The Biden administration is seeking more leverage over owners and leaders of colleges it considers risky, unveiling a new set of conditions it will use to hold individuals personally liable when private institutions cost the government money.
New guidance issued this week outlines how the U.S. Department of Education plans to require private college leaders to assume personal liability for unpaid debts institutions owe to the government when their institutions "fail to operate in a financially responsible way." That means the government could try to claw back money from individuals for certain colleges' financial aid liabilities.
For example, the government could try to recoup money it pays out under the closed school discharge program, which forgives students' federal loans if their colleges close. Or it could go after costs from the borrower defense to repayment program, which discharges loan debts when colleges are found to have misled students or violated the law.
Before the guidance, the Education Department didn't have practices for holding individual college owners or executives responsible for unpaid liabilities run up by risky colleges, it said in a news release.
The Education Department's top higher education official singled out for-profit colleges. The agency is currently canceling loans for over 1 million borrowers "cheated by for-profit colleges," and owners and executives at those institutions escape liability too frequently, Under Secretary James Kvaal said in a statement.
“Congress gave the Department the authority to make college owners and operators personally responsible for these losses in certain circumstances and we are going to use that authority to hold them accountable, defend vulnerable students, protect taxpayer dollars, and deter future risky behavior," Kvaal said.
A year of piercing the corporate veil
The new guidance comes about a year after the Biden administration said it would sometimes require institutions' controlling entities to agree to financial liability for student loan discharges in certain cases. If a company refused to agree, its college wouldn't be eligible for Title IV federal financial aid.
That step, described as piercing the corporate veil of limited liability, drew sharp dissent from for-profit colleges. They raised concerns it would cut investor interest in higher education and quash innovation.
But it didn't go far enough for some Senate Democrats, who asked the Education Department to hold for-profit owners personally liable if their institutions misled students and left them with large debt loads.
A group representing for-profit colleges, Career Education Colleges and Universities, objected to the moves this week. The Higher Education Act limits the Education Department's authority to pierce the corporate veil and lay financial responsibility on individuals, said Nicholas Kent, chief policy officer at CECU, in a statement.
"This administration proposes to exceed this authority through new regulations and subjective guidance, thereby empowering ideologically driven partisans with the unfettered discretion needed to achieve their goal of dismantling private career schools while limiting students’ ability to choose the educational setting that best fits their life circumstances," Kent said.
The Education Department, however, said the Higher Education Act supports its actions. Section 498(e) of the law says the agency can require personal liability from individuals who have substantial control over private institutions, it said.
How the new guidance works
A March 1 Federal Student Aid announcement outlines how the Education Department plans to proceed. It applies to Program Participation Agreements — contracts college leaders must sign to tap into federal financial aid dollars.
In some cases, Program Participation Agreements will now require individuals and companies involved with a college's finances and administration to agree to assume personal liability for financial losses the government absorbs.
Federal law says that individuals who control a "substantial ownership interest" in a college can be held personally liable, as can governing board members, chief executives and other executive officers. But that liability can only be required if an institution has triggered financial red flags.
"The Department anticipates it is most likely to request signatures from individuals at institutions or groups of affiliated institutions that pose the largest financial risk to the United States," the FSA announcement said. That could include institutions receiving tens and hundreds of millions of dollars in federal financial aid funding or those that have raised concerns about complying with financial aid rules.
The announcement includes a list of conditions at a college that might prompt the Education Department to require personal liability from owners or executives:
- Receiving a significant amount of Title IV funding.
- A high number of borrower defense to repayment or false certification claims being approved.
- A track record of being hit with lawsuits, settlements or federal agency disciplinary actions that are related to federal student aid or claims of misrepresentation, consumer harm or financial malfeasance.
- A history of not complying with the Higher Education Act.
- "Substantial problems" with financial responsibility.
- A for-profit institution not meeting the federal 90/10 rule, which requires at least 10% of a college's revenue to come from sources other than federal student aid.
- Title IV funding an institution draws is substantially increasing or decreasing.
- High student withdrawal rates.
- Low retention rates.
- Executive compensation or a bonus structure that could "significantly affect the financial health of the institution."
- The Education Department found a college lacks administrative capacity.
- The Education Department "identified systemic or significant audit or program review findings."
- Unpaid fines or liabilities from an audit or program review.
- States or accrediting agencies recently took adverse action against a college or related institutions.
- Other factors "that are relevant for the Department to determine whether an individual assuming personal liability is necessary to protect the financial interest of the United States."
Meeting some of the conditions above doesn't always mean individuals will be required to take on liability, according to the announcement. The more of those conditions apply to a situation, the more likely the Education Department will be to require personal liability.
“Individuals who control schools and reap substantial profits are responsible for running healthy institutions," Richard Cordray, Federal Student Aid's chief operating officer, said in a statement. "When financially risky schools jeopardize the safety of the government's Title IV funds and take advantage of students, we intend to hold those individuals accountable."
