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The Biden administration is seeking more leverage over owners and leaders of colleges it deems risky, unveiling a new set of conditions it will use to hold individuals personally liable when private institutions cost government money.
New guidance issued this week outlines how the U.S. Department of Education plans to require private college leaders to take personal responsibility for unpaid debts owed to the government when their institutions “fail to operate in a fiscally responsible manner.” That means the government could try to recover money from individuals for some colleges’ financial aid obligations.
For example, the government could try to recoup the money it pays out under a closed-ended graduation program that forgives students’ federal loans if their colleges close. Or it could go after costs ranging from borrower defense to a repayment program that settles loan debt when colleges are found to have misled students or violated the law.
Prior to these guidelines, the Department of Education did not have practices for holding individual college owners or executives accountable for unpaid obligations incurred by at-risk colleges. stated in a press release.
The top official of the Ministry of Education selected for-profit colleges. The agency is currently canceling loans for more than 1 million borrowers “defrauded by for-profit colleges,” and the owners and executives of those institutions too often avoid accountability, Assistant Secretary James Kvaal said in a statement.
“Congress has given the department the authority to hold college owners and operators personally liable for these losses under certain circumstances, and we will use that authority to hold them accountable, protect vulnerable students, protect taxpayer dollars and deter future risky behavior,” Kvaal said .
The year of breaking through the corporate veil
The new guidelines come about a year into the Biden administration he said he would sometime require the controlling units of institutions to agree to financial responsibility for repayment of student loans in certain cases. If the company refused to agree, its college would not be eligible for federal Title IV financial aid.
The move, described as piercing the corporate veil of limited liability, drew sharp disapproval from for-profit colleges. They expressed concern that it would reduce investor interest in higher education and stifle innovation.
But it didn’t go far enough for some Senate Democrats, who asked the Ministry of Education hold for-profit owners personally liable if their institutions have misled students and left them heavily in debt.
A group representing for-profit colleges, universities and career colleges protested the moves this week. The Higher Education Act limits the Department of Education’s power to pierce the corporate veil and place financial responsibility on individuals, Nicholas Kent, director of policy at CECU, said in a statement.
“This administration proposes to exceed that authority through new regulations and subjective guidance, empowering ideologically motivated partisans with the unlimited discretion needed to achieve their goal of abolishing private career schools while limiting students’ ability to choose the educational environment that best fits their circumstances . Kent said.
However, the Ministry of Education said that the Higher Education Act supports his actions. § 498 letter E) The law says the agency can demand personal liability from individuals who have substantial control over private institutions.
How the new tutorial works
March 1st Federal Student Aid Notice states how the Ministry of Education plans to proceed. It applies to program participation agreements — contracts that college leaders must sign in order to use federal financial aid dollars.
In some cases, participation agreements in the program will now require individuals and companies involved in the finance and administration of the college to agree to take personal responsibility for financial losses that the government absorbs.
Federal law says individuals who control a “substantial ownership interest” in a college can be held personally liable, as can board members, CEOs and other executives. However, this responsibility can only be claimed if the institution has triggered financial red flags.
“The Department anticipates that it is most likely to require signatures from individuals from institutions or groups of affiliated institutions that pose the greatest financial risk to the United States,” the FSA said in a statement. This could include institutions that receive tens and hundreds of millions of dollars in federal financial aid funding or those that have raised concerns about compliance with financial aid rules.
The notice includes a list of college conditions that may prompt the Department of Education to require personal liability from owners or managers:
- Obtaining a significant volume of funds under Title IV.
- High number of approvals of repayment requests or false certification claims by the borrower.
- A record that you have been affected by lawsuits, settlements, or disciplinary actions by a federal agency related to federal student aid or claims of misrepresentation, consumer harm, or financial misconduct.
- History of non-compliance with the Higher Education Act.
- “Fundamental issues” with financial responsibility.
- A for-profit institution that does not meet the federal 90/10 rule, which requires that at least 10% of the college’s revenue come from sources other than federal student aid.
- Title IV funding that the institution receives increases or decreases substantially.
- High student selection rate.
- Low retention rate.
- Executive compensation or bonus structure that could “significantly affect the financial health of the institution.”
- The Ministry of Education found that the college lacked administrative capacity.
- The Department of Education “identified systemic or significant program audit or review findings.”
- Unpaid fines or liabilities from an audit or program review.
- States or accrediting agencies have recently taken adverse action against the college or related institutions.
- Other factors “that are relevant to the Department to determine whether an individual assuming personal responsibility is necessary to protect the financial interests of the United States.”
Meeting some of the above conditions may not always mean that individuals will have to take responsibility under the notice. The more of these conditions apply to the situation, the more likely the Department of Education will require personal liability.
“Individuals who control schools and reap substantial profits are responsible for running healthy institutions,” Richard Cordray, chief operating officer of Federal Student Aid, he said in a statement. “When financially risky schools compromise the security of the government’s Title IV funds and take advantage of students, we intend to hold these individuals accountable.”