NAICU Washington Update

In Amicus Brief, NAICU Argues Against “Tuition Claw Back” in Bankruptcy Cases

July 31, 2017

NAICU has joined ACE and 18 other higher education associations in an amicus brief, arguing that bankruptcy trustees cannot reclaim tuition payments made by parents for their children. The coalition of associations is responding to a case involving a demand by a bankruptcy trustee that Sacred Heart University return tuition paid for a child by parents who subsequently declared bankruptcy.  Similar claims to recover tuition payments, known as “tuition claw back,” have been made by bankruptcy trustees to several colleges and universities in recent years.  The Sacred Heart case, however, is the first to reach a Federal appeals court.

These cases are based on the assertion by bankruptcy trustees that these tuition payments are not protected under federal bankruptcy law because the parents do not receive “reasonably equivalent value” for the payments, since it is the child who benefits and not the parents.
The associations’ brief points out that parents gain direct economic benefits from paying for a child’s education because the child is more likely to be economically independent sooner, and less likely to need further support from the parents.  Further, there is a general societal expectation that parents who are able to do so will assist in paying a child’s college expenses, and the federal financial aid system and tax incentives are all based on a presumed parental obligation to pay for education.
The brief also explains that many colleges and universities do not have the financial resources simply to “absorb” the loss of tuition paid for education services that have already been provided.  Most of the time the only option is to pass that cost on to other students.  It is also impossible for colleges and universities to know when parents may be likely to declare bankruptcy.
A number of state legislatures, including Connecticut where Sacred Heart is located, have changed state laws to protect tuition payments in bankruptcy cases.  However, when the bankrupt parents and the institution to which they paid tuition are in different states, federal bankruptcy rules apply.  This case will be the first opportunity for an appeals court to rule on the status of tuition payments in federal bankruptcy cases.

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