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Who killed Heald College?

Heald College supporters in California protest the school's closure in April 2015 (Source: Eeva Deshon)

Last fall, in the midst of a two-year accounting program at Heald College’s Fresno, Calif., campus, Feliciano Castaneda started to worry.

His school was on the brink of closure, according to news reports. Heald’s parent company, Corinthian Colleges, Inc. was the target of several federal and state investigations into whether vocational schools it owned routinely lied about their graduates’ chances of finding jobs and aggressively courted low-income pupils to maximize their access to federal student aid. Regulators had given the company a year to either close its remaining campuses or sell them--including Heald, a 150-year-old junior college with a dozen campuses in California, Oregon and Hawaii.

Castaneda, 19, asked Heald administrators about the reports. They brushed him off.

“All I kept [hearing] was ‘our parent company is in trouble, not Heald College,’” Castaneda said. “‘Our school is not being affected and it will not be.’”

Colleges don’t normally go out of business, so it wasn’t unreasonable to expect a school like Heald to keep running forever. Some of its graduates had gone on to become mayors, wealthy publishers and successful business owners. Barbara Walters delivered the commencement address at that same Fresno campus in 1973.  In recent years, like many vocational schools, its campuses catered to the economically vulnerable. Black and Hispanic women, often parents in single-income households, mostly populated classes. Ninety-seven percent of students received some form of financial aid.

But Heald College did not survive. It abruptly closed this spring, with a staggering $30 million fine levied by the Department of Education delivering the final deathblow.  

A Yahoo Finance investigation into Heald’s closure uncovered a series of missteps that led to Heald’s undoing — from the fatal mistake Heald leaders made in selling their school to Corinthian at the peak of the for-profit education bubble to the troubling lack of oversight from federal and state regulators that allowed Corinthian to grow, unencumbered, for nearly two decades before it finally imploded. This story is as much about a collective failure to protect tens of thousands of students from a predatory institution as it is an example of the consequences of combining business and education.   

A legacy undone

Source: Heald College: Celebrating 150 Years of Success

Heald’s founder and namesake, Edward Payson Heald, was born nearly two centuries ago, but in some ways he resembled any startup guy today eager to try his luck in Silicon Valley. In 1862 Heald left his home state of Maine and sailed to the San Francisco Bay, which was still booming after California’s Gold Rush. Heald had taught business back in Maine, and he started tutoring in his new home state. His business eventually became Heald College, which initially offered courses in bookkeeping, penmanship, and commercial arithmetic — skills essential to young entrepreneurs of the day. Over the decades Heald educated thousands of upwardly mobile business-minded young people. By the early 1980s Heald instructors were teaching 6,000 students at 13 campuses in three states.

Heald updated its curriculum in the 1990s to capitalize on the Internet boom, but when the dot-com bubble burst in the early 2000s, enrollment plummeted along with the economy—and never recovered. By 2006 Heald was hemorrhaging money. It was $20 million behind on a mortgage loan from Bank of America and unlike many private nonprofit schools that benefit from the generosity of wealthy alumni, had no multimillion-dollar endowment fund to cushion it.

“The well-meaning board of trustees and management really didn’t understand how to operate a career college,” said Eeva Deshon, who was president of Heald College for four years before its closure.

Source: Heald College: Celebrating 150 Years of Student Success

Heald’s board felt it had no choice but to try to find a buyer. It summoned investment bankers and put out feelers to private investors. In September 2007, Palm Ventures, a small Connecticut-based private-equity firm run by veteran banker Brad Palmer, put in a winning bid. With Heald College’s sale to Palm Ventures, Heald executives officially converted the college from a nonprofit school with little incentive to boost enrollment to a for-profit revenue model that largely depended on getting as many students in the classroom as possible.

Palm appeared to be riding a trend. The for-profit education sector was booming, as investors took advantage of new regulations that made it easier for for-profit schools to access federal financial aid dollars. Corinthian, which had been in the for-profit college business since 1995, was flourishing.

Between 2000 and 2010, enrollment at private for-profit institutions exploded, growing from 400,000 to 1.7 million students. For-profit schools operated much more like a business than nonprofit colleges or universities, focusing on revenue growth and stock valuation. That may help explain why for-profit schools accounted for roughly 25% of all federal student aid money by 2010 (student aid being a form of revenue, after all), even though just 11% of students attended such schools.

“Because a lot of these schools were publicly traded, there was this huge incentive for enormous growth,” says Stephen Burd, an education policy analyst with the New America Foundation, a nonpartisan think tank. “The whole structure of how a number of these companies operated was ‘growth at any cost’.”

As part of the sale to Palm, Heald’s existing management team was ousted and a new one was installed. Palm appointed a new president — ex-Corinthian executive Nolan Miura, who then recruited Eeva Deshon as his chief financial officer, hiring her from the California Culinary Academy.  

Miura and the new board’s directive was straightforward: Clean up Heald’s financials and get it back on track. Heald went from the brink of bankruptcy in 2007 to generating $38.5 million of profit by 2009, according to figures cited in a Bloomberg press release.

“Those were probably our strongest years in my 20 years with Heald,” recalled Carolyn Pierce, who oversaw Heald’s Fresno, Calif., campus at the time.  “It was a dream team.”  

In Deshon’s mind, they had successfully “righted the ship.”

A fatal mistake

It appeared that Palm Ventures threw Heald a much-needed lifeline, helping it narrowly avoid bankruptcy. But Heald had now cast its lot with Wall Street dealmakers looking to profit from the red-hot, for-profit education sector.

Meanwhile Corinthian Colleges, Inc. — based in Santa Ana, Calif. — had had a near death experience of its own. For 18 months, the for-profit school had been mired in an investigation by the California Attorney General's office into its recruiting practices. In a letter to shareholders in 2007, Corinthian warned of the possibility that it would have to shutter several campuses as a result of the investigation.

Ultimately Corinthian got off with hardly a scratch. The company agreed in July 2007 to pay $6.5 million to settle the suit without admitting any wrongdoing. All of its campuses remained open. The fine was a pittance compared to the cash Corinthian was bringing in at the time. The same year it settled the suit, Corinthian reported close to $1 billion in revenue, a figure that would nearly double by 2010.

Free from the California AG’s probes, Corinthian’s rapid expansion continued relatively unencumbered. The company recipe for expansion was simple: Snap up existing schools through acquisitions (nearly two dozen in all, including WyoTech and Everest Institute). Between 2007 and 2009, enrollment at Corinthian-owned schools grew 50% to more than 93,000.  

So perhaps it wasn’t surprising that Corinthian turned its sights Heald’s way. In 2009, Heald’s new president, Nolan Miura, received a call from his former employer: Corinthian wanted to buy Heald.

Yahoo Finance. Credits: Members of the Noun project: Lauren Jochum, Gianni - Dolce Merda, Aha-Soft, Creative Stall, James Keuning, Gregor Cresnar, Michael Wohlwend, Luis Prado, Christopher Holm-Hansen, Juan Pablo Bravo, N.K.Narasimhan, Loren Klein, Jeff Portaro and Till Teenck.

Miura and his management team, eager to sell, brought the proposition to Palm Ventures. Palm hadn’t planned to flip Heald so soon, but apparently found the offer too good to refuse. In October 2009, Corinthian, advised by BofA Merrill Lynch (BAC), purchased Heald for $395 million in a cash and debt deal. The sale made Heald, regionally accredited and well-respected among its peers, “the Mercedes of [Corinthian’s] brands,” Deshon says.

Miura, who did not return requests for comment, said in a press release that he was confident the deal would benefit both Heald and Corinthian: “Having spent eight years at Corinthian as a senior executive, I know personally that both organizations strive to put students first and to provide a positive culture for faculty and staff."

Heald’s executives had ambitions of their own. Deshon, who replaced Miura as president after the sale, badly wanted to see Heald launch a four-year nursing program. To do so, Heald would need millions of dollars in additional funding and the green light from its accreditor, the Western Association of Schools and Colleges (WASC), one of six regional accrediting bodies in the U.S. that periodically evaluate schools and colleges for academic outcomes and quality. Parent company Corinthian, with its $1 billion revenue stream, was Heald’s golden ticket.

In order to win WASC over, Heald needed to prove that Corinthian wasn’t going to meddle in its academic affairs. Corinthian leaders put them at ease, agreeing to let Heald maintain its independent board of directors, who would control the day-to-day operations at the school.  

There was just one exception: Corinthian wanted to control how Heald advertised its programs and recruited students. At the time, it seemed no different than how Heald already handled its marketing efforts, which it outsourced to a third-party firm. But trusting that Corinthian could handle recruitment and marketing but not influence Heald’s academic matters would turn out to be a major blunder.

“The notion that academics and recruiting were divorced is laughable,” said Barmak Nassirian, director of policy analysis at the American Association of State Colleges and Universities. “You can’t say I have total academic autonomy but somebody else decides who shows up in my classroom.”

When asked whether anyone on Heald’s team had doubts about selling to a company that had been rebuked for deceptive marketing and recruitment practices, Deshon paused before answering.

“We felt comfortable in that what we would get out of [the deal] was more resources and we’d continue to operate Heald like Heald had been operating,” she said.

The wolf in the hen house

Aerial view of Heald college in downtown Honolulu, Hawaii, taken in 2007. (Charlie Boy Criscola via Flickr)

Still, operating under Corinthian’s banner seemed to work for Heald, at least initially. Like a new stepparent eager to win over a wary stepchild, Corinthian showered Heald with attention — and cash.

The company invested $3.25 million in Heald’s IT infrastructure and put in another $2 million to upgrade its information management system, which included revamping Heald’s library systems at all 12 campuses, installing new computer terminals for students and establishing a campus-wide Wi-Fi network. Heald owned five of its 12 campuses at the time, but Corinthian arranged to sell those properties for $39.5 million to real estate investment firm STORE Capital Acquisitions, LLC. From then on, Heald leased all of its campus properties.

Whatever Corinthian was doing to recruit more students appeared to be working. Heald’s enrollment climbed sharply the year after Corinthian took ownership, growing from 12,900 in 2009 to more than 20,000 students in 2011. The Department of Education estimates roughly 50,000 students matriculated through Heald from 2010 to 2014, taking out a total of $680 million in federal loans. Heald leaders took this expansion as a sign of success, but some instructors told Yahoo Finance they worried Heald was opening its doors to students who couldn’t handle the coursework.

John Klopfenstein, a criminal justice instructor at Heald during its first year under Corinthian, said he questioned management about the quality of new enrollees. “The students were so subpar, they could barely formulate a sentence,” Klopfenstein said in an email. “I questioned the management about this and was told they were tested and passed whatever tests necessary to enroll in Heald.”

If any agency was in a position to raise a red flag about Corinthian’s recruitment practices at Heald, it was WASC. Before the accreditor could approve Heald to begin offering four-year degrees, WASC officials had to conduct a months-long review of Heald’s performance and student outcomes, which included carefully dissecting Heald’s relationship with Corinthian.

But in its review of Heald in October 2011, WASC officials appeared to be more than satisfied with the school's practices. Heald’s marketing materials were “appropriate” and “reasonable” for the programs offered, they wrote. WASC officials even praised the school’s efforts to keep its new parent company at arm’s length, saying “the college’s governing board is qualified, engaged, and sufficiently autonomous.”

Yahoo Finance contacted WASC several times for comment. The accreditor’s response was always the same: a terse “no comment” and the sound of a click as their spokesperson hung up the phone.

Caught in the crosshairs

California Attorney General Kamala Harris sues Corinthian Colleges on Oct. 10, 2013. (Getty Images/Justin Sullivan)

With a favorable review from WASC, Deshon and her team had the green light to begin offering four-year degree programs. Its new accreditation status technically put it on par with the likes of Stanford University and UC Berkeley, and Heald officials were eager to shed their image as merely another “career college.” But, unbeknownst to them, their dream would never come to fruition — Heald’s parent company would soon be the target of four state and federal investigations.

In June 2013, the Securities and Exchange Commission said it was investigating Corinthian’s recruiting and job placement reporting practices, causing Corinthian’s stock to plummet 12% in one day.

Just a few months later, California Attorney General Kamala Harris struck. In a 39-page lawsuit, it became clear exactly how Corinthian was influencing Heald’s marketing and recruitment practices — and how much WASC had missed in its evaluation.

Through Corinthian’s marketing efforts, Heald was allegedly running ads for associate’s degree programs it didn’t offer, like radiology and ultrasound technicians. Several ads illegally used a military insignia, purportedly in order to attract military veterans, a common target of for-profit college scams.

“In some cases, a Heald... representative convinces the consumer to visit the campus without ever disclosing that the program is not offered, while in other cases [the representative] pressures the prospective student into considering a different program that is offered by Corinthian Colleges, Inc.,” the complaint said.

Deshon generally denied claims about Heald’s faulty marketing efforts, saying she only saw one instance where Corinthian advertised a course that Heald did not offer. In her mind, Heald was simply being targeted because it was attached to Corinthian.

“We got swept in with the Corinthian ownership logo,” she said. “If Heald had stayed a privately held institution, we would have flown under the radar. We’d be just fine.”

According to the California lawsuit, several of Heald’s programs in particular reported 100% job placement rates, a level many Ivy League schools don't even achieve. In the complaint, the Attorney General said “in some cases there is no evidence that a single student in a program obtained a job.” A separate investigation by the Department of Education found some of Heald’s programs that claimed to have 100% placement rates actually had placement rates as low as 38% and 50%.

Corinthian might have survived the AG lawsuit, like it had in 2007, except for the fact the for-profit education sector would soon come under more scrutiny. A damning 2012 Senate report shone a spotlight on 30 publicly for-profit education companies, including Apollo Education Group, Inc. (APOL), parent of the University of Phoenix, Career Education Corporation, and Heald’s parent company — Corinthian Colleges. With the Obama administration’s blessing, the Department of Education had all the impetus it needed to start cracking down on the sector.

The DOE tasked Under-Secretary Ted Mitchell with leading the investigation of for-profit institutions. Corinthian, having been the source of many consumer complaints (exactly how many is not public record, a spokesperson says), was at the top of the DOE hit list.   

By June 2014, Mitchell and his team, fed up with Corinthian’s inability to meet requests for documentation to support job placement claims, put the school on a 21-day federal student aid freeze. For a company that relied on federal student aid for nearly 90% of its funding, the freeze effectively put Corinthian on life support, leaving it with a $100 million budget shortfall heading into the new school year. Corinthian slashed costs wherever it could, cutting pay for salaried staff at all campuses by 10% and giving campus directors a mandatory one-week furlough in September. Trouble was brewing at Heald too where bills from campus vendors were in arrears. As Carolyn Pierce, then-president of Heald’s Fresno, Calif., campus, recalled, Heald had trouble keeping water coolers on campus filled.  “I think that’s when we started to feel the pain,” Pierce said.

It was the beginning of the end for Corinthian — and for Heald as well.

‘We did it with our eyes open’

Courtesy of Eeva Deshon

If Corinthian were a restaurant chain that had been caught serving contaminated food to customers, regulators could have just shut it down. But closing a college is another matter. The school had some 70,000 students at 100 campuses who were working to earn a degree many hoped would lead to financial security.

Rather than close all the campuses in one fell swoop, the DOE allowed Corinthian to “teach out” some campuses (meaning they would stop enrolling new students and let those remaining complete their degrees) and sell the remaining campuses to a willing buyer. Any schools that couldn’t be sold would be closed. After that, it was widely expected that Corinthian would file for bankruptcy.

This was how in the summer of 2014, Eeva Deshon found herself back at Heald College. If the school was going to survive and emerge from the Corinthian mess, it needed to find a buyer, and Deshon, who left her post as president of Heald in the fall of 2013, agreed to come out of early retirement and help with the process as president again. She’d have less than a year to get the job done. “I knew we were on a fast time line but I thought for sure we would find a buyer before we went into 2015,” she said.

And if Deshon were to find a buyer for Heald, she would have to convince Kamala Harris to back down first. Three serious buyers had expressed interest in purchasing Heald, but in meetings with the Attorney General, Harris had made it clear that any new owner would be liable for whatever came from the state’s lawsuit against Corinthian, according to accounts from Deshon and a Corinthian representative who asked to remain anonymous.

“[The Attorney General] didn’t really have a regulatory role in approving the sale but they could threaten the buyer and tell them that they would continue the litigation against them,” said the Corinthian representative, who was close to the negotiations but asked to remain anonymous. “That’s what happened in this case.”

A spokesperson for the AG’s office denied this account, saying Harris had no official role in the sale of Heald.

While Heald’s leaders tussled with the state of California, Corinthian moved forward with plans to sell a big chunk of its campuses to Zenith Education Group, a nonprofit education company owned by Education Credit Management Corporation, one of the largest student debt collection firms in the U.S.

Heald, as Deshon had feared, was not part of the deal. In fact, all of Corinthian’s California-based schools were left out, largely, she said, due to Kamala Harris’s investigation.

Desperate to drum up public support to convince Harris to back down, Deshon and Heald officials organized rallies in Sacramento and San Francisco in early April. Students and faculty carried signs pleading with Harris to allow a buyer rescue the school. A Change.org petition started by Deshon attracted more than 10,000 signatures. On Twitter, Heald supporters spread the word using the hashtag #SaveHeald.

And then, there was a flicker of hope: One of Heald’s leading bidders seemed willing to purchase the school, legal troubles and all. They would get Heald for what looked to be a steal, roughly $10 million — a fraction of the $395 million price tag it had fetched from Corinthian a few years earlier. A deal was drawn up and scheduled to be signed on April 15 of this year.

Heald management knew the DOE was still conducting an investigation into Corinthian, but they never expected what was next to come: One day before Heald was set to finalize its sale, the DOE announced a $30 million fine against the college for a slew of violations, including claims Heald posted misleading job placement rates for 80% of its programs.

Deshon and executives from Corinthian and Heald were stunned. The DOE must have known that a fine of that magnitude would kill whatever hopes Heald had of making a sale and keeping its students. It was the DOE that agreed to back off and allow Corinthian to teach out or sell the rest of its campuses in the first place. The fine was nearly three times the $10 million that the buyer had agreed to pay to purchase Heald. Not surprisingly that bidder immediately backed out, taking with it Heald’s last chance for survival.

In an interview with Yahoo Finance, DOE Under-Secretary Ted Mitchell said he had no choice but to move forward with the $30 million fine against Heald when he did, even if it meant destroying Heald’s chances of being sold.

“On the one hand, we knew [the fine] was likely to have a chilling effect. On the other hand, it’s our obligation when we know the facts to act on them,” he said. “We did it with our eyes open.”

On April 26, two weeks after the DOE levied the fine that would spell Heald’s doom, Corinthian decided to cut its losses and shut down all of its remaining campuses, including Heald.

“I basically had to terminate 1,500 employees,” Deshon recalled. Heald’s 6,000-plus remaining students found out the news by email or when they tried to access Heald’s website and instead found a letter from Corinthian CEO Jack Massimino announcing the school’s closure.

Deshon was allowed to keep a skeleton crew of four or five staffers to make sure students could access their transcripts and records. Although Corinthian did file an appeal of the DOE fine, it appears to be over for Heald. By law, if a higher education institution files for bankruptcy, any schools operating under its auspices are indefinitely ineligible for federal student aid. Essentially, Heald is dead, a Corinthian rep said.

As for Heald’s troubled parent company, Corinthian’s end won’t be quite as finite. As expected, the company filed for Chapter 11 bankruptcy on May 4, citing $143.1 million of debt and $19.2 million in assets. In addition to more than two dozen creditors, the company will now answer to a special committee approved by the U.S. Trustee Office, which oversees bankruptcy cases, to represent tens of thousands of former students and alumni who could demand as much as $25 billion in tuition refunds.

There are plenty of lessons to be learned from Heald’s demise. The school prospered under the Corinthian banner even as state and federal regulators suspected Corinthian was violating the law for years. And the DOE could have done more to make for-profit students aware of the risks involved. The agency has made some progress in that regard — in March, it released a list of hundreds of colleges it suspects are not in compliance with federal requirements. It’s also possible that the DOE will rethink its trust in the gatekeeping abilities of accrediting bodies like WASC. For instance, it’s widely known that most accrediting evaluations hinge on something called a “self study” — a supposedly objective report compiled by a school’s own officials that details how the school is performing.

“[We want] to be clearer about what standards [of] accreditation ought to be and emphasize student outcomes and the visibility of student outcomes,” Mitchell said. “That said, we need to improve our communication with accreditors and their communication with us just as we’re trying to improve our communications with other agencies.”

For Heald’s former students, like Castaneda, there has been at least one silver lining. In an unprecedented move, the DOE announced in June that it would allow some 40,000 Heald graduates and former students to have their student loan debt forgiven. If every Heald student qualifies, it could amount to more than half a billion dollars in loan refunds. That figure could rise to $3.5 billion if every student who attended Corinthian schools (roughly 350,000 since 2010, according to the DOE) applies — an unfortunate burden for taxpayers to bear, but no doubt a welcome reprieve for students.

Castaneda was able to have $4,000 worth of student loans forgiven from his time at Heald, he said. Unfortunately, federal loan forgiveness rules prevent students from transferring old credits to a new school, which means Castaneda’s old Heald credits are useless. He enrolled at a different community college this summer to begin his studies anew. Compared to some of his classmates, however, he considers himself fortunate. “I felt bad because I had other classmates that were literally going to graduate the month [after Heald closed],” he said. “They did all this work for nothing.”

A Corinthian representative declined to comment on the allegations made by state and federal investigators. But in court documents filed in June, the company expressly denied any allegations of wrongdoing, arguing that both the DOE and California investigations were “politically and ideologically driven” and calling their claims “unfounded.” “[Corinthian] believes that they have provided all of their students with a sound education that increased their skill set, employability and income potential,” they said.

Looking back, Deshon said she is proud of what she and her team accomplished during her tenure at Heald. But she admits the sale to Corinthian was a turning point in the wrong direction. “If I had known five years ago what was going to happen,” she said, “I don’t think anybody would have considered selling.” As for who exactly is to blame for Heald’s quietus, the fault lies with more than just Corinthian.

Heald’s leaders, Heald’s accreditor, Wall Street players, and federal and state regulators should have foreseen what would surely come of Corinthian’s toxic fusion of business and education. All the signs were there, long before Americans were saddled with a potential $500 million write-off and long before Castaneda and thousands of other students squandered millions of dollars in tuition and untold hours in classrooms on an education that is now worthless.