Loans and the Law: Bankruptcy and For Profit-Colleges

In my first installment of this series, I took a quick look at how student loan debts fare in bankruptcy.

In the second, let’s look at a related, but different issue – how for-profit-schools fare in bankruptcy.  In recent months, a number of for-profit schools have declared bankruptcy, such as Anthem Education and the operator of several for-profit schools, BioHealth Colleges, Inc.

Forbes reports that when a for-profit college or university files for bankruptcy, it can become ineligible for Title IV* federal student aid programs.  Congress defined which higher-ed institutions can receive federal student aid in 20 U.S.C. 1002(a) (codifying Title IV).  Guess what doesn’t count?

An institution shall not be considered to meet the definition of an institution of higher education . . . if  . . . the institution, or an affiliate of the institution that has the power, by contract or ownership interest, to direct or cause the direction of the management or policies of the institution, has filed for bankruptcy, except that this paragraph shall not apply to a nonprofit institution [.]**

In other words, if you’re a for-profit and you file for bankruptcy, it seems that Congress doesn’t allow your students to get federal student loans.  And that can be catastrophic for a for-profit school.  As the Bankruptcy Blog put it, “[a]n institution of higher learning without the benefit of Title IV eligibility has little prospect of continuing to serve its students and community.”

Some bankruptcy attorneys, therefore, are pushing Congress to change or tweak the law. Going back to the Forbes article, one suggested option is that for-profit-schools should be able to hold onto Title IV funding for a short period of time.

What do you think?  Should for-profit schools still be able to get Title IV funding after declaring bankruptcy?

*Title IV here refers to Title IV of the Higher Education Act.  There are lots of things called “Title X” in law.  This almost always makes things more confusing, rather than less.  Knowing the title of an act usually is useless – you need to figure out where it has been codified to understand whether it has been amended or still good law and to understand how it works with other provisions of the same section of code.  Chalk one more up to the superpowers of legalese.

**This is at 20 U.S.C. 1002(a)(4)(A).

Disclaimer: THIS IS NOT LEGAL ADVICE!!!!  I’m not a bankruptcy lawyer, and I don’t litigate student loans lawsuits, or anything related.  In sum: #1 I couldn’t offer competent legal advice on this even if I wanted to and #2 I don’t want to and am not offering legal advice.  Lawyer hat is off, blogger hat is on. So don’t rely on anything I say in these columns to make decisions about your own life – but DO think of these as conversation starters on interesting topics.