Is it the end for ITT Tech? The fates of tens of thousands of students with student loans from their time at the embattled for-profit college chain may hinge on that question.
The school is under investigation by several state and federal entities, and was sanctioned by its accreditor earlier this year for its lack of “administrative capacity, organizational integrity, financial viability and ability to serve students.” Unlike fellow for-profit chain Corinthian Colleges, ITT Tech has not been found to have defrauded students—it has, according to regulators, simply failed to maintain financial and organizational soundness. As a result, the Department of Education recently barred ITT Tech from enrolling students who use federal aid such as direct student loans and Pell Grants.
ITT Tech has since announced that it would no longer enroll any new students at all. Given the school’s precarious position, the Department of Education has also required it to put up collateral worth hundreds of millions of dollars against student loans. This will have the obvious effect of hastening the school’s decline. The likely next step is that the school closes permanently. However, ITT Tech could still litigate the matter and hang on for a few more months—much to the Department of Education’s chagrin.
Where does this leave the school’s 45,000 students? The federal student loan program gives currently enrolled students complete loan forgiveness if their school closes—a process known as a closed school discharge. This is the reason the Department of Education required collateral from the school—it will insulate taxpayers from losses due to closed school discharges. However, students are not eligible for the discharge if they transfer their credits to another school, or withdraw their enrollment more than 120 days before the school closes.
This leaves students with a catch-22. They could transfer their credits to a new school, but then lose the opportunity for a closed school discharge if and when ITT Tech finally goes under. Perversely, the discharge opportunity creates a major financial incentive for students not to complete their education.
Another option is for students to not transfer their credits, but start a completely new course of study at a different school. This, however, would require withdrawing from ITT Tech and letting the credits they completed there go to waste. If ITT Tech hangs on for more than 120 days before closing, the students would no longer be eligible for a discharge—a disincentive to pursuing a more promising course of study at another school.
Or, students could do neither. Students may continue their enrollment at ITT Tech on their own dime (not the taxpayer’s). If ITT Tech closes, they will receive a discharge of their loans—but that is a risky bet, since they will have to spend their own money to do so and there is a small chance that the school will wait more than 120 days to close.
None of these are good options. In its zeal for loan forgiveness, the Department of Education wants to force a closure of ITT Tech as quickly as possible to allow for students to discharge their loans and spare them this hard choice entirely. However, this means taking action without gathering all the facts, let alone proving systematic wrongdoing or mismanagement by ITT Tech. The Wall Street Journal editorial board describes the debacle as “how to kill a company without proving a single allegation.”
It is worth mentioning that ITT Tech itself does not believe its credits will easily transfer, which creates even more incentive for the Department to shut the school down as quickly as possible. Yet this begs the question of why the Department of Education—and the accreditor which supposedly ensures quality at the institution—were not aware of this fact in the first place, and did not see it as a warning sign that perhaps ITT Tech was not providing a quality education.
Taxpayers and students may be forgiven for wondering why ITT Tech was the beneficiary of so much federal money in the first place. They might be wondering why the Department of Education entrusted quality assurance at ITT Tech to an outside accreditor with a long history of allowing poor-quality colleges to access taxpayer funds. Many of ITT Tech’s colleges have default rates higher than graduation rates. This should have been a major red flag. Perhaps the Department is overlooking red flags at other schools—which may be in the nonprofit and public sectors as well as the for-profit sector.
The Department of Education appears to have adopted a policy of ignoring red flags as long as possible, then quickly forcing school shutdowns with little inquiry into the warnings’ veracity once some bad press comes along. With a more responsible process for ensuring school quality—and a more responsible federal student loan program—perhaps ITT Tech and its students would have experienced an orderly market exit instead of becoming the higher education sector’s Solyndra.
This column originally appeared on Forbes.
Preston Cooper is a policy analyst at the Manhattan Institute. You can follow him on Twitter here.
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