United Education & Software said Tuesday that it is shedding its troubled student-loan processing business, whose problems this year sparked a review of the operation by various agencies and caused the company’s stock to plunge.
United Education, an Encino chain of trade schools, said the sale of the operation settles a dispute it had with the California Student Loan Finance Corp. (CSLFC) and Bank of America stemming from problems United Education had servicing student loans. United Education serviced some $1 billion in guaranteed student loans for the CSLFC, a nonprofit company that buys student loans from banks and other institutions that issue them. Bank of America is the trustee of bonds issued by CSLFC.
Among United Education’s tasks was to try to collect from borrowers who are behind on payments, following strict guidelines that include sending letters and making phone calls to borrowers. Fees United Education received accounted for about 15% of its overall revenue, which totaled $49.6 million for the six months ended July 31.
Earlier this year, the company discovered numerous problems in the operation, such as failures to send out letters to delinquent borrowers. The company blamed the problems on new computer software it installed. Still, it sparked a review of the loan-servicing operation by several government and private agencies. United Education’s stock, which traded as high as $16.25 a share in April, plunged as a result. On Tuesday, it closed at $4.63 in over-the-counter trading.
Aaron Cohen, United Education’s president, said United Education will record a one-time, $9.5-million writedown before taxes for the quarter ended Oct. 31 as a result of shedding the operation. Cohen said that as a result, the company will post a substantial net loss for the quarter, but added that United Education hopes to ultimately recover close to $5 million of the $9.5 million from its insurance carrier.
Under the agreement, Bank of America will buy the office equipment, inventory and other assets of the operation for $1.5 million to $2 million. It also plans to hire a company called Costa Mesa Service Center to run the operation. United Education will have to pay $2 million to Bank of America within 18 months. In return, it is being released by the CSLFC and Bank of America from any liability in connection with service problems.