The Department of Education has landed in hot water among critics for its enthusiastic endorsement of the sale of a group of for-profit college campuses to a controversial student loan agency.
The Department of Education reached an agreement to essentially shut down Corinthian Colleges, one of the country's largest for-profit college operators, forcing the company to sell off or close all of its campuses nationwide. A BuzzFeed News investigation this month showed Corinthian, owner of the Everest University chain, to be one of the worst actors in a controversial industry, using aggressive and deceptive sales tactics to lure poor and minority students into overpriced degree programs.
But when the nonprofit ECMC Group announced plans last week to buy 56 of Corinthian's campuses, many eyebrows were raised. Critics questioned every aspect of the sale, alleging that ECMC, which has no experience in operating any institution of higher education, is woefully unprepared to take on the task of rehabilitating some of the country's most troubled college campuses.
The federal government disagrees. In a press release lauding the deal, the Department of Education emphasized the schools would be converted to nonprofits and said it was "pleased to help students transition from a problematic for-profit company to a nonprofit that is committed to giving students a new start and more opportunities for success."
That praise contrasted with the concern among ECMC's critics. The student loan agency has been accused of "ruthless tactics" in trying to prevent people from discharging their debt via bankruptcy, and a for-profit debt-collection agency owned by ECMC Group, Premiere Credit, has been criticized for predatory and unethical tactics in several recent reports.
"Any group with no expertise as an education company, I would have said it was strange," said Ben Miller, a senior research analyst with the New America Foundation. "But this one in particular has a history of extremely aggressive tactics and extremely high compensation for its CEO and debt collector — it raises a lot of questions."
The question is this: Why would the Department of Education endorse such a sale?
Robyn Smith, an attorney with the National Consumer Law Center, which published one of the most prominent reports on ECMC and Premiere Credit's troubled debt collection practices, said the government's motives were partly financial: It stood to lose as much a billion dollars if a buyer could not be found for Corinthian's schools and the campuses were forced to shut down. In that situation, the government would be compelled to offer current students loan forgiveness.
"The DOE is concerned about wanting to help students complete their educations, but they also have concerns about having to discharge a very large number of loans if the campus closes," said Smith. She said the National Consumer Law Center has "serious concerns" about ECMC's ability to handle the campuses it bought and about past violations by the group's debt collection agency.
Finding a buyer for a large number of Corinthian schools was seeming increasingly unlikely, industry observers said, given the state of the campuses and the increasingly hostile regulatory environment for for-profit colleges. The schools, which included Everest College and two smaller chains, Wyotech and Heald, had seen sharp enrollment declines and were facing four lawsuits and a dozen state investigations; many other for-profit college companies, the most likely buyers for the schools, are dealing with financial problems and investigations of their own.
So the department may jump on any offer to to buy up the bulk of Corinthian's campuses as a favorable one, even with ECMC's troubled history and questionable education experience. The government also received $12 million of the paltry $24 million sale price, money it says will go to students.
ECMC's nonprofit status allows the department to avoid the stigma of transferring one troubled for-profit college into the hands of another. And as nonprofit colleges, many of the programs at schools purchased by ECMC will not be regulated by the Obama administration's new "gainful employment" rule, which cracks down on for-profit colleges.
The ECMC Group, however, is not a traditional nonprofit: Its debt collection agency is a for-profit subsidiary, and its executive compensation has been called "exorbitant"; the group paid its former CEO $1.1 million in 2010. One of its top debt collector's salaries that year, Bloomberg pointed out, reached $450,000. And the government historically gave federal loan guarantee contracts only to nonprofits, Miller said, so the ECMC Group is a nonprofit in part by necessity: "It's using its tax status for incentives."
For its part, ECMC has acknowledged that its purchase of Corinthian campuses is a business play as much at is a chance to, as it says, "help students." Like Sallie Mae, ECMC Group once did the bulk of its business in federal student loan origination, but the government stopped contracting federal loans to private organizations in 2010. Without the ability to originate new loans, ECMC's $39 billion portfolio is dwindling every year.
"Over time our core business will eventually go away," said Dave Hawn, ECMC's CEO. "This is a pivot for us — a transformational move directly into higher education." He added, "We don't anticipate it to be anywhere near as profitable [as student loan origination], but that's why it's a nonprofit."
It's a "pretty sweetheart deal" for ECMC, said Miller. "They had this big chunk of cash lying around" that, as a nonprofit, they were required to spend. "For very little money, they picked up 39,000 students," Miller said.
Hawn said he has been "disappointed" by the emphasis on the group's debt collection agency, which he calls "highly compliant," and its court battles against bankrupt debtors.
"I don't necessarily expect anyone to believe me, but this is transformative for us as an organization," Hawn said. "This is a very intentional pivot for us an organization towards helping students. We have as our mission statement that we've created in the last year or so, 'Helping students succeed,' and this is a way for us to very directly get involved with tens of thousands of students who are really trying to succeed."
Hawn said ECMC's core mission has always been working for students by helping them avoid loan default. "Unfortunately, the way the program is set up, if the student does end up defaulting, then we are responsible for pursuing collection on that," Hawn said.
As for the widespread doubts about the company's ability to transform Corinthian's troubled schools, Hawn said, "I know right now our press release is just a lot of words on a page, but we will do what we say we're going to do. I ask for people to give us a chance to show that we're very serious about what we're embarking on. We're very excited about it."
When it comes to the Department of Education's role in the Corinthian sale, experts have been critical of more than the choice of ECMC.
"Former students are really in a bind in this deal — they're left with no form of relief, and the department isn't doing much to give it to them," Smith said.
As part of the sale, ECMC has taken on none of the liabilities to current or former students for Corinthian's past actions; all liability will remain with the near-broke company, which will be left with few assets and very little cash, and thus no money with which to pay settlements to students. And the Department of Education has shown little willingness to help students deal with their federal loan debt, Smith said, by, for example, creating a recognized process to assert loan repayment claims against the company.
Students could technically file claims with the government based on Corinthian's widespread unethical practices, Smith said, but "students aren't able to navigate these things on their own. They don't even know the option exists, much less how to enter the process or gather evidence."
The tens of thousands of former Corinthian students who cannot pay their loans — the company had the worst default rate in the industry, according to a 2012 Senate report — will soon see their debts handed over to collection agencies like ECMC's Premiere Credit. If they try to discharge those loans in bankruptcy, claiming "undue hardship," they are likely to run up against an ECMC lawyer trying to disprove their claims.
As Miller put it, "It's pretty ironic that a company that's an expert at debt collection now owns a school that's exceedingly good at sending students into debt."
Molly Hensley-Clancy is a business reporter for BuzzFeed News and is based in New York. She covers the intersection of business and education.
Contact Molly Hensley-Clancy at firstname.lastname@example.org.
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