Less than two weeks after it was slammed with stiff new sanctions by the Department of Education, and just days before its fall semester was scheduled to start, giant for-profit college chain ITT Tech has closed its doors.
ITT announced the shutdown in a blistering statement, released early this morning, in which it called last month’s sanctions “unwarranted . . . inappropriate and unconstitutional.” The statement described “the damage done to our students and employees, as well as to our shareholders and the American taxpayers” as “irrevocable.”
The Department’s actions, however, reflected ITT’s ongoing corporate malfeasance. The chain is currently the subject of lawsuits and investigations by a long list of state and federal agencies, and it has been out of compliance with Department of Education oversight mandates for months.
And ITT Tech’s misbehavior was of particular concern to the Department because the company’s revenue came overwhelmingly from the American taxpayer. Since 2010, some $5 billion in federal money has flowed to ITT in the form of grants and loans, outlays for which the chain had steadfastly refused to be held accountable.
Last month’s sanctions were designed to rectify that. Limits were placed on ITT’s ability to divert revenue to its management and investors. Enrollment of new students using federal loans and grants was paused. And crucially, ITT’s letter of credit was hiked dramatically.
This last provision is worth explaining in more detail, because it clarifies both why ITT failed and what will happen next. When the Department requires that an educational institution post a letter of credit, that institution essentially places a specific amount of money in escrow, setting it aside so that it will be available to use to, for instance, compensate students if the company fails while their studies are ongoing. It’s an insurance policy, in essence, imposed to ensure that the taxpayer isn’t left holding the bag in the event that a college collapses.
If a company is healthy, a letter of credit will be a straightforward cost of doing business—either they’ll be able to cover it themselves, or someone will be happy to lend them cash to do so. If a company is already failing, securing a substantial letter of credit becomes more crucial (because the risk of inaction on the part of the Department is greater) but also more dangerous (because more robust oversight could expose and compound structural weaknesses).
In the past, the Department of Education has often delayed taking action against predatory and mismanaged for-profit colleges until they were in such dire straits that any attempt to impose even mild sanctions would lead to disaster. (Chris Hicks and I discussed this problem, and proposed ways of fixing it, in a report we released this summer.) Thus, when the Department announced in the summer of 2014 that it was placing a three-week delay on disbursements of federal financial aid to Corinthian Colleges, it sent that chain into a tailspin. Corinthian imploded in the months that followed, taking an additional $35 million in emergency taxpayer funding with it.
In some ways, the fall of ITT Tech seems to mirror that of Corinthian—after years of gentle treatment by the Department of Education, a crackdown was followed almost immediately by a collapse. In other ways, however, the Department’s actions in regard to ITT reflect lessons learned from Corinthian, suggesting that the ITT crackdown is less Corinthian II than a first step toward a new model of for-profit college oversight.
I’ll be discussing the similarities and differences between Corinthian and ITT, and what the Corinthian debacle tells us about how the Department should handle the ITT aftermath, in a later post.
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December 11, 2016 at 8:51 am
Donna
I think it is bad business for the DOE to have done what they did. Government at it’s best! I understand the process, but they should have been willing to work out a better solution than to force these tech colleges to shut down. My husband went to ITT and also worked for them when they owned several hotels. They were a really good company to work for at the time but also knew when to sell off the hotels to compensate for their other business ventures.
It seems like the DOE is going after only the tech schools. I go to a private university in Columbus. Every year they raise their tuition but never seem to give back to the students. I was lead to believe that my adult years in college would only cost me $35,000 I am now at $60,000. I can’t stop because I will still have to pay back the loans. I am too close to graduating but I will have a hefty bill to pay back. Not just the $60,000 but all the interest that goes with it.
Why doesn’t the DOE go after these private schools too? The university I attend now forces students to purchase books from them. Two years ago they started putting the schools name on books and rearranging chapters so that you have no other choice than to purchase or rent your books from them. That is SOOOO unfair as it really puts a dent into your costs.
You also have to purchase a parking ticket each quarter or semester. Without a parking ticket you will get a ticket if you park in their lots. The schools also charge for technology fees if you take their online courses. They charge for every little thing. I won’t be able to help my son’s get degrees. All I can hope for is that they will get scholarships.
December 14, 2016 at 8:05 am
Tyrel
Donna you’re retarded and obviously illiterate. They were scamming students all over the country by collecting thousands of dollars more than they should have via grants and loans. Like me for example. They took some $20,000 a quarter from the federal government for my $6,000 a quarter class costs. That’s a federal offense and they will either be paying dearly or going to prison like they deserve. Anyone who sticks up for ITT Tech should go ahead and kill themselves. They were stealing money from students for years and years and years via the federal government. They should be hung for taking advantage of so many people in this desperate time of need to be educated.