BOSTON — ITT Educational Services Inc. paid $20.8 million for debt-ridden Daniel Webster College in June. In return, the company obtained an academic credential that may generate a taxpayer-funded bonanza worth as much as $1 billion.

ITT Educational is the third-biggest higher education company in the United States. Its $3.8 billion market value may increase it by 26 percent, or $1 billion, within five years because of the purchase of 1,200-student Daniel Webster in Nashua, N.H., according to Michael Clifford, an investor in Del Mar, Calif., who has participated in the acquisitions of four nonprofit colleges. At least 75 percent of new revenue would come from access to the more than $100 billion a year in financial aid the U.S. hands out to college students, he said.

Key to tapping that money is Webster’s regional accreditation, which is the same gold standard of academic quality enjoyed by Harvard University and helps students transfer course credits from one college to another.

Daniel Webster’s accreditation was its “most attractive” feature to ITT Educational, said Michael Goldstein, an attorney at Dow Lohnes, a Washington law firm that has represented the company.

“Companies are buying accreditation,” said Kevin Kinser, an associate professor at the State University of New York at Albany, who studies for-profit higher education. “You can get accreditation a lot of ways, but all of the others take time. They don’t have time. They want to boost enrollment 100 percent in two years.”

ONLINE EXPANSIONS MUSHROOM

The nation’s for-profit higher education companies have tripled enrollment to 1.4 million students and revenue to $26 billion in the past decade, in part through the recruitment of low-income students and active-duty military.

Now they’re taking a new tack in their quest to expand. By exploiting loopholes in government regulation and an accreditation system that wasn’t designed to evaluate for-profit takeovers, they’re acquiring struggling nonprofit and religious colleges — and their coveted accreditation. Typically, the goal is to transform the schools into online behemoths at taxpayer expense.

For-profit education companies, including ITT Educational Services, based in Carmel, Ind., and Laureate Education Inc., in Baltimore, have purchased at least 16 nonprofit colleges with regional accreditation since 2004, according to corporate announcements and filings with the Securities and Exchange Commission.

By acquiring regional accreditation, trade and online colleges gain a credential usually associated with the traditional academic culture of liberal arts, faculty scholarship and selective admissions. Normally the accreditation process takes about five years and requires evaluations by outside professors.

Enrollment at Grand Canyon University, a Christian college in Phoenix bought by investors in 2004, has soared to 37,700, as of Dec. 31, up from 1,500, said Brian Mueller, chief executive of Grand Canyon Education Inc. Ninety-two percent of students now take classes online.

Bridgepoint Education Inc., based in San Diego, has boosted enrollment of two regionally accredited colleges it bought in 2005 and 2007 to 53,688 students as of Dec. 31, up from 400 combined, according to a company filing. Ninety-nine percent of those students take courses exclusively online.

Daniel Webster “could parallel Grand Canyon or Bridgepoint’s growth curve,” said Clifford, who was part of the investor group that purchased Grand Canyon.

TAPPING INTO FEDERAL AID

ITT Educational declined to comment for this story. The company plans to open more Daniel Webster campuses and also expand online offerings, Kevin Modany, ITT Educational’s chairman and chief executive officer, said in a Feb. 22 presentation to analysts. The company expects to introduce programs including accounting, education and health sciences, he said.

The U.S. Department of Education, which doled out $129 billion in federal financial aid to students at accredited postsecondary schools in the year ended Sept. 30, is examining whether these kinds of acquisitions circumvent a federal law that new for-profit colleges can’t qualify for assistance for two years, said Deputy Undersecretary of Education Robert Shireman.

Under federal regulations taking effect July 1, accrediting bodies may also have to notify the secretary of education if enrollment at a college with online courses increases more than 50 percent in one year.

For accreditation to continue once the college is sold, the buyer must promise not to change its mission, Steven Crow, former executive director of the Chicago-based Higher Learning Commission, the largest regional body, said in a telephone interview. Regional accreditation is worth $10 million to a for-profit acquirer, Clifford said. That’s how much it would cost to start a regionally accredited college, a process that can take 10 years and has only a 50-50 chance of success. On top of the $10 million, buyers typically pay $23,000 to $50,000 per enrolled student, making the purchase of Daniel Webster a bargain, Clifford said.

ITT Educational Services, which was spun off from ITT Corp. in the 1990s, wasted no time making changes at Daniel Webster. It renovated a main building and razed a dilapidated dormitory. It also dismissed one-fourth of the staff, fired President Robert Myers, and has been accused by faculty members of misleading the New England accreditor, the Commission on Institutions of Higher Education, based in Bedford, Mass.

“ITT didn’t really have much interest in anything other than having acquired a regionally accredited institution,” said Myers, now president of the New England Culinary Institute in Montpelier, Vt. “If I had it to do all over again, I wouldn’t have gone anywhere near ITT. The fundamental nature of the college has changed.”

 

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