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For-Profit Colleges

By Victor A. Vilaplana

In 1992, Congress enacted a number of provisions as part of the Higher Education Act reauthorization in reaction to hearings held by the Senate Permanent Subcommittee on Investigations regarding abuses in the federal student aid program. One of the provisions is 20 USC 1002(a)(4)(A), which automatically makes any post-secondary school that files for bankruptcy ineligible to receive federal student financial aid (often referred to as Title IV funds) for its students. This automatic ineligibility is also set out in 34 CFR 600.7

The effect of the statute and the regulation is to deny to any post-secondary school suffering financial distress the rehabilitative opportunity available under Chapter 11 of the Bankruptcy Code. Instead, such school is left to liquidate its assets and, deprived of access to the government student loan program, frequently to abruptly and chaotically cease operations as in the recent case of Corinthian College, Inc. Why?

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