For Profit College Execs Should Be Personally Liable For Their Crimes

Right now, they can walk away with millions. Fortunately, we can end that.

Back in 2004, Kevin Modany was ITT Technical Institute’s chief financial officer when the FBI raided the offices of the for-profit chain of schools as part of a fraud investigation.

By the time the Indiana-based company collapsed under the weight of its misdeeds in 2016, Modany had risen to CEO. Along the way, he made millions, including nearly $8 million between 2013 and 2015, as the company foundered. ITT’s closure left 35,000 students stranded in the middle of their education and taxpayers on the hook for an estimated $375 million. Modany walked away with a fine of $200,000, a tiny fraction of what the school owed the federal government or what he had pocketed over ITT’s years of defrauding students.

Modany’s story is hardly unique. Less than two weeks after regulators began the process of shutting it down, Corinthian Colleges Inc.’s leaders reportedly took nearly $1 million in bonuses. By January 2017, the U.S. Department of Education had approved more than $558 million in discharges for borrowers who attended the for-profit chain, with more discharges looming. The lesson is clear: until for-profit college executives fear more than a mild rebuke for fleecing students and taxpayers, their actions will not change.

Fortunately, the Department of Education already has the legal authority to hold college executives personally liable for their behavior. It’s past time to start using it. As Senator Elizabeth Warren recently said, the Department must “end this boondoggle and use every tool available to hold these executives personally accountable.”

Providing more than $120 billion in federal student aid each year, the Department is by far the largest source of financial support for college students and, by extension, colleges. That funding is an investment in the futures of both our students and our economy, but it doesn’t come without strings. In exchange for federal funding, federal law has long required that colleges meet basic standards of “financial responsibility.”

In 1992, a bipartisan Congress ensured that taxpayers are protected when colleges fail to uphold this bargain. Because taxpayers can be on the hook for millions when an institution closes or defrauds its students, Congress added provisions that allow—and sometimes require—the Department to recover these financial losses not only from the institutions but also from individuals who “exercise substantial control” over institutions, including board members, the chief executive officer, other executive officers or major owners.

These changes were made with companies like ITT and Corinthian in mind. As Congress considered revised legislation, the Department’s Inspector General presciently testified in 1992 that the law should require school owners to be held personally liable, lest they “escape with large personal profits while the taxpayer and student are left to pay the bill.”

Despite this authority, one would be hard-pressed to find a single example of when the Department successfully used its administrative authority to hold executives personally liable. Instead, when schools fail, the government tries to recover its money by asking a closed institution to repay a liability or through the bankruptcy process like any other creditor. But when a college has closed, and access to further federal funding is no longer at stake, the school has no incentive to repay the debt (if any assets remain). And in bankruptcy, taxpayers are often treated as unsecured creditors and forced to get in line behind those with secured interests. Bottom line: absent a means of forced collections, the Department will rarely — if ever — collect from a shuttered school.

Even when the government does try to hold for-profit leaders personally accountable — as the U.S. Securities and Exchange Commission did with Modany — it is often for shirking duties to shareholders, not for bilking the Treasury or deceiving students. And the fines imposed are a mere fraction of the millions of dollars they reaped.

Former Corinthian CEO Jack Massimino was docked just $80,000. He wasn’t even barred from future executive or board roles at publicly traded companies. Modany is now an “executive management and strategy consultant,” who, while ITT was in bankruptcy, claimed that the company still owed him $5 million in severance and deferred compensation. With the risks so low and the rewards so high, is it any surprise executives will take advantage of students?

Admittedly, this is an area where we could have done more during my time at the Department. By and large, the Obama Administration focused on systemic change, instituting new regulations to crack down on predatory programs, enhance state-level oversight, expand debt relief for defrauded borrowers, and more. Toward the end of the second term, the Department created a new enforcement unit to root out lawbreaking institutions. But we did not aggressively hold individual offenders personally accountable for cheating students and taxpayers.

Since then, things have gotten worse. Secretary of Education Betsy DeVos has empowered former for-profit executives as her top higher education aides. The Trump Administration’s own failures have prevented it from unraveling some of the most crucial Obama-era student protections, and its lax enforcement is an invitation for predatory behavior. Meanwhile, the pandemic has driven a surge in for-profit college enrollment.

If Joe Biden wins in November and Democrats retake power, they will need to move swiftly to prevent the next wave of Corinthian- and ITT-style disasters. According to a poll my organization conducted this month, strong majorities of both parties, including 80% of Republicans, support holding for-profit executives personally liable when their schools take advantage of students. Enforcing the rules on the books and implementing new preventative ones will be a part of that equation. But to truly deter the next generation of exploitative executives, we must send a clear signal — as the Inspector General and Congress warned in 1992 — that the personal risk of fleecing students and taxpayers outweighs any potential financial reward.

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Dan Zibel

Dan Zibel is Chief Counsel at Student Defense, a nonpartisan, nonprofit organization that litigates and advocates for students’ rights to educational opportunity. He previously served as Deputy Assistant General Counsel for Postsecondary Education at the U.S. Department of Education