THE BLOG
09/24/2012 01:55 pm ET | Updated Nov 24, 2012

EDMC Professors and Students Speak: How Lobbyists and Goldman Sachs Ruined For-Profit Education

Professor Lorna Hernandez is, as of last Thursday, free of the for-profit Art Institutes and her faculty number there, 13124. Photo illustration: Lorna Hernandez.

Lorna Hernandez taught graphic design and animation for eighteen years at a for-profit college, The Art Institute of Fort Lauderdale, until she quit, last Thursday.

Unlike some of her faculty colleagues, Hernandez, chair of the school's animation department, was not laid off in last month's major downsizing by Pittsburgh-based Education Management Corp. (EDMC), the publicly-traded corporation that owns her school. But Hernandez says she "saw the writing on the wall": She believed more firings were ahead, and the school's quality standards, in her view, were rapidly declining.

For the past couple of years I've been puzzled by the Art Institutes.

On the one hand, there is significant evidence that EDMC, which is 41 percent owned by the Wall Street investment bank Goldman Sachs, has engaged in the kind of predatory practices of the worst for-profit colleges -- deceptive and coercive recruiting, exorbitant prices, high dropout and loan default rates. The  U.S. Justice Department and half a dozen states have sued EDMC  -- the second largest for-profit college company after the University of Phoenix / Apollo Group -- for fraud, alleging the company paid its recruiters based on the number of students signed up, in violation of federal rules. (A federal judge has dismissed some claims while allowing part of the case to go forward; EDMC CEO Edward West told an investor conference last week that the company complied with the law and is confident it will prevail.)  The Attorneys General of Florida and New York are investigating EDMC schools for alleged misrepresentations to students and state authorities about matters including costs, financial aid, job placement rates, and accreditation. Kentucky's Attorney General is suing the company over alleged recruiting abuses.

As revelations about for-profit college abuses have increased, EDMC has seen its stock plunge faster than most of its competitors; a stock that traded as high as $43 in 2006, and $28 at the end of 2011, plummeted to $2.84 this summer. Student enrollments are also down significantly.

And last month, the company took steps to lay off about 800 employees nationwide. Which propelled Art Institute students from across the country to join a Change.org petition, "EDMC / Goldman-Sachs: End the control by the Corporate Overlords and SAVE OUR EDUCATION!" And which convinced Lorna Hernandez, who had witnessed the steady decline of her school, to quit.

But for Hernandez, for many years the Art Institute of Fort Lauderdale was a great place to teach and learn. "it was glorious," she told me.  "And I was proud."

And that's the other side of the EDMC story. I have known Art Institutes faculty who are outstanding teachers and practitioners. I visited one school a few years ago and saw a serious, dedicated faculty in action. I know that many students of these teachers have obtained great jobs in visual arts, television and film, and the music industry. When I ran the organization Campus Progress, we strongly supported a remarkable young cartoonist named Matt Bors, who earlier this year was presented at the Library of Congress with the Herblock Prize for excellence in editorial cartooning and was the runner-up for the Pulitzer Prize.  Matt is a graduate of the Art Institute of Pittsburgh.

So is the Art Institutes a scam school or a real school? After some investigation, I think the answer is this: The Art Institutes was a for-profit college that often worked, that genuinely helped many students to train for successful careers. But then, mostly during the George W. Bush Administration, the for-profit college industry aggressively lobbied Washington to eliminate any kind of accountability for schools receiving federal tax dollars. In 2002, the Bush Administration gutted enforcement of rules to prevent abusive recruiting practices. In 2006, Congress, ratifying the wishes of for-profit college lobbyists and their allies in the Bush Administration, allowed colleges that provide most their instruction online to qualify for federal student aid.

Those changes, and an overall lack of standards, skewed the incentives for for-profit college companies. A race to the bottom -- a race to maximize profits by short-changing students and taxpayers -- ensued.  It propelled a decade of waste, fraud, and abuse with taxpayer dollars by this industry, which now hauls in about $32 billion a year in federal aid.

EDMC and the Art Institutes took a huge infusion of Wall Street cash and joined in, and in the process have trashed their own institution.  Lorna Hernandez says the Art Institute of Fort Lauderdale was "wonderful" when she started in 1994, until, a couple years later, EDMC become a publicly-traded company. It got much worse, she says, after EDMC sold itself to a group of private equity investors, with Goldman, for $3.4 billion in 2006.  And today it gets worse every month.

Faculty, staff, and students who have lived through this decline have paid the price. Now, they are speaking out.

Jacquelyn Muller, EDMC's Vice President for Communications / PR, responded to one of my multiple phone and email messages last week and agreed to talk. I emailed her specifics of allegations made by EDMC faculty and students, but she never got back to me with comments on behalf of her company.

A giant taxpayer-funded company

EDMC operates 109 campuses spread across 32 states, along with an online division, and had over 151,200 enrolled students as of October 2011. About 53 percent are at the 51 campuses of the Art Institutes, which offers associate's, bachelor's, and master's programs in fields including graphic design, media arts and animation, web development, film and video production, culinary arts, fashion, and interior design. EDMC also operates: Argosy University, which offers doctoral, master's, and bachelor's programs in behavioral sciences, health sciences, business, and education; Brown Mackie Colleges, which provides associate's and non-degree programs to train for entry-level jobs in several fields; South University, which offers a range of degree programs; and Western State University College of Law.

EDMC reported revenues of $2.76 billion for fiscal year 2012. Most of that money comes from you and me.  Senator Tom Harkin's Health Education Labor and Pensions (HELP) Committee calculates that 77.4 percent of of EDMC's 2010 revenue came from U.S. Department of Education student financial aid.  If you add in military and veterans aid money, then 80 percent of EDMC revenue comes from taxpayer money.

The impact of Wall Street money

EDMC was founded in 1962 and began offering professional development programs in Pennsylvania.  In 1970, the company acquired the Art Institute of Pittsburgh, which had been in operation since 1921.

Robert B. Knutson joined EDMC in 1969 and became president in 1971.  An Art Institutes professor recalls once meeting Knutson at an EDMC event.  The professor described Knutson as serious, smart, a good guy, committed to education. Lorna Hernandez, the Fort Lauderdale professor, says Knutson was "a wonderful man who actually cared." Stephen Burd of Higher Ed Watch has written, "Knutson built the company deliberately, with a steady focus on its long-term success, rather than just on its short-term profits."

But Knutson presided over repeated acquisitions of other schools that made the company bigger and bigger. Growth ultimately led to a public stock offering and, in 2006, the takeover of the company by Goldman Sachs and its private equity partners.

Robert Knutson retired as EDMC's chairman the same year as the Goldman buyout. Promoted to chairman was John R. McKernan, Jr., who had been hired as EDMC's CEO in 2003.  (McKernan, a Republican former Governor of Maine, is married to Senator Olympia Snowe (R-Maine).)  McKernan was replaced as CEO in early 2007 by Todd S. Nelson, who had previously been CEO of the nation's biggest for-profit college company, Apollo Group, which owns the University of Phoenix. Nelson had led Phoenix to dramatic growth -- tripling revenues between 2001 and 2006, to $2.4 billion. But he departed in a hurry in 2006 after Apollo paid $9.8 million to settle a U.S. Department of Education complaint that the company had engaged in systematic recruiting violations.

The Goldman Sachs deal had created enormous pressure to make money fast.  EDMC's former chief financial officer, who retired soon after the buyout, told Senator Harkin's staff in 2010: "You take on that amount of private-equity debt, you need to earn high rates of return for these investors, I was worried that the quality of the experience for employees and students was going to deteriorate."

It sure did. In a major investigative piece last year in the Huffington Post, Chris Kirkham described how EDMC admissions and recruiting changed once Goldman bought its stake:

After the deal closed and Goldman became a partner, employees soon noticed a drastic shift in culture. Longtime admissions managers were replaced, ushering in an era in which recruiters were endlessly hounded by supervisors about hitting weekly enrollment targets. The admissions staff nearly tripled, requiring expanded floor space to accommodate a sales force of more than 2,600 across the country.

Management handed down revamped telemarketing scripts designed to prey on poor and uneducated consumers, honing in on their past mistakes in life as a ploy to convince them that college would solve all their problems....

Under Nelson's new leadership, enrollment and profits at EDMC skyrocketed further. The number of online recruits in particular grew at an astronomical rate, increasing fivefold between 2006 and 2009, after deregulation allowed the company's classrooms to become completely virtual....



Employees recounted a distinct culture shift once the company went private under Goldman Sachs and the other private equity investors, as day-to-day operations warped from a commitment to students and their success into an environment laser-focused on hitting mandated enrollment targets. New recruits were viewed simply as a conduit for federal student assistance dollars, the employees said, and pressure mounted from management to enroll anyone at any cost.

In search of more cash, EDMC became a public company once again in 2009, raising $330 million in a public stock offering.  Private, then public, private again, public again (and now facing speculation that it could revert a third time to private ownership), EDMC's downward spiral, in terms of treatment of students, has accelerated. According to the Justice Department's August 2011 complaint in its suit against the company, EDMC "has created a 'boiler room' style sales culture and has made recruiting and enrolling new students the sole focus of its compensation system." The New York Times summarized the federal allegations:

Recruiters were instructed to use high-pressure sales techniques and inflated claims about career placement to increase student enrollment, regardless of applicants' qualifications. Recruiters were encouraged to enroll even applicants who were unable to write coherently, who appeared to be under the influence of drugs or who sought to enroll in an online program but had no computer. According to the suit, recruiters were also led to exploit applicants' psychological vulnerabilities -- for example, a parent's hopes of moving a child out of a dangerous neighborhood.

McKernan stepped down as EDMC's chairman last month. Todd Nelson moved up to chairman, and Edward West, the president and chief financial officer, became the new CEO.

The impact on campus -- the professor

Lorna Hernandez observed a slide in standards at the Art Institutes of Fort Lauderdale after the initial public offering in 1996. But it got much worse after the 2006 Goldman takeover. "That's when education took second place to profit, pure profit," she says.

Hernandez witnessed "a rapid decline in the quality of the students" because the admissions department was "desperate for new students."  The new students -- low-income, veterans, and others -- were surely deserving of opportunity. But many lacked qualifications and preparation, and putting them in overpriced programs -- the Art Institute cost students around $78,000 in tuition and fees for a four-year degree, around four times the cost of Florida State University -- where they could not keep up, was no opportunity at all. More and more students had post-traumatic stress syndrome, even brain injuries, but faculty received no training in how to work with students with such conditions. Hernandez says there were students who were violent and difficult to manage.

In late 2011, the president of the Fort Lauderdale campus was pushed out and a new president named, a former official at the University of Phoenix.  A faculty committee had voted 7-2 against hiring him, but in the end the only vote that counted was corporate management. According to Hernandez, the new president's arrival ushered in a new era of dramatic cost reductions -- in her words, "cut, consolidate, don't question."  She charges that the administration was cutting the school's budget in "desperate and nonsensical ways" -- reducing the quality of toilet paper and paper towels, not buying staples for staplers. The school was selling its computers, closing its print center.  Half of the technical staff was let go. Academic advisors were laid off. Adjunct professor pay was cut.

Hernandez concluded that the school was looting its own assets for cash, because the company knew it would soon be worthless.

In Fort Lauderdale, only one area was beefed up -- the hiring of additional admissions staff.  Recruiters were calling the same prospective student six times in a single day. One classroom was converted into an additional boiler room for recruiting.

Since the Goldman takeover, Hernandez says, school officials had pressured her to make sure students passed her classes, even if they couldn't do the work.  She went along, but this year, she could take no more.  She felt could not in good conscience pass one particular student. He contested a failing grade. Management pushed her. That's when she decided to retire.

"Pure corporate greed," says Hernandez, "has destroyed something that was so viable and so wonderful in terms of education"

Meanwhile faculty nationwide were summoned to a mandatory online ethics class -- with opening remarks by EDMC head Todd Nelson.

Other professors report similar conditions.

Jeremy Dehn taught film production at EDMC's Art Institute of Colorado from 2008 to 2010.  Near the end of his time there, he published an op-ed in the New York Times sharply criticizing the school and concluding, "We need to quit subsidizing for-profit colleges." Dehn told me that his classes had an "insane mix" of students, some talented, some with no aptitude at all, some who could barely read and needed more remedial courses.

This wide range of ability levels in a single class made it very difficult to teach, pulling down those students who were able to do the work. He says the federal government is "pissing the money away" by sending student aid to for-profits like the Art Institutes when many state schools "have no money."

Dehn also says that while tuition at the Art Institute was much higher than state schools, adjunct professors like him were paid significantly less at the for-profit school than at area private non-profit and public colleges

Another professor, who teaches at a campus of EDMC's Brown Mackie college, reports that in March 2012 many faculty members there were demoted from full-time staff to adjunct teachers, their salaries reduced and health benefits taken away. At the same time, the school recently raised tuition; a two-year associate's degree at Brown Mackie costs students around $30,000, compared to $6000 at many community colleges. This professor says recruiters at the school target the most vulnerable local populations with misleading, high-pressure sales calls. She has heard them lie to prospective students about the possibility of transferring credits to other schools in the future. Speaking to each other, these recruiters refer to the students as "packages." Because the school "wants bodies," she says, it will accept virtually any applicant, leading to enrollment of many students who are unable to do the work. Class sizes are increasing. The school's sole job placement staffer manipulates facts -- and students -- to certify adequate placement rates. Like the Art Institutes professors I spoke with, this Brown Mackie teacher believes that EDMC is "trying to squeeze as much as they can" from the asset before it collapses.

The impact on campus -- the student

Vaughn Reynolds applied to the Art Institute of Fort Lauderdale in 2002 out of high school. He wanted to do an illustration program -- to study painting. Art Institute staff told him that the school's illustration program was not available yet but would be by the next academic quarter. They urged him to enroll in the graphic design program, which they said would offer the same initial classes as illustration. They told him the same thing for the next three quarters. By then, he says, "I was taking the wrong courses." So Reynolds left and joined the Air Force, serving in Germany and Iraq, and then served in the Air National Guard in Tampa.

When he was ready to return to school, Reynolds considered attending another school, perhaps one with lower costs. He quickly discovered that the credits he earned at the Art Institute of Fort Lauderdale, a school that lacked regional accreditation, did not transfer to most other schools.  So he returned in 2011, only to have his main academic advisor soon eliminated by a layoff.  Witnessing the severe cutbacks in faculty and educational resources, he sees the school in serious decline.  He says many of the teachers, a lot of who were hired well before the Goldman takeover, are "absolutely phenomenal."  But EDMC management, he believes, has another objective than educating students. "They're trying to burn our school to the ground," he says. He says that the campus president and the administration "don't tell students the truth."

So Reynolds launched the online petition at Change.org. He seeks to unite Art Institutes students at various campuses in opposition to the teacher layoffs, and to educate students and the public about the impact of Wall Street ownership of colleges. The petition has more than 2800 supporters so far.  A related Facebook group has over 1800 members.

The success story?

The day after his 29th birthday, Matt Bors speaks confidently from the stage of the a conference of the Association of American Editorial Cartoonists, getting laughs and appreciative questions from the audience at the George Washington University.  Many of the nation's leading editorial cartoonists are here, most of them much older.  Bors is a star at this event, one of the funniest, most insightful, most uncompromising cartoonists out there, and one of the first from independent media to be recognized for top honors.  He is a pioneer of a new comics journalism that reports from the street; he himself has traveled to Afghanistan and Haiti on assignment. He runs the innovative Cartoon Movement website.  When he accepted the Herblock Prize a few months ago from presenter Garry Trudeau, Matt stole his own show in front of an establishment crowd with a heartfelt but hard-hitting speech. Matt is a big deal.

At lunch after his appearance at the GW conference, Matt and I talked about the Art Institute of Pittsburgh, which he attended from 2001 to 2003, earning an associate's degree.  He had graduated from high school in Canton, Ohio.  His father sold truck parts, his mother was a waitress, no one in his family had ever earned a college degree. Matt wanted to be a cartoonist, but his parents wanted him to get some training in case that path didn't work out.

Remarkably, Matt reported almost the same experience as Vaugh Reynolds had had in Ft. Lauderdale.  He wanted to enroll in an illustration program, and he was told one would be available by the next year. Meanwhile, school officials said, he would get the same needed courses by starting in the graphic design program.  But when Bors graduated, there was still no illustration program.  While he says some of the teachers were good, he learned little at the school that helped him with his career -- in part because he never got the program in illustration he had been promised.

Bors says that many of the students in his classes had no talents to speak of, and it was clear that they would not be able to get jobs as artists or designers.  He realized, from comparing notes with friends that the graphic design program at Kent State in Ohio, that not only was that public university much more affordable, it was also much more selective, accepting only students who had aptitude for the work. It was apparent to Bors that the Art Institute had no such standards.

After graduation, Bors planned a move to the West Coast. He looked at continuing his studies toward a bachelor's degree at more affordable public colleges, but learned, like Reynolds, that his Art Institute credits would not transfer. If he wanted a BA, he would have to stick with the Art Institutes or start all over.

The only lasting legacy of his Art Institute experience was $42,000 in student loans.  Over nine years, Bors has managed to pay off the $10,000 of that for which he took responsibility, but his parents have continued to borrow money and still owe most of the remaining $32,000.

What EDMC has become 

The effect of EDMC's decline is felt across its campuses.

Information that EDMC provided to the Senate HELP committee indicates that of the 78,661 students who enrolled at EDMC-owned colleges in 2008-9, 62.1 percent, or 48,840 students, dropped out as of mid-2010.

When the U.S. Department of Education measured colleges this summer, under its new "gainful employment" rule, to determine which schools -- because of high prices, low graduation rates, and poor job placement outcomes -- left large numbers of students with unmanageable debt, 17 out of 180 programs at the Art Institutes that were surveyed flunked all three prongs of the test, whose standards are almost absurdly low.

At a 2010 HELP committee hearing, Kathleen Bittel, a former recruiter and career counselor for EDMC, testified about the disparity between the size of the school's recruitment staff and its  job placement staff:

I see a systemic problem here when there are only nine employees servicing the students that are being recruited by an admissions workforce of almost 1600. Career Services employees are being paid nearly a third of what the top performers in the admissions department receive. I believe these facts speak volumes as to where the real priorities lie within these companies.

Bittel testified that EDMC placement staff had to meet quotas for successful job placement of students. They succeeded only by manipulating the information, she said.

There remains one area where EDMC serves students better than many for-profit college businesses -- teaching. The Senate HELP committee found that, at least of 2010, EDMC "had far more full-time faculty than similarly sized for-profit education companies and likely more vibrant faculty involvement in academics."  The committee also found that EDMC spent $3,460 per student on instruction in 2009, compared to $4,158 per student on marketing and $3,460 per student on profit, "one of the highest instructional expenditures amongst large publicly traded for-profit education companies."  Some for-profits spend as little as $900 to $1000 annually on instruction.



But being a leader in spending on education among for-profit colleges isn't saying much; non-profit and public colleges generally spend much more on instruction. For example, according to the HELP committee, Penn State spends $16,507 per student on instruction, the University of Pennsylvania $38,974, and Community College of Allegheny County, whose tuition is a small fraction of the Art Institutes's, $4,173. Moreover, it seems EDMC's relative emphasis on instruction may be a remnant of a time when the company leadership was truly committed to helping students build careers -- a remnant that is rapidly fading.

For a sense of the leadership's spending priorities now, as it lays off its faculty, sells its computers, stops purchasing staples, and watches its stock price plummet, consider this:
  • Then-President (and now CEO) Edward West received $1,551,802 in compensation for 2009, $5,486,905 in compensation for 2010, and $6,355,982 in compensation for 2011.
  • Then-CEO (and now Chairman) Todd Nelson  received $1,812,996 in compensation for 2009, $3,804,121 in compensation for 2010, and $13 million in compensation for 2011.

For-profit higher education could help our people and our economy -- if the federal financial aid system were structured so that schools earned higher profits by actually helping students, not by ripping them off. President Obama's administration has pursued serious reforms to move in that direction. Unfortunately, millions of dollars worth of aggressive lobbying and lawyering by EDMC and other for-profit colleges has weakened some of these new rules.  (Meanwhile, Mitt Romney has praised for-profit colleges as modest-priced innovators, received major contributions from industry executives, and pledged to reverse the Obama reforms.) But intensifying media attention and public debate on for-profit college abuses has recently steered many students and investors away from the sector.

Late last week, as EDMC's market value continued to shrink, Reuters reported on the growing risk that the company "may breach debt covenants and be forced to refinance on expensive terms." At the investor conference earlier this month, West said the company is "looking at ways to continue to free up more cash flow."  When asked whether EDMC can "survive" in its current form,  West said "absolutely." He said the company would do so through "enrollment stabilization," i.e. through getting more students signed up and their checks deposited.