Corinthian Colleges, the for-profit chain under investigation for misleading students and faking job placement records, has a savior. The Educational Credit Management Corp. announced Thursday it plans to buy 56 of troubled Corinthian Colleges’ (COCO) 107 campuses for $24 million—quite a deal, considering the chain was worth $4.2 billion in 2003.
But ECMC, as it’s called, has had troubles of its own. The nonprofit’s primary business is as a guarantor of student loans; it collects on the loans it guarantees. It also runs a secondary business, in which it aggressively fights borrowers in court when they try to offload student loans in bankruptcy. The deal “raises great questions about their purposes,” says Representative Steve Cohen, a Democrat from Tennessee, citing ECMC’s “dubious or questionable tactics” and the predatory practices of the for-profit college industry. “There’s a stench that’s out there above this whole area, and the merger.”
ECMC’s approach has come under fire before. In a May letter to Education Secretary Arne Duncan, six members of Congress protested ECMC’s record of “aggressively challenging debtors’ efforts” to get debt relief. A New York Times report this year detailed the company’s “ruthless tactics” in denying borrowers bankruptcy relief, including telling a woman caring for her dying husband that buying him McDonald’s (MCD) meals counted as a luxury purchase.
To some, a loan servicer is the wrong buyer for Corinthian. Students at for-profit colleges often, because of heavy debt loads and poor job training, contend with debt collectors for years. “This is like the government giving the fox unfettered access to the hen house, which in this case is the students,” says Rafael Pardo, a law professor at Emory University. “The perceived conflict of interest really casts a pall on this whole transaction.”
For its part, ECMC says a separate unit will convert Corinthian’s campuses into nonprofit schools; they will run independently of its debt collection and bankruptcy operations. David Hawn, ECMC’s chief executive, says the company can be a force for good: “We really have a greater insight into what walking away with high debt and low job prospects does to the lives of so many young people around the country.” The company says it will lower tuition by 20 percent at most of the Corinthian campuses it will absorb and will start a scholarship program offering students “tens of millions of dollars,” according to Hawn.
Hawn says he got an “out of the blue call” from a midlevel manager at Corinthian this summer, before the company formally agreed to sell off its properties, asking if he would be interested in purchasing the ailing campuses. “It started out as: ‘Are you crazy?’ and now here we are,” he says. After visiting Corinthian’s main greens and talking with its students, many of whom Hawn described as “single moms that are trying to get a leg up on life,” he says he changed his mind.
To ECMC, which has $1 billion in assets, “$24 million is like nothing,” says Trace Urdan, managing director and senior analyst at Wells Fargo Securities. Corinthian Colleges (COCO) had become a penny stock in the aftermath of its legal headaches, including demands by the Consumer Financial Protection Bureau to refund $569 million in private loans to students. Its stock fell 99.6 percent from a high of $33.01 in March 2004, to 12¢ at the close of trading Wednesday, Nov. 19, the day before the deal was announced.
Hawn notes that collecting debt or pursuing borrowers in court is bound to make a company unpopular. “Our role in that regard is not to determine social policy on student loan retainment but to make sure that we are consistently and fairly applying the law.”
The Department of Education and Corinthian’s accrediting agencies still need to approve the deal. Congressman Cohen says he and several colleagues will send a letter urging Secretary Duncan to give the deal greater scrutiny.
