Attorney General Bonta Urges Department of Education to Strengthen Proposal to Prevent Sham Conversion of For-Profit Schools to Non-Profits

Monday, August 29, 2022
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Expresses support for Department of Education proposal to close funding loophole for for-profit schools 

OAKLAND – California Attorney General Rob Bonta, as part of a multistate coalition, filed comments in support of the Department of Education’s (ED) proposal to issue regulations clarifying the recent closure of a loophole that had incentivized predatory for-profit schools to target student-veterans for enrollment. The Higher Education Act’s so-called “90/10 Rule” caps the amount of revenue for-profit schools can receive from federal funding at 90% with the goal of preventing fraud, waste, and abuse in the for-profit education sector. However, until recently, benefits administered by the Department of Veterans Affairs and the Armed Forces were excluded from the calculation of federal funding, creating a loophole that made servicemembers an attractive revenue source for schools to secure the final 10% of funding. The American Rescue Plan Act of 2021 closed this loophole. In the letter, the 21 attorneys general commend ED for proposing regulations that further clarify and strengthen closure of the 90/10 loophole and urge ED to go further in its rulemaking to prevent these for-profit institutions from converting to a non-profit in an attempt to avoid further scrutiny of their misconduct.

“Time after time, for-profit schools have exploited loopholes and defrauded students in order to pad their bottom line,” said Attorney General Bonta. “I applaud the Department of Education for ending incentives for for-profit schools to prey on our student-veterans. But there is more work to be done. We cannot let predatory for-profit schools dodge accountability by putting on a mask and hiding behind a new ‘non-profit’ status. The Department of Education must take action to prevent the sham conversion of predatory for-profit colleges to supposedly benign non-profits.” 

In the letter, the coalition expresses their support for ED’s proposed strengthening of the 90/10 rule, which will clarify the 90/10 rule’s formula and process, prevent abuse, and enhance consumer protection. The coalition also commends ED’s goal of preventing for-profit schools from using high-cost institutional financing or unlawful “income sharing agreements” to meet 90/10 revenue requirements. However, the coalition remains concerned with recent attempts by for-profit institutions to convert themselves into nonprofit entities to benefit from the reputational and regulatory benefits of this status. While ED’s proposals will help prevent sham conversions that harm borrowers and squander taxpayer dollars, the coalition urges ED to narrow the definition of non-profit institution and adopt additional measures to ensure schools converting to non-profit status financially disentangle themselves from private owners who may incentivize misconduct. 

Attorney General Bonta is committed to protecting student loan borrowers and holding for-profit schools accountable. Earlier this year, Attorney General Bonta obtained a judgment against Ashford University and its parent company Zovio for defrauding California students. The Attorney General also secured a multistate settlement against student loan service Navient resolving allegations of misconduct in the servicing and collection of federal student loans. Last year, Attorney General Bonta announced the successful resolution of litigation against ED after the Biden Administration committed to fixing the broken Public Service Loan Forgiveness programs. The improvements followed a lawsuit and yearslong advocacy by California and others urging ED to take robust action to fix the program. 

In filing the letter, Attorney General Bonta joins the attorneys general of Massachusetts, Minnesota, Alabama, Colorado, Connecticut, District of Columbia, Delaware, Hawaii, Idaho, Illinois, Maryland, Michigan, New Jersey, New York, North Carolina, Oregon, Pennsylvania, Rhode Island, Washington, and Wisconsin. 

A copy of the letter is available here.

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