For-profit's proposed sale to credit management firm worries consumer advocates

Critics of deal cite 'questionable tactics' in debt collection

The proposed $24 million sale of for-profit Corinthian Colleges' assets to a nonprofit credit management company has some consumer advocates worried.

Corinthian Colleges, under investigation for faking alumni data and misleading students, plans to sell 56 of its 107 campuses to Educational Credit Management Corporation (ECMC), a student loan guarantor that also runs a secondary business—fighting borrowers in court who try to file bankruptcy.

Rolling Jubilee: The $3.9 million plan to set student debtors free

Corinthian Colleges was valued at $4.2 billion in 2003, but the company's finances have crumbled because of falling enrollment numbers, lawsuits, publicity problems, and a 21-day federal aid payment freeze. For six months, the Department of Education (DOE) has worked to secure a buyer for the for-profit's online and traditional programs.

The deal is expected to close in January, although the DOE has yet to approve the final sale. ECMC will form Zenith Education Group and operate the U.S.'s largest for-profit, career-focused campuses, which enroll approximately 39,000 students. The separate unit means the campuses will run independently of the debt and bankruptcy sectors.

ECMC Chief Executive David Hawn says the company will be a positive force, lowering tuition by 20% at most campuses and starting a scholarship program offering "tens of millions of dollars."

"We really have a greater insight into what walking away with high debt and low job prospects does to the lives of so many young people around the country," he says.

Consumer advocates worried

A loan servicer is a dangerous buyer, warn some consumer advocates, because for-profit students often deal with debt collectors for years due to large loans and weak job training.

"The perceived conflict of interest really casts a pall on this whole transaction," says Rafael Pardo, a law professor at Emory University, who likened the deal to giving a fox full access to the hen house.

ECMC's approach to debt collection involves "dubious or questionable tactics," according to Rep. Steve Cohen (D-Tennessee). In May, six members of Congress wrote to Education Secretary Arne Duncan to protest the organization's tactics, which involved telling the mother of a student borrower that buying her dying husband a $12 McDonald's meal qualified as a luxury purchase.

Cohen says he and his colleagues will send Duncan a letter urging greater scrutiny of the deal.

Under the deal, the potentially-nonprofit campuses would under less pressure from gainful employment regulations, which apply to nearly all programs at for-profit institutions, but only non-degree programs at nonprofit institutions (Straftford/Fain, Inside Higher Ed, 11/21; Kitroeff/Otani, Bloomberg Businessweek, 11/20).

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