A week ago, for-profit college ITT Technical Institute closed. At the time it appeared the company had simply run out of money. Now that is confirmed. ITT Technical Institute is in bankruptcy.
The bankruptcy is as problematic as the shutdown. In bankruptcy the college will sell off its assets and pay as much as it can to its creditors. The largest group of creditors are the roughly 30,000 students who paid for fall courses that the college wasn’t able to deliver. This group includes, at a guess, 5,000 students who planned to start their studies this fall. They paid their tuition, bought their textbooks, in many cases quit their jobs, only to have the rug pulled out from under them just as their studies were supposed to get going. At the same time almost the only substantial assets in the bankruptcy are the loans due from students, including this new group of students and also including at least 10,000 graduates who can’t get jobs and have no means of repaying their college loans. One hopes the bankruptcy court has a keen sense of fairness about this and doesn’t use money from students who were tricked into handing over their life savings and then some to pay off Wall Street investors. Even if that goes well, we will be left with investors trying to collect student loans from graduates who are unemployed, unqualified, and broke — not to mention what happens to the students who were a few courses short of graduating. It paints an unflattering picture of what American higher education has turned into.
In filing for bankruptcy, ITT Technical Institute says it went broke because it had fewer new students this fall. Total enrollment fell only slightly, but new students had a disproportionate impact on the college’s finances. In this respect, the college may be seen as the equivalent of a Ponzi scheme. It depended on a steady stream of new customers to meet its obligations to its existing customers. If that were not the case, it could have continued to serve its existing customer base using the money its existing customers were providing.
The business plan of higher education is not a mystery. Students pay tuition, and that money goes to pay the hourly wages for instructors and the rent for the classroom. It’s a highly scalable business model — it works for schools that have ten students and for those that have 100,000. ITT Technical Institute charged some of the highest tuition rates in the world. That it could not simply scale back by 5 percent and keep operating, even for a few days, shows that its finances did not follow the normal financial model of a school. It was using borrowed money to pay its operating costs while using its revenue to defend its ability to borrow more. That’s technically not a Ponzi scheme but doesn’t differ financially from one in any important respect.
When a Ponzi scheme is discovered, the only solution is to shut it down as soon as possible. The longer it operates, the greater the financial pain when it eventually collapses. I believe the same logic applies to ITT Technical Institute, and perhaps this was the logic that the board of directors applied. As long as its continued operation depended on proving it can expand its customer base, there was no reason to hope it could wind down gently. Had it succeeded in enrolling more students this year only to collapse next year, the cost of the collapse would have been that much greater. Conversely, had it been shut down ten years ago, the cost of the shutdown would have been smaller.
If the closure came 10 or 20 years later than it ideally should have, tallying the cost of the delay is only a theoretical objection. In practice, institutions never stop the day they start doing more harm than good. Instead, that decision comes long after, and the delay in this case is no different. When a board of directors says it’s time to shut down a corporation, it is almost always too late to second-guess the decision.
