- Why Corinthian and ITT declared bankruptcy?
- Did both institutions misguide students?
- How crucial is Title IV funding?
Televisory’s previous blog ‘Changing landscape of private universities in the US’, evaluated the substandard educational institutes and the legislations introduced by the US Department of Education (ED) to crack down on these institutions. In the present blog, the fall of education behemoths such as Corinthian Colleges, Inc. (CCi), ITT Educational Services, Inc. and their failure is being analysed. Subsequently, together these held around 7% of the market share in the United States and bear a testimony to a much deeper problem, which may be of concern for other for-profit institutions as well. Televisory examined the existing establishments in the sector, which might be at risk of a failure considering the regulatory scenario in the United States.
Failure of Corinthian colleges and ITT in the US, an indication of the rooted problem in the sector
In 2012-13, prior to the beginning of fall, Corinthian catered to 4% of the student population for higher education with 128 college campuses in North America. However, as per Televisory’s prior blog on the subject, much of the student admissions were through unethical practices, this was to boost enrollments and capitalise on federal Title IV funds. Thus, due to the sole focus on profitability and relatively low expenditure on instructional expenses, students were the worst sufferers, saddled with high-debt and low-income. This led to a large scale defaults on the educational loans and was a drain on taxpayers’ money.
Therefore, following the data inquiries from the US ED and numerous civil investigative demands for a couple of years, Corinthian on May 4, 2015, announced chapter 11 bankruptcy with assets of $19.2 million and a debt of $141.1 million. A year later on September 16, 2016, ITT Technical Institute filed for bankruptcy under chapter 7 bankruptcy liquidation with assets and liabilities between $100 to $500 million. ITT catered to nearly 3% of the student population for higher education with 139 campuses in the USA (2013).
CCi and ITT were two of the biggest for-profit institutions, which faced the brunt of the Obama administration, in order to weed out the programs that left students with heavy debts and low income. While the behemoths collapsed, there were other notable failures of for-profit institutions mentioned below.
(Note: The above numbers represent the operational campuses at the time of the announcement. Some of these institutions were very large entities, which gradually sold the assets following the litigations.)
Corinthian Colleges, Inc.
The trouble started in 2007 when it was alleged that there is false advertising on admission, placement, graduation rates and average compensation offered to alumni. The suit resulted in $6.5 million of penalties on the institute, in addition to the discontinuation of 11 substandard programs at various campuses. Moreover, such accusations and data divulgence requests were regularly received by the institute, which was either thwarted or partially submitted by the education body.
CCi was deep under legal trouble by Jan. 2014 and there were investigations by ED (Department of Education). A collective investigative demand comprising thirteen states led by Iowa attorney general’s office, Securities and Exchange Commission (SEC) and Consumer Financial Protection Bureau (CFPB) was initiated. These inquiries demanded a multitude of data from CCi and alleged operational practices of fraud, misrepresentation of student placement records and other details such as tuition fees, enrollment practices, accreditation, student lending, etc.
The firm was massively hit on June 12, 2014, with ED amending the rating of all its schools from ‘Advance Payment’ to ‘Heightened Cash Monitoring 1 (HCM1)’ and requested documentation and data as stated above. This resulted in an extension of the period gap (3 days to 21 days), in which the institute receive the Title IV funds from ED. Furthermore, as over 80% of CCi’s income accrued from Title IV funds, this delay along with fall in enrollments left CCi under financial constraints.
Hence, after several futile attempts by the CCi on roll back of fund delay with ED and liquidity crunch compelled the firm to reach an agreement with ED on Jun. 22, 2015. This was to sell its campuses for an immediate release of Title IV funds for $16 million (use for debt repayment prohibited).
Additionally, CCi's troubles did not end as it received various inquests from accrediting agencies and ED (after July 2014) regarding few of its campuses to stop enrollments on the ground of non-compliance of state and education laws, operational viability and financial stability.
On Nov 19, 2014, CCi clinched a deal with ECMC to sell 56 of its Everest and Wyotech campuses and teach out 12 campuses covering 39,000 students. The deal totalled $24 million, however, the company received only $3.5 million as $12 million was paid to ED. The remaining amount was put into escrow to secure a potential indemnification obligation. In addition, Californian campuses were not included in the deal due to hefty potential legal claims in the state for which potential liability could have materialised into millions of dollars owing to pending litigations by the California AG and CFPB.
On Feb. 19, 2015, the government of Ontario suspended its license of operation and this led to the closure of all the 14 campuses in Canada. Ultimately, on Apr. 26, 2015, CCi announced the closure of all the 28 remaining campuses after a failed negotiation with certain parties. This was largely due to federal and state regulators seeking to impose financial penalties and conditions on buyers and teach out partners, leaving more than 16,000 students and staff in predicament. On May 4, CCi filed for bankruptcy.
ITT Educational Services, Inc.
ITT Educational Services, Inc. failed due to identical reasons. The institute was under financial and operational scrutiny for concealing losses in two of its student programs. Likewise, allegations were made for misrepresentation of placement rates and potential salaries. Hence, in Aug. 2015, ITT was also barred from new enrollments, which were eligible for Title IV funding and asked to provide letter-of-credit requirement from approx. $124 to $247 million within 30 days, following which ITT filed for bankruptcy on Sep. 6, 2016, affecting more than 40,000 students and 8,000 employees.
(Note: Corinthian reported revenue for only 3Q in 2014, which is represented here without any adjustments)
The falling revenue of for-profit colleges is a reflection of the increased regulatory oversight during the past 6 years leaving aside the pending litigations and regulatory actions upon Corinthian and ITT, enrollments and revenue for-profit sector fell on account of waning trust of students.
Burden of acquisitions and expansions
In their heydays, for-profit institutions spent a large sum of money on acquisitions and expansions. These corporate actions were fueled by debt and taxpayers’ money in form of Title IV funds, which bankroll the industry. But the increasing defaults on student loans initiated ED’s probe and many institutions came under the net. Consequently, as the probe progressed and more and more institutions were indicted, this made students warier and admissions fell. A decline in admissions took a toll on the liquidity of institutions. Simultaneously, an increase in reporting requirements regarding alumni employment, income and debt repayment, exposed several institutions to risks.
For instance, Corinthian's enrollment fell almost 4% to 74,498 students (during March 2014) within three months of ED’s letter on further investigation. This depressed cash flows to $54.5 million during the first 9 months of 2014 as compared to $128.8 million during the same period in 2013, the firm lacked funds to sustain for three months. Secondly, had the ED withheld $16 million in July 2014, Corinthian would have declared the bankruptcy much earlier. Further, the company was unable to sell Californian assets after several attempts due to multi-million dollar pending litigations and left Corinthian with little choice.
Existing for-profit institutions at risk?
ED scrutiny for sub-standard colleges revealed that most of such colleges were accredited by Accrediting Council for Independent Colleges and Schools (ACICS). Therefore, on Sep. 22, 2016, ED stripped ACICS of its accrediting role and left close to 245 schools unrecognised and 600,000 students faced uncertain future. The companies were supposed to find an accreditor within 18 months (until June 2018) or practically cease business (A college is required to be accredited in order to receive Title IV funding). Apparently, Corinthian's 57 out of 111 colleges and all of ITT Tech's colleges were accredited by ACICS at the time of their closure.
Televisory analysed the following companies based on the number of ACICS accredited colleges, which are facing a battle for their survival:
Education Corporation of America; ECA is a private company which acquired 38 ground campuses from Kaplan Inc. (Subsidiary of Graham Holdings Co.) in February 2015. It presently operates 69 out of 70 campuses accredited by ACICS, which are facing the closure risk.
Globe University; a private firm, accredited by ACICS, the university has already closed 10 out of 11 campuses in Dec. 2016 after all the these were barred by the ED from participating in Title IV funding for charges of predatory lending, false advertising and fraud.
Daymar college Inc.; a private company, which recently settled a $12.2 million lawsuit with former students for false claims on job placements, transfer of credits, etc. At the moment, it has all the five campuses accredited by ACICS.
Moreover, a few large institutions are planning to sell their assets such as Education Management Corporation, which has entered into an agreement to sell all the assets post regulatory approvals to a non-profit organisation. Concurrently, others like Apollo Education Group, Inc. was acquired by The Vistria Group.
The churns and consolidation in the US education sector gradually began emanating from the regulatory changes brought in by the ED. This could entail more closures of for-profit institutions, which are on the verge of losing their accreditation and more importantly credibility among the prospective students due to litigations by alumni.