2016 Proprietary Higher Education Review: “Have you Tried Rebooting?”
By Tony Guida, Partner, Education Group of Duane Morris LLP
“Chaos reigns within. Reflect, repent, and reboot. Order Shall Return.” – Suzie Wagner
I don’t know who Suzie Wagner is, but her quote may just accurately describe the transition from 2016 to 2017 and beyond for the proprietary higher education sector.
In my December 2015 CER article optimistically entitled “2015 Proprietary Higher Education Overview: “There Must be a Pony in Here Somewhere!” I enthusiastically looked for the positive in what was by all accounts a very, very difficult year for the sector. Almost all of the noteworthy activity in 2016 was driven by the Executive Branch. And almost nothing good happened in 2016 until November.
Instead, for most of 2016 it looked as if the Obama administration was making good on predictions by analysts and others that things for the sector would get worse before they got better. 2016 saw a brazen Obama administration and Department of Education (ED) that appeared emboldened by the ease in which it took down Corinthian Colleges and other schools in 2015, with little push back from the Hill, the media or the public at large. In a number of instances, ED took unprecedented actions whose scope and speed took institutions’ breath away. There was a general disregard of due process for the institutions involved or even passing consideration for the students, employees and communities impacted.
When technology misbehaves, the first thing techies recommend is to reboot the equipment. The result of the 2016 presidential election was tantamount to a help desk’s admonition to “turn it off, turn it back on, and see if that helps.” This reboot of the political landscape creates an opportunity for a more predicable future for the sector. While the policy objectives of a Trump administration with regards to higher education are yet to be defined, we know that additional regulatory burdens will not be generated during the next four years. Additionally, there is optimism that some of the more recent regulations may be modified and/or repealed.
This reboot is, in fact, an unexpected but welcomed opportunity for the sector to redefine itself and establish best practices that are aligned with common sense outcomes.
An opportunity that should not be wasted. There is much work to be done in 2017 to make that optimism a reality, but for now let us review the events that shaped 2016 and the lessons learned.
Warning signs before a crash
While computers are known to crash without notice, most times there are warning signs.
The proprietary sector began 2016 with an outreach by Career Education Colleges and Universities (CECU) CEO Steve Gunderson to incoming Secretary of Education John B. King, Jr. seeking “new beginnings” and advocating “that together we can begin an era of constructive collaboration.” King’s response should have raised an alarm. He publicly stated that for schools that were not doing what they were supposed to “we are going to push them to pay attention to those things.” During King’s confirmation hearing, Senate Democrats reinforced this sentiment and probed King about ways that ED could intervene more aggressively against the for-profit sector. The problem was not with holding schools accountable, but rather the disregard for due process justified by preconceived negative opinions about the sector. So much for new beginnings.
ED quickly doubled down. It soon became evident that my prediction (pretty widely held) that President Obama would use his final year in office for a full court press on his agenda using his executive powers would come to pass. ED announced in January that Rohit Chopra, the former Consumer Financial Protection Bureau (CFPB) student loan ombudsman who antagonized the proprietary sector and the consumer banking industry, had joined ED in a senior leadership position focused on protecting student borrowers. In February, ED announced the formation of a new Student Aid Enforcement Unit as part of its “aggressive actions to protect student and taxpayers.” This unit would respond more quickly and efficiently to allegations of illegal actions by institutions by collaborating with other state and federal agencies “in building cases against institutions of higher education [read: proprietary schools].” These developments were a harbinger of an increase in the number of enforcement actions and school closures to come in 2016.
In January, the Federal Trade Commission (FTC) filed suit against DeVry University alleging that its “90 percent” job placement and other claims had misled students about their job and salary prospects after graduation. The Department of Veterans Affairs would later use that suit to strip DeVry of its status as a “Principles of Excellence” school and the Massachusetts attorney general would later issue a civil investigative demand against DeVry. DeVry settled the job placement related claims with ED, agreeing to a provisional program participation agreement, to post a $68.4 million letter of credit, and to limitations on the manner in which it publicizes post-graduation employment rates. DeVry’s settlement with ED did not resolve the FTC lawsuit, which continues.
In early February, ED denied recertification of Title IV eligibility for 23 Marinello Schools of Beauty campuses in California, Nevada, Utah, Kansas, and Connecticut alleging various acts of misrepresentation.
While Marinello filed a response to that action, it was forced to close since ED had placed it on Heightened Cash Monitoring 2 (HCM2) several months earlier and not funded it since then. The Marinello closing impacted approximately 4,300 students and 800 employees.
Other schools that ED cut off funding to during 2016 by denying re-certification, imposing impossible letter of credit or other cash management requirements, or using a combination of them, included MedTech College, Career Point College, Computer Systems Institute, Globe University and Minnesota School of Business, with MedTech and Career Point being forced to closed.
Perhaps the biggest institutional takedown story of 2016 involved ITT Technical Institutes in late summer, the second time in as many years that the Obama administration brought down one of the sector’s largest providers. ED simultaneously put into place a series of actions that included banning ITT from enrolling new students using federal financial aid, placing it on HCM2, and nearly tripling its letter of credit requirement to almost $250 million. Less than two weeks after ED’s actions, ITT was forced after 50 years of operations to close its 130 campuses in 38 states, which left many of the more than 40,000 students unable to complete their degrees and 8,000 employees jobless. Potential federal closed school discharges caused by this closure are estimated to cost the U.S. taxpayers as much as $500 million.
The Obama administration’s very aggressive and very public action against ITT was a reminder of how far it was willing to go – regardless of the cost to the taxpayers or to innocent students, employees and communities – to complete its dismantling of the proprietary sector before the clock ran out.
Failed “system profile” updates
The Apollo Education Group announced in early 2016 that it was being acquired and taken private for $1.1 billion by an investment group led by Chicago-based private equity firm The Vistria Group, whose leadership includes President Obama’s friend Marty Nesbitt and former Obama Deputy Secretary Tony Miller. Miller, in stating his case for the acquisition, echoed the position held by the Obama administration: “For too long and too often, the private education industry has been characterized by inadequate student outcomes, overly aggressive marketing practices, and poor compliance … This doesn’t need to be the case.” This acquisition has been highly criticized given that the Obama administration’s regulatory crackdown on the sector drove the stock prices down to a little more than 10 percent of where prices were when President Obama first took office, with Vistria poised to be the beneficiary of the bargain basement pricing. At the time this article was sent to print, ED had just announced approval of the Apollo transaction but, conditioning on a $386 million letter of credit, growth restrictions, an enrollment cap, an agreement not to use binding arbitration or class action waivers in enrollment agreements, and other conditions that while not uncommon generally but surprising in number and degree on this transaction. It is unclear whether the buyers would close in light of the conditions imposed by ED and the change in political climate.
A number of proprietary schools also explored the possibility in 2016 of converting to a nonprofit entity, with critics alleging that these conversions were being attempted to avoid the negative impact of regulations such as Gainful Employment and the stigma of being labeled a “for-profit school.”
These efforts to convert were largely thwarted by regulators in 2016, with most of them held in limbo. The Higher Learning Commission outright denied Grand Canyon University’s application to become a nonprofit institution.
Later in the year, ED declined to approve the nonprofit conversion of the Center of Excellence in Higher Education that had been pending for more than four years, finding that it did not meet the requirements for nonprofit status for the purpose of federal education funding even though the IRS had approved it as a 501(c)(3) organization. Continuing to use the bully pulpit in announcing its decision, Secretary King stated: “This should send a clear message to anyone who thinks converting to nonprofit status is a way to avoid oversight while hanging onto the financial benefits … Don’t waste your time.” CEHE, continuing the old Tareyton cigarette advertisement “I’d rather fight than switch!” mantra, promptly filed suit in Utah federal court, which is pending.
Attacks on the operating system
In a series of coordinated administrative announcements that began in January 2016, ED, along with the National Advisory Committee on Institutional Quality and Integrity (NACIQI) made substantial changes to their guidelines and standards for evaluating and overseeing accrediting agencies. These changes included pursing differentiated, risk-based reviews of accreditation agencies (to allow more focus on for-profit schools); expanded uses and comparisons of student outcome data and accreditor sanctions in reviews of accreditors; and increased efforts to strengthen the effectiveness of accreditor standards and criteria related to student outcomes. ED also called for increased communication, information sharing, and collaboration among federal agencies to address alleged abuses of the Title IV programs, especially concerning the for-profit sector.
In April, Under Secretary Ted Mitchell sent a letter to all accrediting agencies recognized by ED calling on them to devote greater resources to their review of colleges and universities, particularly for-profit colleges. The letter provided detailed guidance on how accreditors should examine schools, with an emphasis on using quantitative measures such as retention, graduation and student loan default rates to judge quality.
2016 also saw ED’s decision in September to terminate the Accrediting Council for Independent Colleges and Schools (ACICS) as an accrediting agency recognized by ED. That decision followed the recommendations of ED staff and NACIQI. ACICS has appealed the decision to the Secretary of ED and a decision is pending. A final denial of ACICS recognition would have a significant impact on over 800 ACICS-accredited institutions that are currently scrambling to find alternate accreditors. It also will negatively impact hundreds of thousands of students currently enrolled in ACICS-accredited institutions who may have their education abruptly halted by precipitous school closures, or be otherwise negatively impacted by a number of issues that have yet to be worked out, such as being ineligible in some states to sit for licensure or certification examinations needed to practice or find employment. Senate Democrats in December 2016 piled on, writing outgoing Secretary King to urge him to not only deny the ACICS appeal, but to impose a number of significant burdens on ACICS schools during the 18 month transition period in the regulations that include HCM2, letter of credit requirements and enrollment caps – to further punish ACICS accredited institutions who have been found guilty of nothing.
Bugs in the software
Software bug: “an error or flaw in a computer program that may prevent it from working correctly or produce an incorrect or unintended result.” – The Linux Information Project (2005)
During the last several months of 2016, as part of self-defining the higher education legacy of the Obama Presidency, ED began to include in press releases announcing actions against for-profit schools a list that included the following measures it has put in place over the past eight years to “protect … students from abusive career colleges:”
- Creating Gainful Employment
- Publishing the new Borrower Defense to Repayment (BDTR) regulations “to clarify, simplify, and strengthen … existing regulations to grant students loan forgiveness if they were defrauded or deceived by an institution, hold financially risky institutions accountable for their behavior and prohibit the use of so-called mandatory pre-dispute arbitration clauses and class action waivers that deny students their day in court”
- “Establishing tougher program integrity regulations to target misleading claims by colleges and incentives that drove recruiters to enroll students through dubious promises, require states to step up their oversight, and to ensure that only eligible students or programs receive aid”
- “Strengthening oversight and compliance of the career college industry through an inter-agency task force”
- “Protecting military service members, veterans, and their families from predatory actions by for-profit colleges by proposing to strengthen the 90/10 rule
- “Calling for improved accreditation practices that focus on student outcomes”
While at face value well-intended, this mountain of new regulations and investigatory initiatives, directed almost entirely at the proprietary sector, seem predetermined to tip the scales against the sector with the design to eventually bring about its end. They also have countless unintended consequence for students and the institutions that serve them. As evidence of ED’s broad brushed prejudgment of the sector, one need only look to ED’s statement in the June 2016 BDTR Notice of Proposed Rulemaking (NPRM), where it justified imposing a 10 percent letter of credit on institutions subject to mere allegations made in pending government or individual actions “due to the severity and likely success of suits by State and Federal agencies or other oversight entities.” 81 Federal Register 39330, 39362 (June 16, 2016) (emphasis added).
2016 also saw some efforts by individual institutions to voluntarily agree to policies and initiatives that were being put forward by the Obama administration and Congressional Democrats.
The Apollo Group, while awaiting regulatory approval of its going private transaction, announced that it was voluntarily eliminating the use of mandatory arbitration clauses in its enrollment agreements. DeVry quickly followed suit.
DeVry later in the year announced that it would voluntarily limit by the end of its Fiscal Year 2017 the amount of revenue that its Title IV institutions received from federal funding to 85 percent, including Department of Veteran Affairs (VA), and military tuition assistance (TA) benefits.
While it is too soon to determine whether such measure benefited the institutions putting them forward, it is probably true that these measures will be used during HEA reauthorization to attempt to set a new regulatory floor in these areas.
The “blue screen of death”
The presence of the Windows “Blue Screen of Death” (or the “Spinning Beach Ball of Death” for Mac users like me) is a chilling sight that signals that a critical error has occurred from which the device may not ever recover. It signals an error so grave that it may permanently bring the whole system down. Its potential causes are many; often too complex and layered to properly diagnose.
Coming into fall 2016, the Obama administration appeared by all accounts to be winning its war on for-profit colleges and universities. The future looked no better. Hillary Clinton had a commanding lead and it was widely agreed (at least on the East and West Coasts) that Donald Trump had virtually no path to an Electoral College win. The Huffington Post presidential forecast model gave Clinton a 98.2 percent chance of winning the election. There was talk by seasoned political prognosticators on both sides of the aisle that Republican control of the Senate was in jeopardy and conceivably (though very unlikely) the House. The Armageddon scenario had the sector facing an existential threat during the next HEA reauthorization, if it survived the Clinton administration that long.
Clinton’s higher education platform included closing the 90/10 rule “loophole,” “strengthening and continuing” Gainful Employment, increasing enforcement actions against postsecondary institutions engaged in misrepresentation or fraud through federal agency coordination, and supporting loan-free 4-year college and tuition free community college. Names like Shireman, Chopra, Kvaal and others were mentioned as part of the transition team and looked to play large in the new Clinton administration. Sector antagonist Senator Elizabeth Warren and Senator Bernie Sanders were mentioned as possible Chairs of the Senate HELP Committee, with Senator Warren’s name even being mentioned as the new Secretary of ED.
A fatal crash was on the horizon. The screen was turning blue; the keyboard was not responding. (For Mac users, the color wheel was spinning like a top!)
Then Donald Trump’s unexpected “power surge” hit: “Turn off computer and click on the ‘Restart’ option.”
A reboot can fix all sorts of problems. Like waiting for the computer to start after hitting the reset button on a computer, lots of things are up in the air while waiting for the Trump administration and 115th Congress to begin. Will a Trump administration be more friendly to the proprietary sector? Will Gainful Employment and the Borrower Defense to Repayment regulations be eliminated as part of President-elect Trump’s mandate that two regulations must be eliminated for every one implemented? Will Congress eliminate one or both of these regulations? Will there even BE a Department of Education?
As of the date of writing this article some questions are answered, yet many questions remain unanswered.
We do know that President-elect Trump has nominated Elisabeth “Betsy” DeVos as the next Secretary of Education, subject to confirmation by the Senate. She is a Michigan businesswoman, philanthropist, and charter school advocate (whose business model is mainly privately run publicly funded schools), which should directionally bode well for the sector. Her nomination continues a long line of ED Secretaries from the K-12 space, which makes the Undersecretary and Office of Postsecondary Education appointments very important to the sector.
DeVos’ nomination appears well-received by Republican Congressional leadership, but she has been targeted for opposition by Senate Democrats.
Her nomination also might get caught up in a possible “Garland treatment,” which is a threat by Senate Democrats to put President-elect Trump’s cabinet picks through a difficult confirmation process as a payback for how Republicans refused to act on President Obama’s nomination of Merrick Garland for the U.S. Supreme Court.
Senator Lamar Alexander (R-TN) will continue as Chairman of the Senate’s Committee on Health, Education, Labor, and Pensions, with Senator Patty Murray (D-WA) continuing as Ranking member. Rep. Virginia Foxx (R-NC) will take over as Chairwoman of the House Committee on Education and the Workforce, with Rep. Bobby Scott (D-VA) continuing as the Ranking Member.
Is a “hard reset” or a “soft reset” on the horizon?
The question becomes whether the Trump administration and the 115th Congress will be performing a “soft reset” or a “hard reset” on higher education, and what each might mean to the sector. Perhaps most pressing is whether their respective positions and priorities will translate into aggressive and immediate efforts to repeal the Gainful Employment and Borrower Defense to Repayment regulations. On the legislative front, the 115th Congress will take up the important task of reauthorization of the Higher Education Act, either in whole or in piecemeal fashion.
There have been many reports circulating about the proposed Trump agenda. Regulatory reform has been a stated cornerstone of the Trump agenda, but little details have been provided beyond his requirement that for every new regulation two regulations must be repealed. Based on early indications, in addition to a temporary moratorium on new regulations, repeal and replace of the Affordable Care Act, comprehensive tax reform, and reform of Dodd Frank appear to be on the front burners.
Early indications from higher education leadership in the new Congress are promising.
Senator Alexander’s Chief of Staff David Cleary has stated publicly that he expects many of President Obama’s education regulations, which are viewed by Congressional Republicans as an Executive Branch overreach, will be reviewed.
Cleary also predicted that “the aggressive attacks on the for-profit sector will go away” in favor of a more “balanced” approach to holding all colleges accountable. Rep. Foxx, who recently claimed that she was “tea party before the tea party started,” has long been an outspoken critic of the Obama administration’s higher education agenda and has previously pledged to repeal many of its regulations and policies. At the end of the day, a bipartisan approach will be required in the Senate and Republicans will not be able to call all of the shots.
A number of strategies have been discussed as possible means to roll back existing excessive regulations, including Executive Orders (which can typically be used only to repeal other executive orders), a moratorium on new regulations, new negotiated rulemakings to undo existing regulations, use of the Congressional Review Act to overturn recently passed regulations (such as BDTR), budget reconciliation, stand-alone legislation, and reauthorization of the HEA.
The question to be determined is, given the number and significance of other competing priorities for the Trump administration and the new Congress, when and how will regulatory reform in higher education be accomplished.
A backup is highly recommended
At the time of this writing, the Obama administration has a little more than 30 days left, and it is not beyond peradventure that it will take a few more parting shots at proprietary schools using its existing playbook. I expect that during that time further regulations detailing procedures to be followed under the Borrower Defense to Repayment regulations will be issued as promised by ED. I also expect decisions by ED on ACICS’s appeal of the revocation of its recognition. It’s anyone’s guess as to whether ED will issue final regulations on the online portion of the State Authorization regulations. Also, in these waning days of 2016, one or more additional proprietary schools may be slapped with cash management or other actions by ED that force their closure.
The sector should take the opportunity presented by the reboot to continuing to redefine itself to address market conditions and provide better student outcomes (think graduation rates, jobs, earnings, and debt repayment) as well as reach out actively, forcefully and cogently to the new administration and the 115th Congress. Going into 2017, however, I am not overly optimistic, given the number of important competing national and international issues facing this country, that higher education regulatory relief will be immediate or comprehensive in this coming year. With the recently passed Continuing Resolution (CR) extending funding of the federal government though April 28, 2017, and repeal of “Obamacare” and comprehensive tax reform on the agenda as part of a spring budget reconciliation showdown, it is entirely possible that sector specific issues won’t be reached until fall 2017. The Borrower Defense to Repayment regulations take effect on July 1, 2017. That being the case, the sector should also consider taking whatever actions are necessary now to protect itself and to highlight wrongheaded regulations for the new administration and congress in the event that the much hoped for regulatory relief is delayed or does not arrive at all in the way we might expect.
Tony Guida is a Partner with the Education Group of Duane Morris LLP, a law firm with more than 750 lawyers in offices across the United States and internationally. Tony focuses his practice on issues relating to federal and state higher education law, licensing and accreditation, mergers, acquisitions and other substantive changes; government response and crisis management, federal and state higher education policy; and government affairs. He is an experienced executive in the field of higher education.
Tony has previously served in senior executive positions with two major publicly traded companies that owned and operated colleges and universities on multiple platforms, where his responsibilities included regulatory affairs and compliance, acquisitions and divestitures, government and public affairs, policy, strategic planning, new campus development, and public relations. He has also served as CFO and general counsel for a small proprietary college. Prior to joining the higher education industry more than 15 years ago, Tony was a partner in the litigation section of a large regional law firm.
Tony currently serves on the Board of Trustees of a private non-profit university and previously served on the Board of Directors of Career Education Colleges and Universities, a national trade association representing proprietary institutions. He has previously served on the Advisory Committee on Student Financial Assistance, which was created by Congress to serve as an independent source of advice and counsel to Congress and the Secretary of Education on student financial aid policy.
Tony is a frequent speaker at symposia and conferences on issues relating to regulatory compliance, government enforcement actions, higher education mergers, acquisitions, and other transactions and substantive changes, licensing and accreditation, and federal and state higher education policy.
Tony is a 1986 graduate of the University of Cincinnati College of Law, where he was an Editor of the Law Review, and a magna cum laude graduate of the University of Dayton with a degree in Accounting.
Areas of Practice: Higher Education Transactions, Government Response and Crisis Management, Licensure and Accreditation, Federal and State Higher Education Law, Online Education, Federal and State Higher Education Policy and Government Affairs.
Contact Information: Tony Guida // Partner // Duane Morris LLP // 619-744-2256 // TGuida@duanemorris.com // www.duanemorris.com