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Downtown-based for-profit educator fights for survival

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Saturday, June 21, 2014, 9:00 p.m.
 

The illustration showed a college recruiter sporting a sharp suit and satisfied grin while he counted a stack of cash.

“Bling Bling,” he said.

Another two students enrolled meant more money for him, more money for his employer.

The cartoon, allegedly emailed by the director of admissions to the “sales force” of one of Education Management Corp.'s for-profit colleges in 2006, marked the days of runaway profits for a company.

But eight years later, the “bling, bling” has dwindled and the illustration is evidence in a federal lawsuit against the Downtown-based company over its recruitment practices. The lawsuit is one of the myriad challenges weighing on EDMC.

Since the Great Recession, enrollment in EDMC's for-profit colleges has declined, and so has its stock price. The company is facing tightened federal regulations, allegations of illegal recruiting practices and, along with colleges everywhere, is having to adapt to new financial realities within higher education.

For-profit education companies thrived in the 1990s and early 2000s as online education proliferated and regulators sought to open enrollment to as many students as possible, paying little attention to borrowing or graduation rates, said Kevin Kinser, a professor at the State University of New York in Albany.

The situation has changed. Dimming employment prospects during the recession forced students to reconsider spending $96,000 for a college degree that may not result in a job. Defaults on federal student loans have risen, and for-profits such as EDMC are taking the brunt of the blame.

“One of the biggest lessons is this idea that you can't separate enrollment from completion,” Kinser said. “It's not just access to education, it's the outcomes of that education that matters.”

For-profits accounted for two-thirds of the schools with the highest rates of student loan defaults in 2010, according to a report from The Education Trust.

EDMC schools were not on the trust's list of worst offenders, but EDMC is not immune from the problem.

To address rising loan defaults, federal regulators have proposed a new “gainful employment” rule applying to for-profit colleges. The rule would deny federal student aid to programs where too many students default on their loans or where their debt, relative to their earnings or discretionary income, is too high. If adopted, the regulation “would have a material adverse effect” on EDMC, according to documents filed with the Securities and Exchange Commission.

It has been another obstacle facing EDMC during a difficult time.

The company's stock has fallen 90 percent in the past year, currently trading at less than $2 per share. Profits have declined with lower enrollments. In the quarter that ended March 31, EDMC reported the number of new students fell 9.8 percent from the year before and net income declined $10.1 million, or 33 percent.

Also, for-profits face stiffer competition as traditional universities embrace online education, an area where for-profits excelled.

“The sleeping giant has been awoken,” said Alex Paris, an analyst at Barrington Research. “There's going to be a lot of competition from traditional (schools) and that's going to put a lot of pressure on price.”

EDMC officials say they will survive. The 23,000-employee company, with 2,000 in Pittsburgh, is cutting staff and consolidating programs even as it serves 125,000 students across 110 campuses. The company has frozen tuition at more than 50 Art Institute campuses through 2015 and expanded scholarship programs, which will exceed $120 million this year.

“It's a bit of a balancing act,” said EDMC spokesman Tyler Gronbach. “We're trying to provide a very affordable, high-touch solution for students at the same time that we're changing how we operate.”

Then there is the federal lawsuit. Two former employees have alleged that EDMC tied recruiter salaries to the number of students they enrolled, a violation of federal law.

Similar lawsuits have been brought against other for-profits. But the one against EDMC was joined by the Department of Justice and could cost EDMC hundreds of millions, even billions, of dollars.

Gronbach declined to discuss the lawsuit, saying only that “we continue to defend ourselves vigorously.”

The allegations have damaged EDMC's reputation. Still, the problems facing for-profit colleges are larger than bad publicity, experts said. Competition from traditional universities and tighter regulations aren't going away.

Pre-recession, for-profits' business model could survive by focusing on growing enrollments first, leaving it up to students to complete their degree. Schools didn't suffer the financial consequences when someone defaulted on a federal loan — taxpayers did.

That drew attention from the federal government.

“The threat to for-profits is that their business model was disconnected from their academic model,” Kinser said. “From a regulatory perspective, that is unsustainable. No government agency is going to allow that to continue without regulatory oversight.”

Besides freezing tuition and offering scholarships, EDMC has pared its costs by consolidating administrative functions in a building on Penn Avenue called “The Center.” It trimmed staff commensurate with the enrollment declines and consolidated programs.

The company disputes that its business model was disconnected from academics. The Art Institute of Pittsburgh has been educating students for 93 years, establishing a tradition of quality that continued once EDMC purchased it in 1970, said George Sebolt, president of the Art Institute of Pittsburgh.

“The college has made a substantial investment to make sure these students are properly trained,” Sebolt said.

Students interviewed at the Downtown campus said they were aware of the controversy surrounding EDMC, though none believed they were being bilked.

“You get what you give,” said Brandon Allen, a 28-year-old culinary arts student. “And, there's a lot of students that aren't giving anything, and so they're not going to get anything, except for a big bill when they're done.”

Chris Fleisher is a staff writer for Trib Total Media. He can be reached at 412-320-7854 or cfleisher@tribweb.com.

 

 
 


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