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EDMC: Party's off at for-profit juggernaut

| Tuesday, May 15, 2012, 7:35 p.m.
James Bulls, 19, of the North Side works on a recipe in the culinary arts program kitchen at the Art Institute of Pittsburgh, Downtown. The campus is among 50 nationwide that Education Management Corp. operates.
Sidney Davis | Tribune-Review
James Bulls, 19, of the North Side works on a recipe in the culinary arts program kitchen at the Art Institute of Pittsburgh, Downtown. The campus is among 50 nationwide that Education Management Corp. operates. Sidney Davis | Tribune-Review

Even in a city that prides itself on higher education, Pittsburgh's largest learning institute will let its golden anniversary pass Wednesday without a public celebration.

Founded in 1962, Downtown-based Education Management Corp. purchased The Art Institute of Pittsburgh eight years later. Today it has grown to include 135,000 students online and at more than 100 campuses in the United States and one in British Columbia, Canada.

But the educational company known by its acronym, EDMC, has drawn unwanted attention that includes ongoing federal and state lawsuits and investigations. A national accrediting agency has stepped up scrutiny at more than a dozen of the company's schools with low student-retention rates.

"It's really driven by a profit motive, rather than an education motive," said Andrew Stone, a Pittsburgh lawyer who sued the company on behalf of a former recruiter. "The whole business is really driven by how many people enroll, which in turn allows them to draw down more and more federal money."

EDMC administrators say the company's growth has been driven by unmet need, fulfilling a federal goal of training workers in fields as diverse as pharmacology, business, fashion design and culinary arts.

The for-profit company generated $229 million in net income last year for its owners, which include equity funds at Goldman Sachs, a major Wall Street investment firm. Much of that money comes from federal grants and government-backed student loans.

With enrollment in April down 9 percent overall from a year ago and off 16.6 percent online, the company expects to lose $316 million by the end of its fiscal year in June. CEO Todd Nelson said enrollment is "at or near a low-water mark" in a recent conference call with investors.

EDMC does not pay dividends to shareholders, instead using profits to expand and improve programs, said Anthony J. Guida Jr., senior vice president. The company's stock price varied during the past year from nearly $30 a share to less than $10 this week -- its lowest trading price in 18 months.

"If we're going to operate for long-term success, the only way to do that is to make sure our students succeed, then have a good experience and say something great so other students will go," Guida said. "That's how we try to build our reputation with the graduates we have."

Criticism of EDMC, the nation's second-largest for-profit educator behind Apollo Group, which owns the University of Phoenix, occurs amid increased pressure on the industry. Students at for-profit colleges make up 11 percent of the nation's 11 million full-time undergrads but account for 26 percent of borrowers and 43 percent of defaulters, according to the Department of Education.

The agency last year started requiring for-profit schools to post more information about student debt and job placement rates for their programs. The Education Department plans to release additional information by this summer, showing debt-to-earnings rates and student loan repayment rates.

"The revenues of these institutions are dependent on the number of students they enroll in their programs," the Education Department wrote when it issued the rules in the Federal Register. "They are not otherwise dependent on whether their students graduate, find jobs and ultimately repay their loans."

Through a review of public documents and more than two-dozen interviews, the Tribune-Review found:

• EDMC last year received $2.6 billion, or 74 percent of its revenue, from the Education Department's Title IV programs such as Pell Grants and government-backed Stafford Loans.

The company has warned that some of its schools rely so much on Title IV money that they could exceed a federal rule saying at least 10 percent of revenue must come from other sources. Some of its schools got up to 88 percent of their money from Title IV programs last year, the company says.

EDMC said it attracts many low-income and at-risk students who "tend to rely more on Title IV funding, regardless of which college they attend."

• Federal programs to train veterans and military personnel paid EDMC $129 million more. Those programs do not count toward the 90 percent limit on Title IV funds.

President Obama issued an executive order last month, requiring all schools to provide more upfront information to veterans and directing government agencies to fight deceptive marketing to them. Sen. Dick Durbin, D-Ill., has introduced legislation that would count money for veterans in the Title IV limit.

• In addition to paying $764,108 in salary and bonuses last year to John T. South III, the chancellor of its South University, EDMC paid $2.2 million to two companies he owns for leases on five buildings.

The chancellor owned South University before EDMC bought it in 2004, and the leases date to before the acquisition, the company said in a statement. The rents, it said, reflect fair market value.

• Student retention rates are so low at 13 EDMC schools that the Accrediting Council for Independent Colleges and Schools, a national accrediting agency, increased its monitoring.

"We have submitted plans about how we're going to improve retention," Guida said.

Separately, the American Psychological Association placed the doctor of psychology program at EDMC's Argosy University in San Francisco on probation. An association official declined to say why, adding that the school remains accredited and its status will be reviewed in fall 2013.

• Prosecutors from the federal government and 11 states sued to recover a portion of $11 billion in student aid that EDMC received, alleging the company fraudulently recruited students.

In a whistle-blower lawsuit taken over by the U.S. attorney for Western Pennsylvania, former EDMC employees say the company paid admissions officers based on the number of students they enrolled and offered incentives to recruiters that ranged from Starbucks gift cards to stays in Cancun, Mexico, and Las Vegas.

EDMC denies it did anything wrong, saying it complied with laws allowing for-profit schools to base recruiters' pay on student admissions, among other factors. When the rules changed, EDMC says it adapted.

"EDMC worked closely with outside experts in both human resources and education law to develop its compensation plan," the company told the Trib in a statement.

A federal judge on Friday dismissed part of the lawsuit, saying enrollment was only one of several factors used to determine a recruiter's pay, but allowed a claim to proceed that the policy was mere "window dressing."

• Apart from the lawsuit, prosecutors in New York, Kentucky, Florida and San Francisco opened investigations of EDMC's schools, the company reported.

The Education Department's inspector general is looking at the Art Institute of Pittsburgh and EDMC's South University for issues related to academic progress standards and state licensing of online programs. The inspector general's office declined to comment.

The company says it is complying with the investigations.

For-profit schools tend to enroll students who are more financially disadvantaged and who tend to take out more loans, said Brian Moran, general counsel for the Association of Private Sector Colleges and Universities, a Washington-based trade group. To remain viable, he said, schools need successful graduates.

"Many of the issues and challenges that EDMC is facing are very similar to other schools in this space," Moran said. "The proprietary sector has grown over the last decade and because of that growth it has received a great deal of scrutiny and attention."

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