Career Education Corp. said Tuesday that it will pay about $40 million to settle lawsuits filed by students in one of its culinary schools.
The settlement was recorded as a pretax charge against the company’s third-quarter earnings. In the quarter ended Sept. 30, Career Education reported net income of $26.1 million, or 33 cents a diluted share. Operating income excluding the $40 million charge was $78.3 million.
In the year ago quarter, the company, which operates for-profit colleges, reported net income of $20.8 million, or 25 cents a diluted share. The year-ago quarter also included a special item for $18.8 million in compensation expense.
For-profit colleges are getting new oversight from the U.S. Department of Education because of concerns about low graduation rates, poor career placement and ballooning student debt. One new regulation that has been delayed would have required for-profit colleges to better prepare students for “gainful employment” or risk losing access to federal student aid. A bulk of revenue at for-profit colleges comes from federal student aid. Taxpayers are on the hook if these loans go bad.
The parent company of the University of Phoenix, one of Career Education’s rivals, predicted new-student enrollment could tumble 40 percent in its current quarter because of the new regulations. Career Education, based in Hoffman Estates, did not comment on its future student population in its earnings report. The company will hold a conference call with industry analysts on Wednesday.
In the third quarter, Career Education said new-student enrollment grew 6 percent to 40,000. Its total student population was 118,205, up 16 percent from Sept. 30, 2009. Its bad-debt expense in third quarter more than doubled to $31.9 million from $14.2 million in the year-ago quarter.
Revenues rose 14 percent to $524.2 million, from $458.3 million.
The legal settlement involves its California Culinary Academy. In 2007, 37 current and former students sued the school and Career Education for fraud, alleging that culinary school misrepresented its reputation and employment prospects for graduates, according to the company’s public filings. A second lawsuit with similar allegations was filed in 2008.
The settlement of both suits is subject to court approval. The settlement will pay claims by all students who enrolled and/or graduated from the culinary school from Sept. 28, 2003, through Oct. 8, 2008.
Career Education also recorded $7.3 million of legal expenses related to the settlement.
