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ITT Educational Faces the Wrath of Department of Education

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The U.S. Department of Education (ED) finally took absolute actions against ITT Educational Services, Inc. (ESI - Free Report) by banning the education company from enrolling new students who depend on federal financial aid and imposing several financial restrictions on the company. The share price of the education company plunged 61.7% on Aug 26 as ED revealed its decision in a press release on Aug 25.  

The Accrediting Council for Independent Colleges and Schools (ACICS) concluded that ITT “is not in compliance, and is unlikely to become in compliance with ACICS’s Accreditation Criteria.” In response, ED undertook several measures to protect students and tax payers.

The company is required to inform its current students that the company is not in compliance, and is not expected to be compliant with the required Accreditation Criteria. The company is required to develop “teach-out” plans with other colleges so that the current students can complete their education in case the company ceases to operate before the graduation of the students. 

ITT has been ordered to pay additional $152 million over the next 30 days to the ED, which will be used to pay liabilities such as student refunds, student loan cancellations and other expenses if the company closes campuses. The ED also asked the company to freeze any pay raises or bonuses to its executives.

ITT Educational Services seems to be caught up in a storm of controversy for a long time now. It all began in fourth-quarter 2013, when the company had trouble filing earnings results due to uncertainties related to the accounting treatment of the PEAK Private Student Loan Program and the CUSO program in its financial statements. The aforementioned loans created a lot of complications, which finally resulted in the SEC pressing fraud charges against the company and two of its executives in May 2015.

In Sep 2015, the company received a Civil Investigative Demand (CID) from the Department of Justice (DoJ). The CID investigated the company under the False Claims Act in order to determine if it had deliberately submitted false statements, which stand as a violation of the Department of Education’s Program Participation Agreement regulations. The DoJ also investigated if the company even met U.S. Department of Education’s compensation regulations.

ITT Educational Services carries a Zacks Rank #2 (Buy).

Investors interested in the education space may also consider Lincoln Educational Services Corporation (LINC - Free Report) , Apollo Education Group, Inc. and New Oriental Education & Technology Group Inc. (EDU - Free Report) . While Lincoln Educational sports a Zacks Rank #1 (Strong Buy), Apollo Education Group and New Oriental Education & Technology hold a Zacks Rank #2.

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