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SF Film School Too Big To Fail?
by Karl Cohen
Students leaving the Market Street, San Francisco, campus of the Art Institute of California. photo: courtesy AIC
When the Art Institute of California in San Francisco laid off a few people this summer, it garnered no mention in the media although it should have been a major story. Indeed, those job terminations were part of some 800 layoffs ordered by Education Management Corporation, the Art Institute's parent company. Listed as EDMC on the NY Stock Exchange, it is headquartered in Pittsburgh, PA, and serves as proof, if we needed any, that art and film school is big business.
EDMC is presently being sued for about $11 billion by the US government which believes it obtained that sum from taxpayers through an allegedly fraudulent scheme. (Under the False Claims Act, if the suit is successful, the amount could triple.) Late last year, EDMC stock was selling around $30 a share but since the suit was filed the stock’s value has fallen to around $3.
What is EDMC? One thing for sure, its leadership does not come from the academic community. About 70% of the corporation is owned by three major Wall Street investment firms—Goldman-Sachs, with about 40% of the stock, and Providence Equity Partners and Leeds Equity Partners making up the remainder—several top executives of those firms serve on EDMC’s board along with Todd S. Nelson and John R. McKernan, Jr.
EDMC’s CEO from 2007 until August 2012 when he became the corporation’s Chairman, Todd Nelson was previously with the Apollo Group, the largest of the for-profit education corporations. In fact, he was CEO when Apollo itself was sued for alleged recruitment fraud at their University of Phoenix franchise, a chain of some 200 schools and one of the biggest higher education institutes in the world. Apollo settled the suit out of court for $78.5 million (with a non-disclosure clause).
John McKernan, meanwhile, stepped down from as EDMC’s Chairman of the Board of Directors in July 2012. The former governor of Maine (1987-1995), he had been on the board since 1999 and is married to Olympia Snowe, who recently resigned her seat as a US Senator from Maine. Given the Tea Party was taking over the party, she explained, there was no place for her in the Senate as a moderate Republican. The couple owns about about $10 million shares of EDMC stock.
'Parched Penguin', animated short by a student at the Art Institute San Francisco. photo: courtesy AIC
From reading recent blog entries about the EDMC schools, it appears that the layoffs have disillusioned students and have resulted in excellent full-time teachers being dismissed, although some have been rehired as part-time employees at a much lower pay rates. Students noted the dismissal of key support people like computer techs and librarians. A Pittsburgh newspaper reported administrative staff members were also fired.
Nation Learns How Some For-Profit Schools Are Run
Discovering the way this highly lucrative for-profit education business is run has been the task of the US Senate Health, Education, Labor and Pensions Committee (HELP) and hearings led by Senator Tom Harkin (Dem. Iowa). They got news coverage in 2009 and 2010 as they uncovered proof of widespread fraud among several schools in the for-profit education sector but not much of late. The ban on incentives for new students were alleged to have regularly ignored by the school's recruiters themselves who reported being paid bonuses and given gifts for successful signups.
Recruiters admitted lying to entice prospective students to them into expensive contracts and hefty government loans. They were instructed by the schools to make grossly exaggerated statements about the potential income prospective students could expect to earn. They sometimes did not inform students of the full cost of their education or explain that the loans could not be voided by a bankruptcy judge. Young people lacking the aptitude or otherwise not qualified to enter the desired course of study were signed up.
There were “(d)eceptive or otherwise questionable statements to GAO undercover applicants,” at all 15 schools investigated, a report said. The hearings showed that some schools provided inadequate or out-of-date educations and inflated student success rates to continue to be eligible for federal grant programs. Schools have had to claim a fairly high placement rate for their graduates, a difficult trick in the recent economy. In one case, a graduate who studied computer animation was hailed as success story even though he was actually selling electronic goods at a major chain.
The committee called upon several of employees and former employees of Art Institute of America, the second largest for-profit education corporation in the country, to give testimony. The hearings also including undercover videos that were made to back up the claims that recruiters were using dubious or felonious techniques to enroll unqualified students.
The Art Institute of California in San Francisco towers over the centrally located UN Plaza. photo: courtesy AIC
Horror stories told by former students were also entered into the public record, including deceptions to get them to enroll, inadequate teachers and then either no jobs, unpaid internships or low-paying entry-level jobs upon graduation. The high paying jobs recruiters had promised had somehow vanished. Many of the disillusioned students ended up taking whatever jobs they could find outside of their area of expertise in an attempt to pay back their loans.
According to one report, a two-year associate degree in web design or media studies, which can be obtained from a local community college for $6,800, cost at EDMC’S Art Institute in Pittsburgh, PA around $47,500. A BA or BS degree from EDMC is double that.
“Students at for-profit institutions represent 12 percent of all higher education students, 26 percent of all student loans and 46 percent of all student loan dollars in default,” a US Department of Education press release stated in June 2011.
First Legal Action
In 2011, Department of Justice attorneys in California, Florida, Illinois and Indiana decided that EDMC was not qualified to receive the $11 billion it had obtained between July 2003 and June 2011. Their lawsuit declares that, although each year EDMC certified that it was complying with the law, they repeatedly violated federal law forbidding the remuneration of recruiters based on number of students they enrolled. The payment of a fixed salary was designed to remove any incentive for encouraging unqualified students who probably would not be able to complete a degree program.
Of course, EDMC claims they adhered to existing rules and regulations, but if that is true why did 56.8% of their students drop out in less than a year in 2009 (from a 2012 HELP report). Moreover, why is the number of students who actually graduate much lower than graduation rates from state and private non-profit colleges?
The State of California’s Cal Grants program adopted new rules for the 2012-13 school year that are designed to eliminate schools with high loan default rates and/or low graduation rates. The new guidelines require that institutions have a student loan default rate of 15.5% or less and a graduation rate of 30% or higher. The graduation rate for students enrolled at the ten largest for-profit schools in the country hovers around 20%, remarkably lower than the national 55.5% average for all schools.
At present 154 schools are no longer eligible for the Cal Grants, including three campuses in the Art Institutes of California chain. The Art Institute in Los Angeles had a graduation rate that was too low while the schools in Hollywood and Sunnyvale had default rates that were too high. Of the colleges barred from Cal Grants, 137 are private for-profit schools and the rest are private, not-for-profit schools. The five Art Institute campuses in CA that barely passed had default rates between 11.7% and 14.5% and none reported a graduation rate above 38.4%.
Although EDMC once had a high of 158,300 students enrolled, and listed 139,800 in June 2011, that number has dropped to some 124,000 in June 2012, which is the reason for the recent layoffs. EDMC runs campuses in 109 locations in the US and Canada under four names: Art Institute, Argosy University, Brown Mackie College and South University. They also have online divisions.
The federal government gave EDMC $2.2 billion in 2010. That accounted for 89.3 percent of the school’s income. By law the school has no responsibility to pay back the loans or to assist in the collection of that debt if the students default.
Nevertheless, “We remain a vibrant organization," a Pittsburgh, PA newspaper reports it was informed by an official from EDMC in an email. "It is important that we continue to strive to be as healthy, efficient and streamlined as possible so that we can continue to invest in and support growth where we see the greatest need and demand.”
Meanwhile, some students are trying to save the school. “The reality of our country is that big investment corporations are running educational institutions," they note on one of their blogs. "Fundamentally this seems backwards, especially when the CEO of EDMC was compensated with a total of $13,185,559 in 2011, yet they are laying employees off from campuses in droves because these are ‘difficult times in American higher education’.”
The upcoming November election may effect the disposition of the case against EDMC. Mitt Romney has major financial backing from several big education corporations including Goldman-Sachs and he has praised for-profit schools, especially Full Sail in Florida, in speeches. What do you think Mitt might do if he gets a chance to help his buddies at Goldman-Sachs?
Note For Those Seeking A Film Education
There are also for-profits that are respected for providing excellent animation educations. If you know somebody planning an animation career, make sure they do as much research as necessary to find out about the schools they are interested in. Some sites like Wickipedia and Yelp provide critical information when it is available (sometimes it is quite controversial). CineSource Magazine also provides consultation about the Bay Area's cinema schools. If there is an animation studio near where the prospective school, inquire if there is somebody there who reviews portfolios of prospective employees who might be willing to offer an opinion about the quality of work they see coming from the school's graduates.
Posted on Sep 19, 2012 - 04:44 PM