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June 27, 2014 1:27 PM How Fixing Corporate Welfare Might Kill Many For-Profit Schools

By Daniel Luzer

Corinthian Colleges, one of the largest for-profit education companies in the United States (it has some 72,000 students), is in trouble. That’s because the corporation makes its money though what is basically welfare.

According to an article in the Los Angeles Times:

Santa Ana-based Corinthian has been investigated by the U.S. Department of Education, state attorneys general and other federal regulators for years. The company is accused of falsifying job placement rates and misleading students about financial aid obligations. Students at the company’s schools have defaulted on federal loans at some of the highest rates in the nation.
The Education Department stepped in two weeks ago when it imposed a 21-day waiting period on the company’s access to millions of dollars in federal aid — which accounts for nearly 85% of company revenue. In a regulatory filing last week, the company signaled it might have to shut down without more cash.

That last paragraph is crucial here, and underscores the way large-scale proprietary colleges work: their money, the profit, comes from taxpayer-backed student grants and loans.

This latest chapter is related to the Obama administration’s general effort to try to crack down on low performing colleges. In Corinthian’s case, the Department of Education appears to believe that the company wasn’t being entirely truthful about its job placement data. There are also stories about about altered student grades and attendance. And so now it’s getting hit by the feds.


(These columns are actually Tuscan.)

As Jane Shaw writes over at the National Review:

The company is in extremely difficult straits, thanks to the Department of Education. The problem is… a direct attack on this particular school.
For the past six months the department and Corinthian have been going at it…. Now the department is delaying its payment of student loans to the school by 21 days, which, it appears, will severely hurt the cash position of the school, forcing it to borrow-but it’s having trouble doing that, especially since its stock price has dropped to 28 cents.

Corinthian says that it’s trying to answer the Department’s questions and “it had 100 people working on replying to the department’s queries and that the inquiry keeps expanding.”

Shaw seems to suggest that these additional inquiries by the Department are capricious and designed to target this institution specifically.

But she’s got a good point about how Corinthian operates: “companies that live by the sword can die by the sword. For-profit companies rely on government-backed… student loans. Eighty percent of Corinthian’s revenues come from such loans. Without them, the for-profit sector in education would be small indeed….” Exactly.

Those schools don’t really make their own money at all. They’re not even making a lot directly because students decide it’s worth it and make financial decisions to take on their own debt. No, companies like Corinthian are entirely at the mercy of the federal government, because that’s is the source for much of the revenue these “private sector colleges and universities” make. They’re corporate welfare schools.

Making a private fortune using public funding isn’t necessarily a bad thing. The companies that have contracts to build our bridges, perform upkeep on our elementary schools, and pave our roads paid for by state and federal money are performing a useful service. Public money ensures that there’s a stable source of funding and the work gets done. Many landlords have also built large fortunes out of renting to Section 8 tenants, the poor who on their own wouldn’t be able to afford decent housing at all.

But that’s what large for-profit schools are really all about; they’re making their profit off of your taxpayer dollars. It makes sense for the federal government to demand some more information about how your money is spent.

Shaw wonders how “a federal bureaucracy… [has] the power to destroy a company without benefit of judge or jury? The government,” she says, “is fickle.”

Well, sure, but that’s because previous policy was to just shovel money to the for-profit schools in the hopes that it would work out.

That’s what happens when policymakers revise laws, sometimes the rules you were exploiting change and its time to figure out a new business model. Or just close up shop. [Image via]

Daniel Luzer is the news editor at Governing Magazine and former web editor of the Washington Monthly. Find him on Twitter: @Daniel_Luzer

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