Aunt Ginny Gets Served

16 Jul 2010

The for-profit education industry has enjoyed very smooth sailing over the past decade, with huge profits and expanding enrollments swept along by the easing of federal funding regulations during the Bush administration. But now, in the immortal words of Captain Jack Sparrow, “There appears to be a leak.” Actually, during my final term teaching at Everest Institute in Rochester, I saw a couple of them, caused by the predatory nature of the business, and apparently creating some frantic and destructive practices by an industry determined to keep itself afloat.

Corinthian Colleges, Inc., which owns Everest, has a simple and effective way of recruiting urban students:

  • Buy existing accredited colleges in urban areas, such as RBI in Rochester, or Duff’s in Pittsburgh.
  • Blanket the community with billboards and up-beat commercials on Cartoon Network.
  • When people come into the reception area, in groups of 2 or 3, with children in tow, and ask about the promised riches, hand them an iPod so they can listen to a brief introduction.
  • Quickly call out one of the many admissions reps, who will give them a personal tour of the campus, beginning with the framed accreditation in the lobby (an important trophy in the for-profit education game, as Dana College in Nebraska recently discovered), and then proceeding to the trophy case of imprinted water bottles and other stuff the students can earn.
  • Sign them up.
  • Get their financials filled out and processed.

These numbers are now being increased by having recruiters go out into the community, beginning with the high schools. In a recent presentation to potential investors, Corinthian boasts that they have at least 450:

Click for larger image.

According to an April 30 Bloomberg article, for-profits are also targeting homeless shelters, welfare offices, and employment centers.

Where do all these students get the money to pay their exorbitantly high tuition? (Although you won’t find the numbers anywhere on Everest’s web site, a recent article in the Washington Post puts for-profit education at $14,174 in 2009, as compared to $2,544 for two-year state schools.) The students have traditionally paid with a combination of cash (when there is any), bank loans and, most importantly, Federal Title IV education dollars. Lots of them. In fact, Title IV seems to be the driving force behind for-profit education’s explosive growth over the past decade. According to Steve Eisman of FrontPoint Financial Services Fund (Morgan Stanley), in his article, Subprime Goes to College, “At many major-for profit institutions, federal Title IV loan and grant dollars now comprise close to 90% of total revenues.” He also writes that the Apollo Group, owners of the ubiquitous University of Phoenix,

increased total revenues by $833 million. Of that amount, $1.1 billion came from Title IV federally funded student loans and grants. More than 100% of the revenue growth came from the federal government.

So far, so good. But private loans for urban minority students are suddenly very scarce. Corinthian, without the slightest hint of irony, chalks this up to “the recession,” conveniently forgetting that it was one of its spiritual forefathers—the subprime banking industry—that contributed to this new stinginess (and the recession) in the first place. It’s a bit like a pyromaniac saying, “There appears to be a fire.” The bottom line, though, is that the money needs to come from somewhere else.

Here’s where Aunt Ginny comes in. Corinthian is now having its admissions reps ask prospective students if there is anyone in their family who would love to hear that they are going to college, and who would be willing to help chip in. If the student says, “Aunt Ginny,” the rep gets her phone number. And poor Aunt Ginny, who probably never knew that her niece and/or nephew was going to school, receives a call that same day asking for money. In other words, now that the banks have stopped making loans to people who have few assets and fewer opportunities, Corinthian is looking to tap into whatever savings already exist in the community.

And Title IV? Well, it ties directly into such performance issues as income/debt ratios and loan default statistics, which is now problem #2 for Corinthian, since default rates are rising. Here’s another page from the investor presentation:

Click for larger image.

Meanwhile, a quick search of some of Corinthian’s urban campuses at the web site Information for Financial Aid Professionals shows that default rates for certain city locations are even higher:

Everest Institute, Rochester —FY2007: 21.4, FY2006: 17.6, FY2005: 15.8

Everest Institute, Pittsburgh—FY2007: 20.1, FY2006: 16.9, FY2005: 15.2

Everest Institute, Miami—FY2007: 20.0, FY2006: 13.5, FY2005: 3.9

Plus, according to the Wall Street Journal,

Twenty-two campuses of the Everest College chain, a unit of publicly-traded for-profit Corinthian Colleges Inc., had three-year default rates of 30% or higher. One of its schools, Everest Institute in San Antonio, Tex., had a default rate of more than 40%.

Why is this a problem for Corinthian? According to the IFAP,

A school subject to loss of eligibility to participate in the Federal Family Education Loan (FFEL) Program, William D. Ford Federal Direct Loan (Direct Loan) Program, and/or Federal Pell Grant Program has FY 2007, FY 2006, and FY 2005 official cohort default rates that are 25.0% or greater.

If default rates continue to rise (and who knows what they are now), Corinthian will find it harder to bury the urban numbers inside national statistics, and it will face losing its main source of income—Federal tax money.

So, beginning this past Spring, students and staff at Everest have found life-sized color cutouts of administrators lurking in the hallways and holding signs that remind students to pay off their loans. Also, a new poster appeared on the wall across from my American Literature class, with the names of several defaulting students and offering a cash bounty to anyone who could tell the school where they were. It doesn’t seem likely that many of them will cooperate.

How does Corinthian explain the high rates? In their investor presentation, they state, “Recession had driven up defaults in general, including defaults on student loans…Defaults are mainly driven by employment and socio-economic factors, not by institution attended.” And, in their Fiscal 2010 Third Quarter Report,

Although it is too early to provide specific data, preliminary information indicates that cumulative defaults have trended higher for the 2009 cohort of students than for the 2008 cohort at the same time last year. We believe the increase relates to such factors as the on-going recession, which is particularly challenging for the demographic we serve, and changes in the student loan industry.

It’s clear to me that many of the “employment and socio-economic factors” that Corinthian mentions are intensified for city students, having been created and mantained by the targeting of populations who have very few, if any, free market choices. A common defense of schools like Everest Institute is that they serve segments of the population that are overlooked by public colleges. This is semantic snake oil. It’s like saying that payday loan companies “serve” the bankless neighborhoods where they set up shop with 1303.5% interest rates, or that the real estate industry “served” urban areas in the 1960’s and 1970’s, with red-lining, contract sales, and mass evictions. (See the brilliant and exasperating Family Properties, by Rutgers historian Beryl Satter.)

With these threats to its income, the explosive growth of Corinthian Colleges., Inc. might be coming to an end, sinking under the weight of hyper-enrollment of economically disadvantaged populations, and investigations by the Feds, who want to know where all the money is going. Daniel L. Bennett, at the Center for College Affordability and Productivity, believes that this is simply a matter of the market benignly correcting itself:

What’s needed is the innovation that is the product of unadulterated entrepreneurship. This innovation is more often originating in the market driven sector, although I admit that there are some sour apples making the entire sector smell with their abusive recruiting tactics and seeming disregard for imposing exorbitant debt on students, due to the competitive nature of profit-seeking private enterprise. In time, the rotting apples will fall and the remaining tree will blossom into the envy of the orchard, if markets are permitted to work their magic.

I agree in theory, even if I am much less sanguine about the whole “in time” approach. After all, everyone from Thomas Jefferson to Abraham Lincoln said the same thing about slavery, and a hundred years of waiting had to pass before the Kansas-Nebraska Act proved just how futile such wishful thinking can be.

So, yes, the for-profit education behemoths might sink but, like the big banks, they will leave a lot of people floundering in their wake. And if Corinthian goes down, it will likely take Aunt Ginny with it.



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