Debt Collection Expert to Buy College Chain That Excels at Student Debt

If there was one thing Corinthian Colleges excelled at in the last few years it was sending students into debt with questionable credentials that were almost certainly going to lead to default. So maybe it’s fitting that its new owners are a company whose revenue and resource base is built upon collecting defaulted student loans.

That’s what would happen under the sale announced today in which Corinthian Colleges would sell almost all of its non-California U.S. campuses to the Minnesota-based Educational Credit Management Corporation, or ECMC. The total purchase price would be $24 million, though three-quarters of that is going to either indemnify ECMC or back to the Department of Education.

It’s easy to confuse ECMC with the similarly named EDMC—the struggling publicly traded Education Management Corporation that operates the Art Institutes among other brands. But they are quite different. ECMC is not a college operator. It has no educational expertise (not that EDMC’s is great either given the spot it’s in). It’s a nonprofit vestigial organization from the days of the bank-based student loan system.

ECMC is what’s known as guaranty agency. These are a set of agencies that in the days of the bank-based loan system would pay claims to lenders when a federal student loan defaulted (they do not operate in the current Direct Loan Program). By law they had to be public or nonprofit entities. Once a guaranty agency takes over a defaulted loan it is in charge of collecting on the loan or trying to rehabilitate it—functions for which it is compensated handsomely. In fact, guaranty agencies get about 16 cents for every dollar they collect in defaulted student loans (plus charging collection costs) or rehabilitate by getting borrowers to make nine on-time payments in 10 months. For example, ECMC had $426 million in revenue in 2012, the most recent year for which Internal Revenue Service filings are available. Of that, 89 percent ($379 million) came from loan collection. It also owns Premiere Credit of North America, a student loan debt collection agency that has a contract with the Department of Education.

In addition to its role as a guaranty agency and debt collector, ECMC also provides a special function for the Department as its handler of the $2.9 billion in federal student loans that are involved in bankruptcy proceedings. In January of this year the New York Times published an article about ECMC’s overzealous pursuit of borrowers in bankruptcy that “wasted judicial resources.” This included things like accusing an older couple that shared an extra value meal at McDonald’s of spending too much money on dining out.

That should be shocking, but it’s indicative of the core business that ECMC knows and operates in—debt collection and the unpleasant things that come with it. It does not award college credentials. It has a pile of cash constructed over years from struggling borrowers and a lack of a future revenue source now that the bank-based system is gone. The two are a recipe for acquisition; regardless of how related they are to expertise.

To be fair, ECMC is trying to say all the right things about its new role. It’s promising a tuition reduction, new senior leadership, transparency, and a host of things that sound good. But it has no experience doing any of these things and will now have to do all of them on the fly while still trying to maintain enrollment.

In many ways it’s not surprising that ECMC would be the party that ends up solving the issue of what to do with Corinthian. After all, it’s been the Department’s go-to last resort in the past. When the guaranty agency in Connecticut failed, ECMC stepped in to take it over. It did the same thing in California after its guarantor Ed Fund, was shut down by the Department for trying to sell its loan guarantees. ECMC had provided similar roles in the past in Virginia and Oregon.

Now what was the guarantor of last resort is apparently becoming the educator of last resort, providing a way to limit the number of students who lose spots in educational programs that data repeatedly showed were not good values and left many people in bad shape. At least ECMC already knows what to do with them once they get there."

Author:

Ben Miller was the higher education research director at New America, where he provided research and analysis on policies related to postsecondary education. 

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