Private Equity Owned Subprime Schools Try To Preempt New Rules With Promise To Self-Regulate

As we’ve been documenting, the for-profit school industry has been waging a lobbying war in Washington, in an effort to block new Education Department regulations. These regulations (known as “gainful employment” regulations) would cut higher education programs off from federal dollars if too many of their students can’t find jobs and default on their student loans.

Today, an organization called the Coalition for Educational Success (CES) — which vigorously opposes the gainful employment regulations — announced its intention to “develop standards” for the industry, with the promise that these standards “will improve and ensure transparency, disclosure, training, [and] provide strong new protections for students.” “These Standards will serve as a model for all institutions of higher education,” CES said.

CES has called the proposed gainful employment rules “a job killer and a prime example of regulatory over-reach,” and these supposed standards are a pretty clear attempt to preempt the Education Department by arguing that the schools are already taking steps to clean up their own act. But who exactly is the CES? Why does it fear gainful employment rules so much?

CES is led by the Education Management Corporation, a company owned, in part, by Goldman Sachs Capital Partners. The other owners of Education Management Corp are a pair of private equity firms: Providence Equity Partners and Leeds Equity Partners.

Many of these subprime schools make more than 90 percent of their revenue from the federal government and have profit margins of as high as 30 percent. But their students account for a disproportionate amount of student loan defaults and many schools have been caught using misleading statistics and outright intimidation to recruit students.

According to its latest filings with the Securities and Exchange Commission, Education Management Corp. makes about 89.3 percent of its revenue from the government. But earlier this month, Goldman Sachs analysts downgraded Education Management Corp to “sell” because it “will be most exposed to gainful employment regulations, due to its end-market exposure coupled with low repayment rates.”

According to this analysis, if the company loses its access to federal dollars, it’s going to go into the tank. Blocking gainful employment rules from coming online would mean that the company could continue to count on the federal government to insulate it from losses (as student loan defaults cost the government, not the company itself, money).

If we learned anything from the financial crisis, it’s that allowing industries to self-regulate, particularly when they deal with financial products, leads to disastrous outcomes. Allowing for-profit schools to self-regulate would likely not end much better.

Campus Progress has more on CES’ lobbying activities. According to the Center for Responsive Politics, CES has already spent half a million dollars on lobbying this year, after spending $570,000 last year.