New Education Department proposal on college financials goes too far

At a time when the government is intent on helping more students earn a college degree, the Department of Education is proposing new rules that could threaten stability in the nonprofit higher education sector.

 

The Department recently underwent an important and necessary rulemaking process to determine when students can have their federal student loan obligations waived, called borrower defense to repayment. But within its proposal to do so, the agency has created layers of confounding new financial triggers that could push otherwise stable, mission-driven private nonprofit institutions into financially precarious situations. The need for consumer protection is real and students and taxpayers should be safeguarded against deceitful institutions—but the dragnet goes too far.

 

{mosads}The premise of the rules is to protect students from the precipitous closure of a financially shaky institution, but the proposal was drafted without input from financial experts. The Department did not disclose its intention to add to its financial responsibility rules; no independent auditors, higher education CFOs, or other experienced not-for-profit business analysts were included in the critical discussions that became the foundation of the proposed regulations.

 

The lack of financial acumen is clear in the draft. New triggers, intended to signal risky behavior, are not indicative of financial duress but would require that institutions provide a form of financial protection to the Department – which could include expensive letters of credit or even a lump sum of cash that the Department would hold. This would be unduly costly and punitive for many nonprofit colleges that operate close to the margin. This includes religious institutions and colleges that predominantly serve low-income, first-generation students, a population the Obama administration has spent eight years working diligently to support.

 

Perhaps most disturbing, the proposed rules would require institutions to send confusing messages to all prospective and current students based on the ill-conceived triggers. This new federal red flag will discourage enrollment, dissuade donors, and hinder access to capital. Tuition and charitable donations are vital to the health of nonprofit colleges and universities. Drops in enrollment and alumni and donor support will at best force tuition to rise—and at worse force colleges to close.

 

But not all is lost. The Department of Education can revise the rules before their final publication this fall, and still can take into consideration the advice of financial experts left out of initial discussions. The Department should revisit their proposal and develop guidelines that truly protect students from fraudulent schools that seek to cause harm.

 

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The views expressed by authors are their own and not the views of The Hill.