Leading Subprime School Dumps Its Loan Program Due To ‘Credit Risk,’ Wants Taxpayers To Shoulder Risk Instead

Yesterday, I explained how a coalition of for-profit colleges — led by the private equity owned Education Management Corporation (which runs a handful of for-profit schools) — is trying to preempt new Education Department regulations by promising to develop standards and self-regulate. For-profit colleges have launched a lobbying war in Washington to block these regulations, which would prevent higher education programs from collecting federal dollars if too many of their students can’t find jobs and default on their student loans.

These subprime schools depend on the federal government for up to 90 percent of their revenue (89.3 percent in Education Management Corps.’ case), through the various avenues of federal aid their students use. But the students at these schools often can’t find good jobs and the federal government shoulders the loss when they default. Nearly one-quarter of students at for-profit schools default on their loans within three years.

And Education Management Corp. knows that these loans are risky and end up in a significant number of defaults. In fact, the company used to run an in-house loan program for its students, and in its December 2010 filing with the Securities and Exchange Commission, the company explained how that in-house program was a huge credit-risk:

The Education Finance Loan program adversely impacts our liquidity and exposes us to greater credit risk because we own long-term loans to our students. This financing program provides for payments to us by our students over a term as long as 20 years, which could have a material adverse effect on our cash flows from operations. In addition, we have the risk of collection with respect to these loans, which has resulted in an increase to our bad debt expense as a percentage of net revenues compared to prior fiscal years.

According to the Pittsburgh Post-Gazette, “In June 2010, EDMC held $85 million in loans but estimated that it would lose 41.2 percent of its investment to defaults.” Education Management Corp. sold its in-house loan program off on April 14.


But at the same time that it’s dumping its own loan program because not enough students can pay back their loans, the company is lobbying in D.C. to continue having the federal government hold onto risky loans. Instead of cleaning up its product and ensuring that students have some avenue to repay, the company is hoping to insulate itself from the risk.

Unless these programs can prove that they are providing an education that doesn’t leave their students crippled with debt and with bleak job prospects, there’s little justification for having them continue to leech off of the taxpayer for close to all of their revenue. Incidentally, the CEO of Education Management Corp was paid nearly $4 million in total compensation in 2010 (inclusive of a performance bonus).

For more background on subprime schools, read our report, “For-profits, not students.”