Some weeks ago, the Educational Credit Management Corporation (ECMC) Group announced that it had entered into an agreement with Corinthian Colleges Inc. for the acquisition of 56 Everest and WyoTech campuses. As part of the agreement, the Group will pay $24 million for these campuses – an achievement when one considers that Corinthian was worth $4.2 billion in 2003. In addition, the Group will also oversee the transition of the campuses from a for-profit to a nonprofit status.
The Repercussions of the Proposed Sale
ECMC will oversee the direction and management of these campuses through its recently launched education subsidiary, the nonprofit Zenith Education Group. This recently launched subsidiary, run by a new executive team and operating in accordance with a new set of standards for business ethics, expects the transaction for these campuses to conclude in January 2015. In addition, the US Department of Education will need to approve the final sale too.
Currently contingent on several conditions, including obtaining various federal and state regulatory approvals, the sale will result in the creation of the largest nonprofit career college system in America. At the same time, it will enable more than 39,000 students to complete their educational programs.
However, this agreement came about primarily because the Department of Education concluded that Corinthian was too big to fail. Had this agreement not taken place, Corinthian would have had to close the schools once its temporary operating agreement with the federal authorities concluded.
The ECMC’s Proposed Plans for Transforming the Corinthian Campuses
The ECMC Group is a nonprofit corporation that has a mission of helping students succeed. As part of its plans to transform these campuses, the Group aims to implement certain changes to four key areas in the current model upon completion of the acquisition. These areas include:
- In most Everest programs, the Group plans to reduce tuition costs by 20 percent for new students, effective immediately upon closing
- It will also extend this reduction to existing students who enroll in additional courses
- The Company also plans to award millions of dollars annually in institutional grants that will help students avoid having to take out private loans
- Accountability and Transparency
- The Group will focus on meeting two key measures of student success i.e. strong program completion rates and job placement rates
- It will bring in a new senior executive team and focus on educational programming and the overall student value proposition
- It will consolidate, centralize and bring under its purview all compliance, quality control and internal audit functions
- It will employ a monitor for overseeing its regulatory obligations related to the acquired campuses
- It will also enable students to access information about their educational programs, relevant placement rates and other measures easily
- Improved Job Placement
- The Group and campus leadership will liaise with local and regional employers to ensure that the skills taught in classrooms reflect actual workforce requirements and result in the students finding jobs in their chosen field of study
- It will also conduct a comprehensive review of all the programs offered, with the objective of improving under-performing programs or, if needed, eliminating them altogether
- It will also give students in specific under-performing programs a choice of options, including a refund of loans that the Group would fund
- Individualized Support
- The Group will maintain smaller classroom sizes for bringing back the emphasis on quality learning rather than enrollment
- It will enhance academic counseling, tutoring and remedial education services for giving students the tools and resources needed for the successful completion of programs
- It will help students manage their student loans by offering financial literacy counseling in an attempt to reduce student loan debt
- It will also provide career counseling services to students thereby giving them a clear road-map to good jobs in their chosen fields of study
An Overview of the ECMC
While all these plans look good on paper, the ECMC Group’s primary business involves giving guarantees on student loans. As such, it collects on the loans it guarantees. One of its secondary businesses involves fighting borrowers aggressively in court, when they try to offload their student loan debts by filing for bankruptcy.
The ECMC, founded in 1994, is the main private entity hired by the Department of Education for challenging student borrowers who file for bankruptcy on federal loans. It replaced the Higher Education Assistance Fund that became insolvent in 1990.
To deal with high default rates, lawmakers armed the Department of Education with various powers such as the ability to garnish the borrower’s wages and Social Security, in addition to appropriating their tax rebates. These measures helped bring down the default rates from 22 percent in 1990 to about 10 percent in the 2011 fiscal year. Yet, it appears that the ECMC often crosses the line when it comes to making legitimate attempts at recovering money on defaulted loans and legal harassment.
The Checkered Past of the ECMC
In 2010, reports mentioned the theft of identity data on 3.3 million student loan borrowers. The loss, reported from the ECMC headquarters in St. Paul, Minnesota, included the loss of various personal details such as names, addresses, Social Security numbers etc. for as many as five percent of all federal student loan borrowers. More recently, a study published in the Emory Bankruptcy Developments Journal mentions that the ECMC is the creditor in 68 percent of adversary proceedings against borrowers who filed for bankruptcy.
Earlier this year, Natalie Kitroeff wrote about some of the ruthless measures adopted by the ECMC. After reviewing hundreds of pages or court documents and interviewing consumer advocates, experts and bankruptcy lawyers, Kitroeff highlights that the ECMC often ventures into dubious terrain. She mentions that the ECMC:
- Told a cancer patient facing burgeoning medical expenses and with a condition that has a survival rate of about five percent, to repay the loan in full as the possibility of recurrence was insufficient to qualify as “undue hardship”
- Raised objections that a borrower was spending money lavishly by “dining out” – in reference to a meal shared by the borrower and the borrower’s spouse at McDonald’s that amounted to $12
- Garnished a borrower’s Social Security for repaying a loan that the borrower had already repaid – despite the borrower providing evidence to the contrary during the bankruptcy hearing
In the last instance mentioned above, the US Bankruptcy Appellate Panel highlighted the unsoundness of ECMC’s legal theory. It also commented on the “waste of judicial resources” that the ECMC’s stand occasioned. More tellingly, the Panel concluded that the ECMC’s collection activities constituted an abuse of bankruptcy process, in addition to defiance of the court’s authority.
The ECMC Makes More Money on Collecting Debts
A couple of years ago, John Hechinger reported that a student loan debt collector at ECMC made $454,000 in a single year. This was more than twice the pay of the US Secretary of Education. This wasn’t a one-off either. Five other managers earned over $400,000.
The ECMC guarantees loans made by banks and other private lenders. If the borrowers fail to repay the loan, the ECMC promises to repay the lenders. In this scenario, the ECMC charges fees to borrowers and earns commissions from taxpayers when it makes collections on defaulted student loans. The commissions could total as much as 31 percent, Hechinger writes. In case the ECMC cannot recover the money, the federal government takes over the loan, thereby shifting the risk on to the taxpayers.
The ECMC earns one percent of a borrower’s loan amount when it prevents a default through counseling. For a loan amounting to $30,000 that would equate to $300. Once borrowers default or make no payments for 270 days or more, the ECMC adds collection costs to the borrower’s loan balance. This could be as high as 25 percent. In addition, the ECMC gets to retain 16 percent of all the money it recovers.
Hechinger writes that by law, organizations can receive as much as 37 percent of a borrower’s loan amount. This could come via collection costs and taxpayer-funded commissions in a 50-50 ratio. The ECMC typically collects 31 percent, which amounts to $9,300 for a loan amount of $30,000. This, by itself, is 31 times more than what the ECMC makes by preventing defaults through counseling. Yet, Hechinger mentions that the ECMC utilizes 77 default-prevention workers for 241,000 delinquent borrowers and 90 debt collectors for 557,000 defaulting borrowers.
The Concerns of Members of Congress Vis-à-vis the ECMC’s Proposed Purchase of Corinthian Campuses
Furthermore, even Members of Congress have expressed their concerns about the ECMC. In a letter to the Secretary of Education, Arne Duncan, Congressman Steve Cohen joined other US Senators and Representatives in highlighting that federal law enables borrowers to discharge their student loans via bankruptcy if they can demonstrate conditions amounting to “undue hardship”.
Yet, the letter states, the ECMC often blocked this route by aggressively challenging the borrower’s efforts at proving undue hardship. It does this by engaging in lengthy legal challenges and appeals against bankrupt student loan borrowers who have exhibited a clear and legitimate inability to repay their loans. The letter concludes that this approach is neither sensible nor cost-effective.
In another letter, Cohen mentions other concerns resulting from the sale of the 56 campuses. He refers to the dubious tactics used by the ECMC for collecting loan payments from students. At the same time, he draws attention to the fact that the ECMC Group and the Zenith Education Group have no previous experience in operating an academic institution.
Cohen also highlights that by virtue of being a nonprofit entity, the Zenith Education Group would no longer require to comply with the 90/10 rule that for-profit colleges need to meet. In addition, the degree programs offered by the Group will not remain subject to the gainful employment requirements prescribed by the Higher Education Act too.
As a result, Cohen writes, the Group will face no restrictions on the percent of revenue that they can raise from government entities. In addition, they will not need to demonstrate that their degree programs prepare students adequately for careers that will enable them to repay their student loan debts.
A week ago, Molly Hensley-Clancy reported that Higher Ed Not Debt activists wrote letters to six state governors. The letters asked the governors not to release buyers of Corinthian campuses from legal liability in lawsuits and investigations against the company. It is worth noting that under the terms of the sale, the ECMC has not taken on any of the liabilities concerning current or former students for actions taken by Corinthian. As a result, Corinthian will hardly have any assets or cash for paying settlements to students.
In fact, the ECMC was keen on purchasing the campuses in California too. However, Kamala Harris, the California Attorney General, refused to release the ECMC from the liabilities arising from Corinthian’s alleged violations.
Responding to these concerns, the ECMC mentions that its practices comply strictly with federal law. In addition, it mentions that it strives to avoid lengthy court proceedings by helping borrowers apply for income-based repayment plans. Occasionally, it mentions, that it comes across cases that are “close calls.”
In an interesting twist, Ben Miller writes that the ECMC has asked Congress to amend the rules that govern a college’s eligibility to receive federal student aid once it declares bankruptcy. He also enlists some steps by which the ECMC could provide relief to the students in these 56 campuses.
So far, the Department has expressed its happiness with the proposal, as it would result in many students to continue their education. Yet, Hensley-Clancy writes, the Department has a financial stake in this deal too. If the government failed to find a buyer for the campuses, Corinthian would have had to wind up its colleges. This would have forced the government to offer loan forgiveness to current students, amounting to as much as a billion dollars. Therefore, despite the objections raised by critics, the Department of Education will have the final say on the proposed sale.
On their website, the slogan emblazoned by Corinthian Colleges reads ‘We Put Students First’. Yet, the reality was quite different. If it endorses the sales of the 56 campuses, the Department of Education might have shown scant regard to this, as far as the futures of the 39,000 students affected by this sale are concerned. On the one hand, they will not be entitled to any loan forgiveness that would have been the case had Corinthian shut down these campuses. On the other, the credibility of the degree programs continues to remain questionable.
If the sale proceeds, a company with a reputation for debt collection will own campuses that have been responsible for sending several students into defaulting on their loans. The irony is too hard to miss.