Department Of Education Says It Is Not Responsible For Closing For-Profit College

The politics of regulating for-profit colleges.

In an briefing call yesterday, a senior Department of Education official appeared to distance the agency from claims that it had intentionally caused the shutdown of a major for-profit college.

After Corinthian Colleges announced in June that a financial penalty imposed by the Department of Education had placed it in danger of immediate collapse, observers and analysts were quick to credit the government with intentionally moving to shut down one of the sector's most troubled colleges. The government "knew exactly what it was doing" when it cut off the cash-strapped company's access to loan money, one analyst claimed; a Bloomberg story said the penalty showed the department had at last "found a way" to "rein in for-profit colleges."

But on yesterday's call, which reporters participated in on the condition they not name the officials speaking, a senior education official said the department did not intend to shut down Corinthian and did not know what would happen when it imposed a 21-day delay on Corinthian's access to federal loan money. "We did not know the cash situation," said the official, who would not be identified by name. "We had no foreknowledge that this would be the reaction."

The Department of Education had to make clear it had not intentionally shut down the school in part because of its fraught history with attempts to regulate the for-profit industry, said Ben Miller, a senior policy analyst with the New America Foundation. When the department tried in 2011 to impose regulations that would shut down programs at poor-performing for-profit schools, it was accused of colluding with Wall Street short-sellers that benefited from sharp drops in stocks at for-profit colleges. An audit later cleared the department of wrongdoing, although some Republicans called for a further SEC probe, and a former top official with the department is still under federal investigation for illegally sharing information with an advocacy group.

Miller said the history of allegations relating to short-sellers could also explain why the department appeared to be out of touch with Wall Street, where analysts said they were well aware of Corinthian's precarious financial situation. "If the department starts paying attention to stock prices and analysts reports, open itself up to criticism of being in the pockets of short sellers," said Miller.

The department was not able to respond to an after-hours request for comment.

On the briefing call, the official admitted the disclosure that the department was unaware of Corinthian's dire fiscal situation also calls into question the department's financial oversight measures for colleges. The official said the government's financial monitoring system "didn't work in the case of Corinthian" and that the department recognized the need to look through their financial monitoring system and "see what we missed."

The Department of Education claims it closely monitors the financial situation of for-profit colleges, requiring them to achieve "financial responsibility" scores within a given margin in order to receive federal loan money, which makes up most of the colleges' revenue. In May, Corinthian had warned on its earnings call that its responsibility score might slip below the department's requirements.

The official said the department had expected Corinthian to react no differently than any other school that was placed under "heightened cash monitoring," the government's term for the penalty placed on Corinthian. More than 400 other schools are currently under heightened cash monitoring, the official said.

But Corinthian's financial situation was different than almost any other school: It was already teetering on the edge of default and had a tiny amount of cash on hand, according to publicly available filings. In a May earnings report, Corinthian said it had breached the terms of its bank agreements and was in danger of defaulting on its credit lines with lenders. That report also showed that the cash the company had on hand had plummeted precipitously, from a healthy $209 million in 2010 to just $28 million in the last quarter.

Miller said the department was facing a "no-win" situation in the wake of the Corinthian shutdown — it would open itself up to heavy criticism if it admitted it intentionally closed the school. The Wall Street Journal on Sunday published an editorial slamming the department for its actions with Corinthian, saying it was an "extraordinary violation of due process … akin to a judge issuing the death penalty while a case is in discovery."