With heat on company, ITT’s CEO Modany swings back

It’s only spring, and it’s already been a tough year for Carmel-based ITT Educational Services Inc.

The company, which operates 135 for-profit colleges, estimated in January that it would lose $127 million because of an avalanche of student defaults on loans backed by ITT.

Then in February, ITT was sued by the U.S. Consumer Financial Protection Bureau, which accused it of duping students into those loans. And in March, the entire for-profit sector was hit with a new round of “gainful employment” rules from the Obama administration—after the first set was struck down by a judge as arbitrary.

Those new rules, designed to prevent colleges from handing out degrees that don’t help students boost their earnings, could make for-profit colleges like ITT ineligible to receive funds via government student loans, which make up 96 percent of ITT’s revenue. As a result, ITT’s stock price has fallen 43 percent.

Modany

But in an interview with IBJ, company CEO Kevin Modany swung back. The 47-year-old accountant asserted that for-profit colleges are a good deal, that they produce better results than community colleges, and that they are critical for the state and nation to close the skills gap among workers.

Modany even said he’d reimburse students if their education doesn’t pay off with higher earnings—as long as every other college is required to do the same.

What follows is an edited transcript:

IBJ: The CFPB lawsuit filed against ITT Educational earlier this year was built on mystery shopper reports from ITT, which you felt were misused. Why do you think the CFPB’s approach was off base?

MODANY: For somebody to go through and selectively pull out isolated instances of non-compliance, which the [mystery shopper] program is intended to identify, where we have taken disciplinary action, and to ignore all of the other [reports]—which is the largest percentage—by far—of the shoppers, where there is a great response, where the shopper himself or herself makes extremely positive comments about their experience with our school—for them to completely ignore that and for them to selectively choose some of these instances of non-compliance and to present that as an example of our environment, is inappropriate.

IBJ: The Obama administration’s new gainful employment rules would require that ITT’s graduates spend no more than 8 percent of their income (or 20 percent of disposable income) on student loan payments, and that no more than 30 percent of student borrowers default. What do you think about the proposed rules?

MODANY: Many of us [in the for-profit sector] are going, “It’s terrible. I hate it.” What’s good about it? It’s raised awareness nationally about the importance of education and the return on an investment in education, and taxpayers’ right to hold institutions accountable for that. That’s a great subject and gainful employment has pushed that.

But I think it’s misguided. When you just target on one sector [for-profit colleges] and then inappropriately try to paint that sector with a bad brush and try to only speak to the negative of that sector—every sector of every business has challenges; we’re not any different in that regard.

We have opportunities to do better. But to focus solely on that for the purposes of creating this target of this regulation I think is misguided. It’s not focusing on the right objective—which is to ensure that as taxpayers we’re getting a good return on our investment, and students are getting a good return on their investment.

IBJ: Net costs for an ITT associate’s degree were typically about $28,000 while the average starting salaries of its graduates is about $32,000. [ITT reports its net costs now have come down to $23,000 after increasing scholarships last year.] It takes a long time for someone earning $32,000 to pay off that much debt. And many students don’t even graduate. How is that a good deal?

MODANY: People that make that statement aren’t looking at the facts in an appropriate way. We should take a look at where a person was when they started their program of study, what the increase in their earnings is—not just from the time they started to the time they graduate and start their [career]—we have to look at it in a more longitudinal way. More than two or three years. The data will tell us what the right number is. And we should say, over that period of time, let’s look at the income you get.

I don’t think anyone would argue, and the facts will prove, that someone with a credential will get higher annual increases in their earnings than someone who does not have a credential. [A 2012 study published by the National Bureau of Economic Research found graduates of two-year for-profit colleges enjoyed weekly earnings 10 percent above high school graduates, when measured three years after graduation, and 15 percent when measured four years after graduation.] That’s the type of construct we should be talking about if we really want to determine what a good investment is. And we should have all of us as institutions, of all types—taxpaying and non-taxpaying—accountable for that.

IBJ: What would be a better way than the Obama administration’s gainful employment rules to hold colleges accountable for the career outcomes of their graduates?

MODANY: I would argue if you’re not meeting that [return on investment goal]—you have an opportunity to meet it. Why not provide some reimbursement to the students then, as a way to meet the metric? So you came to my school, you didn’t achieve some sort of return, [then] I am required to make some sort of payment down on your debt, as an institution. So it’s kind of a risk sharing. The concept of risk sharing’s not a bad idea—again, for all institutions, not just taxpaying. If you want to play in this game, take a little bit of risk.

IBJ: President Obama has set a goal of getting 60 percent of American working adults to have a postsecondary credential by 2025, up from 39 percent now. Indiana’s leaders have set the same goal. Can those big goals be reached without increasing graduates from for-profit colleges?

MODANY: Each one of the students that go to Ivy Tech, the community college system here, is subsidized by the state in a material way, and there’s not money to subsidize more of those individuals.

Our state is just one example of what we see all across the country. So trying to solve this problem in a public arena with taxpayer funds is not doable right now. So the private sector, including the taxpaying institutions, have to be part of this solution.

To take the taxpaying institution sector out, who is providing a credential to society at a lower cost, a lower taxpayer cost than other opportunities, to take that more efficient educational channel out or to reduce it substantially, seems extremely counter to the goal.

IBJ: You also feel that for-profit colleges are serving more of the students in the most need—minorities, those with low incomes, those without family support?

MODANY: Yes. In order to move that dial, we have to recognize the demographics that we’re talking about. Who will be educated to raise that number? We’re talking about working adults, we’re talking about people of the age of 25 to 35, making up a large population of that group that do not have postsecondary credentials right now. That is the non-traditional student, who has a lot of life obligations. The hardest group to educate.

IBJ: For-profit colleges have worse graduation rates on four-year degrees than public colleges, but have much better graduation rates for two-year degrees, compared with community colleges. What accounts for the difference between for-profit colleges and community colleges?

MODANY: The amount of hand-holding that goes on with an individual student in our institution I think would surprise many.

We have a very focused group of people providing services to students that help them with their life obligations: that help them with their transportation issues, that help them with accessing content when life and work get in the way.

When a student gets in class, if they miss a class, we will call that student. Not the next day, not in a week—at the break. And we will call to let them know that we know they’re not there, and that we want to know if there’s something that we can do to help them, and then we will make arrangements to get them the content that they missed, and provide some faculty time or some academic support time, to help them ensure that they don’t have a gap in their learning.

That’s why you see graduation at community colleges [so much lower than] ours, at somewhere around 35 percent.•