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The closure of a college often leaves students in limbo. Without being able to finish a degree, students must scramble to transfer and to figure out how to deal with the debt they have racked up.

The shutting down of Mid-Continent University last year created an additional headache for its former students. The Baptist institution, located in western Kentucky, is trying to force them to repay money that the university originally promised to provide as federal loans.

The university is trying to reorganize in bankruptcy and is looking for cash to pay off its debts. Mid-Continent says it advanced students more than $10 million in loans, which it expected the U.S. Department of Education to reimburse through the federal student loan program.

But the money never arrived. That’s because the department placed the university on its most stringent level of oversight. And in the face of that scrutiny, the university was unable to document -- to the department's satisfaction -- that the students for whom it originated federal loans were actually eligible for those loans.

Mid-Continent says the restrictions on its access to student aid money, which were imposed at the beginning of the 2013-14 school year, were largely to blame for the financial woes that led to its closure the following June.

The situation highlights the department’s use of those financial sanctions, which are known as heightened cash monitoring. For colleges that depend on financial aid for revenue, the restrictions can be financially crippling. And at least in the case of Mid-Continent, it appears to have left students in the lurch.

The tool, which is aimed at tightening the grip on federal funds when department officials have concerns about a college's handling of federal aid money, was also used last year in the case of Corinthian Colleges. It sparked a liquidity crisis at that for-profit college chain, forcing the institution into an agreement with the department to close or sell its campuses. And before that, in the early 2000s, heightened cash monitoring sent Computer Learning Centers into bankruptcy.

But those were two large, for-profit education companies that had to immediately disclose the problem to investors. At Mid-Continent, neither the university nor the Department of Education told students that the federal loans the university continued to offer students might not come through.

Those students are now on the hook for that money, according to the university. Mid-Continent last year told students that they could take out private loans from the institution to cover the money that would have been provided to them in federal loans.

The Kentucky attorney general’s office quickly stepped in and put a stop to that debt collection, over concerns that students were being inappropriately pushed into private loans.

A spokeswoman for the attorney general’s office said it had reached an agreement “in theory” for the university to now offer private loans with similar terms to federal loans. But it has not given final approval for the university to proceed.

The office is separately investigating the events surrounding the college’s closure, the spokeswoman said, and that inquiry remains ongoing.

Mounting Troubles

Mid-Continent, which first opened in 1949 but received federal student aid only for the past decade or so, caught the attention of regulators at the Education Department in 2011, according to documents obtained by Inside Higher Ed.

The department’s audit that year found, among other things, that the university was distributing federal loans and grants to students at 22 satellite locations without first obtaining permission from its accreditor and state regulators. So serious was that violation, the department wrote to the university at the time, that officials were “seriously considering” imposing a restriction on its access to federal aid.

It wasn’t until two years later, in August 2013, that the department followed through on that action. Citing “unresolved” issues stemming from the 2011 audit, the department placed the university on heightened cash monitoring. (Officials also notified Kentucky state regulators, from whom Inside Higher Ed obtained a copy of the letter under open-records laws.)

That sanction came as a surprise to the university and sent it into “survival mode,” according to Tim Walker, the vice president of finance and administration.

The department’s most restrictive level of cash monitoring, which it imposed on Mid-Continent, requires the university to use its own money to fund federal grants and loans to students and then seek reimbursement from the department.

“They said, ‘start doing it today, you get no more money,’” Walker said. The university had enough cash on hand to cover operations for the rest of the school year. But during that time, the department did not accept any of its requests for reimbursement.

“It’s not to say that we didn’t have the right information but the problem was being able to produce it quickly and produce it” in the format that the department wanted, Walker said.

Students, and even some members of the Board of Trustees, meanwhile, were largely unaware that the federal government had enough concern about the university that it was restricting its access to aid.  

Signs of trouble became public last February when the university’s longtime president, Robert Imhoff, resigned. At a press conference the next month, university officials explained the situation to students, saying they were optimistic they would overcome the cash-flow issues.

They also indicated that, like other institutions that have been slapped with heightened cash monitoring, they had appealed to members of the U.S. Congress to pressure the Education Department into providing some relief from the scrutiny. That effort appears to have been unsuccessful.

Gale Hawkins was a trustee from 2003 until last year, when he was fired by the board for speaking to the news media about the college’s closing without its prior approval. He said he was troubled that the university was not up front with students about the increased scrutiny from the feds.

“A certain number of people would have said, ‘If you’re not in the good graces of the U.S. Department of Education, I’m going to another school,’” he said. “Consumers did not have the information that was due to them to make an informed purchase of services from Mid-Continent.”

Several students say the university misled them by offering and crediting their accounts with federal loans while, at the same time, not being able to substantiate any of those payments with the department on the back end.

Students said they were surprised when, several months after the school shut down classes, they received a notice about a “remaining balance” owed to the university.

The university’s president wrote to students that “instead of exercising our legal right to require immediate payment of your unpaid balance” the university would be offering an “interest-free institutional loan.”

“It’s the way out of [heightened cash monitoring] that is the fairest for the students and the university,” Walker, the university vice president, said in an interview. “We’re trying to make it right for the students.”

Three-time Mid-Continent University graduate Vandrea Erskine disagrees. Erskine, 36, received her associate's and bachelor's degrees from a campus-based program at Mid-Continent before enrolling in an online master's program through the university two years ago when she moved with her family to Rainbow City, Ala. 

During her final two terms in the online program in 2013 and 2014, she applied for and Mid-Continent credited her account with about $10,000 described as "direct federal loans" to cover tuition, supplies and some living expenses. 

"We did everything we were supposed to do," she said. "We filled out the paperwork, signed the federal promissory note. We honestly believe we were receiving funds from the Department of Education." 

Erskine was able to finish her degree before the university closed last year, but she says she thinks it's dishonest that the institution is trying push her into a private loan to repay money that she thought was a federal loan. 

"Had I known that Mid-Continent was not getting funding from the [Department of Education], I would have honestly transferred right out of that school because if you can't get money from the federal government, you clearly are having some problems," she said. 

Erskine said that should would refuse to pay the money the university said she owes. The legal issues over the university's collection of money from all of its students remain, too.  

On its Web site, Mid-Continent writes that the department has determined that students owe the institution the money they would have received in federal loans. But a department official said that’s inaccurate and that the department has no rules governing what a university must do when it rejects a reimbursement for aid under heightened cash monitoring.

The attorney general’s office said that it would be making a decision soon on whether the university can proceed with offering private loans to students.

The university also last week won approval from a bankruptcy court judge to hire a company to collect that debt, which it has listed as its largest asset. Its bankruptcy restructuring plan is due later this spring. 

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