Santa Ana-based Corinthian Colleges Inc. and other for-profit school operators were in the spotlight again last week at a Senate committee hearing about federal financial aid to their students.
The hearing by the Senate Health, Education, Labor and Pensions Committee was the first in a series on for-profit school operators, which train students for jobs in healthcare, automotive repair, criminal justice and other areas.
A critic of the schools, hedge fund manager Steve Eisman, testified before the Senate committee.
Eisman, who runs Morgan Stanley’s FrontPoint Partners LLC of Greenwich, Conn. and gained fame shorting subprime mortgages, has described for-profit school operators as “subprime goes to college.”
Last week, Eisman called for-profit schools “as socially destructive” as the subprime mortgage industry.
A day before the hearings, the head of a trade group representing for-profit schools spoke in defense of the industry.
Harris Miller, head of the Washington, D.C.-based Career College Association, took aim at Eisman, calling him a short seller “constantly warning of economic doom and gloom.”
Miller called recently proposed federal rules for for-profit school operators “bad policy.”
Earlier this month, the Department of Education outlined rules that require for-profit school operators to provide students with graduation and job-placement rates and limit how the companies pay recruiters to bring in students.
The rules are set to take effect a year from now and would apply to more than 600 colleges and universities. They’re aimed squarely at for-profit school operators, including Corinthian and its rivals.
Competitors that fall under the federal rules include Phoenix-based Apollo Group Inc., Indiana’s ITT Educational Services Inc. and Career Education Corp. of Illinois.
The proposals are part of an effort to crack down on students who take on too much federal aid and run the risk of defaulting on loans.
But the proposals fell short of cutting off aid to for-profit school operations, something company watchers had feared.
A rule that would disqualify for-profit colleges from federal aid if their graduates spend more than 8% of their starting salaries repaying loans was delayed and could come by August, according to the Education Department.
Corinthian runs more than 100 campuses in the U.S. and Canada offering degrees in healthcare, criminal justice and other areas.
The company and others saw big growth during the recession but have come under fire for students who took on debt they couldn’t afford.
Corinthian’s shares have fallen sharply in recent weeks and now are down about 25% for the year after being up as much as 40% in early May. The company had a market value of about $910 million last week.
The company is dealing with an Education Department review that found one of its colleges made misrepresentations to students, breached its fiduciary duty and intentionally evaded a requirement that only 90% of funding come from federal student loans.
The company disputes the findings.
