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Student Defense Publishes Legal Memo on Department of Education's Obligation to Reform Financial Responsibility Regulations

February 15, 2022

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Student Defense Publishes Legal Memo on Department of Education’s Obligation to Reform Financial Responsibility Regulations
Memo introduced at Negotiated Rulemaking urges Department to come into compliance with Higher Education Act

A member of the U.S. Department of Education’s negotiated rulemaking committee who represents military members and student-veterans is urging fellow negotiators to consider changing the Department’s “Financial Responsibility'' regulations to better shield students and taxpayers from fraudulent higher education profiteers. Barmak Nassirian, a member of the Department’s Institutional and Programmatic Eligibility Committee, cited a newly released Student Defense legal memorandum underscoring the urgent need for these reforms.

The memo highlights the need for the Department to take the following steps to bring its Financial Responsibility regulations into compliance with the Higher Education Act:

  1. The Department must change its regulations to comply with the statutory 3-year limitation on the use of provisional participation in Title IV Federal Student Aid programs.

  2. To ensure the Department is obtaining ample financial protections to guard against taxpayer losses from school closures and institutional misconduct, the Department must align its regulations and practices with the statutory financial responsibility standards.

Provisional certification is intended to temporarily allow an institution to participate in federal financial aid programs while the institution proves it can fully meet financial responsibility requirements. Congress has capped the length of time that a school can operate provisionally at three years, underscoring the temporary nature of provisional certification.The memo highlights how the Department has repeatedly allowed schools to remain under provisional certification far beyond the three year statutory limit, essentially rendering the protections moot.

“This has proved costly to students and taxpayers alike,” the memo states. “Institutions that do not satisfy the general financial responsibility standards after three years of provisional certification must only be allowed to participate in Title IV if they qualify under separate statutory and regulatory alternatives, and under conditions that reflect the underlying failures.”

The memo also scrutinizes the Department’s regulations and practices regarding financial sureties and points to specific instances where the methods used to determine a school’s required financial surety was significantly lower than the school’s actual financial liability, causing substantial harm to taxpayers.

“Take the case of Vatterott College, which failed the Department’s composite score every year from 2006 until its closure in December 2018,” the memo says. Despite Vatterott’s decade long failure, “the Department failed to obtain adequate protection for financial loss from the institution to cover these losses.” As of May 2021, this failure cost taxpayers roughly $241 million.

“The Biden administration has vowed repeatedly to better students and taxpayers from fraud, waste, and abuse,” said Dan Zibel, Student Defense Vice President and Chief Counsel. “To do so, the Department must remedy its long history of ignoring statutory requirements that were specifically designed with these goals in mind. The recommendations we’ve made are designed to not only protect students, but also to bring the Department’s policies in line with how Congress intended these programs to work. We hope the Department seriously considers these policy recommendations during this window of opportunity to enact meaningful reforms.”

The current rulemaking session is anticipated to last through Friday, February 18. A full copy of the legal memorandum can be found on the Student Defense website.