Owners of For-Profit Schools Must Pay if the Colleges Close, Education Department Says

Fatima Fokina

The Education Department says it will hold companies that own certain private colleges financially responsible for taxpayers’ losses if their schools defraud students or abruptly shut down.

“If a company owns, controls or profits from a college, it should also be on the hook if the institution fails students,” James Kvaal, the department’s under secretary, said in the announcement on Wednesday.

Taxpayers have been left with billions of dollars in losses in recent years when student loans made by the government were wiped out because the students were victimized by the schools they attended. The vast majority of those losses stem from for-profit schools that have come under increasing scrutiny for their educational practices.

When a college suddenly closes, stranded students can have their federal student loan debt forgiven through what’s known as a closed-school discharge. Another relief program, called borrower defense to repayment, can eliminate the federal student loan debt of students who were significantly misled by their school’s false claims. In both cases, taxpayers are typically stuck paying the tab.

The department will require the new guarantees on a rolling basis, as schools sign or renew the agreements that let them receive federal student loan funds. It plans to demand them from private colleges and universities showing signs of potential distress and from those changing ownership.

A series of collapses at large for-profit chains have sent claims through both relief programs soaring in recent years. Last month, the Education Department 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 grow — from DeVry’s current owner, which bought the long-troubled school in 2018.

The new policy does not guarantee that taxpayers will be repaid for future claims, however. Most investors or organizations that buy schools do so through holding companies, and if the institution implodes, the holding company is typically left with few assets.

In 2019, for example, dozens of schools owned by Dream Center, a Christian nonprofit with no experience in higher education, collapsed barely a year after the organization bought them. While Dream Center is still operating, the entity that owned the schools — Dream Center Educations Holdings — is in receivership.

But the new rule also allows the Education Department to require companies with “substantial control” over schools to sign these agreements. That could make investment companies, including some private equity firms that are active in the for-profit education market, responsible for the debt if their schools fail.

“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,” said Richard Cordray, the head of the department’s Federal Student Aid division. “We will be vigilant in our oversight and enforcement of this new policy.”

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