How Many Agencies Does It Take to Close a For Profit College?

For years students flocked to schools run by Corinthian Colleges (COCO), one of the largest for-profit education companies in the U.S. Attracted by late-night TV commercials and Internet ads for vocational certificates and online business degrees, they enrolled on the promise that the extra career training would give them a leg up in the job market. The marketing worked: At its peak, in 2003, the publicly traded company was worth more than $4 billion. About 72,000 students attend Corinthian’s three chains—Everest, Heald, and WyoTech.

Like other for-profit colleges, Corinthian, based in Santa Ana, Calif., has long fought allegations by state and federal authorities that it preyed on its students, saddling them with debt they wouldn’t be able to repay. For at least eight years, state attorneys general, Senate Democrats, and the Department of Education have been pressuring Corinthian to change its recruiting practices and improve the accuracy of its government disclosures.

Then, earlier this year, came a surprise: An Education Department inquiry revealed that Corinthian’s finances were in disastrous disarray. The company, which like other for-profits has seen a decline in enrollment since the end of the recession, had become almost entirely dependent on regular cash infusions from the government’s financial aid programs—$1.4 billion last year, or more than 80 percent of the company’s revenue—to keep the doors open at its 107 campuses. In July the government gave Corinthian until the end of the year to get out of the education business.

Usually, when a school closes, the Education Department tries to find other programs to accept the students and the credits they’ve earned. But the size of Corinthian’s student body means it’s hard if not impossible to find enough places at other for-profit or community colleges. That creates a problem for the government, which must forgive loans for students who don’t transfer to other institutions. In the case of a school as large as Corinthian, that provision could cost taxpayers millions of dollars.

Now the Education Department is actively trying to shore up Corinthian’s schools even as it shuts the company down. “They thought they were going to be sending a really strong message” by cracking down on Corinthian, says Trace Urdan, an analyst at Wells Fargo Securities (WFC). “They didn’t really understand that it may collapse.”

The government agreed to release $35 million to keep classes going. Corinthian spokesman Kent Jenkins says the plan “provides current students with the opportunity to complete their educational programs with minimal disruption.” When it was announced, the Education Department’s Mitchell noted that the plan would protect taxpayers’ investments by limiting the number of students who could request debt relief.

Corinthian hired Barclays (BCS) to help find new owners. That won’t be easy: Revenues have fallen across the for-profit college industry as federal scrutiny has increased and unemployment has declined. The government’s “unprecedented” action against Corinthian doesn’t help draw private money to the industry, says Wells Fargo’s Urdan. Potential investors and operators worry that other for-profit schools may be shuttered. “There is a contingent that says there is a secret list in the basement of the Department of Education, and they will be knocking these guys down one after another,” Urdan says.

More From Bloomberg Businessweek: