The U.S. Department of Veteran Affairs (VA) lacks the authority to require letters of credit (LOC) from schools eligible to enroll GI Bill beneficiaries. In contrast, the U.S. Department of Education (ED) can require schools to submit LOCs if they are deemed to pose risks to Title IV student financial aid programs. The LOCs help to offset the cost of student loan forgiveness if a school closes.

An LOC is a guarantee issued by a financial institution to make payments under specified circumstances, such as a school’s closure; those payments would help to cover the cost of restoring benefits paid on the behalf of veterans and eligible family members who were enrolled at an institution that closed before they graduated. Taxpayers covered the entire cost of GI Bill benefits restoration for beneficiaries enrolled at Corinthian and ITT Tech as part of a 2017 law, but the high cost led Congress to enact only a limited benefits restoration for those attending schools that have closed since then—reinstatement of eligibility for benefits used only during the term in which the school closed. In July 2019, Veterans Education Success testified before the House Veterans Affairs Committee regarding its proposal to provide VA with LOC authority.

This fact sheet examines available ED data on LOCs requested between July 1, 2016, and June 30, 2017, which ED refers to as Award Year 2017.


  •  ED’s list of LOCs overstates the number and amount actually requested and submitted because (1) a designated chain owner submits one LOC on behalf of all of the schools in the chain and (2) the list double counts LOCs that simply had the amount increased or had an LOC renewed from one school fiscal year to the next. Our analysis is based on an unduplicated list of schools and LOCs.
  • The predominate reason LOCs were requested involved failing ED’s financial responsibility standards. Weak financial conditions could result in a school’s closure.
  • The majority of LOCs were requested from for-profit schools.
  • Eighteen for-profit and two nonprofit chains submitted LOCs for 90 schools that they owned.
  • The largest single LOC totaling $386 million, one third of all LOCs requested, was requested from the new owners of the University of Phoenix, which was purchased by private investors in 2017.
  • At least one of the for-profit chains that was required to submit an LOC, Vatterott, closed in 2018. Another chain, Education Corporation of America (ECA) submitted an LOC in the prior Award Year (2016), but not in 2017. It is unclear if ED held a letter of credit in 2018 when the school lost its accreditation due to rapidly deteriorating financial conditions and was forced to shut down.


Financial Responsibility. Participation in Title IV federal student aid requires institutions to demonstrate financial responsibility. To assist ED in evaluating financial responsibility, schools must submit an annual audited financial statement as well as a compliance audit that examines whether a school meets the participation requirements outlined in statute and regulation. Examples of participation requirements for schools include state licensure, accreditation by an entity recognized by ED, and ability to administer federal student aid. Schools must contract with a licensed accountant for the financial audit and often use the same firm for the compliance audit. ED uses the audits to calculate a financial responsibility score, known as the “composite score.” Scores of less than 1.5 can result in ED’s requiring a school to remit an LOC.

LOC. LOCs are commonly issued by a bank and are secured by cash reserves held by the bank. Banks charge schools a fee for an LOC, often a percentage of its value. In most cases, the LOC must be received by ED within 75 days of the date it was requested.

The bank will pay the LOC to ED if the Department initiates collection for reasons stipulated in the LOC. For example, funds from the LOC can be used to reimburse ED for costs associated with school closures such as student loan cancellation costs or teach-outs, which allow students to complete their degrees at the closing school or another institution.

Public institutions are considered to have the “full faith and credit of the state or other government entity” and, in general, are exempt from LOC requirements.

Why Are LOCs Requested?

ED lists six reasons why institutions can be required to submit LOCs (see Table 2).

Table 2: Description of Reasons for Requesting LOCs

  • Composite score of less than 1.4: School failed the ED standard for determining if schools are financially responsible
  • Untimely refunds: School failed to maintain sufficient cash reserves to refund Title IV funds to ED for students that withdrew from the school in a timely fashion
  • Failed past performance requirements: School failed to satisfactorily resolve compliance issues identified in program reviews or audit reports
  • Going concern: A school’s audited financial statement expressed doubt about the continued existence of the school as a going concern, which could pose a risk to ED and
  • New owner missing 2 yrs. or 1 yr. of audited financial statements: A school’s new owner is unable to provide the required 2 years of financial statements.

An LOC is typically for 1 year from the date of the condition that gave rise to its request but can be renewed annually if the condition persists. Late refunds to students or failure to make such refunds result in LOCs for at least a 2-year period, and LOCs based on past performance concerns may be in effect for 5 years.

School Closures

A June 2019 U.S. Government Accountability Office (GA0) testimony on school closures found that most of the approximately 220 school closures from academic year 2013-4 through 2015-16 were for-profit institutions and that the record number of recent closures was due to a rise among for-profit schools. According to GAO, school closures are particularly harmful when they involve large schools that close abruptly with little or no advance warning.


We analyzed the latest available data on LOCs posted on ED’s website—those requested (477) from July 1, 2016 through June 30, 2017 (Award Year 2017) and compared it to data from Award Year 2016. We also reviewed but ultimately decided against reporting on an overlapping list of LOCs received (825) by the Department from January 1, 2016 through November 30, 2017. This dataset, which was provided to the office of Senator Elizabeth Warren in April 2018 was missing the school-group-name field.

The Award Year datasets provide each school’s Office of Postsecondary Education Identification (OPEID) number, name, state, fiscal year end date, LOC request/receipt dates, reason the LOC was requested, LOC amount, and percent of Title IV funds that the LOC represents. In addition, they also identify: (1) schools that are owned/operated by a corporate chain, along with the school’s group name, and (2) the location that is responsible for submitting the consolidated financial statement covering all institutions under common ownership (“locator” school). This field is important because, “An LOC amount reported for the locator school is representative of the LOC received for all members of the school group.”

To determine the amount of LOCs held by the Department, we identified and removed duplicates in the Award Year 2017 list of requested LOCs. For example, a duplicate occurs when ED asks for an increase in an LOC amount for an identical reason or makes an LOC request based on school audits for consecutive fiscal years in the same covered time period—July 1st to June 30th.

Schools, however, may appear multiple times in an Award Year dataset for legitimate reasons. For example, an LOC may have been requested more than once during the year for different reasons or time periods, e.g., failed financial responsibility standards and “going concern” (see Table 2). Because schools can have multiple LOCs, the number of schools with an LOC and the number of LOCs held by ED differ.

“Requested” LOCs Overstates Number of LOCs Actually Held by the Department

During Award Year 2017, ED requested 477 LOCs from 373 schools totaling $1.34 billion. Sixty-five percent of the schools were for-profit and 32% were nonprofit. Ninety of the 477 schools, however, were owned by the same chain; 18 for-profit chains owned 86 of the 90 schools and 2 nonprofit chains owned the remaining 4 institutions.

The 477 LOCs requested during Award Year 2017 is larger than the number actually held by ED (373) during that year because:

  • the school within a chain that submitted the consolidated financial statement is responsible for submitting the LOC for all members of the chain. Thus, the 90 schools that were part of chains submitted 20 LOCs (see Table 3);
  • the amount of the LOC may have been increased from the original amount and as a result the initial LOC requested is a duplicate; or
  • the renewal of an LOC for failing to earn the minimum composite score for two different school fiscal years occurred during the same Award Year and one LOC is a duplicate.

For Award Year 2017, removing such duplicates reduces the number of schools with LOCs that are actually held by ED from 477 to 373 and the total amount of LOCs from $1.34 billion to $1.27 billion.

Why Were LOCs Requested?

Our unduplicated count of schools with LOCs for Award Year 2017 shows that the largest number were requested because 212 of 380 schools received a financial responsibility composite score of less than 1.4 (see Table 4). Although only 39 LOCs were requested because a new owner was missing required audited financial statements due to a change in ownership, one chain, the University of Phoenix ($386 million), accounted for almost all of the $406 million requested for this reason.

Distribution of Unduplicated LOC Amounts Submitted by Schools

About 70% of LOCs submitted during Award Year 2017 were for less than $500,000 and more than half of those were under $100,000. Only 1% (3 schools) were for $100 million or more. LOCs ranged from a low of $5,000 to a high of $386 million (25% of the school’s Title IV funds for that fiscal year). The most common percentages requested were 10%, 25%, and 50%. Only seven schools had LOCs higher than 50%, ranging from 59% up to 100%.

Comparing Award Year 2016 and 2017 LOCs Requested

The number of LOCs requested in both award years was similar—462 in 2016 and 477 in 2017. However, $938 million was requested in 2016, compared to $1.34 billion in 2017. A $386 million (25%) University of Phoenix LOC was almost 30% of the total requested in 2017.

Although ED requested the Education Corporation of America (ECA) to provide a $27 million LOC in 2016 based on a financial responsibility composite score of less than 1.4, no LOC was requested in 2017. ECA operated Virginia College, Brightwood College, and other brands. The chain was struggling financially and was notified by the Accrediting Council for Independent Colleges and Schools in December 2018 that it was revoking the schools’ accreditation because of “rapidly deteriorating financial conditions.” The Education Corporation of America announced that it would close all of its campuses. The chain enrolled about 20,000 students at 70 locations. Education Corporation of America was one of the 10 schools receiving the most Post-9/11 GI Bill revenue from Fiscal Years 2009 through 2017. Because Award Year 2018 and 2019 LOC data are not yet available, it is not clear if ED held an LOC from the chain at the time of its closure.

 Corinthian, but Not ITT, Avoided LOCs

A 2017 report by the Government Accountability Office (GAO) found that a few schools have manipulated ED’s financial responsibility standards in order to avoid posting LOCs. Corinthian took out short-term loans and reported them as long-term debt (typically used for investments in facilities expansion and improvements), which ED’s composite score formula treats positively and can increase a school’s score. By manipulating its composite score, Corinthian had no LOC in place to cover some portion of the $550 million in ED loan discharges as a result of the school’s closure.

In contrast, ITT had been required to submit LOCs since 2014, and in 2016 its LOC was increased from about $80 million to $94 million. The reason cited for the LOC was “failed past performance requirements.” Such LOCs are generally for a 5-year period. In August 2016, ED notified ITT that it faced new restrictions on Title IV participation, including a ban on enrolling new students who relied on federal student aid and an increase in its LOC from $94 million to $247 million. ED cited its accreditor’s findings that ITT was “not in compliance, and was unlikely to come into compliance, with accreditation criteria.”

Note: All tables and endnotes are available in the PDF of this Issue Brief.