Lon Morris College estate officials are considering suing former LMC students to recover unpaid back tuition that might help defray bankruptcy costs.
This isn't intended as a first resort and certainly isn't the most popular option on the table. But the strategy is apparently used by several colleges around the country — although it was unclear Friday if any of those are actual bankruptcy cases.
Penn State, for instance, is suing dozens of former students to recover anywhere from $13,200 to $26,800 in tuition and loans. Yale University and Temple University go as far as to share the same debt collections attorney.
According to LMC Chief Restructuring Officer Dawn Ragan's account in the college's proposed liquidation plan, as much as $1 million might be collected from the sum total of students who still owe tuition.
"The charitable nature of the school would generally not support suing former students for tuition," the plan states. "Nevertheless, the plan reserves all the debtor's right to comment collection suits for unpaid tuition — including selling the claims and placing those rights with collection companies."
This possibility is mentioned in the same section of the proposed liquidation plan that stipulates LMC bankruptcy officials reserve the right to sue all LMC officers, directors, or trustees who were at the college at any point before the bankruptcy.
In other states, academic institutions have had success suing students. According to a report cited in the Daily Pennsylvanian, Penn State representatives are emphatic about recovering lost tuition.
“If students graduate or leave the University with an outstanding balance, their debt will be transferred to the University’s Collections Office,” Marlene Bruno, spokesperson for Penn's Student Registration and Financial Services, told the Daily Pennsylvanian.
According to the proposed Lon Morris liquidation plan, LMC originally offered significant scholarships to students in an effort to increase enrollment.
But a great deal of the scholarship aid was unfunded, meaning "it was not supported by donor gifts or endowments, and was merely a discount to the stated tuition," the plan states.
As the number of students paying tuition at the full rate continued to decline as time went by, the College accepted more and more students with Pell grants, the Liquidation Plan states.
The Plan alleges such students are at a higher risk of failure to complete degree requirements and indicate a higher degree of financial need.
"These new students also occasioned a dramatic increase in accounts receivable and bad debts," the plan states. "As poor policies and controls allowed students to continue to remain enrolled in classes and receive grades and transcripts without satisfying their bill, a student accounts receivable balance in excess of $1 million was generated — much of which is expected to become bad debt."
When the college lost its Title IV Higher Education Act funding — including federal Pell grants, teacher education assistance, SMART grants, work study and federal student loans -- many students dependent on that aid couldn't pay for their education, the plan shows.
Houston attorney Hugh Ray III of McKool Smith, who works with the estate, did not immediately return a request for comment Friday.
Ragan also did not respond to a request for comment Friday, but did address the general issue in a Nov. 30 interview.
"The debtor has been seeking to obtain unrestricted funds to be used to help pay its debts," she said in an email.
That statement was made in regard to a Texas Attorney General's investigation. The AG is looking into a missing 1.3 million that was accessed from an endowment and should have reverted to Sam Houston State University after LMC declared bankruptcy.