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Higher Ed Watch

A Blog from New America's Higher Education Initiative

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What’s the Matter with EDMC?

Published:  October 10, 2011
Issues:  

There was a time not so long ago that Education Management Corporation (EDMC) was considered to be one of the better for-profit higher education companies in the business. The arts schools that it had run since the early 1970s were generally well regarded, and the company seemed to be focused on its long-term success, rather than just its quarterly profits.

Today, EDMC is the target of a multibillion dollar lawsuit brought by the U.S. Department of Justice and half a dozen states, accusing the publicly-traded company of defrauding the federal 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 of Education’s Inspector General

Among other things, EDMC has been accused of pumping up its enrollment numbers by aggressively recruiting unqualified students, loading them up with debt, and failing to help them find gainful employment in the fields in which they trained. The company has also been charged with cooking the books on the job placement rates that it discloses to students and reports to accreditation agencies and state regulators.

Despite all of this scrutiny, EDMC has been among the most resistant for-profit higher education companies to reforming its practices -- going so far as to quit a lobbying coalition it started after that group began developing a voluntary code of conduct for its members to follow.

So what happened? That question can be answered in two words: Goldman Sachs.

In 2006, Goldman Sachs and two other private equity firms acquired EDMC for $3.4 billion. The deal eventually gave Goldman about a 40-percent ownership stake in the company.

EDMC was far from perfect before the sale. In the years leading up to it, the company had been rapidly expanding into fields outside the arts and, as the lawsuit shows, had started to bend the rules, particularly in the way it paid recruiters.

But according to former Education Management employees, the DOJ’s lawsuit, and other press reports, the takeover of EDMC by Goldman and the other private equity investors fundamentally changed the company. The new owners' one and only focus: achieving hypergrowth.

To execute the plan, they hired a team of executives from the Apollo Group who had been instrumental in the massive expansion of the University of Phoenix but had come under fire for the tactics they used to achieve this aim. In fact, the man they chose to lead EDMC -- Todd S. Nelson, who served as Apollo Group’s CEO from 2001 to 2006 -- had the rare distinction among for-profit college executives for having been forced out of his job for having been, according to his former boss University of Phoenix founder John Sperling, too “preoccupied” with the stock price of the company.

Goldman’s plan was remarkably successful. From 2007 to 2011, EDMC’s enrollment numbers doubled, from about 80,000 to nearly 160,000, making it the second largest for-profit higher education company in the country. At the same time, the company’s annual revenue has nearly tripled to a whopping $2.8 billion (nearly 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 students and taxpayers, and the reputation its founders worked carefully to build over nearly four decades.

We will soon take a closer look at Higher Ed Watch about how Goldman’s purchase of EDMC transformed the company. Stay tuned.

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