New federal rule could have troubling impact on South Carolina colleges and universities, say experts

Could for-profit colleges and universities operating in South Carolina — such as The Art Institutes in Charleston and University of Phoenix in Columbia — be under threat from a new federal rule that goes into effect next week?

A diverse array of voices, including the conservative Heritage Foundation and the Washington Post editorial board, have recently been publicly critical of the new rule, which some say could lead to more lawsuits against these colleges, and leave taxpayers on the hook.

In a piece in The Daily Signal earlier this month, Heritage Foundation experts Andrew Kloster and Mary Care Reim explain that the new rule “seeks to amend 34 C.F.R. § 668.171 by defining an institution of higher education as ‘financially irresponsible’ if it is subject to a lawsuit by a state, federal, or other oversight entity for $750,000 or 10 percent of the institution’s current assets, unless the institution provides financial protection, such as a letter of credit.” 

Kloster and Reim say that the rule could “encourage plaintiffs’ lawyers to sue colleges frivolously, and seek quick settlements, driving up costs for schools while providing no improvements.”

Labeling the rule an “overreach,” The Washington Post editorial board also criticized the measure, warning that it could impact all institutions of higher learning — not just for-profits.

“The 530-page regulation proposed by the Education Department, which would not be limited to for-profits but would also affect traditional public and private colleges and institutions, would vastly — critics say irresponsibly — expand the basis for debt relief with a far lower burden of proof,” notes the editorial board. “Of particular concern is language that allows students to sue if their college made a ‘substantial misrepresentation’ even if there is no harm and no evidence of intent to defraud or mislead, which is generally the standard in fraud claims.”

Katherine Lee Carey, special counsel in the education practice group at Cooley, LLP, also expressed dismay about the proposed rule in a recent interview at Forbes.

"The private lawsuit provision is particularly troubling: The amount claimed in a lawsuit often bears no relationship whatsoever to the real value – if any – of the claim," said Cooley. "But if this provision makes it into the final rule, plaintiff’s lawyers will immediately grasp that a great negotiating tactic will be to threaten a large-value lawsuit.

The proposed rule goes into effect on Monday, August 1. Palmetto Business Daily will continue to monitor the rule and its impact on South Carolina colleges and universities.

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Cooley LLP Forbes Media The Heritage Foundation The Washington Post University of Phoenix

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