Financial Troubles for For-Profit Higher Education!

Dear Commons Community,

The Chronicle of Higher Education (subscription required) has an article that examines the fragile financial situation of three major for-profit higher education providers – ITT, Education Management Corporation, and Corinthian. The major causes for this fragility are enrollment declines and increased scrutiny from federal agencies or  state attorney generals or both. The article details the specific issues at each of the three above mentioned providers.

“At Corinthian, the issue was cash flow. The company was so pressed that when the department in June took the unusual step of delaying disbursements of federal student aid for 21 days, Corinthian revealed that, without the federal money, it wouldn’t be able to pay its bills and its creditors weren’t willing to lend it any more money. The announcement set in motion the series of events that led to the deal to effectively shut the company down.

Education Management has a debt problem—about $1.3-billion worth. And the payments it owes on that debt, particularly the balloon payments coming due in the next couple of years, are too big for the amount of revenue it now generates. (It took on most of the debt back in 2006, when Goldman Sachs Capital Partners led a buyout of the company with lots of borrowed money.) Now Goldman Sachs, which still owns a sizable share of EDMC, finds itself negotiating with another Wall Street titan, KKR, over the debt terms. You can read about some of the juicy machinations of this Goldman Sachs-KKR conflict in a New York Post article from July.

Then there is ITT, whose chief executive, Kevin M. Modany, just announced plans to resign. The company has a cash-flow problem too, but unlike Corinthian, it has nothing to do with anything the department has done. ITT’s injuries are more self-inflicted.  For years the company had been the guarantor of a private loan program for its students. That required it to make payments to a trust to make up for amounts that student borrowers didn’t pay when they defaulted on their loans. (The high-cost loan program is also the focus of a lawsuit that the Consumer Financial Protection Bureau has filed against ITT.) And the rates of those defaults were high. ITT had been setting aside money to make those payments, which will amount to about $200-million for the rest of 2014 and 2015.

But it hadn’t formally accounted for those payments on its balance sheet. The U.S. Securities and Exchange Commission cried foul on the practice and ordered the company to treat the loans as part of its core business. But ITT has yet to issue updated financial reports showing the impact of that change on its books. (In fact, it hasn’t filed any quarterly or annual reports since September 30, 2013.) The company also failed to produce an audited financial statement by a June 30 deadline, which put it in violation of department regulations. That alone could allow the department to require ITT to post a letter of credit, which the company has said would cost it $98-million.”

At the start of this century, for-profit colleges and universities emerged with great promise for providing higher education to many students who would have difficulty in being admitted into traditional colleges. Now they are the focus of student loan abuse, enrollment declines, and financial collapse.  They brought these situations upon themselves.



Comments are closed.