Corinthian Colleges Inc., the troubled Orange County for-profit college corporation, has cut a deal with the federal government that's likely to force the sale of many schools and the closure of others.
The agreement keeps the doors open for now at more than 90 schools across the country, but the U.S. Department of Education will have final say over their fate.
Santa Ana-based Corinthian has been investigated by the U.S. Department of Education, state attorneys general and other federal regulators for years. The company is accused of falsifying job placement rates and misleading students about financial aid obligations. Students at the company's schools have defaulted on federal loans at some of the highest rates in the nation.
Two-year programs at one of the company's Everest College locations in Southern California can cost up to $22,000 per year, according to federal data.
The Education Department stepped in two weeks ago when it imposed a 21-day waiting period on the company's access to millions of dollars in federal aid — which accounts for nearly 85% of company revenue. In a regulatory filing last week, the company signaled it might have to shut down without more cash.
The Obama administration has ramped up scrutiny of for-profit colleges in recent years, zeroing in on schools that left students with burdensome debts and little training for well-paying jobs. But by bringing Corinthian to the verge of closure, the Department of Education has sent one of its strongest signals yet.
"I definitely think this says something broader about the department's approach," said Trace Urdan, a managing director at Wells Fargo Securities who follows the for-profit higher education industry. "If they wanted to fire a really impressive warning shot, this definitely accomplishes that."
The for-profit college industry grew rapidly during the Great Recession, when many unemployed workers sought refuge in higher education and job training programs. But the industry's growth slowed beginning in 2011, amid tighter federal regulations intended to root out high-pressure sales operations targeting low-income and minority students.
Many companies in the industry, including the Apollo Group, which owns the University of Phoenix, saw revenues and stock prices fall. But Corinthian was among the hardest hit, and began facing extreme pressure from state and federal investigators.
The future is unclear for more than 72,000 Corinthian students across the country, who attend classes at the company's Everest College, WyoTech and Heald branded schools. As part of the agreement, Corinthian will either sell the schools to other buyers or "teach out" underperforming programs — putting a stop on new admissions, but allowing existing students to finish their degrees.
Student advocacy groups that have been critical of for-profit colleges praised the Department of Education's decision to draw the line on Corinthian, but many also questioned why the government continued to hand out more than $1 billion each year to a company with many warning signs.
"Hopefully this sends a message that no school is too big to fail," said Pauline Abernathy, a vice president at the Institute for College Access & Success, a policy group focused on student debt issues. "But hopefully it will also encourage the department to act sooner to encourage schools to improve more quickly, so that this kind of situation does not drag out so long."
As part of Monday's agreement, the Education Department will give Corinthian — one of the nation's largest college corporations — access to $16 million in previously restricted federal loan and grant money.
In a press release, the company described the agreement as one that will "best protect the interests of students, faculty and staff, ensure the integrity of federal student aid funds and preserve the value of the schools."
Corinthian and the Education Department agreed to approve a plan for the company's future by July 1. After that, the company will be subject to stringent review by a federally approved independent monitor, who can access all the company's internal financial documents.
More than a dozen state attorneys general are looking into Corinthian's business practices, and the Department of Education in January began investigating allegations that the company falsified the job placement rates used to attract prospective students.
In addition, the company has struggled with cash flow over the past year, making it particularly vulnerable to the department's 21-day waiting period.
"If you were to go looking for those with the most troubled history, Corinthian would very clearly be at the top of your list," said Ben Miller, a former policy advisor at the Department of Education who is a senior policy analyst with the New America Foundation. "It was not only struggling academically with its students, but struggling financially as well."
At Corinthian's Everest College in City of Industry, in an office park east of Los Angeles, many students didn't fully understand the implications of a possible sale involving large swaths of the company.
Students received an email Monday morning that described an "agreement" with the Department of Education that "maintains uninterrupted daily operations of our ground and online schools until a more detailed transition plan can be finalized." The email added that students would be able to continue in their programs, and that financial aid would not be affected.
Christian Ordonez, a 19-year-old from East L.A., said he didn't really understand what the email meant. He took out a loan worth tens of thousands of dollars to attend a two-year criminal justice program at Everest, and said he was worried about what his degree would be worth in the end.
"Hopefully it is going to be worth something, or we wasted a lot of money on this," he said. "Imagine if it is useless?"
Others felt comfortable with their job prospects, and praised Everest's programs.
Anabelle Garcia, 18, of La Puente is two weeks away from completing a medical assistant program at the Industry campus.
"Friends and family have gone here and gotten jobs," she said while sitting in her car, about to drive to a job at Fry's Electronics. "That's why I wanted to come here."
She said she doesn't believe the college's uncertain fate will harm its reputation or her job prospects.
"Stay positive," she said.
Several analysts who follow Corinthian viewed Monday's agreement as a precursor to bankruptcy, giving the company time to sell off some assets to generate cash. The grace period also prevents a shutdown that would have left students in the lurch.
But it's unclear what the market will be for Corinthian's schools. Many analysts pointed to the company's ongoing legal entanglements with state attorneys general and the U.S. Consumer Financial Protection Bureau. They argued that any sale would need provisions to protect buyers from liability.
The company's WyoTech and Heald schools, which teach automotive repair and business classes, respectively, are viewed as the assets with the most solid reputation.
Urdan, of Wells Fargo Securities, predicted "fire sale prices" for most of the schools. To generate cash in recent years, Corinthian has already sold off most of the campus buildings and converted them to lease arrangements, meaning the value of the schools will be the staff and associated brands.
"What you're left with is going to be something called Corinthian Colleges that has a bunch of cash and a bunch of liabilities," Urdan said. "It will basically be an entity set up to defend its business practices against lawsuits."