The Department of Education said it would hold companies that own some private colleges financially responsible for losses to taxpayers if their schools cheated students or closed abruptly.
“If a company owns, controls or profits from a college, it should also be liable if the institution fails students,” James Kvaal, the department’s undersecretary, said Wednesday.
Taxpayers have been left with billions of dollars in losses in recent years when government student loans have been wiped out because students have been victimized by the schools they attend. The vast majority of these losses come from for-profit schools that are coming under increasing scrutiny for their educational practices.
When a college suddenly closes, stranded students can get their federal student debt forgiven through what is called a closed school exit. Another rescue program, called defense of the borrower to repayment, can eliminate federal student loan debt for students who have been significantly misled by their school’s misrepresentation. In either case, taxpayers are usually obligated to foot the bill.
The department will require the new guarantees on an ongoing basis as schools sign or renew agreements that allow them to receive federal student loan funds. He plans to require them from private colleges and universities showing signs of potential distress and from those changing ownership.
A series of meltdowns at large, for-profit chains has sent claims in both relief programs skyrocketing in recent years. Last month, the Department of Education approved borrower defense claims for thousands of students who attended DeVry University – the first time it has granted claims at a still-operating school. The department said it would try to recoup some of that cost — at least $72 million, with the bill likely to rise — from DeVry’s current owner, who bought the struggling school in 2018.
However, the new policy does not guarantee that taxpayers will be reimbursed for future claims. Most investors or organizations that buy schools do so through holding companies, and if the institution implodes, the holding company is usually left with few assets.
In 2019, for example, dozens of schools owned by Dream Center, a Christian nonprofit with no higher education experience, collapsed barely a year after the organization bought them. While Dream Center is still in operation, the entity that owned the schools – Dream Center Educations Holdings – is in receivership.
But the new rule also allows the Department of Education to require companies with “substantial control” over schools to sign such agreements. This could make investment firms, including some private equity firms active in the for-profit education market, liable for debt if their schools fail.
“Too often the department has seen those who reap the rewards of college actions when things are going well let us hold the bag when things are going badly,” said Richard Cordray, head of the federal student aid division. of the department. “We will be vigilant in our monitoring and enforcement of this new policy.”