Trouble remains following failed for-profit schools' revival
WASHINGTON (AP) — When one of the country's largest for-profit college companies failed in 2014, the Education Department faced a choice. It could shut down Corinthian Colleges Inc., incurring a $1 billion loss to taxpayers and sending students scrambling, or it could find someone to take the school off its hands.
With a history of fraud discovered by auditors and investigators, and poor outcomes for students, the company drew only one interested buyer: a student loan debt collection firm that had formed a nonprofit educational company called Zenith Education Group.
A little over one year after Zenith took the helm, a review of the school's operations by The Associated Press shows that despite ostensibly new oversight by the Obama administration, the business model for what had been a failing chain of career training schools hasn't fundamentally changed.
The Education Department has permitted Zenith, the new owners, to recruit students using large-scale telemarketing and paid media campaigns that sometimes advertise programs that no longer exist. Executives who formerly oversaw Corinthian's business practices, which state and federal officials said were fraudulent, remain employed at Zenith.
As with Corinthian, Zenith still requires students to waive their right to sue the school in a class action — a legal power play unheard of among traditional colleges. Zenith continues to recruit students using the very same ads that Corinthian ran during the very same daytime TV talk shows.
Ominously for students and the government, recent graduates told the AP they are struggling to find work that would allow them to pay back their student loans. That raises the prospect the U.S. is seeding a new crop of loan defaults.
"I graduated in April at the top of my class, with honors," said Shane Satterfield, a roofer in Georgia who now owes more than $30,000 in debt for the associate's degree in computer science he completed last year. "And I can't get a job paying over $8.50 an hour."
The mess of how to deal with Zenith and its struggling for-profit former peers is among the most serious problems confronting the Education Department and its new leadership. John B. King Jr., who was expected to win Senate confirmation late Monday as education secretary, was hired as an adviser in January 2015, after the department had set Zenith's path under then-Secretary Arne Duncan.
Zenith chairman David Hawn said some marketing practices the AP identified were problematic, and he acknowledged that graduates are not yet coming out of the school with key credentials for getting a job. But he said the schools were on the right track.
"We are spending a lot of money to right the ship," Hawn said. He added that Zenith had shrunk — it is down to about 15,000 students — and lost more than $100 million in its first year and expects to lose money again in its second. "Every step we're taking is in support of our quest to become a really great career school," he said.
Corinthian's failure gave the administration unprecedented say in its relaunch.
"The Department of Education sold these schools to a firm that had no experience in providing education and insufficient motivation to genuinely fix the business model," said David Halperin, a Washington lawyer and consumer advocate who helped identify problems at Corinthian. "It would have been better to help existing students find new opportunities elsewhere."
Education Department Undersecretary Ted Mitchell, who oversees colleges and vocational schools, said the government was raising AP's findings with Zenith. "The fact is that we were able with Zenith to provide a plan for tens of thousands to move on," he said. "If Zenith is not doing right by its students, we won't hesitate to act."
Though the timing of Corinthian's collapse was a surprise, the reasons for it were not:
—A January 2011 whistleblower lawsuit alleged that Corinthian employees routinely fabricated employers to make it appear that unemployed graduates had landed good jobs in their chosen careers.
—A July 2012 report by the Senate Health, Education, Labor and Pensions committee found that more than half of Corinthian students dropped out.
—Undercover investigators at the Government Accountability Office enrolled in Everest, Corinthian's flagship among its schools, and received passing grades for obviously plagiarized or incorrect assignments.
—A lawsuit by California's attorney general, filed in 2013 and amended in 2014, alleged rampant lying to students about job placement and cited internal marketing documents that identified Corinthian's best prospects as people with "low self-esteem" who have "few people in their lives that care about them." That case is pending.
Despite the misconduct allegations, the Education Department didn't cut off the hundreds of millions in student loan dollars it was channeling to Corinthian. The harshest punishment the department imposed was a three-week hold on payments in June 2014. The temporary delay in loan disbursements led to Corinthian's abrupt collapse.
The financial failure left the department in a nasty position. After years of payouts to investors and multimillion-dollar bonuses for its executives, Corinthian had few assets, 70,000 students and massive legal trouble.
Simply allowing Corinthian to fold would have forced the U.S. government to absorb hundreds of millions of dollars in losses on student loans and put students on the street. Keeping the schools alive would save the government from much of the damage. But given the depth of the legal and financial troubles, suitors were scarce.
"There was this strong sense, from the media communications standpoint, where they said 'Do we really want all these students getting thrown out of school,'" said Robert Shireman, a former deputy undersecretary who left the department in 2010. "Somewhere in there, someone came up with ECMC," Education Credit Management Corp., the nonprofit student debt collection company based in Oakdale, Minnesota, that controls Zenith.
When Zenith Education Group acquired the remains of Corinthian, its executives knew what they were getting.
Zenith's schools, the company wrote, had a culture of "accepting anyone with a pulse." A large portion of the student body was "at risk," and Corinthian had defrauded students through false promises of future employment and deprived them of a functional education, it said. In a way reminiscent of the subprime mortgage crisis, Zenith said Corinthian had walked off with money from government-backed loans and left everyone else in the lurch.
A year later, the school has lowered tuition by 20 percent and shuttered some career programs with the worst student outcomes. Aside from these changes, Zenith's flagship Everest University is operating largely according to Corinthian's for-profit business model.
Many of Corinthian's senior regulatory and compliance officials stayed on board. Zenith's deputy general counsel and its corporate counsel came from Corinthian. Also still at Zenith are executives who oversaw Corinthian's accreditation, student finance operations and its hard-charging recruitment call centers.
The longtime director of compliance and program management at Corinthian, Susan Samek, now oversees job placement verification. That role requires her to ensure that Everest is no longer lying to the government or its students about placement rates, which Zenith acknowledged had happened.
Some Zenith executives have altered their social media profiles in ways that obscure details of their earlier work with Corinthian. In October, shortly after Hawn disputed in an interview that Zenith Deputy General Counsel Diana Scherer had handled regulatory compliance at Corinthian, her LinkedIn profile was edited to remove mention of that work.
Hawn said that just because Zenith compliance employees had also held senior positions at Corinthian does not mean they will repeat that organization's mistakes.
"Compliance matters to us in a big way," he said. He said the compliance department ultimately reports to people employed by Zenith. As for the holdover employees, he said, "I'm proud they're serving alongside us."
Zenith has retained Corinthian's policy of prohibiting its students from suing it in class actions. Under Corinthian, students were required to sign waivers giving up their right to sue over misconduct at the school; their only option was arbitration. At the Education Department's insistence, Zenith dropped the across-the-board ban on lawsuits. But Zenith still requires students to sign a ban on class actions, which are generally regarded as an effective way to pursue a large number of cases.
Such a ban is virtually unprecedented at nonprofit colleges, but Hawn said that Zenith will keep it for now despite what he said were few student complaints.
"Arbitration, that's a much better remedy," Hawn said. "As our confidence grows in our ability to serve our students well, we will continue to look at the class-action lawsuit issue."
The Education Department's Mitchell said the government wants Zenith to lift its class-action ban. Though the Department cannot simply mandate that Zenith drop it, the government proposed rules late Friday afternoon that would bar colleges at large from restricting students' right to sue.
Recruiting at Zenith still bears echoes of the hard-sell tactics of its predecessor.
Under a government agreement, Zenith hired a law firm to review its operations and monitor its progress. Samples of recruitment calls from Zenith's call centers found that 11 percent of student contacts in November for Everest's physical campuses contained statements that merited review, including unsubstantiated statements about Everest's tuition, the likelihood of graduates finding jobs, child care options for students and the ability to transfer Everest's credits to other schools.
In practice, Everest's credits are usually not transferrable. Under Zenith, an addendum to Everest's enrollment agreement said credits "will probably not be transferable to a college or university" and that an Everest degree "will probably not serve as a basis for obtaining a higher level degree at a college or university."
When an AP reporter inquired about taking classes, Everest admissions staff would not discuss the likelihood of credit transfers, saying only that a student's future university of choice would determine that. Separately, an AP reporter briefly registered last summer for classes at Everest in computer science to get a firsthand impression of Zenith's operations and then withdrew during a trial period before the bill of about $3,500 came due.
Zenith has a board of directors that is supposed to keep an eye on governance of its schools. But in an unusual move for a nonprofit educational institution, those board members receive salaries of between $84,000 and $142,000 a year for working between seven hours to 19 hours each week. The money flows through Zenith's parent, ECMC, and not directly from Zenith's budget.
"When a nonprofit board is paid, those people are consultants," Shireman said. He said such board members would have little incentive to act in ways that would harm Zenith's finances. "They are not overseeing the management on behalf of the public."
The Education Department's Mitchell also faulted the arrangement.
"The proper governance of education requires an independent board," he told the AP. "I'm personally disappointed that they haven't moved more quickly on this."
Current students and recent Everest graduates gave mixed reviews to Zenith. Some said they would recommend Everest to friends. But most expressed disappointment and disillusionment. None reported seeing major changes in their curriculum. Hawn said that such things take time. He expects to roll out the introduction of more employer-recognized professional certifications late this year.
"Do we have programs today that need work? Frankly, every one of them does," Hawn said. "But that's why we're doing what we're doing."
Among its faculty, some of Everest's online instructors have substantial professional experience in their fields and many are adjunct faculty shared with for-profit online colleges. A few professors' entire post-secondary education has occurred at for-profit online schools.
Despite telling the AP last October it wanted to recruit students more selectively, Zenith has continued to run the same ads Corinthian produced. The TV spots — featuring quick cuts and a high tempo musical background — portray Everest as a fast track to a solid paying job and even buying a house. One includes actors explaining why Everest is better than community college, which is almost always a more affordable educational option.
Everest spent roughly $11.5 million last year on national television ads, according to data provided by iSpot.tv, a media tracking firm. Most were ads Corinthian created. That spending disproportionately focused on daytime TV talk shows with such hosts as Maury Povich, Steve Wilkos and Jerry Springer — shows whose audiences skewed toward the young, black and poor.
Everest also has prospected for students by advertising programs that didn't exist.
When Zenith took control of Everest, it shut down the school's online paralegal program as a result of its terrible track record, but continued to advertise the program on its website, in paid search ads and in correspondence with prospective students. In conversations with Everest's admissions team, recruiters repeatedly tried to suggest enrolling in other programs.
Everest plans to bring back a version of the online paralegal program later this spring, Hawn said, and only began advertising for it in last month. The AP found Everest advertising for the canceled program in November, four months ago.
Similarly, Everest's online marketing materials continued to promote associates degrees in criminal justice and homeland security, programs that have been permanently phased out.
"It's not OK to advertise something we don't offer," Hawn said. "We've got to insure we don't do that."
Students who provided what were supposedly recent testimonials about the quality of Everest's online education appear never to have attended Everest, the AP found. They were students more than a decade ago at Florida Metropolitan University, a for-profit school that Everest later bought.
The AP contacted one of the students, Martine Darby, about whether she had ever endorsed Everest. She said she had not.
"I would not want my name associated with Everest," Darby told the AP. She was impressed by FMU when she attended, but she ran into trouble years later when she attempted to transfer the credits to Arizona State.
"I was told that none of my credits from the associate's degree I paid $30,000 for were transferrable because the school is not accredited with the appropriate organization," she wrote.
After the AP asked Zenith about the testimonials, Everest replaced them with a note stating "NEW TESTIMONIALS COMING SOON!"
"We've addressed that," Hawn said. "That was inappropriate."