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    26 Aug 2016

    ITT Tech banned from enrolling new students who rely on federal loans

    The federal government has issued what analysts are calling a death sentence for ITT Technical Institute, while offering assurances that the for-profit college chain's students will be taken care of.
    The Education Department on Thursday handed down a series of devastating restrictions that could put Carmel-based ITT Educational Services Inc. out of business within weeks. The government banned ITT from enrolling new students who depend on federal aid, the source of most of the company's revenue, and required it to warn current students that its accreditation is in jeopardy.
    Even more onerous, though, is a requirement that ITT must increase its reserves from $94.4 million to $247.3 million, or 40 percent of federal student aid the company received in 2015. ITT has been ordered to provide a letter of credit for the beefed-up surety, which is meant to support students in case the company closes, within 30 days.
    The Education Department's announcement sent shares of ITT plummeting 35 percent to $1.40. The actions come amid a federal crackdown on for-profit colleges that already has caused Corinthian Colleges to close last year and Brown Mackie College to close all but four locations.
    ITT offers on-campus and online classes in business, nursing and health sciences, electronics and information technology. It has 137 campuses across 39 states. ITT last year generated $850 million in revenue, about $580 million of which came from federal student loans.
    Education Department Secretary John B. King Jr. called the moves against ITT necessary to protect students and taxpayers.
    “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 student aid funds," King said.
    ITT did not respond to requests for comment.
    The company's chances for survival have been considered slim for several months as the Obama administration targeted for-profit colleges. At least 19 state attorneys general are investigating ITT over its marketing, recruiting and job placement numbers. ITT also is facing action from the Securities and Exchange Commission and Consumer Financial Protection Bureau.
    Critics argue ITT is financially unstable after years of offering controversial third-party loans that performed poorly as students struggled to find jobs. Still, the extent of the Obama administration's punishment surprised even insiders who have been following the company. A Credit Suisse note issued Thursday called it "an action with very little precedent."
    King in a conference call with reporters said the government will ensure existing students “don’t shoulder the burden of the school’s bad behavior." Existing ITT students can continue to apply for federal loans under the Title IV program. ITT had more than 40,000 students as of June 30.
    If ITT closes before students complete their programs, those students "will likely be eligible to discharge federal loans," Under Secretary Ted Mitchell said. Students who enrolled with ITT but have not yet started class will not be able to use federal student loans, according to a blog post on the Education Department's website.
    King deflected a question about whether his department intends to put ITT out of business.
    "We're taking the steps necessary here to protect taxpayers and students," King said. "Institutions do sometimes close, and the department has in place procedures for managing school closure."
    Alexander Paris, an analyst for Barrington Research Associates Inc. who follows ITT, called King's remarks disingenuous. Paris noted that ITT in July reported having $78 million on hand, making it extremely unlikely that the company can borrow enough money to meet the Education Department's new threshold for reserves.
    "Not allowing any new students under Title IV in and of itself could be a death sentence," Paris said. "You have to always be bringing in new students because you have those who drop out for one reason or another and those who graduate.
    "The thing that is certain to bankrupt this company is this increased demand for 40 percent surety. Taking the dollar amount from $94 million to $250 million within 30 days, I don't see how it's remotely possible they could come up with that much money in that short of time."
    King declined to say whether he thought ITT could meet the Education Department's demand, saying, "our action is based on what we think is necessary to protect taxpayers and students." The Education Department has banned ITT from offering raises or severance packages to company executives without approval, which suggests the government expects ITT to close in the near future.
    Paris called the government's actions an overreach.
    "Just speaking as a private citizen, it's just shocking what the federal government can do to a private-sector, taxpaying corporate citizen without giving them due process," Paris said. "This is a load of allegations from various different agencies. It's a load of lawsuits by state's attorneys general. But nothing's been proven. Obviously, these actions will have the effect, in my opinion, of putting the company out of business without allowing for due process."
    ITT's enrollment was rapidly declining even before the latest restrictions. In the three-month period ending June 30, ITT enrolled 9,846 new students, an 18.3 percent decline from a year earlier. ITT in July said it expected new student enrollment to fall 45 to 60 percent in the second half of the year. Now, virtually all enrollment is likely to cease.
    Ben Miller, the senior director for postsecondary education at the Center for American Progress, said the Education Department's timing likely saved many new students from starting classes at colleges that eventually would close anyway.
    "It had been clear for some time that ITT was not financially viable over the long term, and something had to be done to acknowledge that letting the school continue to operate was a serious financial risk to everyone involved," Miller said. "I think doing it now, before the new semester starts, is probably the best timing you could have gone for. No matter what, there's going to be some disruption for some people."

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