Education authorities in the US are using letters of credit (L/Cs) as part of a package of tough measures on state funded for-profit education companies that fail to deliver adequate services.

The US Department of Education (DoE) said earlier this year it would require larger L/Cs from education providers that receive state aid to guarantee they deliver the services that public money is provided for (DC World News, 10 June 2016).

Tough actions

The DoE has now banned the company behind the for-profit chain of ITT Technical Institutes (ITT Tech) from enrolling new students using federal financial aid funds.

Also, to ensure state funds are not wasted, ITT Tech is once more required to increase its L/C, this time from US$94.3 million to US$247 million or 40 per cent of aid the school received in 2015.

Increasing L/C requirements

In June, the DoE sent a letter to ITT Tech requesting the company set aside more money to cover losses in the event of its collapse.

According to that letter, the decision was made to order ITT Tech to increase its L/C from 10 per cent to 20 per cent of state aid received after education inspectors began scrutinising the school over concerns about the institutes' administration, organisation and financial viability.

Warning signs

After scrutiny, inspectors found that ITT was "not in compliance" and is "unlikely to become in compliance" with accreditation criteria.

Analysts say the DoE's tough stance could signal the beginning of the end for ITT Tech, and sends a warning to other for-profit colleges that rely heavily on federal financial student aid that they need to raise standards or face the consequences.

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