Restructuring Pros Look To Congress As For-Profit Schools Battle Government Crackdown

Career College Central Summary:

  • America’s recent college graduates are swimming in student loan debt, but members of the corporate restructuring community are concerned about another aspect of higher education finance – specifically, how to address the growing number of cash-strapped for-profit schools.
  • The sector has struggled thanks to increased regulation and a drop in enrollment following the surge of 2008, when the economic crisis sent droves of adults back to school.
  • FCC Holdings, for example, found itself under pressure to access funding after defaulting on a loan payment and watching its enrollment numbers sink. Education Management Corp. has endured several quarters of declining earnings and a low rating from Standard & Poor’s and now plans to delist its stock. For its part, Corinthian Colleges was put on watch by the Department of Education (DOE) following a breach of a credit agreement and was recently sued by the Consumer Financial Protection Bureau (CFPB) over allegedly misleading recruitment tactics.
  • While debt-laden companies often turn to Chapter 11, higher education institutes bear more risk in filing for bankruptcy than companies in other industries. Doing so threatens their eligibility for Title IV federal student aid programs, a critical source of cash.
  • Restructuring attorneys say Congress should consider easing this restriction, among others.
  • “We believe the current statutes in place really cause friction,” said Joseph Smolinsky, a partner at Weil Gotshal & Manges.
  • Postsecondary schools that enter bankruptcy still have the option of selling their assets, but if financially strained colleges don’t want to lose their Title IV funding and be forced into a sale or wind-down process, they can also restructure their debt outside of a courtroom.
  • The Obama administration, on the other hand, is more concerned about reining in what it sees as misleading recruitment and enrollment tactics employed by for-profit colleges. These companies are often perceived as predatory and have been targeted by lawsuits accusing them of duping unsuspecting students into taking on unmanageable debt loads for a degree that does not offer them lucrative job opportunities.
  • In fact, the administration is hoping to add regulations. In March the DOE declared its support for an updated “gainful employment” rule, which would make federal aid contingent upon meeting certain standards, such as ensuring that students graduate with annual loan payments that amount to less than 20 percent of their discretionary earnings or 8 percent of their total earnings.
  • Opponents like the Association of Private Sector Colleges and Universities say the new requirement would force schools to cut programs and curtail enrollment, noting that many of its students are minorities, women and low-income.

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