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California Association of Private Postsecondary Schools

Corinthian's failure could cost the federal government $1.2 billion

06/30/2014

Inside Higher Ed ~ June 30, 2014. WASHINGTON -- The U.S. Department of Education has until tomorrow to reach an agreement with Corinthian Colleges on a plan to sell or shut down the for-profit chain’s 107 campuses. If they fail, the federal government could lose more than $1.2 billion in discharged student loans.

That figure was included in a legal filing Corinthian submitted last Thursday in a California court. The document was in response to a lawsuit from California’s attorney general, Kamala D. Harris. Harris last week asked the court to make Corinthian stop recruiting new students.

The company’s response to Harris’s legal challenge had a less restrained tone than the language in the June 19 corporate announcement, which calmly explained the for-profit's money crisis and possible closure.

Since then officials from Corinthian have been in “around the-clock-negotiations” with the department and potential buyers of its assets, according to the legal document. They are seeking a soft landing for Corinthian’s 72,000 students and 12,000 employees.

“No one benefits if the school is forced to close down before it is able make provisions for its students,” the company said in the filing. “The school and the Education Department are in the midst of a delicate and complex process of restructuring Corinthian and teaching-out or selling schools.”

According to the terms of a preliminary deal, released last week, the government and an outside monitor will oversee the orderly shutting down of any campuses the company cannot sell. The idea is for students to be able to finish their studies at those institutions, under the protection of the closure plans of accreditors and state and federal regulators.

Students can continue attending the former Corinthian campuses that the company manages to sell.

The feds and Corinthian haven’t always seen eye to eye as they work on the phasing-out plan. For example, they offered conflicting descriptions of how the crisis began. If the two sides fail to reach a deal, the cash-starved company likely will topple. That would mean Corinthian campuses would shut down immediately.

“The school’s failure would unnecessarily harm students because they would have no access to academic records, assistance with transition or transfer, or any other services that a school in teach-out can provide,” the company said.

Taxpayers will also be on the hook. That’s because 72,000 students would be able to have their federal loans discharged if their campuses shut down, according to the department’s policies. “The federal government would be forced to forgive in excess of $1.2 billion in student loans” if Corinthian closes, the company’s legal filing said.

That amount seemed high to some observers. But Corinthian’s tuition rates are relatively expensive, and roughly 83 percent of its $1.6 billion in annual revenue comes from federal sources.

In addition, the company said its closure would “completely deplete” California’s Student Tuition Recovery Fund. That state pot of money is designed to “relieve or mitigate economic losses” of students who are unable to complete their studies when a college fails or shuts down.

Better Off Discharging?

Harris sued Corinthian last year. Her lawsuit said the company violated consumer protection and securities laws through its alleged targeting of low-income students with false and predatory advertising.

Last week Harris added to the suit. Echoing a similar call by a dozen Democratic U.S. Senators, she asked the court to “immediately force Corinthian Colleges to tell prospective students the truth about the company’s dire financial situation and its agreement with the federal government to sell or close all of its schools.”

The problem, said Harris and the group of Senate Democrats, is that Corinthian is still enrolling students. She said the recruiting pitches are false advertising. For example, Harris cited a Heald College website that said, “Since we’ve been around for over 150 years, you can count on us to be here when you need it most.”

The company, however, said continued student recruitment is necessary for it to have a chance of selling off campuses.

“In order to keep students in school and to attract a qualified buyer (as will be determined by the Education Department), a flow of students is necessary,” Corinthian said. With her filing last week, the company said Harris "appears to think that students will be best served by causing immediate panic and destroying any chance the school has of selling its campuses to buyers who will responsibly operate them."

Either way, selling off campuses won’t be easy, experts said, despite prices probably being low. For-profits are the mostly likely buyers. But they face an uphill regulatory environment as well as sliding revenue and enrollments, in most cases.

As a result, most for-profits probably aren’t looking to expand. And the relatively weak performance of Corinthian’s campuses on student loan default and “gainful employment” metrics might make them less attractive.

Senate Democrats, most notably Sen. Dick Durbin of Illinois, have also said they would oppose any for-profit that is facing a state or federal investigation from either purchasing a Corinthian campus or participating in the “teach out” of its students.

For some critics of Corinthian, students might be better off if they get their federal loans discharged and start over again, rather than having their campus sold or gradually phased out.

“Do students at closing campuses have the option to refuse a planned teach-out and instead seek Closed School Discharge?” the group of Democratic senators wrote last week in a letter to Arne Duncan, the U.S. Education Secretary. “If so, how will the Department ensure students are properly notified of their options?”