10 per share. Vistria is headed by Martin Nesbitt, who is a good friend of President Obama’s and the chairman of the foundation that will build his presidential library, and Tony Miller, a former deputy secretary of education in the Obama administration. Once private, the company would no longer be compelled to regularly report information like enrollment numbers for Phoenix, which is still the largest for-profit university in the country.
I cannot overestimate the impact of a seven-year assault on our sector.
But the deal is contingent on the change of ownership winning approval from both the Education Department and the Higher Learning Commission, Phoenix’s accreditor. And despite the political connections of the would-be buyers, there is growing doubt that those approvals will be granted. One sign of that: The price of the stock is now trading at about $8.25 per share, down from the $9-plus price per share it hit around the time shareholders approved the deal. That suggests investors are no longer as confident the transaction will go through as planned.
“People are pricing in the risk of the deal failing,” said Jeffrey Silber, an analyst with BMO Capital Markets. From the standpoint of an investor in the sector, “if that doesn’t happen, that will be the next shoe to drop.” Investor interest in the for-profit-college sector is already pretty low, he added, “I’m not going to lie and tell you that my phone is ringing off the hook.”
In July the Higher Learning Commission said that it would defer action on Phoenix’s change-of-ownership petition until it receives a recommendation from the department, but that if that didn’t come by September 28, the accreditor would consider the request at its November meeting.
A decision on the fate of a major accreditor of for-profit colleges.
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A federal advisory panel and Education Department staff have recommended that the Accrediting Council for Independent Colleges and Schools lose its recognition as an accreditor. By late October, it will be up to a senior department official to rule on the council’s fate. Acics, as the council is known, now accredits some 800 colleges, enrolling some 800,000 students (that count includes the ITT students). If the department revokes Acics’ recognition, those colleges would then have to find another body to accredit them if they wanted to continue participating in federal student-aid programs.
The accreditor could have up to 18 months to continue, and appeals could forestall or overturn a negative ruling. Still, Mr. Gunderson said many of the association’s members had already begun seeking alternatives, a process that could cost them as much $50,000 per campus, and much uncertainty.
The specifics of a new regulation that will govern when and how student-loan borrowers can avoid repaying their student loans because of misconduct by their colleges.
The first draft of this “defense to repayment” regulation, which the secretary of education, John B. King Jr., has said is designed to ensure that “we won’t sit idly by while dodgy schools leave students with piles of debt and taxpayers holding the bag,” included several provisions that have alarmed the for-profit colleges.
Chief among them is a provision that could require colleges to post letters of credit with the department if an institution is accused of misconduct in a lawsuit that substantially threatens the college’s assets, even if the charges are not yet proven. “All of these groups that are out to destroy the sector” could file multiple frivolous lawsuits and financially cripple a college, said Mr. Gunderson, adding that he and his group’s members do want a “clean, clear, fair” regulation. Many of his members, he said, view the proposed regulations as “worse than gainful employment.”
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Other colleges outside the for-profit sector have raised similar concerns. But student advocates said worries about lawsuits are overblown. For one, said Toby Merrill, director of the Project on Predatory Student Lending at Harvard Law School, “you can’t just create a lawsuit out of air” — there needs to be someone who has been wronged. Besides, she countered, referring the for-profit-college association’s unsuccessful legal challenge to the gainful-employment regulations, “if we’re going to talk about frivolous litigation, I don’t think Steve Gunderson is in any position to talk.”
The department is expected to release its final version of the defense-to-repayment regulation by November 1.
That much-contested gainful-employment has already gone into effect, but the first real sense of its actual impact won’t be known until January, when the Education Department publishes the first sets of official data showing debt-to-income and debt-to-earnings figures for students in career-focused programs at for-profit institutions and other colleges. Initially, the department has estimated that as many as 24 percent of programs at for-profit colleges could fail the gainful-employment debt tests, but as Mr. Gunderson noted, since then the sector has shrunk and many institutions have reconfigured programs that were at risk of failing.
The economic recovery.
As much as tougher regulations and continuing negative news coverage may have popped the for-profit-college boom (with another critical piece expected on Tuesday, when a Frontline report called “A Subprime Education” will air on PBS), broader financial trends have also been a factor. When the economy is bad, people often return to school. But as hiring has picked up, many of the for-profit colleges that have stuck the closest to their career-focused mission are now feeling the pinch. “Vocationally oriented schools have been hurt most by the recovering economy,” says Mr. Silber, of BMO.
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Despite that trend, the trade association plans to make a major push beginning this month, to highlight research on the role career colleges can play in producing millions of skilled workers for in-demand jobs in today’s economy.
A new administration.
Although little is assured in this presidential election, predictions that Hillary Clinton will win the presidency have also produced some anxieties among for-profit-college advocates, particularly as news got out this month that Rohit Chopra has joined Mrs. Clinton’s transition team. Mr. Chopra was formerly with the Consumer Financial Protection Bureau, when it sued ITT and Corinthian. “The thinking is he’s not necessarily a fan of this sector,” said Mr. Silber.
Mr. Gunderson said his association hopes that whoever is in charge of the next administration, that they appreciate the value of career education. “If they continue this war,” he said, “we won’t exist.”
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.
The veteran reporter Goldie Blumenstyk writes a weekly newsletter, The Edge, about the people, ideas, and trends changing higher education. Find her on Twitter @GoldieStandard. She is also the author of the bestselling book American Higher Education in Crisis? What Everyone Needs to Know.