On April 26, 2015, in the wake of charges that it had misled students and provided a poor quality education, Corinthian Colleges shut down its operations, leaving tens of thousands of students holding the bill for hundreds of millions of dollars in student loans and no legitimate degree or path to to a good job.
In response to this collapse and with other potential closures on the horizon, the U.S. Department of Education (ED) sought input into how it should make decisions about canceling students’ loans in these situations, and how it can prevent future abuse by colleges of the federal student loan program.
In comments that Century Foundation senior fellow Robert Shireman and I submitted on the Department’s draft rules, we make two major suggestions for improvement. First, we recommend that ED do more to recognize the spending restrictions and governance requirements that make public and other nonprofit colleges—as opposed to for-profit colleges—less of a risk to students and taxpayers. And second, we urge the Department to strengthen the approach it takes to ensuring that students and former students have full access to the courts to resolve disputes if they so choose.
Recognizing Current Law Restrictions on Nonprofit Entities
The owners of a for-profit college can spend college resources on anything they choose, even taking it for themselves. As a result, when a for-profit college is struggling financially, the owner-investors seek to limit their personal losses, which means there is less available to run the college itself. Nonprofit colleges, on the other hand, have no owners and are required to spend all of their resources on education, explaining why sudden closure is much less common in the nonprofit sector.
In its proposed rule, the Department of Education establishes some indicators that require a college to set aside some funding to reimburse students and the government in case the institution closes. In our comments, we recommend that the Department apply these triggers only to for-profit institutions, since nonprofits (if they are legitimate, another issue we address in our comments) have adopted other protections that are designed to protect consumers.
We support the Department of Education’s efforts to undermine students’ legal rights through forced arbitration, class action bans, and mandatory internal processes. It was The Century Foundation’s research that pointed out the prevalence of these restrictive clauses in enrollment contracts at for-profit institutions, keeping disputes secret and impeding law enforcement investigations. For the Department’s proposal to be effective, some changes are needed. First, the ban on restrictive clauses should apply to all students participating in the federal aid program, not just students who currently have loans. Second, all pre-dispute arbitration clauses should be banned, not just those that are conditioned on enrollment. Third, students’ access to the courts should not depend on whether the services or program in question was financed with federal loan funds.
What Happens Next?
The Department of Education will finalize its rules while taking into consideration each of the more than ten thousand comments that were submitted by the August 1 deadline. The Department, we hope, will see the importance of a stronger final version of the rule and will publish it prior to November 1, so that it can take effect for the 2017–18 school year.