Company’s purchase of N.H. college could earn it $1 billion

By Daniel Golden
Bloomberg News / March 9, 2010

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ITT Educational Services Inc. paid $20.8 million for debt-ridden Daniel Webster College in June. In return, the company obtained an academic credential that may generate a taxpayer-funded bonanza worth as much as $1 billion.

ITT Educational, based in Carmel, Ind., is the third-biggest higher-education company in the United States. Its $3.8 billion market value may increase by 26 percent, or $1 billion, within five years because of the purchase of 1,200-student Daniel Webster in Nashua, according to Michael Clifford, an investor in Del Mar, Calif., who has participated in the acquisitions of four nonprofit colleges. At least 75 percent of new revenue would come from access to the more than $100 billion a year in financial aid the US hands out to college students, he said.

Key to tapping that money is Webster’s regional accreditation, which is the same gold standard of academic quality enjoyed by Harvard University and helps students transfer course credits from one college to another. Daniel Webster’s accreditation was its “most attractive’’ feature to ITT Educational, said Michael Goldstein, an attorney at Dow Lohnes, a law firm that has represented the company.

“Companies are buying accreditation,’’ said Kevin Kinser, an associate professor at the State University of New York at Albany, who studies for-profit higher education. “You can get accreditation a lot of ways, but all of the others take time. They don’t have time. They want to boost enrollment 100 percent in two years.’’

For-profit higher-education companies have tripled enrollment to 1.4 million students and revenue to $26 billion in the past decade, in part through recruitment of low-income students and active-duty military.

Now they’re taking a new tack in their quest to expand. By exploiting loopholes in government regulation and an accreditation system that was not designed to evaluate for-profit takeovers, they’re acquiring struggling nonprofit and religious colleges and their coveted accreditation. Typically, the goal is to transform the schools into online behemoths at taxpayer expense.

For-profit education companies have purchased at least 16 nonprofit colleges with regional accreditation since 2004. Jack Welch, former chief executive of General Electric, and Michael Milken, the junk bond pioneer, have invested in for-profit companies that bought or formed partnerships with nonprofit, regionally accredited schools.

By acquiring regional accreditation, trade and online colleges gain a credential usually associated with the traditional academic culture of liberal arts, faculty scholarship, and selective admissions. Normally the accreditation process takes about five years and requires evaluations by outside professors.

ITT Educational declined to comment for this report. The company plans to open more Daniel Webster campuses and to expand online offerings, Kevin Modany, ITT Educational’s chairman and chief executive officer, said in a Feb. 22 presentation to analysts. The company expects to introduce programs including accounting, education, and health sciences, he said.

The US Department of Education, which doled out $129 billion in federal financial aid to students at accredited postsecondary schools in the year ended Sept. 30, is examining whether these kinds of acquisitions circumvent a federal law that new for-profit colleges cannot qualify for assistance for two years, said Robert Shireman, deputy undersecretary of education.

Under federal regulations taking effect July 1, accrediting bodies may also have to notify the secretary of education if enrollment at a college with online courses increases more than 50 percent in one year.

For accreditation to continue once the college is sold, the buyer must promise not to change its mission, said Steven Crow, former executive director of the Chicago-based Higher Learning Commission. Once accreditation is maintained, the acquirer seeks permission to start branch campuses and online programs, Crow said.

ITT Educational Services wasted no time making changes at Daniel Webster. It renovated a building, razed a dilapidated dormitory, dismissed one fourth of the staff, fired president Robert Myers, and has been accused by faculty members of misleading the New England accreditor, the Commission on Institutions of Higher Education.