How EDMC Went Bad

[This is the third and final part of our Higher Ed Watch series looking at what's gone wrong at the for-profit college giant Education Management Corporation. To read the first two posts, click here and here.]

For nearly 40 years, Robert Knutson, the founder of Education Management Corporation (EDMC), built up a for-profit higher education company that was focused on doing “everything we can to ensure that students are successful, and our education process is oriented to the needs of our students,” as he told the Wall Street Corporate Reporter in 2002.

But after Goldman Sachs and two other private equity firms acquired Education Management in 2006 for $3.4 billion, they set an entirely different mission for the company: achieving hypergrowth.

To accomplish this goal, the company’s new owners hired a group of executives from the Apollo Group who had been instrumental in the massive expansion of the University of Phoenix earlier in the decade but had run afoul of federal regulators over the tactics they used to achieve that growth. Despite these troubles, the former Apollo officials brought nearly the exact same playbook to EDMC, according to former Education Management employees, the U.S. Department of Justice, and other press reports.

As the Huffington Post reported last week, this new leadership team created a “cut-throat sales culture” that was “laser focused on hitting mandated enrollment targets.” These executives hired thousands of new recruiters and made sure that they knew that their jobs depended on getting students in the door and signed up for loans, even if they knew full well that the students were unqualified for the work and had little chance of succeeding.

"The drive for numbers has created a recruiting staff that could care less about the well-being or success of the students” they bring in, a recruiter for EDMC's South University told the Huffington Post, in the online publication's words. “They’re wolves; they’re hunters,” the recruiter said. “They have one objective: They’re there to make money and get students.”

In retrospect, what’s happened at EDMC should not have come as a surprise. As Goldie Blumenstyk of the Chronicle of Higher Education wrote soon after Goldman’s purchase of EDMC, “When private equity funds do the buying, they do so with an overriding strategy in mind: Acquire the college or company, often with a lot of borrowed money, find ways to make it bigger and more profitable, and sell it at a higher price, either to other private investors or through a public offering."

“Since most private-equity funds are organized as limited partnerships with 10-year lifespans,” she added, “they hope to pull off these sales in five to seven years.”

In other words, firms that do these types of deals are not invested in the long-term health and well-being of the corporations they purchase. Instead, their mission is to build the companies up as fast as they can so they can sell them off and make a killing.

Goldman and its private equity partners appear to be well on their way to achieving this goal. In the five years since they bought EDMC, enrollments have doubled to about 160,000 students and annual earnings have nearly tripled to a whopping $2.8 billion (just about 90 percent of which came from the federal student aid programs).

But the methods EDMC’s leaders have used to achieve this growth have come at a great cost to its students, taxpayers, and the reputation its founders worked carefully to build over nearly four decades. While Education Management was long considered to be one of the best for-profit higher education companies in the business, it is now the target of a multibillion dollar lawsuit brought by the Justice Department and half a dozen states, accusing it of defrauding the government by defying a federal law that prohibits colleges from compensating recruiters based on their success in enrolling students. Meanwhile, attorneys general in four states -- Florida, Kentucky, Massachusetts, and New York -- are investigating the company, as is the Department's Inspector General.

“I worked for EDMC for many years, and can mark the change of employee and student care from excellent to nonexistent direct to Goldman Sach’s influence,” a commenter wrote to Higher Ed Watch last week. “It was a wonderful place to work. Now it is a nightmare.”

The Battle Plan

Soon after taking over EDMC Goldman and its private equity partners swept out the company's old management and put a new board of directors in place, with heavy representation from their firms. The lone holdout from the old regime was former Maine Governor John R. McKernan, Jr., who in the years leading up to the sale had built the company up by purchasing other for-profit college companies.

The new board then hired former Apollo Group chief executive officer Todd S. Nelson to lead the company in it mission to become “the preeminent global higher education company.” Nelson had been forced out of his job at Apollo for having been, according to University of Phoenix founder John Sperling, too “preoccupied” with the stock price of the company. He was one of at least ten former University of Phoenix officials to land top management positions at EDMC after the sale.

To carry out their ambitious plans for growth, Nelson and his colleagues set their sights on the company’s fledgling online-only offerings, which enrolled about 4,000 at the time of the buyout. In the years before the sale, Knutson had withstood pressure from Wall Street to ramp up these programs because he feared that doing so would be detrimental to students. “The vast majority of our students prefer to be in a physical classroom environment because they like going through the learning process along with other students and also because of the social ramifications,” he explained to the Wall Street Corporate Reporter.

The company’s new leaders had no such qualms. According to the Justice Department’s lawsuit, they laid out a goal of increasing enrollment in these exclusively online programs to 50,000 within five years.

In order to achieve such enormous growth so quickly, EDMC officials knew they had to overhaul the company’s recruiting operation. To start, they had to build up its ranks.

According to the federal lawsuit, EDMC employed about 550 recruiters at the time of the sale. The Justice Department says that the company’s new owners initially planned to increase that number to 1,000 within two years. But under Nelson’s leadership, the number of Assistant Directors of Admissions (ADAs), as they came to be called, has skyrocketed to about 2,600 today.

In addition, the new leadership scrapped the “sophisticated screening tools” that the company had been using when hiring recruiters to make sure they were a good fit for the job, the lawsuit states. Nelson and his colleagues felt that “the screening process was time-intensive and was not allowing EDMC to keep pace with its hiring goals.” Instead, the lawsuit says, they “began to hire large numbers of ADAs out of so-called ‘cattle calls’ with little or no screening.”

‘An Absolute Feeding Frenzy’

But Education Management officials knew that increasing the number of recruiters was not enough. They realized that they had to change the culture of the company so that the recruiters understood that their jobs were entirely dependent on bringing in students.

According to the lawsuit, they set out to accomplish this in two ways. First, they increased the demands they put on recruiters. For example, they required each of the ADAs to sign up on average 3 new students a week, up from 1.6 before the sale, the Justice Department says.

Second, and perhaps more importantly, these officials decided that the turnover rate of admissions officers at the company was too low. In other words, they felt that the recruiters had gotten too comfortable in their jobs.To remedy this, they vowed to increase the turnover rate to at least 25 percent, "by firing ADAs who did not meet their enrollment 'sales' targets," the lawsuit says.

They then did everything they could to constantly remind recruiters of this looming threat. “Managers erected dry-erase boards to publicly track enrollments,” the Huffington Post reported. “Admissions directors began sending e-mails at a furious pace, tracking enrollments daily and even hourly. Admissions directors circulated statistical reports to management tracking each recruiter’s enrollment statistics.”

Former recruiters say that the sense of paranoia that management created was overwhelming. “It was an absolute feeding frenzy,” Kathleen Bittel, who worked as a recruiter at EDMC’s Argosy University in 2007, told the online publication. “They were on us every minute of the day. We had managers and directors who were just literally circling the pods, listening to every word that was spoken.”

And it had its desired effect. Under this pressure, recruiters were willing to do or say anything to get students in the door, no matter whether these individuals could handle the work or not. “It just got to the point where I felt like I was lying to these people on a regular basis,” Patrick Flynn, a former recruiter at South University told the Huffington Post. “Honestly I just felt dirty doing the things I was doing.”

As a result, these recruiters say they were encouraged to admit anyone with a pulse, including “applicants who are unable to write coherently, applicants who appear to ADAs to be under the influence of drugs, and applicants for EDMC’s online program who do not own computers,” the lawsuit states.

Even worse, they loaded these students up with federal and private student loan debt that many of them will never be able to repay.

Conclusion

EDMC is certainly not the only for-profit higher education company that has been accused of these types of abuses – and it's probably not even close to being the worst.

But at Higher Ed Watch, we find the story of EDMC’s transformation to be especially compelling because it once had a reputation for doing things right. Over almost four decades, Robert Knutson built the company deliberately, with a steady focus on its long-term success, rather than just on its short-term profits.

But as we said last week, those days are now long in the past.