How a recent policy change at the Education Department could affect for-profit companies


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Last month, the US Department of Education announced it would hold owners of some private colleges financially responsible if institutions defraud students or close without warning — a move that will largely affect for-profit schools.

The policy means the Department of Education can require any company with at least 50% ownership of a private college to join college officials in signing the institution’s Program Participation Agreement, or PPA, who is committed to meeting federal standards. Typically, only a college’s superintendent or other official signs these agreements.

If the college defrauds students or closes unexpectedly, the Department of Education can cancel its student loans and recoup those losses under terms outlined in the PPA.

The for-profit sector expressed concern over the announcement. In a statement last month, the president of Career Education Colleges and Universities, which lobbies on behalf of for-profit institutions, urged Department Ed to take a close look at the circumstances of institution closures before “piercing the veil corporate” of limited liability to recover money to cover taxpayers’ losses.

A month later, the sector is worried about what politics could mean for its ability to raise funds.

“When investors are nervous, they don’t invest as much capital, and there’s usually less innovation and competition in higher education – which I think is ultimately bad for students,” he said. said John Huston, CECU’s vice president for legislation and regulation. business.

Certainly, the Department of Education’s announcement formalized a change in policy. But the agency had already taken steps to hold a private college owner financially responsible for wrongdoing before codifying its procedures. Additionally, the advertised policy may be weaker than what is allowed by federal regulations, and some groups have urged the department to go further and hold corporate executives personally accountable.

The policy change will likely make owning for-profit universities less desirable for private equity firms, which may fear it will become more expensive to own such institutions, said Trace Urdan, managing director of Tyton Partners, an investment banking firm.

But development is not an entirely new framework. Rather, it is another step in a regulatory environment that is becoming increasingly difficult for for-profit colleges.

“It’s not a drastic change,” Urdan said. “It’s a gradual change.”

Florida Coastal School of Law sets precedent

The Ed Department has already had a private equity firm sign off on a for-profit college’s PPA in at least one high-profile case. The Florida Coastal School of Law was a proprietary school that ceased operations in 2021 after the Department of Education withdrew its access to federal student aid, which had provided about 80% of its revenue.

But before the school closed, the Ed department asked Sterling Capital Partners – a private equity firm with a 98.6% stake in Florida Coastal’s parent company – to sign the institution’s draft PPA. . The department said the signing was necessary after Florida Coastal failed to meet financial accountability standards.

School officials resisted and Sterling Capital’s general counsel said he was not involved in the day-to-day operations of Florida Coastal and was winding down its proprietary investment fund of the institution. Florida Coastal’s interim PPA expired at the end of March 2021, and Sterling Capital told the Ed Department the following month that it had divested its entire stake in the college’s parent company.

The Ed Department refused to reinstate Florida Coastal’s federal financial aid, and the institution collapsed several months later. He has since sued the department over the decision, and the case is still pending.

Other situations may not be as serious. The Education Department said it will ask owners of private colleges to sign the agreements when their campuses have failed to meet financial accountability requirements, when they are only tentatively certified to participate in aid programs federal authorities or when they have important responsibilities resulting from the fraud of students.

Huston argued that these are overly broad criteria that can affect financially sound institutions. Instead, he argued, the department should take a case-by-case approach.

If institutions failed to meet financial accountability requirements, they were typically asked to issue a letter of credit instead, a type of financial guarantee that typically ranges from 10% to 50% of federal student aid. of title IV that an establishment has received in a previous year. It is also common for the ministry to require institutions to post letters of credit when they are sold to new owners, Urdan said.

But this practice could develop as an alternative to the new PPA requirements. Department policy states that some ownership groups may not be required to sign PPAs if a school has alternative protections, such as letters of credit.

“If I read between the lines, it looks like this will become common practice in PPA renewals,” Urdan said. “So basically, instead of something that’s just imposed initially on change of control, it looks like it’s going to be required whenever a PPA is considered.”

PPAs last up to six years, according to the Department of Education website.

Huston agreed letters of credit will likely still be on the table as an alternative to owners signing the PPA.

“But, you know, not every institution will be in a situation like that, where they have the capacity to do that,” Huston said. “Some owners will sign, and some will decide to post larger letters of credit.”

Supporters want even tougher policies

Some policy advocates and lawmakers have called on the Education Department to hold corporate executives personally accountable for wrongdoing by for-profit colleges.

In October 2020, the National Student Legal Defense Network, an advocacy organization, called on the next presidential administration to hold executives accountable within the first 100 days. The group also called letters of credit “woefully inadequate” to protect against taxpayer losses.

Representative Bobby Scott, a Virginia Democrat who chairs the House Education and Labor Committee, wrote in August 2021 to Education Secretary Miguel Cardona urging the department to take legal action against the for-profit college executives who allegedly defrauded students. And Richard Cordray, who heads the Ed Department’s student aid office, signaled his support for such measures during a congressional hearing last year.

Others took issue with the fact that the new Department of Education policy only affects organizations with at least a 50% stake in a private college. Meanwhile, federal regulations consider entities to have “substantial control” over institutions if they own at least 25%.

Aaron Ament, president of the National Student Legal Defense Network, said in an emailed statement that it’s critical the department does not dilute its authority “to hold business owners with smaller actions accountable” or does not waive Cordray’s commitment to hold individuals personally liable.

“This will not only deter abusive behavior, but give future investors and insurers pause before backing companies with predatory behavior,” Ament said.


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