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Is an Obscure Art School Teaching Animation in San Francisco Too Big to Fail?

When the Art Institute of California in San Francisco laid-off a few people this summer it wasn’t mentioned by the media, but it should have been part of a major news story.

Guest Post by Karl Cohen

When the Art Institute of California in San Francisco laid-off a few people this summer it wasn’t mentioned by the media, but it should have been part of a major news story.  Those job terminations were part of some 800 layoffs ordered by Education Management Corporation (EDMC on the NY Stock Exchange), a corporation in Pittsburgh, PA that is presently being sued by the US government for about $11 billion.  Our government believes EDMC obtained that sum from them through an allegedly fraudulent scheme.  (Under the False Claims Act, if the suit is successful, the amount could triple.)  EDMC stock was selling around $30 a share late last year, but since the suit was filed the stock’s value has fallen to around $3.

And who is EDMC?  The leadership does not come from the academic community.  About 70% of the corporation is owned by three major Wall Street investment firms: Goldman-Sachs, Providence Equity Partners and Leeds Equity Partners.  Goldman-Sachs owns about 40% of the stock.  Several top executives of those three firms are on EDMC’s board along with Todd S. Nelson and John R. McKernan Jr.

Nelson was EDMC’s CEO from 2007 until August 2012 when he became the corporation’s Chairman.  Before joining EDMC, he was with the Apollo Group, the largest of the for-profit education corporations and he was their CEO when Apollo was sued for alleged recruitment fraud at their Phoenix University, a chain of 105 schools.  Apollo settled the suit out of court for $78.5 million (with a non-disclosure clause).

John R. McKernan Jr. stepped down from being EDMC’s Chairman of the Board of Directors in July 2012.  He was a former governor of the State of Maine (1987-95), had been on the EDMC board since 1999, and is married to Olympia Snowe, who just resigned from her seat as a US Senator from Maine.  When she resigned she explained there was no place for her in the Senate as a moderate Republican as the Tea Party was taking over her party.  The couple owns shares of EDMC stock once worth about $10 million.

From reading recent blog entries about the EDMC schools, the layoffs have disillusioned students and have resulted in excellent full-time teachers being dismissed.  Some have been rehired as part-time employs at a much lower rate of pay.  Students report key support people were also let go including computer techs and librarians.  A newspaper in Pittsburgh reported administrative staff members were also dismissed. 

The nation is learning about the way some for-profit schools are run

Discovering the way this highly lucrative for-profit education business is run at some schools has been the task of the US Senate Health, Education, Labor and Pensions Committee (HELP).  Their hearings led by Senator Tom Harkin (Dem. Iowa) were getting news coverage in 2009-10 as they uncovered proof that there was widespread fraud among several schools in the for-profit education sector.  Recruiters indicated they were being paid bonuses for successful work, an illegal practice.  The schools were alleged to regularly ignore the ban on incentive payments to recruiters for new recruits.

Recruiters admitted lying to entice prospective students to sign expensive contracts and to take out government loans.  Recruiters were instructed to make grossly exaggerated statements about the potential income the prospective students could expect to make after graduation and they sometimes did not inform students of the full cost of their education or explain that the loans could not be voided by a bankruptcy judge.  Young people that lacked the aptitude or were otherwise not qualified to enter the desired course of study were signed up.  The hearings showed some schools were even providing inadequate or out of date educations. 

The hearings also uncovered the schools often exaggerated the success rate of their students in order for the school to continue to get the federal grant program income.  Schools have had to claim a fairly high placement rate for their graduates, a difficult thing to do in the recent economy.  In one case a graduate who studied computer animation was counted as success story, but he was actually selling electronic goods at a major chain store.

Since the Art Institute of America is part of the second largest for-profit education corporation in our nation, it was logical that the committee called upon several of their employees and former employees to give testimony.  The hearings also including undercover videos that were made to back up the claims that recruiters were using dubious techniques to enroll unqualified students.  A report said that all 15 schools investigated “made deceptive or otherwise questionable statements to GAO undercover applicants.”

Horror stories told by former students were also entered into the public record.  The committee was told many times about the deception experienced to get them to enroll, about inadequate teachers and then upon graduating they found there were either no jobs, unpaid internships or only low paying entry level jobs available.  The high paying jobs the recruiters had talked about had somehow vanished.   Many of the disillusioned had to end up taking whatever jobs they could find outside of their area of expertise in order to attempt to pay back their loans. 

According to one report a two year program at EDMC’S Art Institute in Pittsburgh, PA leading to an associate degree in web design or media studies cost around $47,500 while a same degree can be obtained from a local community college for $6,800.  A BA or BS degree from EDMC is double that.

As a rule the students attending for-profit schools will owe more on loans because their tuition is higher. A US Department of Education press release said in June 2011, “Students at for-profit institutions represent 12 percent of all higher education students, 26 percent of all student loans and 46 percent of all student loan dollars in default.”

The first legal actions

In 2011 the Department of Justice lawyers and attorneys in four states (California, Florida, Illinois and Indiana) decided that EDMC was not qualified to receive the $11 billion it had received between July 2003 and June 2011 for the education of their students.  The lawsuit declares that each year EDMC falsely certified that it was complying with the law, but they repeatedly violated federal laws forbidding them to pay recruiters based on how many students they enrolled. 

The law stating the recruiters should be paid a fixed salary was designed to remove any incentive for them to accept unqualified students who probably would not be able to complete a degree program.  Of course EDMC claims they adhere to existing rules and regulations, but if that is true why did 56.8% of their students drop out in less than a year in 2009 (from a 2012 HELP report) and why is the number of students who actually graduate much lower than graduation rates from state and private non-profit colleges?

The State of California’s Cal Grants program adopted new rules for the 2012-13 school year that are designed to eliminate schools with high loan default rates and/or low graduation rates.  The new guidelines require that institutions have a student loan default rate of 15.5% or less and a graduation rate of 30% or higher. The graduation rate for students enrolled at the ten largest for-profit schools in the country hovers around 20 percent, remarkably lower than the national 55.5% average for all schools.

At present 154 schools are no longer eligible for the Cal Grants including three campuses in the Art Institutes of California chain.  The Art Institute of Los Angeles had a graduation rate that was too low while the schools in Hollywood and Sunnyvale had default rates that were too high.  Of the 154 colleges ineligible for Cal Grants, 137 are private for-profit schools and the rest are private, not-for-profit schools. (The five Art Institute campuses in CA that barely passed had default rates between 11.7% and 14.5% and none reported a graduation rate a bove 38.4%.)

EDMC once had about 158,300 students enrolled at the same time.  That number had dropped to about 124,000 as of June 30, 2012 which is the reason given for the resent layoffs (it was 139,800 in June, 2011).  (EDMC runs campuses in 109 locations in the US and Canada under four universities names: Art Institute, Argosy University, Brown Mackie College and South University.  They also run an online division.

The federal government gave EDMC $2.2 billion in 2010.  That accounted for 89.3 percent of the school’s income.  By law the school has no responsibility to pay back the loan or to assist in the collection of that debt if the student defaults. 

A newspaper in Pittsburgh, PA reports getting an email from EDMC saying that “we remain a vibrant organization. It is important that we continue to strive to be as healthy, efficient and streamlined as possible so that we can continue to invest in and support growth where we see the greatest need and demand.” 

Students trying to save the school note, “The reality of our country is that big investment corporations are running educational institutions.  Fundamentally this seems backwards, especially when the CEO of EDMC was compensated with a total of $13,185,559 in 2011, yet they are laying employees off from campuses in droves because these are ‘difficult times in American higher education’”

The upcoming November election may affect the disposition of the case against EDMC.  Mitt Romney has major financial backing from several big education corporations and he has praised for-profit schools in speeches, especially Full Sail in Florida.  Goldman-Sachs is one of Romney’s biggest financial backers.  What do you think Mitt might do if he gets a chance to help his friends at Goldman-Sachs?


Karl Cohen is president of ASIFA-SF and teaches animation history at SF State University. He is the author of Forbidden Animation: Censored Cartoons and Blacklisted Animators, as well as hundreds of articles about animation, many published by AWN.