March 25, 2022
New Policy to Hold Owners of Colleges Accountable Announced
The Department of Education announced a new policy this week that would require certain companies that own private, nonprofit or for-profit colleges to be held liable for government losses related to the sudden closing of a college or engagement in fraud. While colleges themselves have traditionally been liable for these costs, this new policy would also hold private firms that own the colleges responsible. The new policy will take effect on July 1, 2022.
Currently, the Department is allowed to forgive the costs of the federal student loans of borrowers when a college fraudulently misleads them or suddenly closes. The policy announced this week will apply only to companies or other organizations that have “substantial control” over a private, nonprofit or a for-profit college that is facing financial trouble with regulators or has recently changed owners. Substantial control is defined as having a 50% or greater stake in the college. While these owners would have to sign liability agreements, the liability would affect the corporation and not target individuals.
The issue of reviewing and revising nonprofit and for-profit governance standards was also a topic during the most recent negotiated rulemaking session, where appointed representatives from the higher education community work with the Department prior to it issuing rules. During the session, the Department proposed that if a person or entity acquired at least a 5% ownership interest, direct or indirect, of an institution it would be considered a change in ownership. The Department also proposed that if 25% of ownership is acquired by a person or a legal entity it would be considered a change in control of an institution. Both changes in control and changes in ownership trigger different regulatory oversight of institutions.
Currently, the Department is allowed to forgive the costs of the federal student loans of borrowers when a college fraudulently misleads them or suddenly closes. The policy announced this week will apply only to companies or other organizations that have “substantial control” over a private, nonprofit or a for-profit college that is facing financial trouble with regulators or has recently changed owners. Substantial control is defined as having a 50% or greater stake in the college. While these owners would have to sign liability agreements, the liability would affect the corporation and not target individuals.
The issue of reviewing and revising nonprofit and for-profit governance standards was also a topic during the most recent negotiated rulemaking session, where appointed representatives from the higher education community work with the Department prior to it issuing rules. During the session, the Department proposed that if a person or entity acquired at least a 5% ownership interest, direct or indirect, of an institution it would be considered a change in ownership. The Department also proposed that if 25% of ownership is acquired by a person or a legal entity it would be considered a change in control of an institution. Both changes in control and changes in ownership trigger different regulatory oversight of institutions.
For more information, please contact:
Karin Johns