New Education Department Rules on Failing For-Profit Colleges

The Education Department announced new measures that will hold companies that own for-profit colleges that fail responsible for the funds owed to the federal government, including liabilities arising from closed-college loan discharges and borrower defense to repayment claims. This will ensure that even if a college closes, the department can recover funds from entities that had a direct or indirect ownership interest in the college instead of leaving the bill to taxpayers.

“If a company owns, controls, or profits from a college, it should also be on the hook if the institution fails students,” said Under Secretary of Education James Kvaal. “Today’s steps will ensure taxpayers aren’t held liable for colleges that fail their students or close their doors, especially without the opportunity for students to finish their courses of study.”

Under this policy, any organization or entity with at least a 50 percent interest in a nonpublic college that meets certain other conditions will generally join that institution’s leadership in signing the college’s Program Participation Agreement. The additional signature will be required in cases where the institution has not met financial responsibility requirements, where the college is provisionally certified to participate in the federal financial aid programs, and for colleges with significant liabilities for borrower defense or other findings, among other circumstances.

Jason Altmire, president and CEO of Career Education Colleges and Universities, said, “Determining whether to pierce the corporate veil should be a fact-specific inquiry. When corporate parents intentionally withdraw equity or become the alter ego of the institutional subsidiary, piercing the veil may be appropriate. However, courts have long recognized that piercing the veil is not appropriate in the case of ordinary business decisions. The U.S. Department of Education should take into account all circumstances surrounding an institutional closure before taking the extraordinary step of piercing the corporate veil to reach the assets of the corporate parent.”