Corinthian Colleges (COCO), The For-Profit College That's Too Big to Fail

The For-Profit College That's Too Big to Fail

By Karen Weise  September 25, 2014

For years students flocked to schools run by Corinthian Colleges (COCO), one of the largest for-profit education companies in the U.S. Attracted by late-night TV commercials and Internet ads for vocational certificates and online business degrees, they enrolled on the promise that the extra career training would give them a leg up in the job market. The marketing worked: At its peak, in 2003, the publicly traded company was worth more than $4 billion. About 72,000 students attend Corinthian’s three chains—Everest, Heald, and WyoTech.

Like other for-profit colleges, Corinthian, based in Santa Ana, Calif., has long fought allegations by state and federal authorities that it preyed on its students, saddling them with debt they wouldn’t be able to repay. For at least eight years, state attorneys general, Senate Democrats, and the Department of Education have been pressuring Corinthian to change its recruiting practices and improve the accuracy of its government disclosures.

Then, earlier this year, came a surprise: An Education Department inquiry revealed that Corinthian’s finances were in disastrous disarray. The company, which like other for-profits has seen a decline in enrollment since the end of the recession, had become almost entirely dependent on regular cash infusions from the government’s financial aid programs—$1.4 billion last year, or more than 80 percent of the company’s revenue—to keep the doors open at its 107 campuses. In July the government gave Corinthian until the end of the year to get out of the education business.

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Usually, when a school closes, the Education Department tries to find other programs to accept the students and the credits they’ve earned. But the size of Corinthian’s student body means it’s hard if not impossible to find enough places at other for-profit or community colleges. That creates a problem for the government, which must forgive loans for students who don’t transfer to other institutions. In the case of a school as large as Corinthian, that provision could cost taxpayers millions of dollars.

Now the Education Department is actively trying to shore up Corinthian’s schools even as it shuts the company down. “They thought they were going to be sending a really strong message” by cracking down on Corinthian, says Trace Urdan, an analyst at Wells Fargo Securities (WFC). “They didn’t really understand that it may collapse.”

Corinthian’s unraveling started in January. The Education Department asked the company for information verifying the job placement statistics it reported to regulators, which were also used in marketing materials. Corinthian had already let the department know that some of its figures were inflated. In June, dissatisfied with the speed of Corinthian’s responses, the department put a 21-day hold on disbursing federal financial aid to the company. In a call with reporters, Ted Mitchell, the department undersecretary responsible for higher education, said he expected Corinthian to continue operating normally, just as hundreds of other schools routinely do when their federal payments are suspended.

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Instead, the delay created a cash crunch. The company tried to secure private financing, but when it failed, it turned to the government for help. The Education Department could either let Corinthian fail or look for ways to dismantle it without closing the schools. Shutting the campuses would mean leaving students in a lurch, with credits that may not be accepted at another school, but it would also give those students greater rights to seek loan forgiveness.

On July 3, Mitchell announced the Education Department would appoint an independent monitor to oversee the sale or closure of Corinthian’s schools, which are both online and scattered across 26 states. Most operate under the Everest brand, which offers medical and other professional licensing; a dozen campuses grant business degrees under the name Heald College, and five locations known as WyoTech provide training in auto repair, electrical work, and plumbing.

The government agreed to release $35 million to keep classes going. Corinthian spokesman Kent Jenkins says the plan “provides current students with the opportunity to complete their educational programs with minimal disruption.” When it was announced, the Education Department’s Mitchell noted that the plan would protect taxpayers’ investments by limiting the number of students who could request debt relief.

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Corinthian hired Barclays (BCS) to help find new owners. That won’t be easy: Revenues have fallen across the for-profit college industry as federal scrutiny has increased and unemployment has declined. The government’s “unprecedented” action against Corinthian doesn’t help draw private money to the industry, says Wells Fargo’s Urdan. Potential investors and operators worry that other for-profit schools may be shuttered. “There is a contingent that says there is a secret list in the basement of the Department of Education, and they will be knocking these guys down one after another,” Urdan says.

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However, even as Education tries to salvage Corinthian, other government agencies aren’t letting up. In August the chain received a subpoena from the Justice Department seeking documents relating to job placements, graduation rates, and statements to investors. The Securities and Exchange Commission is investigating its financial reporting, and agencies in at least a half a dozen states have launched their own probes. That scrutiny has already led to actions that have hurt Corinthian’s bottom line, including limits to the company’s access to student funding under the GI Bill. “By a number of objective measures, our schools serve our students very well,” says Corinthian’s Jenkins.

The Consumer Financial Protection Bureau on Sept. 16 sued Corinthian for operating what it called an “illegal predatory lending scheme” that lured students with false job promises, saddled them with high-cost debt, then harassed them when they couldn’t repay their loans. The CFPB wants Corinthian to refund $569 million in private loans to students. Corinthian “strongly disputes” the allegations and says it’s already taken “strong action to rectify” the behavior described in the CFPB complaint. The attention “magnifies the headache” for the Education Department, Urdan says, because it may turn off potential applicants, making Corinthian’s colleges even less attractive to prospective buyers.

Some in Congress are blaming the Education Department, saying it missed the warning signs of Corinthian’s weakness. “Though financial analysts were well aware of the precarious financial situation of Corinthian, the department apparently was not,” six Democratic senators, including members of the Committee on Health, Education, Labor, and Pensions, wrote in an August letter to President Obama. Mitchell vowed in July “to go back and look at our own processes and Corinthian’s filings and see what we missed.”

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On Sept. 18 the White House began the final stage of review for new rules that would cut off student loans at for-profit schools if they don’t meet certain standards, such as having no more than 30 percent of borrowers defaulting within three years of taking out loans. (Corinthian’s schools all have default rates below 30 percent.) The next day, Corinthian’s Everest College tweeted out an inspirational message that included a photo of a butterfly with the note: “Every experience, good or bad, transforms you.”