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Extra Credit: Should top executives be held personally liable after for-profit colleges collapse?

Hello and welcome back to MarketWatch’s Extra Credit column, a weekly look at the news through the lens of debt.

This week, I wrote about the collapse of a few well-known college chains, the corporate unwinding of its parent organization, Dream Center Educational Holdings, and a push by advocates and students to hold the executives in charge of the schools accountable for their collapse. 

So for this week’s Extra Credit, I thought I would stay with the topic and talk a bit about the impact of school closures on students and taxpayers. 

When college chains, like the ones owned by the Dream Center — including the Art Institutes and Argosy University — collapse, students are left with few good options. They can attempt to transfer their credits to another school. Or they can have their federal student loans canceled, which puts taxpayers on the hook for any debt that’s cancelled. But the people who ran the schools often escape responsibility

Advocates are pushing the Biden administration to hold executives personally accountable for their role in the demise of these schools, a step they say could protect students and taxpayers going forward. By the time the schools collapse, there isn’t much money left for the Department of Education, typically one of many creditors, to claim and use to mitigate losses. 

In the case of the Dream Center, the Department of Education has already canceled more than $100 million in loans for borrowers who were attending the schools when they closed. 

“Pursuing personal liability is the only way to prevent precipitous closures and to recoup for taxpayers the costs associated with fraud and closures that are the most harmful to students,” said Yan Cao, a senior fellow at The Century Foundation. 

Still, some are skeptical of the idea of holding school executives personally accountable. Though executives who have violated the law and knowingly engaged in wrongdoing shouldn’t be immune from legal scrutiny, the proposal “goes well beyond that,” said Jason Altmire, the president of Career Education Colleges and Universities, a trade group representing for-profit colleges.

“That is somewhat of an aberration from the traditional rules governing personal responsibility in corporate law in America,” he said. 

Further than the Department of Education has ever gone

Holding executives liable would be further than the Department of Education has ever gone in its oversight of for-profit colleges. Still, the agency has had the authority to do it since the 1990s, the National Student Legal Defense Network, which represents student loan borrowers in litigation, including former Art Institutes students, argued in a memo last year. 

Senator Elizabeth Warren, a Massachusetts Democrat and former longtime university professor, endorsed that conclusion in a press release accompanying the report. She called on the Department to “use every tool available to hold college executives and owners who defraud students personally accountable.” 

This week, Representative Bobby Scott, a Virginia Democrat and chair of the House Committee on Education and Labor, wrote to the Department of Education urging the agency to use its authority to hold executives personally responsible for their collapsed schools’ liabilities to the federal government. 

“We want them to use all available levers of power to achieve progressive gains and that includes reining in the abuses of for-profit colleges,” Jeff Hauser, the executive director of The Revolving Door Project at the Center for Economic and Policy Research, said of the Biden administration. “In general, dishonesty and consumer fraud need to be taken very seriously by the executive branch.” 

One way to do that would be to look more closely at the agreements colleges make with the Department of Education in order to receive federal financial aid funding, said Beth Stein, a senior advisor at The Institute for College Access and Success. “We need to think a little more proactively about what the terms of that contract look like,” Stein said. For example, the contracts could include personal liability for executives in the case of a college’s failure.  

“That is something that the new head of [the Office of Federal Student Aid],” and his team “could make an element of how they might approach these things going forward,” she said. 

‘The people being held accountable are not being held accountable’

Meanwhile, students like Cherisse Hunter-Southern are still coping with the consequences of the turmoil surrounding the school chains for years before they became part of the Dream Center portfolio and ultimately collapsed. 

Hunter-Southern, 40, is at the age where she’d like to start thinking about buying a home, but the damage to her credit score from the $188,000 in student loans she’s struggling to repay has made that more difficult. 

Hunter-Southern, who sued Argosy University shortly after it was sold to the Dream Center by Education Management Corporation, chose to attend the Ontario, Calif. campus of the school, to earn her doctoral degree in psychology, because she wanted to attend a college near her home that offered enough flexibility to balance work, school and her responsibilities as a parent.

But the education was subpar, she said, even before the school closed. 

The schools owned by the Dream Center collapsed in 2019 amid allegations that the executives running the colleges knew about accreditation problems at some Art Institutes campuses and didn’t inform students; and that students at many colleges in the Dream Center chains didn’t receive stipends — the financial aid funds students receive in excess of tuition for living expenses — and more.  

Earlier this year, Hunter-Southern wrote to the judge overseeing the receivership urging him to block a proposal by the court-appointed receiver, Mark Dottore, that would bar litigation against the executives over their conduct related to the schools.  

Dottore, through his attorneys, asked the judge to overrule her objection, saying that “the overwhelming majority” of Hunter-Southern’s education took place while the school was owned by EDMC and the bar order wouldn’t prevent her from making a claim against any of the entities that preceded the receivership, including EDMC, or the receivership entity. Dottore, through his lawyers, wrote that he could reject her claim in the future. 

After a Zoom hearing this week in which the judge indicated that he intends to approve the bar order, Hunter-Southern said she felt “baffled,” by the situation.

“The people who need to be held accountable are not being held accountable,” she said, adding that if the executives “want to go work somewhere else, they have the possibility and the potential to do the same thing, not just to me, but to other students.” 

Hunter-Southern noted that consumers have the opportunity to get their money back on much smaller purchases than higher education.

“When you go to the store and you get a broken pair of sunglasses, you should be able to return the sunglasses and get the ones you want,” she said. 

“You stole my money and I’m $188,000 in debt and for what? The worst education ever.”

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