Corinthian's Nonprofit Buyer

The ECMC Group, a nonprofit organization that runs one of the largest student-loan guaranty agencies, announced Thursday that it will purchase 56 campuses from Corinthian Colleges, a crumbling, controversial for-profit chain.

ECMC will create a nonprofit subsidiary, called the Zenith Education Group, to run the campuses, which enroll more than 39,000 students. The sale price is $24 million, according to a corporate filing from Corinthian. After having absorbed more than half of Corinthian’s enrollment and assets, Zenith will operate the nation’s largest chain of nonprofit career-oriented campuses.

Corinthian’s Everest, Heald and Wyotech chains include 107 campuses, which in July enrolled 72,000 students and employed 12,000. The company has been attempting to sell 85 U.S. and 10 Canadian locations, while gradually closing 12 campuses.

The sale announced Thursday includes 53 Everest College and three WyoTech campuses (click here for list).

Corinthian had been teetering even before a 21-day freeze on federal aid payments pushed it over the edge earlier this year. The company, which is one of the sector’s largest, had been hit hard by slumping enrollment and revenue, as well as investigations, lawsuits and bad publicity.

David Hawn, ECMC’s president and CEO, acknowledged that his organization had taken on “heavily distressed assets.” But he called the acquisition an opportunity to lead a “transformation” of both Corinthian’s campuses and the career-education industry, which has been dominated by for-profits.

“Our success is not going to be measured by how many students we enroll, but how many complete,” he said, as well as how many graduates are “placed in well-paying jobs.”

The deal is unusual, and perhaps unprecedented, on several levels. For almost six months the U.S. Department of Education has been working with Corinthian to secure a buyer for its campuses and online programs.

The department has yet to approve the final sale, which is expected to close in January. With a likely sale price of $24 million, ECMC will purchase half the campuses of a company that was once worth $3.4 billion.

ECMC runs the Educational Credit Management Corporation, the guaranty agency subsidiary part of the operation. The nonprofit, which has relatively deep pockets, submitted the winning bid for the Corinthian campuses.

The department will receive $12 million of the purchase amount. If approved, the new chain presumably will not face limitations the department imposed on Corinthian, such as aid freezes or oversight by the independent monitor, Patrick Fitzgerald, a former U.S. attorney.

The department has been "involved in a review of the transaction,” Hawn said, calling it a “very deliberative process.”

‘Clean Break’

Pending the sale's approval, ECMC will own all of Corinthian's U.S.-based Everest and WyoTech locations outside of California. The nonprofit will also manage the "teach out" of 12 additional Corinthian campuses.

The unsold 39 campuses collectively enroll 20,000 students. Corinthian said it was continuing to look for a buyer.

While Hawn said ECMC was interested in buying the California campuses as well, it avoided them because of a lawsuit Corinthian is facing in the state. That legal challenge from California’s attorney general, Kamala Harris, features a wide range of allegations about deceptive marketing and job-placement claims.

Most of Heald College’s 12 campuses are also located in California.

Hawn said Zenith would work to improve the Everest and Wyotech campuses. The new owner will not change the names of those institutions, he said, because rebranding is expensive. And ECMC would rather spend that money on upgrades.

First up will be a tuition reduction of 20 percent for new students in most Everest programs, ECMC said, effective as soon as the deal closes. The organization also plans to fund millions of dollars in institutional grants so students will not have to take out private loans.

ECMC said it will “transform the culture of the campus system” by bringing in a new leadership team and a new strategic focus on educational programming and the “overall student value proposition.” It will consolidate and centralize all compliance, quality control and internal audit functions.

“To ensure a clean break from Corinthian’s troublesome past practices, ECMC Group will also employ a monitor to oversee its regulatory obligations,” the group said in a written statement.

Degree programs at the soon-to-be-nonprofit chain of campuses will not fall under new federal regulations that seek to hold colleges accountable for graduates’ ability to repay their loans. The so-called “gainful-employment” rule applies to virtually all academic programs at for-profits, but only to non-degree ones at nonprofits.

Almost all of the purchased campuses hold national, rather than regional accreditation. The regional version conveys more status and desirability. The Everest campus located in Phoenix, however, is accredited by the Higher Learning Commission, a regional agency.

ECMC has reached out to the accreditors, which will have to approve the change in control of the campuses.

Hawn said he was hopeful that Zenith and ECMC will be able to steer clear of the myriad legal and regulatory woes Corinthian faces, including federal and state lawsuits. Most of those legal challenges involve claims that the company misled students about their odds of getting a good job with a credential from Corinthian. But the Consumer Federal Protection Bureau (CFPB) sued over allegations of predatory lending.

ECMC has had discussions with numerous federal agencies as it worked on the deal, Hawn said. The nonprofit has also met with “key players” on Capitol Hill.

Hawn said ECMC “worked to ensure that Corinthian’s legal difficulties are not inherited by us.”

New Owner, New Controversy?

ECMC has faced some controversy of its own. The ECMC Group has several subsidiaries, including a foundation, a loan-servicing corporation, an accounts-receivable management company and a records-services arm.

The Educational Credit Management Corporation is the core operation, however. It manages a $39 billion federal student loan portfolio. That entity had $683 million in assets in 2012, including to an Internal Revenue Service filing. The overarching group’s assets were an additional $577 million.

Congress in 2010 moved all federal lending under the government’s direct loan program. But ECMC retained some involvement. “We continue in our guarantor role by sponsoring programs to help students and families plan and pay for college,” the corporation said on its website. “We work with schools and loan servicers to lower student loan default rates, promote financial literacy and provide resources to support student loan borrowers to successfully repay their loans.”

Bloomberg News and The New York Times both published lengthy articles in recent years that detailed the corporation’s sometimes-aggressive pursuit of borrowers.

ECMC charges fees to when it collects from a loan-holder, Bloomberg reported, and also receives a commission from the feds. The Times’s article described the corporation’s “ruthless” approach as the largest backstop for federal loans. Those tactics included being so stingy with the parents of a borrower, one of whom was gravely ill, that a $12 meal at McDonald’s was deemed excessive.

“We are concerned that the article left the reader with an inaccurate impression of arbitrary standards enforcement," ECMC said in a written statement. "This is simply not the case. Our role is not to determine social policy on student loan repayment, but to present the law fairly and consistently."

Supporters of ECMC's approach said aggressive debt-collection can be necessary to hold borrowers accountable. They said others, like the federal government, must pay for any uncollected debt.

The Education Department is a major client of the guaranty agency. Asked about any possible conflicts of interest with the sale of Corinthian, which the department helped negotiate, Hawn cited the rigor of the ongoing review process by the feds.

A Coup for the Education Department?

The pending sale of more than half of Corinthian’s campuses is, in some ways, a coup for the department, which has been scrambling to manage the orderly unraveling of one of the nation’s largest colleges since its regulatory crack down on the company earlier this year set off a liquidity crisis.

The prospect of finding an eligible buyer for a company with plummeting enrollment and so many legal and regulatory woes was seen as a tall order by many observers of the for-profit sector. Several Democratic members of Congress, namely Senator Dick Durbin of Illinois, had also demanded that the department should not allow another for-profit operator under federal or state investigation to purchase Corinthian’s campuses.

And the sale of the campuses, as opposed to their more immediate closure, means the department will not find itself in the position of having to use billions in taxpayer dollars to discharge students’ federal loans.

Ted Mitchell, the undersecretary of education, has been at the head of the department’s intensive discussions over Corinthian’s future in recent months. At times officials worked in a “War Room” during what the department described as “round-the-clock” negotiations.

On Thursday Mitchell praised the sale of Corinthian’s campuses. He said the deal would “allow students to maintain progress toward achieving their educational and career goals and protect taxpayers’ investment, while Corinthian moves out of the business.”

Or a Step in the Wrong Direction?

At the same time, however, a chorus of consumer and student advocacy groups said they had serious concerns about the sale. They expressed concern that the campuses would be run by an organization that has not previously managed academic institutions.

“ECMC has no experience running a college, let alone one of this scale, and is instead known for ruthless and abusive student loan operations,” the Institute for College Access and Success, known as TICAS, said in a statement. “With so many other colleges offering lower price, higher quality career education programs, it’s unclear why this agreement is in the interests of either students or taxpayers.”

Higher Ed Not Debt, a coalition of progressive organizations and unions that focuses on student loan issues, similarly took issue with ECMC’s “storied history of harshly preventing the discharge of students’ loans in bankruptcy.”

“While bailing out 56 schools, the sale treats the more than 30,000 students like financial assets,” Maggie Thompson, the group’s campaign manager, said in a statement. “All students should have the opportunity to opt-out of the sale and receive full refunds including full loan discharges of both federal and private loans.”

Durbin, the top-ranking Democratic Senator, has relentlessly criticized Corinthian in recent months. He did not directly praise or criticize Thursday’s agreement, saying only that the sale of the campuses “should focus on sparing the students who have been victimized and the taxpayers who continue to be on the hook.”

Student Loans and Conflicts of Interest?

Department officials did win some student debt relief for Corinthian students as part of the purchase agreement. An official called those provisions “an important part of the deal for the department.” Corinthian has agreed to forgive all of the private student loan debt on its books as soon as the sale closes. That amounts to about $4 million dollars, according to the company.

The CFPB has accused Corinthian of luring students into its Genesis loan program with false promises about career counseling and misrepresented job placement statistics. The lawsuit against the company also seeks debt relief for those students.

However, the loan-forgiveness provisions of the deal were woefully inadequate, consumer and student advocates said. Robyn Smith, a lawyer at the National Consumer Law Center, which represents low-income student loan borrowers, criticized the limited relief for students "who were subjected to Corinthian's deceptive high pressure sales practices."

Another concern over the sale is the possible conflict of interest that may arise with the non-profit corporation’s debt-collection subsidiary. ECMC Group owns Premiere Credit of North America, which is one of the 22 private debt collection agencies that the department hires to collect defaulted federal direct student loans.

If the sale goes through, ECMC would be in the position of owning, through Zenith, colleges and universities that could disburse federal direct loans to students while simultaneously profiting, through Premiere Credit, from direct loans that go into default. The department randomly assigns private debt collectors like Premiere Credit individual student accounts.

ECMC said it was working to address those concerns.

"We are in discussions with the Department of Education to ensure that Premiere Credit does not work any cases that are referred to them by the Department of Education that involve students attending the Everest and WyoTech campuses included in the acquisition," a spokesperson for ECMC said in a written statement. "We will have a solution in place by the closing of this transaction.”

An Education Department official, who declined to be named, said the department would be reviewing that potential for a conflict as it considers granting approval to the sale. “This is an important concern, and it is a question we will need to resolve as a condition to close this sale,” the official said. “We will work with our partners at the Department of Justice in thinking through the answer.”