During the recession, Corinthian’s business boomed as the unemployed sought refuge in higher education.
Corinthian targeted uninformed, low-income consumers — those with “low self-esteem” who were “unable to see and plan for the future” and had “few people in their lives that care about them,” according to internal Corinthian documents referenced in the attorney general’s lawsuit last year.
“You’ve got people who are crying in their chairs, thinking that you’re really there to help them,” said Smith, the former employee at Everest College in Houston. “If you’re a good rep, you’re going to turn that around and use it against them to convince them to come to school.”
Low-income students also tend to qualify for the maximum in federal loans and grants, allowing them to afford Corinthian’s high tuition — at least until they graduate.
In 2010, as graduates entered a brutal job market, the defaults on federal loans piled up. That worried investors, so Corinthian executives sought to appease them with promises to aggressively manage default rates and avoid federal sanctions, according to records of investor conference calls.
The company had employees and contract workers call students to persuade them to apply for forbearances or deferments, available to eligible borrowers who can’t find steady work. The students got token freebies, including McDonald’s gift certificates; the contractors got bonuses for convincing them, according to company documents obtained as part of a U.S. Senate investigation of the for-profit college industry.
The strategy effectively delayed potential defaults, but didn’t prevent them.
For example, federal data show that 19 percent of Corinthian’s 2008 students defaulted within the two-year time frame examined by the government, but the rate nearly doubled to 37 percent within three years, after the government stopped looking.
The company also struggled to meet a federal requirement that 10 percent of the school’s revenue must come from sources other than government aid. That could be either cash or private student loans.
Corinthian responded with tuition hikes of up to 20 percent in 2011, a move intended to force students into private loans, the company said in conference calls with investors. The tuition increases pushed many students beyond the maximum they could borrow in federal student loans.
The company acknowledged to investors that it expected more than half of students to default on the private loans, which initially had interest rates ranging from 12 percent to 18 percent.
(Next page: Corinthian’s response)
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