As the U.S. Department of Education forgives thousands of loans students took out to attend Corinthian Colleges andsets up a new federal debt relief process for other colleges, one pressing issue is how much it will cost taxpayers.
“It’s very hard for us to wrap our arms around how much this is going to cost,” Gail McLarnon, the department official leading a rule-making panel that is working out the details of that debt relief process, told the committee this week.
Taxpayers will largely be stuck with the bill from millions of dollars’ worth of forgiven loans relating to the collapse of Corinthian Colleges, because the company is bankrupt. But moving forward, department officials say they want to expand their ability to guard federal money before a college goes under — in part so the feds can recoup from colleges the loans they cancel when institutions close or large numbers of borrowers prove they were defrauded.
The Obama administration has proposed expanding the circumstances under which the Education Department will require colleges to post letters of credit — essentially collateral that colleges must set aside when officials have concerns that the institution may be unable or unwilling to pay back money it owes to the government.
As part of negotiations over debt relief rules, the Education Department for the first time on Thursday released top-line statistics about how frequently it requires colleges to post letters of credit. Over the past five years, the department reported, officials have required letters of credit from colleges on more than 2,700 occasions, including institutions that got hit with the requirement multiple times. But the department did not identify the full list of colleges facing letters of credit.
Federal data obtained by Inside Higher Ed under the Freedom of Information Act provide a snapshot of which colleges the department has required to post letters of credit as of last fall.
More than 400 colleges and universities had outstanding letters of credit totaling nearly $900 million on Nov. 17, according to an Inside Higher Ed analysis. The majority — 273 institutions — were for-profit colleges; the remaining 148 were nonprofit colleges.
The colleges range widely, though the largest letters of credit were required of large for-profit education companies. Following is a list of the largest letters of credit outstanding on Nov. 17:
Company Name of Institution | Type | Amount (% Title IV) | Reason |
Education Management Corporation Argosy University The Art Institutes Brown Mackie College South University | For-Profit | $271.5 M (15%) | Failed Past Performance Requirements |
Laureate Education Walden University Kendall College NewSchool of Architecture and Design | For-Profit | $85.6 M (10%) | Failed Numeric Test |
ITT Educational Services ITT Technical Institute Daniel Webster College | For-Profit | $79.7 M (10%) | Failed Past Performance Requirements |
Delta Educational Systems Berks Technical Institute Creative Circus McCann School of Business & Technology Miller-Motte Technical College Tucson College | For-Profit | $40.4 M (15%) | Failed Numeric Test |
Education Affiliates All-State Career School Denver School of Nursing Fortis College/Institute St. Paul’s School of Nursing | For-Profit | $35.5 M (15%) | Failed Past Performance Requirement |
Everglades College, Inc. Everglades University Keiser University | Private, Non-Profit | $27.6 M (10 %) | Failed Numeric Test |
Education Corporation of America Virginia College | For-Profit | $26.5 M (10%) | Failed Past Performance Requirements |
Instituto de Banca y Comercio, Inc. (Puerto Rico) National University College Ponce Paramedical College Instituto de Banca y Comercio | For-Profit | $22.5 M (15%) | Failed Past Performance Requirement |
The most frequent reason that colleges were required to post a letter of credit is because they earned a failing score on the Education Department’s financial responsibility test. Colleges, especially nonprofit institutions, have long complained that this test does not accurately gauge the fiscal health of an institution. The score, which is calculated on a range of -1 to 3, is based on the financial statements college submit to the department. Colleges falling below the passing score of 1 are required to post a letter of credit, while some colleges falling below 1.5 may also have to post a letter of credit.
At the same time, though, the department’s current letter-of-credit policies don’t appear to sweep up a number of colleges that the Education Department has flagged for problems. Of the 73 colleges facing the most stringent heightened cash monitoring restrictions last September, fewer than half — 24 colleges — had posted letters of credit by the middle of the next month, according to a review of federal records.
The second most common reason for letters of credit for the colleges analyzed last November was a failure of past performance requirements, which department officials said most frequently means a college’s financial reports were more than a month late. But it could also indicate that a college or some of its executives were previously sanctioned by the Education Department.
In addition, several dozen colleges also were required to post a letter of credit because they recently changed owners or did not properly provide students with federal student loans or grants. And three colleges were required to post letters of credit because their auditors questioned the solvency of the institution.
Too Big to Fail?
Before it began collapsing in 2014, Corinthian Colleges was not required to post a letter of credit. In fact, lawyers for the now-defunct for-profit college chain told a California court that year that it shouldn’t take action against the college, in part because doing so would trigger a possible $1.2 billion bill for taxpayers stemming from closed-school discharges.
Critics have argued that some of the large for-profit education companies — where students have hundreds of millions, if not billions of dollars, in outstanding federal student loans — are essentially “too big to fail.” Regulators, they argue, may be reticent to take action against a large college if its closure means having to forgive large sums of money.
“Corinthian was circling the drain and not being required to post a letter of credit,” said Chris Hicks, who until recently was with the labor group Jobs With Justice and has authoredtwo reports on the department’s letter of credit practices. “Letters of credits can mitigate costs to taxpayers to cover debt forgiveness, and they’re being used too infrequently.”
The 421 colleges and universities that were required to post a letter of credit as of last November collectively received more than $4.5 billion in federal student loans during the last academic year, federal records show.
Letters of Credit Are Rarely Drawn
Data provided by the Education Department show that even when the department does require letters of credit, it has rarely ended up using the money. According to the data provided by the department, between January and November 2015, the Education Department drew down funds from only 10 colleges that had posted letters of credit, totaling just $2.9 million.
The largest letter of credit actually drawn by the department during that time was $1.9 million from Sojourner-Douglass College, a private college in Baltimore, which closed last year after losing its accreditation.
Expansion of Letters of Credit
The department is proposing to significantly expand when the Education Department requires letters of credit.
Under the proposal, colleges could be required to post letters of credit based on a range of triggers, including being sued by a state or federal agency, being placed on probation by an accreditor, violating a debt obligation, having a cohort default rate above 30 percent for two years in a row, having more than 50 percent of programs fail the gainful employment test, and when a company’s stock is delisted involuntarily from an exchange.
The negotiated rule-making panel will meet for a final time Friday. The Education Department has said that it intends to finalize the package of regulations by November so that they can take effect in July 2017.
[SOURCE :-insidehighered]