December 03, 2014

Cohen, Grijalva, Takano Call for Scrutiny of Deal to Sell For-Profit College Campuses to Ruthless Student Debt Collector

Congressmen Steve Cohen (TN-09), Raul Grijalva (AZ-03), and Mark Takano (CA-41) today called on U.S. Secretary of Education Arne Duncan to closely scrutinize a proposal by Educational Credit Management Corporation (ECMC) to purchase a total of 56 campuses owned by defunct for-profit Corinthian Colleges Inc., which agreed to sell or close all of its campuses after failing to address concerns about its educational outcomes and recruiting practices. ECMC has no prior experience operating institutions of higher learning, but it does have a checkered history that includes using ruthless collection tactics against student loan debtors who should have reasonably qualified for bankruptcy relief.

“Any sale of Corinthian’s campuses should be approved by the Department of Education only if it, unlike Corinthian’s practices, puts students first,” wrote the Congressman in a letter to Secretary Duncan today. “We are concerned that [ECMC has no] previous experience in operating an academic institution. Rather, the ECMC Group, as one of the largest student loan guaranty agencies in the United States, has benefited by collecting loan payments from students, sometimes using dubious tactics. Serious consideration should be given before transitioning management of Corinthian’s campuses from one company that profited off deceptive lending practices to an umbrella company that also has a checkered history in student loans.”

Congressman Cohen is also the lead sponsor of the Private Student Loan Bankruptcy Fairness Act of 2013 with Congressman Danny Davis (IL-07), which aims to restore fairness in student lending by treating privately issued student loans the same as other types of private debt in bankruptcy. In 2005, the law was unjustifiably changed to give private student loans the same privileged bankruptcy treatment as government loans, even though private student loans have vastly different terms and fewer consumer protections. The Congressman’s bill would amend the Bankruptcy Code to restore the dischargeability of debt from private loans made by for-profit lenders, which was available before 2005.

“Congress taking action on student loan debt is long overdue,” said Congressman Cohen when he introduced this legislation (H.R. 532). “People who seek higher education to better their futures should not be dissuaded from doing so by the threat of financial ruin. The bankruptcy system should work as a safety net that allows people to get the education they want with the assurance that, should their finances come under strain by layoffs, accidents, or other unforeseen life events, they will be protected. Our bill takes a modest but important step in achieving this goal.”

Congressman Cohen has long opposed ECMC’s use of aggressive tactics against students and middle class families. Earlier this year, he joined U.S. Senators Dick Durbin (D-IL), Jack Reed (D-RI) and Elizabeth Warren (D-MA) as well as U.S. Representatives John Conyers (D-MI), Elijah Cummings (D-MD), and Hank Johnson (D-GA) in urging Secretary Duncan to bring more fairness to struggling students by establishing clear standards of eligibility for “undue hardship” discharge of federal student loans in bankruptcy. Additional guidance would benefit the most vulnerable student loan debtors by bringing consistency to the manner in which the Department of Education’s contractors like ECMC handle undue hardship claims. Such guidance would further enable the Department of Education to focus student loan collection efforts on cases where there is a more realistic opportunity for loan recovery.

“Federal law does provide that bankruptcy discharge is available for student loans in cases of undue hardship,’ and while the courts have established a high legal standard for a debtor to show “undue hardship” there are some debtors who should be able to avail themselves of this option,” wrote the Members at the time. “However, the path to an undue hardship discharge is often blocked by Department contractors, such as the Educational Credit Management Corporation (ECMC), which have a practice of aggressively challenging debtors’ efforts to show undue hardship. While we recognize the Department’s prerogative to fairly collect on student loan debts owed to it, we do not find it sensible or cost-effective for the Department or its contractors to engage in lengthy legal challenges and appeals against bankrupt student loan borrowers who have demonstrated a clear and legitimate inability to repay their loans.”

Text of today’s letter from Reps. Cohen, Grijalva, and Takano is below:

December 3, 2014

The Honorable Arne Duncan

Secretary

U.S. Department of Education

400 Maryland Ave. SW

Washington, DC 20202

Dear Secretary Duncan:

Thank you for your efforts to ensure that schools at all levels are institutions whose primary goal is educating students.

We are writing to express concerns about the ECMC Group’s proposed purchase of campuses owned by for-profit company Corinthian Colleges. Any sale of Corinthian’s campuses should be approved by the Department of Education only if it, unlike Corinthian’s practices, puts students first.

As a proprietary entity, Corinthian Colleges has operated to make money for its investors. Accounts of students’ dealings with Corinthian demonstrate that educating students has been of secondary importance to the company. Corinthian may not have been operating with the best interest of its students in mind, as it has allegedly mismanaged funds, doled out high-interest student loans using questionable practices and falsified job placement data. We want to ensure that students on any future iteration of Corinthian campuses will receive a quality education and have access to legitimate, full-time employment opportunities without being unduly indebted with federal and high-interest private student loans they cannot repay.

Corinthian is liquidating its assets in the wake of years of investigations into the college for using aggressive tactics to encourage disadvantaged students to enroll, mismanaging finances and inflating employment rates of its graduates. In 2013, the California attorney general sued Corinthian for allegedly misrepresenting job placement rates to students, advertising programs that it does not offer, unlawfully using military seals in advertising and inserting unlawful clauses into enrollment agreements that purport to bar any and all claims by students. This year, the Massachusetts and Wisconsin attorneys general filed separate lawsuits alleging similar actions, and the Consumer Financial Protection Bureau (CFPB) filed a lawsuit in Illinois alleging that Corinthian lured its students into taking out federal and private student loans by giving them false and misleading representations about job placement assistance and employment opportunities. In addition, more than 20 other state attorneys general, the Department of Justice, and the Securities and Exchange Commission have open investigations into the company.

As a for-profit college, Corinthian appears to have operated by exploiting students as revenue generators rather than investing in educating them. According to a report prepared by the Senate Health, Education, Labor and Pensions (HELP) Committee staff, Corinthian spent barely half of its revenue on instruction in 2009—$3,969 per student—compared to $2,465 per student on marketing and $998 per student on profit. In 2010, Corinthian reported 81.9% of its revenue came from title IV federal financial aid programs. By 2012, it was 89.8%. This amount does not include revenue received from the Departments of Defense and Veterans Affairs education programs. Community colleges, by contrast, spend a comparable amount per student, but charge far lower tuition. Despite receiving such a high percentage of its operating expenses from federal dollars, Corinthian has used nearly half of that on marketing or profits rather than on educating students.

One of the largest hurdles to higher education, affordability, was raised even further by Corinthian. Despite targeting low-income and first-generation students, the suit filed by the CFPB alleges that Corinthian artificially increased tuition so that the college could meet 90/10 rule standards, ensuring that federal aid would not cover the entire cost. This practice forced many students to take out private student loans, often backed by Corinthian at high interest rates, to cover the cost of tuition. Such practices led to dramatically inflated tuition rates at Corinthian. According to the same HELP Committee report, some programs at Corinthian Colleges cost as much as 17 times more than comparable programs at other nearby credible academic institutions. Should Corinthian’s campuses continue to operate, the Department should do everything possible to ensure that the students are not subjected to similar tactics.

As reported by the Department of Education last week, ECMC Group’s newly-formed nonprofit education entity, Zenith Education Group, has submitted a proposal to acquire 56 of Corinthian’s Everest and WyoTech campuses. We are concerned that neither the ECMC Group nor the Zenith Education Group has any previous experience in operating an academic institution. Rather, the ECMC Group, as one of the largest student loan guaranty agencies in the United States, has benefited by collecting loan payments from students, sometimes using dubious tactics. In 2012, a panel of bankruptcy appeal judges expressed concern that the ECMC Groups’s collection activities “constituted an abuse of the bankruptcy process and defiance of the court’s authority.” Serious consideration should be given before transitioning management of Corinthian’s campuses from one company that profited off deceptive lending practices to an umbrella company that also has a checkered history in student loans.

As a nonprofit entity, Zenith Education Group will no longer be held to the same 90/10 rule required of for-profit colleges, and its degree programs will no longer be subject to the Higher Education Act’s gainful employment requirements. Thus, they will not be restricted by the percent of revenue that can be raised from government entities, nor required to demonstrate that their degree programs will prepare students for careers that will enable them to repay their student loan debts. Although the ECMC Group has proposed a tuition cut, the ECMC Group should do more reduce the dramatically inflated costs of attending in order to bring tuition down to a level in line with costs at credible academic institutions.

Additionally, if the acquisition is approved, we hope you will require the Zenith Education Group to identify and implement specific steps to achieve its expressed desire to improve job placement and increase individualized support. This plan should be received by the Department prior to approval of the purchase and Zenith held accountable for ensuring that the goals are met.

We hope that you will carefully scrutinize the acquisition offer from the ECMC Group to ensure that students at any future iteration of Corinthian’s campuses are provided a worthwhile education that will enable them to repay their student loans. We appreciate your attention to our concerns.

Sincerely,