As federal lawyers bore down on Corinthian Colleges Inc., a Lake Oswego firm infused the national chain of trade schools with cash — enough money to allow Corinthian to issue more than 100,000 new student loans.
That matters today because federal regulators maintain in court filings that Corinthian Colleges had been using predatory and deceptive tactics to entice students into enrolling and borrowing for tuition.
An affiliate of Aequitas Capital Management bought for about half price more than $500 million in Corinthians student loans and then charged the college chain millions in fees for its help. In the process, the Aequitas affiliate threw a lifeline to Corinthian that helped keep its doors open, becoming an instrumental player in a student loan program that regulators contend put thousands of additional college students on a path toward default and heartbreak.
When Corinthiancollapsed and shut down its remaining campuses earlier this year, students were stuck with high-priced loans and unfinished degrees.
Aequitasis a private firm that manages investments for wealthy individuals. It formed Campus Student Funding LLC to buy the debt from Corinthian. Neither Aequitas nor Campus Student Funding have been accused of wrongdoing and they accept no blame for what happened. The company says it struck a sound business deal in 2011 that helped students who otherwise couldnt go to college.
Indeed, thousands of students completed their degrees and paid their loans.
Some werent so fortunate.
Dawn Thompson, 49, studied at Corinthian for six years to become a paralegal. The struggling Midwest mom of two remains unemployed and buried in $170,000 in loans. She said her Corinthian degree did her no good. Shes joined a nationaldebt strike movement urging other students to refuse to repay their Corinthian loans.
Others are taking aim at Aequitas.
We will make every effort to make Aequitas business less and less profitable, said Laura Hanna, a debt strike organizer. These loans are immoral and scandalous.
Federal regulators are pressing holders of Corinthian student debt to forgive it. Campus Student Funding still owns more than $80 million in Corinthian student loans. The company said most students are paying off their loans.
But the heady gains Campus Student Funding enjoyed in the beginning may give way to millions in lost revenue in the wake of Corinthians collapse. A June 8 filing in US Bankruptcy Court shows that a Corinthian subsidiary owes the Aequitas student funding arm more than $44 million.
The arrangement illustrates the big money and the big risks inside the world of high-interest student loans. Nationally, students are borrowing about $100 billion a year to attend college, a flow of cash that proved irresistible to profiteers.
Publicly owned companies flocked to the college business a decade ago and companies such as Corinthian racked up billions in revenues. The schools arranged federal loans for students who then passed the money to the schools for tuition and other costs.
Records and congressional testimony describe how students at Corinthian paid tuition double what comparable schools charged. Worse, they were stuck with financing that was the equivalent of payday loans — interest five times what other sources charged.
A promising deal
Aequitas officials said in written statements that its affiliate did business with Corinthian because it was in good standing with the US Education Department.
Our philosophy is to support underserved sectors and for many of these students earning a degree would help them make a living and help contribute to society, the company said. Perhaps a single parent or high-school dropout, getting a higher education was a last chance to save their future.
Bob Jesenik, a one-time US Bancorp manager, formed Aequitas in 1993 and earned $1 million last year. The name Aequitas, pronounced E-kwi-tos, is Latin for justice and equality.
Some of Oregons most well-regarded businessmen sit on his companys advisory board. They include Gerry Frank, longtime aide to US Sen. Mark Hatfield who is a freelance columnist for The Oregonian/OregonLive; former Portland television station manager Marty Brantley; corporate lawyer Will Glasgow; and local tech entrepreneurs Patrick Terrell and Keith Barnes. Frank and Brantley declined comment, Neither Glasgow, Terrell nor Barnes returned messages.
Aequitas owns investment advisory firms, other operating companies and a business lending arm. Its CarePayment subsidiary buys consumer debt from doctors and hospitals in whats called receivables financing.
In 2011, the small regional firm sought a way to expand into student lending — and had the seeming good business fortune to link up with Corinthian, one of the nations largest for-profit colleges. It became the companys single largest investment. At the time, California-based Corinthian had 110,000 students and revenues surpassing $1.7 billion.
But Corinthian had serious baggage.
Critics for years accused Corinthian of targeting poor and minority students with loans carrying interest rates up to 19 percent. In 2007, California authoritiesalleged the college lured students by lying to them about the success its graduates had in finding work. The college admitted no wrongdoing but paid $6.5 million to settle.
In June 2011, US Sen. Tom Harkin, D-Iowa,heaped scorn on Corinthian during a Senate committee hearing. He said that the companys students were more likely to end up with ruined credit than a valuable degree.
Three weeks later, Aequitas-affiliate Campus Student Funding signed its deal with Corinthian. Jesenik, the CEO, said the company did so despite concern the chain might be labeled a predatory lender.
It was clear that Corinthian was having troubles of their own, both regulatory and financially, Jesenik said in a 2014 deposition. We were all aligned to make sure that whatever we did with Corinthian was going to be safe, was going to be defensible.
Jesenik sat for the deposition after his company was sued by another firm. The suit, which is pending, involved fees and control of the Corinthian relationship.
$1.1 million a month in fees
Campus Student Funding negotiated highly favorable terms.
It bought Corinthians student loans at a deep discount — usually in the range of 50-55 cents on the dollar. That left the Aequitas affiliate to potentially double its money by collecting the full value of the loan from students.
It didnt have to worry about whether students paid their loans. Corinthian agreed to take back any student loan that went unpaid after 90 days.
Finally, Campus Student Funding got fees: program management fees, transaction fees, and asset management fees. While Aequitas officials said the fees totaled $36 million, Corinthian officials said the total was $68 million. Aequitas disputes the higher figure, saying Corinthian had trouble in its final days providing accurate information.
Corinthian had good reason to agree to such terms: access to billions from the federal treasury.
The US Education Department dispenses nearly $100 billion a year in taxpayer-funded student loans — the largest source of college money in the country. The students use those loans to pay tuition and other college costs. Corporate colleges such as Corinthian commonly derive 80-90 percent of their revenue from such financing.
Education Department rules require those for-profit colleges to come up with at least 10 percent of their revenue from other sources — meaning students. But since Corinthians student body tended to be poor, Corinthian needed to lend students enough to cover the full tuition.
It was this private, internal loan program that Campus Student Funding financed. By early 2014, the company had purchased more than $561 million in such loans.
With the Aequitas affililate funding its internal loans, Corinthian had what amounted to an ATM card to use at the Education Department.
These loans were toxic multipliers, said Ben Miller with theCenter for American Progress. For every dollar they loaned in this program, they got nine dollars from the federal government.
Aequitas said it was appropriate to finance Corinthian because the Education Department also was funding loans for Corinthian students. The federal lending continued despite investigations of Corinthian that had gotten under way by other government agencies.
Between 2011 and 2014 and with Aequitas help, Corinthian banked more than $3 billion from the federal treasury. Aequitas, meantime, offered returns of 12 percent to its investor clients who put money in the student lending deal.
When scrutiny of for-profit colleges intensified, Campus Student Funding and Corinthian in 2012 cut loan rates by 2 percentage points or more. Aequitas said it also lowered loan fees and extended grace periods.
Olaf Janke, Aequitas chief financial officer, said in a 2014 deposition that they hoped to make the loans more student-friendly. He acknowledged that the federal Consumer Financial Protection Bureau urged such reforms. Janke said Aequitas wanted to avoid the fate of other private student lenders, which paid multi-million dollar settlements after being accused of discriminatory lending and overcharging.
Janke, who has since left Aequitas, said in the deposition that Campus Student Funding replaced the diminished interest income by charging higher fees to Corinthian. Aequitas officials disputed that.
Aequitas finally ended the relationship in January 2014. The company didnt cite qualms about Corinthians treatment of students as the reason it cut the cord.Rather, as an internal Aequitas memo to its clients showed, the companys own investors and lenders balked at the risk as Corinthians conduct was spotlighted.
We had increasing difficulties in procuring capital, Janke said in his deposition. Due to the Corinthian negative headlines, investors either demanded a higher rate of return for their investment or they elected not to invest at all.
Last summer, the Education Departmentrestricted Corinthians access to federal money. In response, the corporate college stunned its investors and critics in announcing intentions to get out of the business.
Three months later,the Consumer Financial Protection Bureau sued Corinthian in federal court, claiming the private loan program that Campus Student Funding helped finance violated federal consumer protection laws. The federal agency accused Corinthian of predatory, deceptive and illegal practices in the program. Neither Campus Student Funding nor Aequitas were named.
The bureau has asked the judge to cancel 130,000 private Corinthian student loans.
Working behind the scenes, the bureau has already managed to get millions of dollars worth of Corinthian student debt extinguished. Sources said the bureau is in talks with Aequitas to work out such forgiveness but Aequitas hasnt agreed.
In a May SEC filing, Aequitas warned its clients that the fast changing regulatory environment could adversely affect the performance of certain of its investment funds.
Despite the controversy, Aequitas hasnt soured on higher ed, telling investors in early 2014 that it was aggressively pursuing other higher education funding relationships.
It formed anew affiliate providing Web-based college reviews, scholarship directories and internship listings. After three years of doing business with the corporate college that became the poster child for abusive student lending, Aequitas now casts itself as the college students ally.
Were here to help students, proclaims its website. Every action we take and decision we make must benefit students. If it doesnt, we wont do it.
— Jeff Manning