President Biden campaigned on a promise that, under his administration, for-profit colleges would have to “prove their value” before gaining access to federal aid, so that students would not sink into debt as a result of some schools’ predatory practices. As it happens, there is a clear (but underutilized) tool in the U.S. Department of Education (ED) arsenal for requiring risky schools to prove their value, formally called a program participation agreement (PPA), that all schools must complete to become eligible to receive federal aid. Functionally, a PPA acts as a contract in which a school promises to meet federal standards and do right by the students it enrolls. For too long, however, predatory for-profit schools have enrolled students and harvested their federal aid without holding up the school’s end of the bargain, violating the terms of their PPAs; it’s time for ED to start enforcing the contract.
The recent collapse of Center for Higher Education Excellence (CEHE), a covert for-profit college chain, is but one painful example of how students are harmed when years of weak PPA enforcement leads to corruption of the federal aid system. In 2020, a lengthy trial brought by Colorado’s Attorney General’s Office concluded with clear findings of systematic fraud by CEHE schools, through the intentional design of CEHE leaders. As I wrote at the time, these findings clearly disqualified CEHE from federal aid; and yet, ED spent the next year delivering federal funding to those same culpable leaders, without establishing guardrails to protect students from further abuse or setting the stage for a more responsible closure. Ultimately, after absorbing billions in taxpayer dollars, CEHE closed overnight, with no warning to students until the last minute—at which point staff steered students toward other troubled schools such as South University, which has its own history and affiliations with predatory practices and sudden closures.
For several years prior to closing, CEHE had been subject to a probationary status known as provisional certification that comes with a specialized contract—a provisional PPA (PPPA)—that was intended to force the school to shape up, or, at the very least, set the stage for a less-damaging closure. (See Figure 1.) Unfortunately, the PPPA did neither—and this troubling situation is part of a trend.
Figure 1: CEHE Provisional Status
Source: Department of Education emails to CEHE, May 2020, obtained by The Century Foundation through public records requests, available at https://drive.google.com/file/d/1a9AaGcW7EhovGL5bCVQ4mnevCGUYOjP4/view.
For too long, lack of action on enforcing PPPAs has become the norm, allowing schools that harm students to operate indefinitely with federal funding. Students—who enroll under the belief that federally aided schools must meet federal standards—should be protected from unscrupulous schools that continue to turn a profit regardless of whether they deliver on their promise to provide high-quality educational services. If predatory schools break their promises in their PPAs, then the PPPAs that follow must have appropriate enforcement and revocation protocols tailored to address the specific risks involved.
The Purpose of Provisional Program Participation Agreements
Prior to 1992 amendments to the Higher Education Act (HEA), the Department of Education reviewed colleges’ eligibility to receive federal aid dollars on a binary basis: schools that met federal standards were certified and received standard contracts (PPAs), which set terms for their receipt of federal money; schools that failed to meet general standards or that violated the terms of their PPAs lost eligibility—at least in theory—and their eligibility for taxpayer-supported programs such as federal student loans, Pell Grants, and federal work-study would be terminated.
But problem colleges present regulators with no good choices for remedy: continuing to prop up a school that fails to meet standards in hopes that it will turn around undermines integrity of the aid programs and is bad for students, yet cutting off funding can disrupt students’ education or push a struggling school over the edge toward collapse. Moreover, many colleges—particularly those in the for-profit sector—lack the means or the mission to invest their own resources to improve if they become a substandard school. Instead, as history shows, owners of underperforming for-profit colleges tend to preserve assets for themselves, enroll new students to extract their tuition dollars even as collapse becomes inevitable, and ultimately close overnight, leaving students reeling.
In 1992, with for-profit schools precipitously closing amid waves of fraud, abuse, and financial mismanagement, Congress amended the Higher Education Act (HEA) to create a new college oversight tool: provisional PPAs (PPPAs), which can function as a corrective action plan when colleges start to fall below standards—for example, when accreditors place them on a warning status, or their finances begin to decline, or federal investigators find problems. Instead of immediately terminating federal subsidies, which could trigger a sudden closure, or continuing to certify institutions that have violated standard PPAs, which erodes federal standards and program integrity, ED could use a PPPA to deliver highly restricted funding, closely monitor institutional risk, and manage a closure if needed.
Under PPPAs, problem schools continue to receive federal subsidies, but only if they agree to fix their problems and then succeed in coming back into compliance with federal standards within a short period of time. During this probationary period, ED can monitor the school closely and is empowered to swiftly cut off a school’s aid if the school’s leadership proved unable or unwilling to reform. Additionally, PPPAs provide a vehicle for ED to plan an orderly transition for students if the school lost certification, filed for bankruptcy, or otherwise closed. For example, ED could use the PPPA period to secure student records, capture technical know-how from key staff, kick-start the development of articulation agreements that would allow students to transition to neighboring schools, and direct resources toward meeting the needs of matriculated students rather than profit-boosting schemes like supercharging recruitment efforts to pull in even more students.
The special process to terminate (or “revoke”) a PPPA school’s funding is the linchpin of this tool. ED is in fact authorized to tailor the terms of both standard and provisional PPAs, but is more inclined to do so with PPPAs. For fully certified schools, the process of customizing a standard PPA can be slow and painstaking. In contrast, for a provisionally certified school, a fast track—known as “revocation”—allows ED to withdraw aid or add “any additional conditions” with the stroke of a pen, effectively keeping risky colleges on a very short leash. By combining effective contract design and consistent use of revocation authority, ED could better utilize PPPAa to ensure that risky colleges shape up or lose federal funding, while also better protecting students.
Additionally, a special rule cements ED authority to revoke PPPAs for substantial misrepresentations, creating a powerful tool to halt ongoing fraud and abuse by schools that have already received a warning. As ED investigates hundreds of thousands of fraud complaints, including many against provisionally certified for-profit schools, the revocation authority may come in handy.
There’s one big problem, though: the Department of Education has rarely if ever used the revocation authority. In 1999, roughly six years after Congress empowered ED to use PPPAs, the Department of Education’s Office of the Inspector General (OIG) set out to determine whether PPPAs were an effective tool for managing “those at-risk schools who may fail to take corrective action or whose compliance with Federal regulations deteriorated.” The OIG found it impossible to evaluate the usefulness of PPPAs because in six years, ED had not revoked a single PPPA, despite evidence that many schools were in violation of federal standards. At the time, ED agreed with the OIG’s recommendation that it should begin to appropriately revoke PPPAs; but after another twenty-two years, numerous sudden closures, hundreds of thousands of defrauded students, and billions in wasted taxpayer dollars, ED data available to TCF do not show a single revoked PPPA.
Figure 2. Department of Education Concurs in 1999 with OIG Recommendation to Use Revocation Authority
Source: “Review of the Effectiveness of Provisional Certification Administered by the U.S. Department of Education: Final Audit Report,” U.S. Department of Education, Office of the Inspector General, 1999, https://www2.ed.gov/about/offices/list/oig/auditreports/a0770008.pdf.
Zombie Schools and the Perversion of PPPAs
In lieu of revoking the PPPAs of schools that persistently fall short of federal standards, ED has stretched its certification authority to continue funding schools for years, even decades, after they fail to meet eligibility requirements. This erosion and perversion of higher standards effectively rewrote the rules of the Higher Education Act, signalling to all unscrupulous profiteers that the bar was, in fact, much lower than what federal law requires.
One way in which ED has continued to deliver taxpayer funds to perpetually failing schools is to grant these schools many consecutive extensions on deadlines for reform. Each PPPA is limited by statute to a maximum three-year term, but in practice, colleges regularly blow past their three-year deadlines with impunity. For example, Education Affiliates, a for-profit education chain backed by well-funded private equity investors, has fallen short on a federal calculation for financial stability each year since at least 2007—suggesting that investors have found it more profitable to continually undercapitalize their schools rather than make the meaningful investments in students’ education that would be necessary to bring these schools up to standards. When for-profit schools intentionally underfund educational programs, ED should decline further extensions of the bond-based alternative to financial responsibility (which is discretionary) and require owners to raise capital (without increasing tuition), and invoke a rule to secure personal financial guarantees from persistent offenders.
Moreover, some schools have a track record so troubling that ED cannot justify renewing the school’s certification, even on a provisional basis. These become “zombie schools”: they are not quite alive but not quite dead. By law, certification is a prerequisite for federal aid. Losing certification, whether through the expiration of a PPPA or otherwise, should trigger a loss of aid. But, ED has become so oriented toward preventing closure-based harm that it has created a class of federally funded schools not authorized by statute, which only further fuels fraudulent and abusive behavior by these colleges. Zombie schools live in legal limbo: they have failed to maintain eligibility for the federal aid revenue that is their lifeblood; but, by the grace of ED’s distorted oversight, they remain on life support, receiving an unending flow of federal dollars and exposing more and more students to risk.
CEHE occupied this type of zombie status before it collapsed. South University—where collapsed CEHE is encouraging displaced students to enroll—has also not obtained certification in years. They are not alone: The Century Foundation’s analysis of an important but difficult to use ED database known as PEPS revealed forty zombie schools (including twenty-eight for-profit schools) as of May 2021.
Among the longest-standing zombie schools is for-profit Walden University: when ED did not renew Walden’s certification in March 2020, Walden lapsed into zombie status and stayed there until August 2021. While Walden operated as a zombie college, whistleblowers, investors, and accreditors acknowledged allegations that Walden lied to nursing students and enrolled them in dead-end programs that lacked the clinical placements students needed to become nurses. Ordinarily, this type of misrepresentation could lead to a revocation action, but for a zombie school, there is already no PPA to be revoked.
What pulled Walden out of zombie status? A change in ownership engineered by another for-profit college conglomerate, Adtalem Education Group. Adtalem (formerly DeVry Education Group) already had a troubled history: it rebranded after its subsidiary DeVry became known for lying to students about their job prospects and salaries, was subject to a rare ED enforcement action, and was skewered on late night’s The Daily Show. In 2020, DeVry’s former owners decided to buy Walden, but only if the Department of Education didn’t place too many conditions on Walden in any forthcoming contract.
In June 2021, ED agreed to issue a contract—a temporary provisional participation agreement (TPPPA)—that would deliver uninterrupted aid to Walden (a school that should not have been receiving federal aid during the previous fifteen months of operation) after its acquisition by Adtalem (a company that has so far escaped responsibility for overseeing years of DeVry’s fraud). In rubber-stamping Adtalem’s August 12, 2021 acquisition of Walden over the objections of advocates, ED illustrated how deeply PPA contracts have been undermined and, moreover, how tricky owners can game the system by combining zombie status with another weak link: temporary agreements that accompany structural changes.
Structural Changes and the PPPA Trade
The reality that PPPAs are rarely revoked for bad (even unlawful) behavior makes these government contracts appealing assets for profiteers. Whereas a new for-profit college must demonstrate its viability by operating without federal aid for at least a year before it can apply for certification, sophisticated investors and conglomerates have found a way to bypass this rule by simply buying other schools for their PPPAs.
By law, when control of an institution changes hands, the transaction terminates the existing PPPA, ending eligibility for federal aid; in that sense, the buying and trading of federal aid eligibility is not allowed. But in practice, corporate actions regarding PPPAs have evolved faster than ED’s oversight processes, resulting in a marketplace where companies compete for a chance to gain access to a troubled school that they view as an unlimited spigot of federal dollars. For ED, the limited options for remedy again distort the rules and impedes the cutoff of aid. Since an interruption of certification could impact students, ED has used its discretion to issue a TPPPA immediately after a transaction, even when the school fails to satisfy statutory mandates such as the requirement to submit a “materially complete application” within ten days of the transaction. Unscrupulous schools know this; for example, faced with a warning that they failed to include key details for review following a completed conversion transaction, executives at for-profit Ashford University (now rebranded University of Arizona Global Campus or UAGC) retorted: “Given that our student body is approximately 35,000 students, receipt of the TPPPA is of critical importance.” Translation: we don’t have to follow the rules when we hold hostage the education of 35,000 students, and when you care more about those students’ futures than we do.
TPPPAs were originally intended to serve as short-term stop-gap measures. At the end of the temporary agreement, ED denies certification or issues either a standard or provisional contract addressing risks and establishing participation terms for the post-transaction school. TPPPAs start the clock with a little over a month scheduled for post-transaction review. In recent years however, highly questionable schools have operated on TPPPAs for years, effectively repealing the rule that schools lose their contracts unless they demonstrate that the restructured institution can satisfy federal standards.
Ideally, structural changes to a school such as new ownership should be mapped out months or years in advance. The school and its future owner would present a detailed structural change plan to ED for pre-acquisition review. In a pre-acquisition review, ED may deny the change request, seek modifications, or provide preliminary approval. Even if the school receives tentative pre-acquisition approval, however, it must submit a complete set of transaction documents—such as balance sheets from the day the transaction closed—to demonstrate that the change occurred as planned. If the complete application is submitted, ED may issue a TPPPA and begin a post-acquisition review, which could lead to a standard or provisional PPA. In theory, because the change was mapped out and approved in advance, the TPPPA is only needed as a quick post-transaction check to ensure that nothing questionable happened during the transaction.
In reality, however, temporary agreements have dragged on for years, allowing the involved schools to continue to operate. Take the example of South University, which has run through four owners in the past two decades: in 2003, South was bought by a publicly traded for-profit company, Education Management Co. (EDMC); in 2017, as EDMC crumbled in scandal, South and affiliated schools were bought by profiteers at Dream Center Education Holdings; in 2019, as Dream Center collapsed amid revelations of fraud, South was passed on to another shady owner, a corporate shell called the Education Principle Foundation (EPF), which was rebranded from Colbeck Foundation only days before the transaction by executives of private equity firm Colbeck Capital Management. All the while, students’ educations have been shuffled among profiteers and their shell companies for over a decade without South’s owners once demonstrating that the college met the standards for full certification. Two years after the EPF sale, South’s 2019 TPPPA (originally expiring February 2019) is still the only basis for its continued ability to market to students as a federally approved school and receive federal aid.
Too Flawed to Fail
The corruption of ED’s certification system extends beyond wasted tax dollars and defrauded students who are directly harmed by unaccountable schools. Over time, the pattern of underenforced standards, loosely granted federal aid, and an outsized aversion to closing predatory schools has effectively established a shadow set of rules that operate in practice for all participants in the higher education system.
A system has developed in which schools that persistently fail to meet federal standards continue to receive federal funds indefinitely, regardless of their ability or willingness to improve. Worse yet, ED has become so singularly focused on preventing school closures that, perversely, schools with worse outcomes can leverage their failure as a bargaining chip.
If a school closes in the early stages of academic decline, its students will be able to transfer credits and continue their education at other reputable institutions—once they have overcome the initial shock and hurdles associated with the closure. This was the case with Mt. Ida college, where regulators reported that over 90 percent of students found satisfactory options for continuing their education. But, if a school’s academic quality is so poor that no legitimate colleges would partner with that school or accept its credits, then students will likely have no viable transfer options after a closure. For example, shortly after for-profit ITT Tech collapsed in 2016, 670 students wrote to ED about how, contrary to ITT’s enrollment promises, their credits could only be transferred to other predatory, for-profit schools. When schools deteriorate to this point, closures hit students harder; rather than advancing with decent transfer options, students are confronted with the brutal reality that their credits may be meaningless. These schools have become too flawed to fail, as ED is particularly loath to end aid to a failing school when students have no good transfer options. In the worst cases, ED ends up subsidizing a school that has sunk this low, when it really should be ripping off the bandaid to prevent students from going deeper into debt for what are essentially worthless credits or degrees.
Additionally, in a school’s early stages of financial decline, ED can restrict growth or seek financial guarantees to prevent or prepare for future financial deterioration. However, when a poorly run school approaches the brink of collapse, owners play a game of chicken that ED always loses: schools threaten to close if ED takes any step toward increasing accountability or protecting students from further harm, and ED backs down. Particularly when unscrupulous for-profit operators are willing to sacrifice students’ educations as a bargaining chip, even common sense precautions—such as offering greater transparency or limiting the further enrollment of new students who would be harmed if the school closes—are abandoned in an attempt to forestall closure. ED is effectively drafted into playing a co-conspirator in an end-stage Ponzi scheme that relies on revenue from new student enrollments to cover expenses incurred to recruit and retain the previous batch of students. When it comes to a school’s finances, as with academics, once a school is past the point of reform, it actually becomes more and more difficult to impose meaningful protections without tipping schools into an abrupt closure.
Moreover, the for-profit college sector has a unique incentive in favor of financial precarity: students’ tuition revenue can be distributed directly to owners. Raiding the coffers makes owners rich and, as an added benefit, distribution helps to shield the institution’s assets from liability. A strategy of intentionally keeping a school thinly capitalized runs counter to the intent of federal “Financial Responsibility” rules, but weak enforcement allows unscrupulous schools to continuously violate those rules—so long as they maintain piddling bank guarantees known as letters of credit (LOCs). When profitability wanes or liability looms, for-profit owners (and creditors) prefer an immediate bankruptcy, which preserves assets but harms students, to a responsible closure, which benefits students but drains assets. In many cases, ED could deter the worst sudden closures through a two-pronged strategy that combines pre-closure efforts to secure personal financial guarantees from the executives who control closure decisions (and currently profit from sudden closures), and aggressive post-closure collection of institutional and personal liabilities.
In the absence of early enforcement, predatory schools can pursue a risky but profitable strategy of intentional decline: by failing to take corrective action and allowing standards to slip lower and lower while extracting federal aid for investor gain—of becoming too flawed to fail.
The Path Forward
To rein in predatory colleges and ensure that federal funds subsidize schools only when they deliver on their promises, ED must use provisional agreements as intended. That boils down to three steps: better drafting, supervision, and enforcement. Once risks have been identified, ED must draft PPPAs that serve as corrective action plans with measurable benchmarks for improvement (or revocation). For example, a school like Ashford (now UAGC) whose accreditor has noticed concern about insufficient support for academic instruction should demonstrate increased instructional spending as a condition for participation. This is a reasonable condition, considering Ashford spent just nineteen cents on instruction for every dollar it collected in tuition and fee revenue in 2017. While monitoring compliance with PPPA terms, ED should also supervise key student protection tasks such as securing student records, laying the groundwork for transition plans should the school close, and preventing executives from squirreling away assets. Under watchful supervision, many colleges that rely on federal funds for their revenue would be forced to improve how they treat students in order to survive.
Some schools may fail at first, and will experience revocation if they violate PPPA terms or remain unable to satisfy federal standards when the provisional contract expires. This does not mean, however, that the school must close. Schools can improve through private funding and then apply for reinstatement after they become compliant with federal standards. Morris Brown, an HBCU which is on track to regain federal aid eligibility after a twenty-year improvement process, illustrates how this path could work. Financially responsible schools would have reserves to draw from to withstand the loss of federal funding, and for other promising private institutions, investor capital and charitable donations can help tide a school over if it is truly on a viable path to success. The operating principle, however, should be reset so that schools must self-finance improvement efforts once they have declined too far. The current practice of extending endless taxpayer-funded improvement opportunities has eliminated a key incentive for institutions to actually improve.
Finally, enforcement means that some schools that currently benefit from a lax regulatory environment will close for good. This should not surprise anyone: the current environment has attracted unscrupulous profiteers with the promise of “free” federal dollars (advanced by taxpayers and paid for with the debts of low-income students) to anyone who gets their hands on a PPPA. Closing these schools means that scammers who are looking for the kind of profit margins typically associated with shady money-making schemes will exit the market, clearing the path for schools that genuinely seek to deliver educational services.
Tags: higher education, department of education, for profit
Predatory Colleges Think They Are Too Flawed to Fail. Biden’s Department of Education Should Prove Them Wrong.
President Biden campaigned on a promise that, under his administration, for-profit colleges would have to “prove their value” before gaining access to federal aid, so that students would not sink into debt as a result of some schools’ predatory practices. As it happens, there is a clear (but underutilized) tool in the U.S. Department of Education (ED) arsenal for requiring risky schools to prove their value, formally called a program participation agreement (PPA), that all schools must complete to become eligible to receive federal aid. Functionally, a PPA acts as a contract in which a school promises to meet federal standards and do right by the students it enrolls. For too long, however, predatory for-profit schools have enrolled students and harvested their federal aid without holding up the school’s end of the bargain, violating the terms of their PPAs; it’s time for ED to start enforcing the contract.
The recent collapse of Center for Higher Education Excellence (CEHE), a covert for-profit college chain, is but one painful example of how students are harmed when years of weak PPA enforcement leads to corruption of the federal aid system. In 2020, a lengthy trial brought by Colorado’s Attorney General’s Office concluded with clear findings of systematic fraud by CEHE schools, through the intentional design of CEHE leaders. As I wrote at the time, these findings clearly disqualified CEHE from federal aid; and yet, ED spent the next year delivering federal funding to those same culpable leaders, without establishing guardrails to protect students from further abuse or setting the stage for a more responsible closure. Ultimately, after absorbing billions in taxpayer dollars, CEHE closed overnight, with no warning to students until the last minute—at which point staff steered students toward other troubled schools such as South University, which has its own history and affiliations with predatory practices and sudden closures.
For several years prior to closing, CEHE had been subject to a probationary status known as provisional certification that comes with a specialized contract—a provisional PPA (PPPA)—that was intended to force the school to shape up, or, at the very least, set the stage for a less-damaging closure. (See Figure 1.) Unfortunately, the PPPA did neither—and this troubling situation is part of a trend.
Figure 1: CEHE Provisional Status
Source: Department of Education emails to CEHE, May 2020, obtained by The Century Foundation through public records requests, available at https://drive.google.com/file/d/1a9AaGcW7EhovGL5bCVQ4mnevCGUYOjP4/view.
For too long, lack of action on enforcing PPPAs has become the norm, allowing schools that harm students to operate indefinitely with federal funding. Students—who enroll under the belief that federally aided schools must meet federal standards—should be protected from unscrupulous schools that continue to turn a profit regardless of whether they deliver on their promise to provide high-quality educational services. If predatory schools break their promises in their PPAs, then the PPPAs that follow must have appropriate enforcement and revocation protocols tailored to address the specific risks involved.
The Purpose of Provisional Program Participation Agreements
Prior to 1992 amendments to the Higher Education Act (HEA), the Department of Education reviewed colleges’ eligibility to receive federal aid dollars on a binary basis: schools that met federal standards were certified and received standard contracts (PPAs), which set terms for their receipt of federal money; schools that failed to meet general standards or that violated the terms of their PPAs lost eligibility—at least in theory—and their eligibility for taxpayer-supported programs such as federal student loans, Pell Grants, and federal work-study would be terminated.
But problem colleges present regulators with no good choices for remedy: continuing to prop up a school that fails to meet standards in hopes that it will turn around undermines integrity of the aid programs and is bad for students, yet cutting off funding can disrupt students’ education or push a struggling school over the edge toward collapse. Moreover, many colleges—particularly those in the for-profit sector—lack the means or the mission to invest their own resources to improve if they become a substandard school. Instead, as history shows, owners of underperforming for-profit colleges tend to preserve assets for themselves, enroll new students to extract their tuition dollars even as collapse becomes inevitable, and ultimately close overnight, leaving students reeling.
In 1992, with for-profit schools precipitously closing amid waves of fraud, abuse, and financial mismanagement, Congress amended the Higher Education Act (HEA) to create a new college oversight tool: provisional PPAs (PPPAs), which can function as a corrective action plan when colleges start to fall below standards—for example, when accreditors place them on a warning status, or their finances begin to decline, or federal investigators find problems. Instead of immediately terminating federal subsidies, which could trigger a sudden closure, or continuing to certify institutions that have violated standard PPAs, which erodes federal standards and program integrity, ED could use a PPPA to deliver highly restricted funding, closely monitor institutional risk, and manage a closure if needed.
Under PPPAs, problem schools continue to receive federal subsidies, but only if they agree to fix their problems and then succeed in coming back into compliance with federal standards within a short period of time. During this probationary period, ED can monitor the school closely and is empowered to swiftly cut off a school’s aid if the school’s leadership proved unable or unwilling to reform. Additionally, PPPAs provide a vehicle for ED to plan an orderly transition for students if the school lost certification, filed for bankruptcy, or otherwise closed. For example, ED could use the PPPA period to secure student records, capture technical know-how from key staff, kick-start the development of articulation agreements that would allow students to transition to neighboring schools, and direct resources toward meeting the needs of matriculated students rather than profit-boosting schemes like supercharging recruitment efforts to pull in even more students.
The special process to terminate (or “revoke”) a PPPA school’s funding is the linchpin of this tool. ED is in fact authorized to tailor the terms of both standard and provisional PPAs, but is more inclined to do so with PPPAs. For fully certified schools, the process of customizing a standard PPA can be slow and painstaking. In contrast, for a provisionally certified school, a fast track—known as “revocation”—allows ED to withdraw aid or add “any additional conditions” with the stroke of a pen, effectively keeping risky colleges on a very short leash. By combining effective contract design and consistent use of revocation authority, ED could better utilize PPPAa to ensure that risky colleges shape up or lose federal funding, while also better protecting students.
Additionally, a special rule cements ED authority to revoke PPPAs for substantial misrepresentations, creating a powerful tool to halt ongoing fraud and abuse by schools that have already received a warning. As ED investigates hundreds of thousands of fraud complaints, including many against provisionally certified for-profit schools, the revocation authority may come in handy.
There’s one big problem, though: the Department of Education has rarely if ever used the revocation authority. In 1999, roughly six years after Congress empowered ED to use PPPAs, the Department of Education’s Office of the Inspector General (OIG) set out to determine whether PPPAs were an effective tool for managing “those at-risk schools who may fail to take corrective action or whose compliance with Federal regulations deteriorated.” The OIG found it impossible to evaluate the usefulness of PPPAs because in six years, ED had not revoked a single PPPA, despite evidence that many schools were in violation of federal standards. At the time, ED agreed with the OIG’s recommendation that it should begin to appropriately revoke PPPAs; but after another twenty-two years, numerous sudden closures, hundreds of thousands of defrauded students, and billions in wasted taxpayer dollars, ED data available to TCF do not show a single revoked PPPA.
Figure 2. Department of Education Concurs in 1999 with OIG Recommendation to Use Revocation Authority
Source: “Review of the Effectiveness of Provisional Certification Administered by the U.S. Department of Education: Final Audit Report,” U.S. Department of Education, Office of the Inspector General, 1999, https://www2.ed.gov/about/offices/list/oig/auditreports/a0770008.pdf.
Zombie Schools and the Perversion of PPPAs
In lieu of revoking the PPPAs of schools that persistently fall short of federal standards, ED has stretched its certification authority to continue funding schools for years, even decades, after they fail to meet eligibility requirements. This erosion and perversion of higher standards effectively rewrote the rules of the Higher Education Act, signalling to all unscrupulous profiteers that the bar was, in fact, much lower than what federal law requires.
One way in which ED has continued to deliver taxpayer funds to perpetually failing schools is to grant these schools many consecutive extensions on deadlines for reform. Each PPPA is limited by statute to a maximum three-year term, but in practice, colleges regularly blow past their three-year deadlines with impunity. For example, Education Affiliates, a for-profit education chain backed by well-funded private equity investors, has fallen short on a federal calculation for financial stability each year since at least 2007—suggesting that investors have found it more profitable to continually undercapitalize their schools rather than make the meaningful investments in students’ education that would be necessary to bring these schools up to standards. When for-profit schools intentionally underfund educational programs, ED should decline further extensions of the bond-based alternative to financial responsibility (which is discretionary) and require owners to raise capital (without increasing tuition), and invoke a rule to secure personal financial guarantees from persistent offenders.
Moreover, some schools have a track record so troubling that ED cannot justify renewing the school’s certification, even on a provisional basis. These become “zombie schools”: they are not quite alive but not quite dead. By law, certification is a prerequisite for federal aid. Losing certification, whether through the expiration of a PPPA or otherwise, should trigger a loss of aid. But, ED has become so oriented toward preventing closure-based harm that it has created a class of federally funded schools not authorized by statute, which only further fuels fraudulent and abusive behavior by these colleges. Zombie schools live in legal limbo: they have failed to maintain eligibility for the federal aid revenue that is their lifeblood; but, by the grace of ED’s distorted oversight, they remain on life support, receiving an unending flow of federal dollars and exposing more and more students to risk.
CEHE occupied this type of zombie status before it collapsed. South University—where collapsed CEHE is encouraging displaced students to enroll—has also not obtained certification in years. They are not alone: The Century Foundation’s analysis of an important but difficult to use ED database known as PEPS revealed forty zombie schools (including twenty-eight for-profit schools) as of May 2021.
Among the longest-standing zombie schools is for-profit Walden University: when ED did not renew Walden’s certification in March 2020, Walden lapsed into zombie status and stayed there until August 2021. While Walden operated as a zombie college, whistleblowers, investors, and accreditors acknowledged allegations that Walden lied to nursing students and enrolled them in dead-end programs that lacked the clinical placements students needed to become nurses. Ordinarily, this type of misrepresentation could lead to a revocation action, but for a zombie school, there is already no PPA to be revoked.
What pulled Walden out of zombie status? A change in ownership engineered by another for-profit college conglomerate, Adtalem Education Group. Adtalem (formerly DeVry Education Group) already had a troubled history: it rebranded after its subsidiary DeVry became known for lying to students about their job prospects and salaries, was subject to a rare ED enforcement action, and was skewered on late night’s The Daily Show. In 2020, DeVry’s former owners decided to buy Walden, but only if the Department of Education didn’t place too many conditions on Walden in any forthcoming contract.
In June 2021, ED agreed to issue a contract—a temporary provisional participation agreement (TPPPA)—that would deliver uninterrupted aid to Walden (a school that should not have been receiving federal aid during the previous fifteen months of operation) after its acquisition by Adtalem (a company that has so far escaped responsibility for overseeing years of DeVry’s fraud). In rubber-stamping Adtalem’s August 12, 2021 acquisition of Walden over the objections of advocates, ED illustrated how deeply PPA contracts have been undermined and, moreover, how tricky owners can game the system by combining zombie status with another weak link: temporary agreements that accompany structural changes.
Sign up for updates.
Structural Changes and the PPPA Trade
The reality that PPPAs are rarely revoked for bad (even unlawful) behavior makes these government contracts appealing assets for profiteers. Whereas a new for-profit college must demonstrate its viability by operating without federal aid for at least a year before it can apply for certification, sophisticated investors and conglomerates have found a way to bypass this rule by simply buying other schools for their PPPAs.
By law, when control of an institution changes hands, the transaction terminates the existing PPPA, ending eligibility for federal aid; in that sense, the buying and trading of federal aid eligibility is not allowed. But in practice, corporate actions regarding PPPAs have evolved faster than ED’s oversight processes, resulting in a marketplace where companies compete for a chance to gain access to a troubled school that they view as an unlimited spigot of federal dollars. For ED, the limited options for remedy again distort the rules and impedes the cutoff of aid. Since an interruption of certification could impact students, ED has used its discretion to issue a TPPPA immediately after a transaction, even when the school fails to satisfy statutory mandates such as the requirement to submit a “materially complete application” within ten days of the transaction. Unscrupulous schools know this; for example, faced with a warning that they failed to include key details for review following a completed conversion transaction, executives at for-profit Ashford University (now rebranded University of Arizona Global Campus or UAGC) retorted: “Given that our student body is approximately 35,000 students, receipt of the TPPPA is of critical importance.” Translation: we don’t have to follow the rules when we hold hostage the education of 35,000 students, and when you care more about those students’ futures than we do.
TPPPAs were originally intended to serve as short-term stop-gap measures. At the end of the temporary agreement, ED denies certification or issues either a standard or provisional contract addressing risks and establishing participation terms for the post-transaction school. TPPPAs start the clock with a little over a month scheduled for post-transaction review. In recent years however, highly questionable schools have operated on TPPPAs for years, effectively repealing the rule that schools lose their contracts unless they demonstrate that the restructured institution can satisfy federal standards.
Ideally, structural changes to a school such as new ownership should be mapped out months or years in advance. The school and its future owner would present a detailed structural change plan to ED for pre-acquisition review. In a pre-acquisition review, ED may deny the change request, seek modifications, or provide preliminary approval. Even if the school receives tentative pre-acquisition approval, however, it must submit a complete set of transaction documents—such as balance sheets from the day the transaction closed—to demonstrate that the change occurred as planned. If the complete application is submitted, ED may issue a TPPPA and begin a post-acquisition review, which could lead to a standard or provisional PPA. In theory, because the change was mapped out and approved in advance, the TPPPA is only needed as a quick post-transaction check to ensure that nothing questionable happened during the transaction.
In reality, however, temporary agreements have dragged on for years, allowing the involved schools to continue to operate. Take the example of South University, which has run through four owners in the past two decades: in 2003, South was bought by a publicly traded for-profit company, Education Management Co. (EDMC); in 2017, as EDMC crumbled in scandal, South and affiliated schools were bought by profiteers at Dream Center Education Holdings; in 2019, as Dream Center collapsed amid revelations of fraud, South was passed on to another shady owner, a corporate shell called the Education Principle Foundation (EPF), which was rebranded from Colbeck Foundation only days before the transaction by executives of private equity firm Colbeck Capital Management. All the while, students’ educations have been shuffled among profiteers and their shell companies for over a decade without South’s owners once demonstrating that the college met the standards for full certification. Two years after the EPF sale, South’s 2019 TPPPA (originally expiring February 2019) is still the only basis for its continued ability to market to students as a federally approved school and receive federal aid.
Too Flawed to Fail
The corruption of ED’s certification system extends beyond wasted tax dollars and defrauded students who are directly harmed by unaccountable schools. Over time, the pattern of underenforced standards, loosely granted federal aid, and an outsized aversion to closing predatory schools has effectively established a shadow set of rules that operate in practice for all participants in the higher education system.
A system has developed in which schools that persistently fail to meet federal standards continue to receive federal funds indefinitely, regardless of their ability or willingness to improve. Worse yet, ED has become so singularly focused on preventing school closures that, perversely, schools with worse outcomes can leverage their failure as a bargaining chip.
If a school closes in the early stages of academic decline, its students will be able to transfer credits and continue their education at other reputable institutions—once they have overcome the initial shock and hurdles associated with the closure. This was the case with Mt. Ida college, where regulators reported that over 90 percent of students found satisfactory options for continuing their education. But, if a school’s academic quality is so poor that no legitimate colleges would partner with that school or accept its credits, then students will likely have no viable transfer options after a closure. For example, shortly after for-profit ITT Tech collapsed in 2016, 670 students wrote to ED about how, contrary to ITT’s enrollment promises, their credits could only be transferred to other predatory, for-profit schools. When schools deteriorate to this point, closures hit students harder; rather than advancing with decent transfer options, students are confronted with the brutal reality that their credits may be meaningless. These schools have become too flawed to fail, as ED is particularly loath to end aid to a failing school when students have no good transfer options. In the worst cases, ED ends up subsidizing a school that has sunk this low, when it really should be ripping off the bandaid to prevent students from going deeper into debt for what are essentially worthless credits or degrees.
Additionally, in a school’s early stages of financial decline, ED can restrict growth or seek financial guarantees to prevent or prepare for future financial deterioration. However, when a poorly run school approaches the brink of collapse, owners play a game of chicken that ED always loses: schools threaten to close if ED takes any step toward increasing accountability or protecting students from further harm, and ED backs down. Particularly when unscrupulous for-profit operators are willing to sacrifice students’ educations as a bargaining chip, even common sense precautions—such as offering greater transparency or limiting the further enrollment of new students who would be harmed if the school closes—are abandoned in an attempt to forestall closure. ED is effectively drafted into playing a co-conspirator in an end-stage Ponzi scheme that relies on revenue from new student enrollments to cover expenses incurred to recruit and retain the previous batch of students. When it comes to a school’s finances, as with academics, once a school is past the point of reform, it actually becomes more and more difficult to impose meaningful protections without tipping schools into an abrupt closure.
Moreover, the for-profit college sector has a unique incentive in favor of financial precarity: students’ tuition revenue can be distributed directly to owners. Raiding the coffers makes owners rich and, as an added benefit, distribution helps to shield the institution’s assets from liability. A strategy of intentionally keeping a school thinly capitalized runs counter to the intent of federal “Financial Responsibility” rules, but weak enforcement allows unscrupulous schools to continuously violate those rules—so long as they maintain piddling bank guarantees known as letters of credit (LOCs). When profitability wanes or liability looms, for-profit owners (and creditors) prefer an immediate bankruptcy, which preserves assets but harms students, to a responsible closure, which benefits students but drains assets. In many cases, ED could deter the worst sudden closures through a two-pronged strategy that combines pre-closure efforts to secure personal financial guarantees from the executives who control closure decisions (and currently profit from sudden closures), and aggressive post-closure collection of institutional and personal liabilities.
In the absence of early enforcement, predatory schools can pursue a risky but profitable strategy of intentional decline: by failing to take corrective action and allowing standards to slip lower and lower while extracting federal aid for investor gain—of becoming too flawed to fail.
The Path Forward
To rein in predatory colleges and ensure that federal funds subsidize schools only when they deliver on their promises, ED must use provisional agreements as intended. That boils down to three steps: better drafting, supervision, and enforcement. Once risks have been identified, ED must draft PPPAs that serve as corrective action plans with measurable benchmarks for improvement (or revocation). For example, a school like Ashford (now UAGC) whose accreditor has noticed concern about insufficient support for academic instruction should demonstrate increased instructional spending as a condition for participation. This is a reasonable condition, considering Ashford spent just nineteen cents on instruction for every dollar it collected in tuition and fee revenue in 2017. While monitoring compliance with PPPA terms, ED should also supervise key student protection tasks such as securing student records, laying the groundwork for transition plans should the school close, and preventing executives from squirreling away assets. Under watchful supervision, many colleges that rely on federal funds for their revenue would be forced to improve how they treat students in order to survive.
Some schools may fail at first, and will experience revocation if they violate PPPA terms or remain unable to satisfy federal standards when the provisional contract expires. This does not mean, however, that the school must close. Schools can improve through private funding and then apply for reinstatement after they become compliant with federal standards. Morris Brown, an HBCU which is on track to regain federal aid eligibility after a twenty-year improvement process, illustrates how this path could work. Financially responsible schools would have reserves to draw from to withstand the loss of federal funding, and for other promising private institutions, investor capital and charitable donations can help tide a school over if it is truly on a viable path to success. The operating principle, however, should be reset so that schools must self-finance improvement efforts once they have declined too far. The current practice of extending endless taxpayer-funded improvement opportunities has eliminated a key incentive for institutions to actually improve.
Finally, enforcement means that some schools that currently benefit from a lax regulatory environment will close for good. This should not surprise anyone: the current environment has attracted unscrupulous profiteers with the promise of “free” federal dollars (advanced by taxpayers and paid for with the debts of low-income students) to anyone who gets their hands on a PPPA. Closing these schools means that scammers who are looking for the kind of profit margins typically associated with shady money-making schemes will exit the market, clearing the path for schools that genuinely seek to deliver educational services.
Tags: higher education, department of education, for profit