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ED Announces Private College Owners Will Pay Tab for Student Loan Discharges Following Closures

By Owen Daugherty, NASFAA Staff Reporter

Private college owners will be on the hook for paying the student aid bills of their students should loan forgiveness or discharge be warranted following school closures or borrower defense to repayment claims, according to an announcement from the Department of Education (ED) Wednesday.

The new policy announced Wednesday aims to ensure companies that own institutions of higher education are held responsible for federal Title IV financial aid funds that are owed to the federal government following closures or findings of misleading practices.

“If a company owns, controls, or profits from a college, it should also be on the hook if the institution fails students,” Under Secretary of Education James Kvaal said in a statement. “Today’s steps will ensure taxpayers aren’t held liable for colleges that fail their students or close their doors, especially without the opportunity for students to finish their courses of study.”

Under existing policy, institutions have already been legally held liable for covering the costs of forgiving the federal student loans of borrowers, though in many cases institutions are unable to repay because they’re defunct or have gone bankrupt. The new policy stipulates ED will now require signatures on program participation agreements with the federal government from corporations or entities that control some private colleges.

ED noted that it might require signatures from entities that are sole members or hold all voting interest in an institution, as well as entities that hold 50% or more interest in an institution. 

The department added that additional signatures will be required in cases where the institution has not met financial responsibility requirements, where the school is provisionally certified to participate in the federal financial aid programs, and for schools with significant liabilities for borrower defense or other findings, among other circumstances.

"Too often the Department has seen those who reap the rewards of colleges' actions when things go well leave us holding the bag when things go badly,” added Richard Cordray, chief operating officer of Federal Student Aid (FSA). “We will be vigilant in our oversight and enforcement of this new policy."

The new policy takes effect on July 1 and is the latest measure from ED under the Biden administration to crack down on poorly performing for-profit institutions.

Jason Altmire, president and CEO of Career Education Colleges and Universities (CECU), said in a statement that deciding “whether to pierce the corporate veil should be a fact-specific inquiry.”

“When corporate parents intentionally withdraw equity or become the alter ego of the institutional subsidiary, piercing the veil may be appropriate,” he continued. “However, courts have long recognized that piercing the veil is not appropriate in the case of ordinary business decisions. The U.S. Department of Education should take into account all circumstances surrounding an institutional closure before taking the extraordinary step of piercing the corporate veil to reach the assets of the corporate parent.” 

The administration has also taken action to target relief to borrowers from for-profit institutions who were defrauded by their schools. To date, the Biden administration has cleared $3.2 billion in debt owed by borrowers who were defrauded or saw their schools close through closed school discharge and the approval of borrower defense claims.

In the announcement, ED also pointed to the recent negotiated rulemaking sessions that wrapped up last week and the key issues they worked to address, including expanding access to closed school discharge and borrower defense, as well as institutional and programmatic eligibility.

 

Publication Date: 3/24/2022


David S | 3/24/2022 2:37:30 PM

Darren - if a school fails, who should be held accountable? You're suggesting that the Dept of Ed should be; how is that? Who is the "everyone else" you see being wrongly held responsible by ED besides the ownership of the failed school? Are you proposing that the owners should be permitted to close up shop and keep all of the federal aid revenue?

Darren C | 3/24/2022 10:30:26 AM

Something about this seems fishy about this. So the Dept. of ED forces these institutions to close their doors and is trying to force them to pay off the student loan debt. It's too much power coming from the same place. It seems like the Government wants to hold everyone else responsible for all these issues with the education system and student loan debt other than themselves. They apparently just want to dictate what everyone else has to do to ensure ED is kept as far away from accountability as possible.

Michelle C | 3/24/2022 9:58:41 AM

Now if we could just get these for-profit schools to put a fraction of their profits into escrow for when they fail - that would be helpful.

Ben R | 3/24/2022 8:24:35 AM

" . . . taxpayers aren’t held liable for colleges that fail their students or close their doors, especially without the opportunity for students to finish their courses of study.”

I thought the issue was that the schools in question were lousy, not that they closed their doors.

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