Investor Alert

April 9, 2020, 6:39 a.m. EDT

Exclusive: These for-profit colleges could reap up to $1 billion in federal bailout money

Some eligible schools have been accused of fraud and misuse of federal student aid

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By Matt Smith

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Among the for-profit chains eligible for aid in the stimulus package is Eduk Group, a group of trade schools in Puerto Rico and Florida that appears eligible for approximately $35 million in bailout money. According to the most recent available federal data, Instituto de Banca y Comercio, one of Eduk’s schools, was under a federal status called “heightened cash monitoring,” where schools with problems managing their finances are put on a special watch list that could ultimately make it hard to access federal aid dollars.

Eduk did not respond to a request for comment.

Jeffrey Leeds, founder and managing partner of Eduk Group’s owner Leeds Equity Partners, said he was not interested in discussing the firm’s new status as a potential top recipient of the federal bailout funds for for-profit schools.

“We haven’t thought about those issues because that ideological debate continues to rage and we don’t want to be a part of that,” he said.

Leeds has been a prolific deal maker in the for-profit education sector. The firm had joined one of the earlier, well-timed deals of the mid 2000s, joining with Providence Equity Partners and Goldman Sachs in 2006 to borrow $2 billion in a $3.4 billion buyout of Education Management Corporation, (EDMC) owner of a law school and four major postsecondary school chains.

The chain was subject to an undercover investigation by the Government Accountability Office, whose results were presented during 2010 congressional hearings. It also became subject to a U.S. Senate Investigation, fraud probes by 11 states and the District of Columbia, and a federal whistleblower lawsuit.

EDMC was “operating essentially as a recruitment mill,” said U.S. Attorney Loretta Lynch, in announcing a $95.5 Million settlement that also included forgiveness of $100 million in student loans. EDMC didn’t admit any wrongdoing as part of the settlement. EDMC President and CEO Mark McEachen said in a statement at the time, “Though we continue to believe the allegations in the cases were without merit, putting these matters behind us returns our focus to educating students.”

EDMC filed for chapter 7 bankruptcy liquidation in June 2018. But Education Department data shows remnants of the EDMC chain appear as among the top school groups eligible for stimulus funds.

Another for-profit college chain Education Affiliates is potentially eligible for the third largest estimated stimulus sum of $33 million. In 2015 the firm settled a whistleblower lawsuit with the U.S. Department of Justice following allegations that school recruitment staff helped students fake admission test scores, obtain bogus high school diplomas, and submit fraudulent applications for financial aid. The $13 million settlement followed allegations of “predatory conduct that victimized students and bilked taxpayers,” education undersecretary Ted Mitchell said in a statement.

Education Affiliates said at the time that it did not admit to any wrongdoing. Education Affiliates did not respond to requests for comment for this article

Concerns about for-profit school chains during the past decade led to a broader Obama-era crackdown that included enforcement actions, the enactment of policies and rules designed to protect student borrowers, and the shuttering of some for-profit chains.

While this period saw a decline in the business prospects of for-profit colleges, analysts say a turnaround is possible. DeVos has blunted or abandoned Obama-era policies meant to curtail excesses of for-profit schools. And typically when the economy slows down some people who are unemployed go back to school, suggesting another boomtime.

But we’re in no ordinary slowdown, said Robert Lytle, who heads the education team in Ernst & Young Global Limited’s strategic consulting affiliate EY Parthenon. People are likely to remain in shock for a while before making any major economic decisions such as paying for a new degree, he said.

“This particular recession is outside the boundaries of anybody’s planning. But net, net, being in the education delivery business, or somebody who sells goods and services to the education system has been a more comfortable place to be than the other sectors,” he said.

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