Experts Focus on Ways to Strengthen Financial Oversight of Colleges

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Pexels Pew Nguyen 239548Through a public process called negotiated rulemaking, the U.S. Department of Education (ED) will begin debating with stakeholders next week about how to tighten financial regulations of colleges.

A recent article from The Century Foundation (TCF), a nonpartisan think tank, outlined several suggestions to ED for better protecting students and taxpayers from colleges, particularly for-profits, at risk of closing abruptly. Such sudden shutdowns leave students in the lurch and can cost taxpayers millions in federal dollars.

“There’s been a pattern of schools, especially for-profits, enrolling thousands of students, then shutting their doors with no warning,” said Carolyn Fast, senior fellow at TCF and author of the piece, titled “Overhaul Financial Oversight of Colleges to Better Protect Students and Taxpayers.” “The question is, why does this keep happening? And what can the Department do differently to prevent these closures and the harm that comes from them?”

One of the paper’s recommendations is that ED should change how it identifies financially unstable schools—and how frequently schools should report as well as update their financial health to ED. Fast said that there can be a big time lag between when ED gets details about a school’s financial standing to when that school runs into struggles.

“Part of the issue is that the Department seems to identify the problem when it’s already too late,” said Fast. “So, by the time they know the school may have a problem, it might be too late for the Department to take action, and the school has been getting federal funds in the meantime.”

For instance, the paper noted that, despite being almost two years into the pandemic, ED is currently relying on the financial composite scores of colleges based on 2018 and 2019 data. A financial composite score is a single number meant to indicate the financial health of a higher education institution. But in a rapidly changing economy, if that score comes from old data, then Fast questioned how that number can show an accurate picture.

“I think the piece is really spot-on with the call for more information,” said Matthew Bruckner, an associate professor of law at Howard University School of Law. Bruckner is an expert on bankruptcy law in higher education. “The Department makes decisions with big impacts using old information. If you’re on the financial fence, they should instead be asking, what steps are you taking today to address that which you know is coming?”

In contrast, Bruckner pointed out that the U.S. Securities and Exchange Commission (SEC) receives quarterly updates on the financial health of companies. He added that the SEC gets even more frequent updates when a company is undergoing a major financial change. Yet the ED does not require such timely reporting.

Fast’s piece added that ED can do a better job of holding colleges accountable, particularly for-profits that often have been found to deploy predatory lending and recruitment practices on some of the country’s most underserved students. 

Dr. William Tierney, university professor emeritus at the University of Southern California (USC), researches for-profit colleges and added that many of the country’s poorest students are left in debt or without a degree when schools suddenly close. And if a student can’t transfer their credits to another school to finish their degree, their loans are discharged with the taxpayer footing the bill.

“We’ve had enough cases of this now to know what the problem is: it’s either the consumer or citizen who gets screwed,” said Tierney on the abrupt closures of several for-profit colleges in recent years, including Corinthian Colleges and ITT Tech. “There has to be accountability on the front-end not the back-end. I’m not comfortable with ‘buyer beware.’”

Daniel Zibel, vice president and chief counsel as well as cofounder of the National Student Legal Defense Network, agreed with the call for front-end changes. The National Student Legal Defense Network is a nonpartisan, nonprofit organization focused on students’ rights to educational opportunity using litigation and advocacy.

“When people enroll at a college, they are seeking a leg-up, a chance at economic mobility, and when a school closes while you’re in the middle of an education, that is incredibly disruptive,” said Zibel. “I think the Department should be doing everything they can on the front-end to make sure students are protected.”

Yet Tierney noted that for-profit college regulations have been “a yo-yo” between presidential administrations over the last few years.

“When you have somebody who ran an illegitimate for-profit college, meaning Trump, and he works at getting rid of all the regulations, and then Biden comes in, well, we can do something now,” said Tierney. “But we’re not doing enough. It’s a problem.”

Bruckner emphasized that state-based regulators also have a responsibility “to ensure that the education being provided is a good education—and that the students are not likely to move or lose credits midway through their degree.”

Yet Fast said that she remains hopeful for next week’s negotiated rulemaking and what changes ED may bring about. Fast will be one of the negotiators during rulemaking. One additional point she will keep an eye out for is if ED will work on “bright-line rules,” or actions the Department must take when a college is deemed highly financially unstable. These “bright-line rules” could push ED to take more preventive measures.

“I am optimistic,” said Fast. “I think the Department is committed to working hard on this issue and coming up with practical solutions.”

Rebecca Kelliher can be reached at rkelliher@diverseeducation.com