Sunday, March 10, 2013

Capital Punishment for Educational Conglomerates

Forbes reported in January that a major for-profit educational conglomerate called ATI Enterprises was quietly liquidating itself rather than commit sepukku in bankruptcy court:
ATI, based in Texas, started as a small operation 50 years ago that eventually turned into a major money maker for the entrepreneurs that grew it to as many as 23 schools across five states, including seven in Texas. Despite the money and brainpower put into the school, in November the company decided to close all its schools under the ATI brand following a devastating two-year litany of bad press and regulatory scrutiny.

Why not declare Chapter 11 reorganization? There's a little problem of eligibility for federal student loans under 20 USC 1094:

1094(a) Required for programs of assistance; contents

The agreement shall condition the initial and continuing eligibility of an institution to participate in a program upon compliance with the following requirements:


(3) The institution will establish and maintain such administrative and fiscal procedures and records as may be necessary to ensure proper and efficient administration of funds received from the Secretary or from students

(4) The institution will comply with the provisions of subsection (c) of this section and the regulations prescribed under that subsection, relating to fiscal eligibility.

So the lenders are out of luck, because if ATI declares bankruptcy like a normal business, its major source of funding its sales dries up. Of course, if the government notices that ATI's liquidating assets, that would likely incur the same capital punishment, unless it has sufficient internal controls to wall off the unit's it's still operating.

So, why all the scrutiny that brought down ATI's other units? A 2012 Senate report had this to say:

A 2-year investigation by the Senate Committee on Health, Education, Labor, and Pensions demonstrated that Federal taxpayers are investing billions of dollars a year, $32 billion in the most recent year, in companies that operate for-profit colleges. Yet, more than half of the students who enrolled in in [sic] those colleges in 2008-9 left without a degree or diploma within a median of 4 months.

Okay, but you can't earn a real diploma in 4 months full time. How much of that $32 billion was for other half of the students - the ones who didn't wash out in the first 120 days? If $30 billion is for the ones who worked their way through it, and $2 billion for the washouts, then it might be money well spent. On the other hand, if it's $18B and $14B, then clearly the government needs to recalibrate the rules to pay for performance. Considering that the default rate from all for-profit students (see appendix 16-17 of the Senate report) is around 17-19%, that suggests that about $6B out of the $32B is at risk.

I haven't finished perusing the appendixes to see what the equivalent numbers are for public institutions. I would expect that there are subdivisions of most public institutions that have a worse record for student payback, but I'm sure public institutions hide that by reporting the university as a whole or by college, not by degree program.

Hopefully, Congress will force a little more accountability on both types of institution.

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