UPDATE: Feds ban ITT Educational from enrolling students on federal aid

ITT Educational Services Inc. shares plummeted 35 percent Thursday after the U.S. Education Department banned the Carmel-based for-profit educator from enrolling new students who receive federal aid.

The decision is a potential death blow to ITT, which derives most of its revenue from federal loans and grants.

The education said the move "follows determinations made by the school’s accreditor, the Accrediting Council for Independent Colleges and Schools, that ITT 'is not in compliance, and is unlikely to become in compliance with [ACICS] Accreditation Criteria.'"

The education department announced the decision on Homeroom, its official blog

In a blog entry credited to U.S. Under Secretary of Education Ted Mitchell, the department said the decision was made after ITT fell out of compliance with its accreditor’s standards and “put its students and millions of dollars in taxpayer-funded federal student aid at risk.”

Trading in ITT stock was halted Thursday after shares fell 75 cents, to $1.40 each. The stock is down 62 percent since the beginning of the year.

ITT did not immediately reply to a request for comment.

The department has turned up its oversight of ITT in recent years and required the company to boost its cash reserves to cover potential damages to students and taxpayers.

“To protect prospective students and taxpayers, we’re no longer allowing ITT to enroll new students with federal aid,” the education department said. “In addition, in case the school’s actions cause it to close, we’re increasing the amount of cash reserves it must send us and we’re ending its installment payment plan for the amount previously required.

The department also said it was “slowing down when ITT receives student aid from the government to ensure that ITT is handling its finances properly.”

In June, the department ordered ITT to bolster its surety funds to show that it has more than $123.6 million available to refund students in the event the company shuts down unexpectedly. The department said that amount was equivalent to 20 percent of the federal funds the company received last year.

In Thursday's notice, the department said it is now requiring ITT boost its surety funds to $247.3 million within the next 30 days.

Surety funds are held by the department in a Federal Holding Account and are used to reimburse the department for liabilities related to the investigations, including student refunds, student loan cancellations and other expenses if ITT closes campuses.The department’s move echoes its 2014 response to allegations that Corinthian Colleges Inc. faced financial difficulties and had been misleading students with false graduation and job-placement rates. Back then, the department delayed ITT’s normally quick access to federal student aid funds, causing a cash crunch at the for-profit college chain that culminated in a government-brokered sale of dozens of its campuses, as well as a bankruptcy filing for the rest of the company, in 2015.

“Hard to imagine ITT can provide a doubling of required surety without new federally aided students,” Ben Miller, senior director for postsecondary education at the Washington, D.C.-based policy group Center for American Progress, said on Twitter. “This is probably the end.”

ITT faces the prospect of further pain in the coming days. The education department’s demand “is in no uncertain terms an event of default” under a financing deal ITT struck with private equity firm Cerberus, said Bradley Safalow, founder and chief executive of PAA Research. Education Secretary John King Jr. declined to say if he were confident ITT could afford the collateral demand.

The loss of federal funding for new students marks a serious blow to the company's finances. Last year, the federal student loan program provided 79 percent of its cash receipts, according to ITT's most recent annual report. The company said in July that it expected new student enrollment to drop by as much as 60 percent compared to last year during the six-month period ending in December.

The department said ITT is also required to develop “teach-out agreements” with other colleges that will let students complete their studies if ITT ceases operations.

In addition, ITT is "prohibited from awarding raises, paying bonuses or making retention or severance payments to its executives or to paying special dividends or out of the ordinary expenditures without department approval," the department said.

ITT reported revenue in the latest quarter of $191.5 million, down almost 17 percent from the $230 million the company brought in a year ago.

Total student enrollment decreased 15.4 percent, to 43,293, as of March 31, compared with 51,201 as of March 31, 2015.

ITT operates more than 130 ITT Technical Institute campuses in 38 states and online students nationwide.

ITT appeared to receive a short reprieve earlier this week when the ACISC delayed making a decision about the company's accreditation. The accrediting organization said it continued until December an existing show-cause directive, meaning ITT needed to provide more evidence for why its accreditation should not be ended.

ACICS has questioned ITT’s “administrative capacity, organizational integrity, financial viability and ability to serve students that complies with ACICS standards.”

The ACICS said ITT was facing civil investigative demands from 19 state attorneys general regarding marketing, recruitment, financial aid, academic advising, career services, admission practices, accreditation, graduation rates and job-placement performance.

In addition, the ACICS said ITT faces litigation and investigations from three federal agencies related to the school’s “student-lending practices and misrepresentations to investors.”

ACICS has its own problems. In June, the education department recommended stripping the group of its oversight powers. ACICS accredits 245 colleges with about 800,000 students but has been accused of not effectively safeguarding the federal student aid system from schools that either deceived students or denied them an adequate return on their educations.

If ITT were to abruptly shut down, still-enrolled students who don’t transfer their credits elsewhere would be eligible to have their related federal student loans canceled. The feds have forgiven close to $100 million in debt incurred by former Corinthian students left stranded by that company’s 2015 closure. The education department's collateral demand is meant to fund any potential future debt cancellations.

Millions of students have flocked to campuses and online programs in search of credentials of questionable value in recent years. State and federal investigators have alleged that many schools deceived these students about their future job prospects. The Consumer Financial Protection Bureau alleges that ITT also misled its students—a charge the company strongly denies. But ITT’s schools in recent years have collectively received billions of dollars in taxpayer-funded student loans and grants. Borrowers have defaulted on much of that debt.

If the education department follows the CFPB and determines that the company duped students into enrolling, borrowers would be eligible to have their federal debt canceled. Taxpayers would pay the price.