Arizona Private Postsecondary School Bond
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What Are Arizona Private Postsecondary School Bonds?
These bonds guarantee the repayment of students who do not receive the education services for which they have prepaid tuition and fees to a private postsecondary school and have not been issued a refund by the school. This financial protection extends to parents, guardians, or other parties who prepaid a student’s tuition and should have repaid via a refund.
Private postsecondary school bonds also provide financial protection for the Arizona State Board of Private Postsecondary Education (the Board) if the school fails to pay renewal or inspection fees.
Who Needs Them?
By law, the bonding requirement applies to all accredited and non-accredited private postsecondary universities, colleges, and career colleges offering degree programs and/or vocational programs. It does not apply to driving schools, training programs companies conduct for their employees, programs that train nursing assistants, or private courses offered by non-licensed entities.
Furnishing the Board with a surety bond is a mandatory step in the licensing process. The Board (the “obligee” requiring the bond) sets the required bond amount for each school’s owner (the “principal” required to purchase the bond). The minimum amount required for any school is $15,000. The calculations are as follows:
- For accredited schools—15% of gross total revenue (GTR) of $400,000 or below or 10% of GTR above $400,000
- For non-accredited schools—20% of GTR up to $400,000 or 15% of GTR above $400,000
How Do They Work?
A private postsecondary school bond is a legally binding contract among the bond’s obligee, principal, and a third party—the bond’s guarantor (known as the “surety”). The terms of the bond compel the principal to operate in accordance with all applicable state laws and regulations, which include the requirement to provide all educational services for which tuition and fees have been paid.
If the principal fails to deliver the educational services, for which students have already paid (by closing its doors due to insolvency, for example), and does not refund prepaid tuition, each injured party has the right to file a claim against the bond.
In some cases, disgruntled students and parents may already have complained to the Board before filing a claim with the bond’s surety. The surety will investigate each claim received and may attempt to negotiate a settlement if the claim is found to be valid. Absent a settlement, the principal is legally obligated to pay all valid claims.
How Are Claims Paid?
Despite the principal’s legal obligation to pay valid claims, the surety typically will make the payment initially. That’s because in providing the bond, the surety has guaranteed the payment of valid claims and paying them on behalf of the principal ensures a prompt resolution. The surety’s payment, however, does not relieve the principal of the obligation to pay; it simply transforms it into an obligation to repay the surety. If not repaid, the surety can take legal action against the principal to recover the claim amount.
Be aware that Arizona also maintains a Student Tuition Recovery Fund Program with a minimum balance of $500,000 funded by fees paid by licensed private postsecondary schools. The fund sometimes is used to compensate students when a school ceases operation without delivering all prepaid educational services. When this is the case, the Board has the option of authorizing refunds from the Tuition Recovery Fund and filing a claim against the private postsecondary school bond to reimburse the Tuition Recovery Fund.
How Much Do They Cost?
The annual premium cost for an Arizona private postsecondary school bond is determined by multiplying the required bond amount by the premium rate assigned to the principal through an underwriting process. That premium rate will reflect an assessment of the school’s financial strength and stability and the financial leadership and personal credit score of its owner, the principal. The higher the principal’s credit score, the lower the risk of the surety incurring claims and/or not repaying the surety, and therefore, the lower the premium rate will be.
The average well-qualified principal will pay a premium rate that’s between one and three percent.
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