Why Is Corinthian Colleges in Crisis?

Corinthian Colleges  has reached a memorandum of understanding with the Department of Education (DOE) that ensures the continued operation of its schools. While Corinthian will get $16 million in federal student aid funds it has earned through enrollment, the school will seek buyers for many of its underperforming campuses. Students at affected campuses will go through a "teach-out" process. During the "teach-out," new students cannot enroll, but current students can complete their instructional programs or transfer to another institution.

Earlier in the month, Corinthian announced that federal funding restrictions threatened the for-profit school's ongoing operations. Corinthian receives an estimated $1.4 billion in federal financial aid each year, which makes up 80% of its annual revenue. The DOE's restrictions would have delayed Corinthian's access to the funds for an additional 21 days. According to Corinthian, the funds usually become available within 24 to 72 hours of their request.

How did Corinthian get into trouble with the DOE? Is the school in trouble with other regulators? And what does Corinthian's crisis mean for its for-profit educational competitors ITT Educational Services ; Strayer Education ; and DeVry Education Group


Regulators give Corinthian Colleges a closer look
Corinthian's dropout rates, student loan default rates, and marketing about job-placement rates have drawn the scrutiny of the DOE and other regulators.

The DOE noted that Corinthian has failed to cooperate with the federal probe into allegations that it altered grades and misled the public on job-placement rates. Federal officials have sent the school five letters since the start of the year requesting data and other documents, yet Corinthian has failed to adequately respond to any of the letters.

Corinthian's regulatory troubles are not limited to the DOE. In its April quarterly earnings release, Corinthian stated that the Massachusetts Attorney General had filed a complaint against the company that month. The complaint alleges that Corinthian pushed students into high-interest subprime loans to fund their educations and misrepresented job-placement rates.

In January, an investigation by attorney generals from multiple states (led by Iowa's attorney general) began. The information sought by this multi-state investigation includes organizational information; tuition, loan, and scholarship information; lead generation activities; enrollment qualifications for students; accreditation; completion and placement statistics; graduate certification and licensing results; and student lending activities. As of April, a total of 16 states were involved in this investigation.

Due in part to its regulatory challenges, Corinthian was already facing declining financials. Its April quarterly revenue was down 11.7% to $349.8 million, compared to $395.9 million for the same period last year. Enrollment fell 13.7% to 74,498 compared to last year's enrollment of 86,297. New enrollment dropped 13.1% to 22,853 from 26,288 last year.

Are the other schools passing or failing?
ITT is facing its own regulatory challenges. In February, the Consumer Financial Protection Bureau, or CFPB, sued ITT, alleging that the school exploited its students and pushed them into high-cost private student loans that were very likely to end in default. This is the first CFPB lawsuit against a for-profit college. ITT's May quarterly earnings release acknowledged that the school was working with the Office of the Chief Accountant of the SEC in connection with the company's accounting for its PEAKS Private Student Loans. This delayed ITT's financial reporting. However, operational data was available for the quarter. Student enrollment fell 7.4% to 40,379 for the period, compared to an enrollment of 43,627 for the same period last year. New enrollment also dropped 3.8% to 16,746 from 17,412 a year ago.

Strayer did not report any investigations or regulatory pressures. However, it still faces some financial challenges. In its May earnings release, Strayer reported that its first-quarter revenue dropped 15% to $116.5 million from $137.5 million for the same period last year. This resulted from lower enrollment. Total enrollment fell 10% to 41,327 from 46,130 last year. There was some encouraging news: Strayer's new enrollment grew 1%.

Like Strayer, DeVry is not under any current investigation or any regulatory pressures. It is in even better shape than Strayer. In its April earnings release, DeVry reported a slight drop in quarterly revenue -- down 1.5% to $496.1 million from $503.8 million last year. Its enrollment was up by 1.7% to 121,643 students compared to 119,523 students last year. Much of the new student enrollment came from its nursing schools and  DeVry Brasil. The nursing schools could add four campuses by the end of fiscal 2015. DeVry Brasil added nine new degree programs in the past quarter. DeVry also engaged in high-profile marketing, as it was the official education partner for Team USA at the Sochi 2014 Winter Olympics. 16 of DeVry's student athletes competed in either the 2014 Olympic or Paralympic Olympic Winter Games.

Grading the schools
Corinthian's outlook is bleak. It faces challenges on multiple regulatory fronts with other related challenges while it conducts ongoing educational services. ITT is also facing its own regulatory pressures and faces dropping enrollment. While it's not facing any government action, Strayer is struggling but has shown some signs of growth in its latest enrollment figures.

While its revenue remains essentially flat, DeVry has shown enrollment growth and has engaged in a high-profile marketing push with its Team USA partnership at the 2014 Sochi Olympics. Of the four for-profit schools, DeVry is the one that makes the grade.

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The article Why Is Corinthian Colleges in Crisis? originally appeared on Fool.com.

Johnny Chen has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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