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HOME / DEPARTMENT PROGRAM AND SERVICES / ACCREDITATION, CERTIFICATION AND QUALIFICATIONS / PRIVATE TRAINING SCHOOLS / THINKING OF OPERATING A PRIVATE TRAINING SCHOOL /

Security Bonding for Private Training Schools

The theory of the bond/security

A private training school must provide security - some form of deposited money that is forfeited to the Department of Innovation and Advanced Learning if the school does not live up to its obligations to students.

The underlying idea is that the bond money is to be used to pay for the refunds due to students if the school fails to deliver the promised training, and will not or cannot refund the tuition. When a school terminates a program, refunds are calculated (according to section 12 of the Private Training Schools Regulations) in proportion to how much contracted-for training remains to be given: the amount of the student's money which the school holds that is 'unearned' -- that is, the portion of the fees the school has taken from the student which is equivalent to the percentage of the training which has not yet been delivered.

The amount of the security is meant to be what it would take to pay the refunds at the highest point of exposure, which is when the school holds the highest amount of prepaid but 'unearned' fees for the largest number of students. However, since there is a minimal risk of having to pay that total amount, the law says the security must be only 60% of the worst-case obligation.

Here is an example

The facts for a proposed school:

• There are going to be 15 students
• Tuition fees are set at $4,500
• It will be paid in this way: $2,700 (60%) up front, and then the remaining $1,800 (40%) at the 9-week point (that is, when 25% of the 36-week training has been given).

The point of highest exposure happens at the ninth week when the second payment comes in. At that peak, the school will hold (for one student) this amount of prepaid but 'unearned' fees:

• $2,700, minus $1,125 (which is 25% of the overall fees, equivalent to the 25% of the training that has been already provided and so will never have to be refunded) which leaves $1,575 in unearned fees from the initial payment
• plus the new instalment of $1,800
• thus a total of $3,375 is the most money the school would ever have to refund to a student.

Recognizing that there is only a limited chance that the worst-case scenario will occur, calculate 60% of $3,375 which makes the potential refund $2,025 per student.

There is a possibility that all of the students will require refunds; therefore, the $2,025 is multiplied by 15 (the number of students).
=>  The amount of the bond would be $30,375.

There are three kinds of consideration when arranging the required security:

A. Form

Security Bonds can be in the form of either:

1. A surety bond from a surety (guarantee/insurance) company. This is a single document that has you and the surety company together promising to pay the penalty money if the school defaults on its contractual obligations to students.
See our model form for a surety bond

2. A personal bond plus collateral security.

• In the first document - the personal bond - you or your company are promising, in a legal form, to pay the penalty money if the school defaults on its contractual obligations to students.
  See our model form for a personal bond
• The second piece - the collateral security - is some form of liquid asset that is readily convertible into money. It is what backs up the personal bond's promise: it is kept in the possession of the Administrator and can be cashed in if the school defaults.

This collateral security can be in any one of these forms:

1. a government bond – a Canada Savings Bond or a province's bond or debenture
2. a Guaranteed Investment Certificate (GIC) or similar term investment from a bank or credit union.
   Caution: It must be clear that nothing can be done to change the investment without the agreement of the Administrator of Private Training Schools.
3. an irrevocable standby letter of credit from a bank or credit union in which the bank promises to pay (using money which has been frozen in your account or can be taken from assets you have pledged) in case of default.
   Caution: Banks may be unaccustomed to including a key ingredient in a letter of credit, the extra 2 years of obligation, so this needs some attention. (See below under Duration)
   See our model form for a irrevocable standby letter of credit

If you use a government bond or a GIC as collateral security it must be made out to "the Minister of Innovation and Advanced Learning of Prince Edward Island, in trust for ... (your name or the name of your company)."

The Department of Innovation and Advanced Learning is the custodian of this money, but they can cash it in only if your school defaults. Interest made belongs to the owner of the private training school.

B. Duration

• You must keep your bond (and collateral security) current as long as you are operating the school.
• If you use a personal bond, it should not specify an expiry date; it should state that it continues until you cancel it (noting that it can only be cancelled on 2 months notice)
• In the case of a government bond or GIC, the paper certificate does not expire, even though it may mature. As a result, you do not have to make any special provision about duration.
• A surety bond normally is made out for a year, and before expiry the company bills you for the coming year's premium and sends the Administrator a notice of renewal called a continuation certificate.
• An irrevocable letter of credit is similar: the bank will specify a date of expiry, before which the school will have to arrange for a new letter of credit or have the bank write in an amendment to extend it for another year. Or the bank may write the original letter of credit to state that renewal for another year is automatic, unless the bank gives 2 months notice that it intends to cancel the letter on its expiry date. An 'irrevocable' letter of credit means that it cannot be cancelled except when it expires.
• Important: Regardless of what form you use for your security, the law demands that the promise and the money to back it up must 'endure' for a 'period of discovery'. It must keep running for an extra 2 years beyond the day on which it technically comes to an end, regardless of what might happen to you and the school. This is to ensure that the regulator can access the security money to pay for student refunds in cases where the problem (e.g. uncompleted course) does not appear until some months after the school has closed. This does not mean that the bank or surety company will have to pay for a default that occurs after the expiry of its bond or letter of credit. Rather, it means that a claim can be made up to two years later for a default which happened during the term covered by the promise, between the document’s date of effect and its expiry or the date of the school’s closing. Experience elsewhere in Canada is that it often takes up to two years to settle the fall-out of school closures.

C. Amount

The law sets a minimum of $5,000 and a maximum of $100,000, but calculating the actual amount of the security can be quite complicated. It depends on the inter-relationship of student numbers, fees, and the timing of fee collection.

The law says that a school must put up 60% of "prepaid" student fees (tuition plus all course costs). The amount of the bond is based on the highest amount of fees the school would be holding at the point in the year when enrolment is highest: that is, the number of students at high point, multiplied by the amount of fees a student would actually have paid. (Some schools, for instance, collect in 60/40% instalments.) The bond would be 60 % of that figure.

The complexity of varying course-costs for different programs and different systems of paying-in-instalments may make it unrealistic to use the formula in its simplest form.

One method for such cases is to use an average program cost (averaging the fees for all the programs) and a hypothetical average prepaid instalment of 60%. This is the formula:

average program fee per student
x  0.6 (hypothetical 60% instalment)
x  number of students at peak enrolment
x  0.6 (legal requirement for 60% of prepaid fees)
= Bond amount

Another method can be used if the school has just one program or only a few programs. Then it is usually possible to plot the details of actual student numbers and payments on a monthly basis.

The best approach for determining the amount of security is for the applicant to try working it out in a preliminary way, and then ask the Administrator to do a calculation based on that information.