Student Aid Agency Reviewing Operations at 15 Trade Schools

Fifteen trade schools owned by a fast-growing Encino company are being reviewed by the state to determine whether some students receiving government-backed loans really needed the money.

In addition, the state is investigating whether the schools are taking too long in refunding tuition when a student drops out, state officials confirmed Monday.

Greg Gollihur, deputy director of the California Student Aid Commission, which guarantees that student loans will be repaid, said that since January, the commission has been reviewing operations at Pacific Coast schools that are owned by publicly held United Education & Software.

“I would say it is cause for concern. But, at this juncture, it’s impossible to say whether there is any wrongdoing,” Gollihur said.

The review of the student-aid operation was disclosed in a weekend story in Barron’s on a United Education public stock offering scheduled this week. The company’s stock fell $3.125 a share Monday to close at $12.625 in over-the-counter trading.

Government-backed loans are important to trade schools like the ones United Education owns. Company officials previously have said that 90% of the students, who pay from $2,000 to $7,000 a year in tuition, receive some kind of federal aid, mostly government-backed loans. Gollihur said the average government-backed loan made to trade school students in the state is $2,700.

David W. Munro, United Education’s chief financial officer, said the company did not want to comment on the inquiry, citing Securities and Exchange Commission rules that require companies to refrain from public comments that might affect a pending stock offering. He did confirm that the offering still is scheduled. Public documents filed with the SEC on the stock offering do not mention the state commission’s review.

United Education operates 33 trade schools that train people in such fields as welding, auto mechanics, bookkeeping, aircraft repair and court reporting. It also has a home-study school and sells computer software used by trade school administrators.

United Education’s stock has been one of the hottest over-the-counter issues this year as its earnings have soared, which the company has attributed primarily to the acquisition of other schools.

In the fiscal year ended Jan. 31, its earnings more than doubled from a year earlier to $4.4 million, with revenue also more than doubling to $80.7 million. Taking into account a 50% stock dividend earlier this month, the company’s stock nearly had doubled this year from $8.33 a share in January to more than $16 a share last week.

The company has proposed selling 1.2 million shares of stock in its latest offering. In addition, StanChart Equities, an affiliate of Union Bank in Los Angeles, has planned to exercise a warrant to buy 613,689 shares for $3.33 each and sell them in the public offering. A similar stock offering by United Education was shelved last fall after the October stock market crash.

The California Student Aid Commission guarantees and insures for the federal government loans made by banks to students. When a student defaults on a loan, the commission makes good on the loan to the bank and then is reimbursed by the federal government for at least 80% of the loan.

Gollihur said that, thus far, the commission has asked eight Pacific Coast schools to “reconstruct” their loans, which requires them to supply to the commission detailed accounts of loan dates, times, amounts and durations.

Gollihur said he is uncertain what kind of action the commission might take. In general, he said, if problems are found in the student aid programs, the schools are given a chance to comply. If they resist, he said, they face stiffer penalties, which can include limits placed on government-backed loans or suspension of loans to students.

In general, default rates on loans for trade school students are higher than at universities, state colleges and junior colleges because trade school students often get lower paying jobs upon graduation.

Gollihur said California’s trade school default rate is about 33%, compared to 17% for all schools.