Obama’s 11th-Hour Education Regulations Worrying Experts

Financial aid follows students to their school of choice. But that could change as the new regulations take effect.

By Nancy Flory Published on June 9, 2017

New education regulations initiated by former President Obama will go into effect this summer. This worries education experts. The regulations will make colleges and universities financially and legally vulnerable — and some colleges could shut down.

Borrower Defense to Repayment Regulation

The revised Borrower Defense to Repayment (BDR) rule takes effect on July 1. The new BDR makes it much easier for borrowers of student loans to walk away from their debt. The new regulation also puts an already flawed system of measuring colleges’ success on steroids, said Jeff Andrade. Andrade is the former Deputy Assistant Secretary for Postsecondary Education. He was also the Director of the Fund for the Improvement of Postsecondary Education under George W. Bush.

To qualify for debt forgiveness, students must provide documentation supporting their claim. They must prove 1) substantial misrepresentation; 2) breach of contract or 3) fraud. Under the new BDR, the Education Department decides whether a student will repay their debt. In the past, local judges or arbitrators ruled on the issue.

This change could create immediate financial repercussions for the schools. Andrade said the real kicker is that the bar for qualifying a student is very low. Merely an accusation of misrepresentation or breach of contract could trigger immediate financial sanctions on the institution. And colleges are concerned about frivolous claims. It “takes it out of the normal venues for deciding these disputes … and puts it into a venue where nobody knows how they will rule on claims. Colleges don’t know the risks.”

Closing Small Private and Faith-Based Schools

But small private or faith-based colleges face the greatest risk because they don’t have large endowments. The new regulation makes it easier to put those colleges in financial jeopardy before they could defend themselves.

Congress agreed in a July 14, 2016 letter to the U.S. Department of Education. They warned that the proposed rule “could increase tuition (by increasing schools’ legal liability) [and] bankrupt proprietary schools.” Many nonprofit schools could close as a result. This would also limit education options for students. A misrepresentation could result in the Secretary ruling for a group of thousands of borrowers. The cost to taxpayers would be great, even by the Department of Education’s admission. It would be “anywhere from $646 million to $41.3 billion over 10 years.”

Current Financial Responsibility Regulation

The current financial responsibility regulation measures key aspects of schools’ financial strengths. Schools are rated on a scale of 0 to 3.0. Schools rated 1.5 or lower must secure a letter of credit to assure the government they aren’t going under. This is a problem because of many “false positives” triggered by the analyses. In 2014, for example, Georgetown University had an almost perfect score. Then the value of the stocks in its endowment funds dropped. As a result, the university almost had to post a letter of credit of over $25 million. This while the university had endowments of almost $1.3 billion. The current system, said Andrade, “can put even a college with a strong cash flow in financial jeopardy.”

Sometimes a university has to wait for reimbursement of student loans. This can cause the school to be rated financially unstable, said Andrade. “Creditors are less willing to extend to colleges subjected to these sanctions, and some institutions have gone under.” Once again, the greatest risk is to those smaller private or faith-based institutions.

Gainful Employment Regulation

The Obama administration also put in place the Gainful Employment regulation. This regulation stigmatized private career-based programs. As a result, it became harder for borrowers to get financial aid for schools offering those programs.

“Most colleges, … could be doing a better job in preparing students for the workforce and seeing to it that they graduate,” said Andrade. The career-based schools often do a better job at preparing students for the workforce. The Gainful Employment regulation knocks out programs that are producing good results. But it protects programs at public institutions with worse outcomes. Andrade believes that the Left wants to push students out of independent schools. He thinks they want students in directly-subsidized institutions. The Left is making it look like our “K-12 system — which has been a disaster for decades, particularly for the working class and the poor.”

The Threat of the Culmination of These Actions

Right now, the higher education system offers students a lot of options. There are many choices from career-based schools to universities offering almost any program imaginable. Currently, financial aid follows students to their school of choice. But that could change as the new regulations take effect. Some of these policies are threatening opportunities particularly for poor and working class students, said Andrade. “It can destroy the private and faith-based components of our current system of higher education.”

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