ITT Educational Services, one of the largest operators of for-profit technical schools, ended operations at all of its ITT Technical Institutes on Tuesday, citing government action to curtail the company’s access to millions of dollars in federal loans and grants, a critical source of revenue.
The move to shut down the chain of career schools after 50 years arrives two weeks after the Education Department said ITT would no longer be allowed to enroll new students who rely on federal loans and grants, award raises, pay bonuses or make severance payments to its executives without government approval. The department’s unprecedented move sent shares of the publicly traded company tumbling to an all-time low and raised questions about the future of the company.
“With what we believe is a complete disregard by the U.S. Department of Education for due process to the company, hundreds of thousands of current students and alumni and more than 8,000 employees will be negatively affected,” ITT said in a company statement announcing the shutdown. “We reached this decision only after having exhausted the exploration of alternatives, including transfer of the schools to a non-profit or public institution.”
As of Tuesday, the company said it has eliminated the vast majority of the positions held by its more than 8,000 employees. The remaining staff members will stay onboard to help the roughly 40,000 students at ITT’s 137 campuses decide what to do next.
Students can try to transfer their credits to other institutions to complete their education or start over. Transferring credits and completing a degree at another institution, though, will make current ITT students ineligible for federal student loan forgiveness under what’s known as a closed-school discharge.
The shutdown of ITT campuses puts hundreds of millions of dollars in federal financial aid on the line because the government is obligated to forgive the federal loans of students affected by the closure. ITT reported almost $850 million in total revenue in 2015, roughly $580 million of which was sourced from federal aid, according to the department.
When the department announced the round of restrictions, Education Secretary John B. King Jr. said that “looking at all of the risk factors, it’s clear that we need increased financial protection and that it simply would not be responsible or in the best interest of students to allow ITT to continue enrolling new students who rely on federal aid funds.”
Financial analysts said the deathblow to ITT came in the form of a letter of credit. Education Department officials demanded that the company provide a letter of credit from a bank assuring the availability of as much as $247 million, up from the $124 million letter of credit ITT already had on file. The letter is meant to protect students and taxpayers if the school is unable to cover federal student-aid liabilities.
Officials at ITT said that having to set aside 40 percent of the money it received in federal financial aid and the additional restrictions “forced us to conclude that we can no longer continue to operate our ITT Tech campuses and provide our students with the quality education they expect and deserve.”
The company blamed the government for disrupting “the lives of thousands of hardworking ITT Tech employees and their families.” ITT said its schools have helped “hundreds of thousands of non-traditional and underserved students improve their lives through career-focused technical education.”
State and federal authorities, however, disagree. ITT has spent much of the past two years clouded by allegations of fraud, deceptive marketing and steering students into predatory loans. The company is being investigated by more than a dozen state attorneys general and two federal agencies. Those cases led the for-profit chain’s accreditor, the Accrediting Council for Independent Colleges and Schools, to ask ITT in April to show why it is worthy of accreditation.
The accreditation council, the gatekeeper between colleges and billions of dollars in federal financial aid, said the string of state and federal investigations, lawsuits and regulatory actions against the company call into question ITT’s integrity, financial viability and ability to serve students. In a regulatory filing in late August, ITT said the council requested more information addressing various allegations ahead of an accreditation meeting, to be held in December.
Department officials took action out of concerns raised by the accreditation council. The threat of ITT’s losing accreditation, which would result in tens of thousands of students seeking loan forgiveness, led the department three months ago to request the company set aside more money to cover losses if it were to collapse.
“We have also always worked tirelessly to ensure compliance with all applicable laws and regulations and to uphold our ethic of continuous improvement,” ITT officials said Tuesday. “When we have received inquiries from regulators, we have always been responsive and cooperative.”
Problems between ITT and the department have been building. The agency placed additional restrictions on the company’s use of federal grants and loans in October, after ITT failed to account for millions of dollars in aid that was disbursed to students in the past five years. The company landed on the department’s watch list, known as “heightened cash monitoring,” a year ago for missing the deadline for filing financial statements.
The department is not the only federal agency to sound alarms about ITT’s behavior. In May, the Securities and Exchange Commission filed civil fraud charges against the company, chief executive Kevin Modany and chief financial officer Daniel Fitzpatrick for allegedly making false and misleading statements about the failure of two in-house student-loan programs. Rather than disclose the tens of millions of dollars in impending losses to investors, the SEC said the company made secret payments on delinquent accounts to delay defaults. Executives assured investors in conference calls that the programs were performing well, while ITT’s obligations to pay out on soured loans began to balloon.
The loan programs in that case are also at the heart of a Consumer Financial Protection Bureau lawsuit that was filed in 2014. The consumer watchdog has accused the company of providing zero-interest loans to students but failing to tell them that they would be kicked out of school if they didn’t repay in a year. When students could not pay up, ITT allegedly forced them to take out high-interest loans to repay the first ones, the CFPB said.
Both of those cases are still wending their way through the courts, with the SEC trial set to get underway in October 2017.
ITT has maintained that despite the mounting cases against the company the department’s action to curtail its access to taxpayer funds was “inappropriate and unconstitutional.”
“We were not provided with a hearing or an appeal,” ITT said Tuesday. “Alternatives that we strongly believe would have better served students, employees, and taxpayers were rejected. The damage done to our students and employees, as well as to our shareholders and the American taxpayers, is irrevocable.”
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