New guidance from the Department of Education will hold “risky” for-profit college leaders responsible for unpaid federal debt

The Biden administration announced last week that it will be taking steps to hold for-profit college executives personally responsible for their school’s unpaid federal student debt.

The new guidance, released by the Department of Education, gives the Secretary of Education the authority to “require leaders of private colleges that fail to operate in a financially responsible way to assume personal liability for the cost of unpaid debts owed to the Department of Education.”

Essentially, this provision gives the Department the authority to hold private for-profit college leaders responsible for unpaid federal debts owed to the Department of Education if they deem the institution to be financially irresponsible, or deem that it has defrauded students.

This measure is in line with the Department of Education’s overall push to ease the burden federal student debt has on borrowers who have been misled by for-profit colleges. The Department has canceled billions of dollars of student debt over the last few years for students who attended private for-profit colleges that misled or defrauded them, through the borrower defense repayment program and the closed school discharge program. More than a million borrowers have benefitted from these student loan forgiveness measures.

The Biden administration is cracking down on risky behavior by for-profit colleges

The Department of Education has been taking steps to crack down on for-profit colleges that engage in risky behaviors for years. The closed school discharge program and the borrower defense repayment program have resulted in millions of borrowers having their federal student debt discharged. Most recently, the Department discharged $3.9 billion of federal student debt for students who attended ITT Technical Institute. It was found that the school had been engaging in multiple illegal practices that led to it being closed.

While these measures have helped to hold private for-profit colleges accountable for risky behaviors, there was not a policy in place to hold individual stakeholders responsible until now.This new step to hold the leaders of for-profit schools financially liable for student debt is intended to provide further relief to borrowers and to dissuade private colleges from engaging in financially irresponsible practices.

Whether college leaders will have to assume financial responsibility for student debt will be decided on a case by case basis. If the leaders of these institutions refuse the financial responsibility, their schools will be blocked from participating in federal financial aid programs going forward.

In its official press release, the Department of Education outlined the circumstances under which private college leaders could be held liable. This list is not exhaustive, but it includes:

• Colleges that have lawsuits, or other legal or disciplinary actions against them that involve federal student aid or claims of dishonesty, fraud, misrepresentation and consumer harm.
• Colleges that have significant compliance issues, such as “lack of program audits or reviews, unpaid liabilities from audits or lack of administrative capability.”
• Colleges that compensate its executives in a way that could significantly harm the institution itself.

Under these guidelines, the colleges most likely to face these repercussions are those whose students have grounds for debt forgiveness under the closed school discharge program and the borrower defense to repayment program.

The closed school discharge program

The closed school discharge program is a Federal Student Aid program that allows students whose schools closed while they were enrolled or soon after they withdrew to apply for federal student debt forgiveness. Students are eligible to have up to 100 percent of their debt discharged if they meet the program’s criteria. Those who meet the criteria are sent the application for loan discharge automatically.

The borrower defense to repayment program

The borrower defense to repayment program is another Federal Student Aid program that discharges the federal student debt of borrowers who attended a college that misled them or engaged in misconduct. Students can file an application for this debt relief program on FSA’s website. To qualify, students must be able to demonstrate that their college violated state laws related to their student debt or educational experience.

Pushback from private college leaders

This most recent provision is part of an overall push by the Biden administration to hold private colleges responsible for harm done to students. Last year, the Department of Education unveiled a policy that would make all firms and stakeholders with at least a 50 percent stake in a private college sign that institution’s program participation agreement (PPA). Before this policy change, only a college’s chief executives and officials had to sign this agreement.

The decision to make stakeholders sign PPAs received pushback from private college leaders and lobbyists, who are worried that these measures could impact funding for private colleges. Career Education Colleges and Universities (CECU), a trade association that represents and lobbies for for-profit colleges, has been particularly vocal about these concerns.

Concern about regulating the practices of for-profit private colleges is largely based on the idea that investors are not going to invest if they are nervous about legal and financial repercussions. Nicholas Kent, CECU’s chief policy officer, gave a statement last week about the Education Department’s decision to hold college executives and stakeholders personally responsible for student debt. He claimed that the Biden administration is exceeding its legal authority and “dismantling private career schools while limiting students’ ability to choose the educational setting that best fits their life circumstances.”

The Department of Education, however, maintains that this move is well within their legal authority, and that this policy is about protecting students. “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,” Under Secretary James Kvaal said in the Department’s press release.

How will regulating for-profit colleges help student borrowers?

The prevalence of for-profit colleges in the U.S. has increased dramatically over the past couple of decades, and there has always been a great deal of scrutiny surrounding their practices. For-profit colleges have faced countless lawsuits over the years, and have a history of misleading and defrauding students. Regulating the practices of for-profit colleges and holding college leaders and other executives personally accountable could help end these longstanding practices.

Federal Student Aid Chief Operating Officer Richard Cordray gave a statement about the Department of Education’s new policy in its official press release, stating that, “Individuals who control schools and reap substantial profits are responsible for running healthy institutions. 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.”

If you are a student at a private for-profit institution and you suspect your school may be defrauding or scamming you, you can report them to the Education Department’s Office of Inspector General.