Jul 13, 2021 - Economy & Business

Private equity funds skirt responsibility in for-profit college fraud

Illustration of money rolled up with a sticker of a graduation cap.

Illustration: Sarah Grillo/Axios

Private equity funds are almost never liable for the misdeeds or financial responsibilities of their portfolio companies, because of how such deals are structured. In the case of for-profit college investments, that means taxpayers have been left holding the bag.

Driving the news: The Biden administration recently canceled $55.6 million in student loan debt for fraud victims of three for-profit colleges.

  • One of them was Marinello Schools of Beauty, which had been owned by private equity firm Abry Partners until it lost federal student aid access in 2016 and shut its doors.

This isn't first time that the feds have bailed out students who were defrauded by PE-backed, for-profit colleges. For example, private equity firms had stakes in publicly traded ITT Tech, whose former students were recently given $500 million in loan forgiveness.

Then there are PE-backed schools that do owe money to the Department of Education. But they haven't paid, and no collectors are hitting up private equity.

  • The largest of these, according to the National Student Defense Legal Network, is now-defunct Vatterott College, which owes $244 million.
  • Vatterott had been owned by TA Associates, which has a current portfolio company (Full Sail University) that continues to participate in Title IV loan programs.
  • NSDL also cites over $2 million owed to DoE by Fortis, an indirect portfolio company of JLL Partners.
  • Plus Education Corp. of America, which it says "has left taxpayers on the hook for at least $30 million, and likely more." Backers included Monroe Capital, Vision Capital and Landmark Partners.

Look ahead: There's still a backlog of tens of thousands of fraud claims that remain unforgiven, but which the Biden administration is working through.

The bottom line: Private equity funds typically lost their entire investment when for-profit college deals went south. But they didn't need to pay up for the fraud. The rest of us did.

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