Education Department Takes Steps to Hold Leaders of Risky Colleges Personally Liable

Today, the U.S. Department of Education (Department) released guidance outlining how it will implement long-standing provisions in the Higher Education Act that grant the Secretary 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. The guidance clarifies the circumstances in which the Department may require certain individuals to assume personal liability as a condition of allowing the schools they own or operate to participate in the federal financial aid programs and details the considerations that the Department will take into account when determining whether to require an individual to assume personal liability by signing the institution’s program participation agreement. The Department would then be able to pursue those individuals for the cost of liabilities that are not otherwise paid for by their institutions, including those stemming from closed school and borrower defense discharges.

“The Biden-Harris Administration is canceling the loans of more than a million borrowers cheated by for-profit colleges. But too often, the owners and executives of these colleges escape liability,” said Under Secretary James Kvaal. “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.”

“Individuals who control schools and reap substantial profits are responsible for running healthy institutions,”  said Federal Student Aid Chief Operating Officer Richard Cordray. “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.”

This guidance clarifies how the Department will implement Section 498(e) of the Higher Education Act (HEA), which specifies that the Department may require individuals who exert significant control at private institutions to assume personal liability. However, prior to this guidance, the Department 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.

The Department anticipates it is most likely to require an individual to assume personal liability on behalf of the institutions or groups of affiliated institutions that pose the largest financial risk to the United States, including institutions that annually receive tens or even hundreds of millions of dollars of Title IV funds and institutions with the most serious and significant sets of concerns related to their compliance with federal financial aid rules.

By focusing on the riskiest institutions and the individuals with the ability to make significant decisions regarding the operation of their institutions, the Department will not only be protecting students and borrowers, but also fulfilling Congress’ statutory direction that the Department protect the financial interests of the United States.
To guide the Department’s decision-making, the guidance includes a non-exhaustive list of factors the Department may consider when determining whether to pursue personal liability. These include:

• Civil or criminal lawsuits, settlements, or disciplinary or legal actions by the Department or other state or federal agencies involving federal student aid or claims of dishonesty, fraud, misrepresentation, consumer harm, or financial malfeasance.
• Significant compliance issues, such as findings stemming from program reviews or audits, unpaid liabilities from either of those processes, or findings of a lack of administrative capability.
• An executive compensation or a bonus structure that could significantly affect the financial health of the institution.

The Department will consider these factors when assessing institutions that have demonstrated certain statutory indicators of financial risk, such as significant audit findings, or failing to meet financial responsibility requirements.

Going forward, the Department will generally begin making determinations on a case-by-case basis about whether it will require individuals to assume personal liability when their institution’s program participation agreement is up for renewal or if they undergo a change in ownership. There also may be instances in which the Department accepts other financial protections to minimize the risk of financial losses in lieu of the signature.