Why colleges in bankruptcy should have access to federal financial aid

Career College Central Summary:

  • With the reauthorization of the Higher Education Act (HEA) in full swing, the time is ripe for Congress to reconsider current laws prohibiting postsecondary institutions that declare bankruptcy from participating in the federal financial aid programs.
  • Chapter 11, in particular, is a critical tool for institutions in distress, and may be needed now more than ever.In addition to the 90/10 rule (then 85/15), cohort default thresholds, and other well-known safeguards, the program integrity package introduced language that immediately rendered any postsecondary institution that files for bankruptcy ineligible to participate in the federal financial aid programs. 20 U.S.C. § 1002(a)(4)(A).
  • Given the importance of federal financial aid revenue to most postsecondary institutions, this provision essentially transformed a bankruptcy filing into an institutional death knell.
  • While the bankruptcy provision indeed prevents postsecondary institutions from declaring bankruptcy to frustrate regulatory sanctions, as solutions go, it would seem a classic case of using a sledgehammer to crack a nut.
  • In other words, equally effective options appear to be available, and without the potential collateral damage. And it’s worth taking a moment to recognize that the potential collateral damage is indeed significant.

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