ANALYSIS: Dept. of Ed overreaches authority with new financial policy

New guidance from the Department of Education may require 'the assumption of personal liability, by one or more individuals who exercise substantial control' over a private college or university.

The stated intention is to target predatory for-profit schools, but the statutory language is vague.

The Department of Education (DOEd) last Thursday announced new guidance creating a pathway for the federal government to hold leaders and owners of private higher education institutions personally liable for mismanagement of federal funding, including outstanding student loan debts.

The guidance is based on Section 493e of the Higher Education Act (HEA), which stipulates that the DOEd Secretary may require “the assumption of personal liability, by one or more individuals who exercise substantial control over such institution” in order to “protect the financial interest of the United States.”

Prior to the announcement, the DOEd “did not have a practice—even for the riskiest colleges—of requiring individuals to assume personal liability, challenging its ability to hold them responsible for unpaid liabilities.”

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Federal Student Aid Chief Operating Officer Richard Cordray is quoted in the press release  saying, “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.” 

Title IV funds consist of a variety of federal loan options, including direct subsidized or unsubsidized loans, direct undergraduate or graduate PLUS loans, and Pell Grants.

Under Secretary of Education James Kvaal clarifies that this is intended to target executives of for-profit colleges that “too often, the owners and executives of these colleges escape liability” after they have “cheated” their students.

The language of the guidance, however, does not circumscribe the implementation of Section 493e only to for-profit institutions.

Any individual that “directly or indirectly controls a substantial ownership interest in the institution,” including members of a board of directors, a chief executive officer, or “other executive officers of the institution” could be held liable under the new guidance.

Although only institutions that have been audited by the DOEd can be reviewed under the personal liability statute, the guidance creates 14 different violations for which the Secretary can deem personal liability a necessary measure.

Among these are if the DOEd deems there is a “lack of administrative capability,” “high withdrawal or low retention rates” and whether student loan funding at the institution has “substantially increased or decreased recently,” according to the guidance. 

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The language of the guidance is broad enough to include “any other factors specific to the institution or the individual 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.”

Nicholas Kent of Career Education Colleges and Universities (CECU), representing for-profit schools, thinks it goes too far, according to Inside Higher Ed.

Biden’s DOEd “proposes to exceed this authority [granted by the HEA],” says Kent This “subjective guidance [empowers] ideologically driven partisans with the unfettered discretion needed to achieve their goal of dismantling private career schools.”

Campus Reform has contacted the DOEd and the CECU with a request for comment and will update this story accordingly.

Follow Gabrielle M. Etzel on Twitter.

Editorials and op-eds reflect the opinion of the authors and not necessarily that of Campus Reform or the Leadership Institute.