Long-term prepaid tuition comes undone

The business failure of Nova Corp.–the nation’s largest English-language school chain–left about 300,000 students in the lurch. This raises the question of how customers can be better protected when a business goes belly-up.

G.education Co., a Nagoya-based cram school operator, will take over Nova businesses, which last month filed for court protection from creditors under the Corporate Rehabilitation Law.

Nova’s students are extremely unlikely to see any of the more than 40 billion yen that they put down for prepaid tuition. Nova had 670 schools nationwide. But G.education will take over up to 200 of Nova’s schools, and only 30 will be reopened this week.

Nova’s students have been hung out to dry. The risks of the prepaid tuition system that has become the norm in the industry have become all too evident. The government and related industries must set about creating a system in which customers can learn without worrying about whether their money will go down the drain.

Tuition fees are paid to a business operator in return for services received. When the operator cannot provide these services, prepaid tuition fees should be entirely refunded.


Shifty calculations

In Nova’s case, the more lessons a student paid for in advance, the larger the discount they could receive. But when a student tried to cancel a contract, Nova settled the cancellation by using a higher unit price per lesson than when the contract was signed, thereby reducing the amount it had to repay. In April, the Supreme Court ruled Nova’s settlement method was illegal.

In June, the Economy, Trade and Industry Ministry ordered Nova to suspend for six months its soliciting and signing up of customers for new contracts of one year or longer due to its exaggerated advertisements, and for other reasons.

As the alarm bells began ringing louder and louder, as many as 100,000 students canceled their Nova contracts.

However, Nova was unable to meet the refund requests. The company had only about 1.8 billion yen in a reserve fund to cover an expected loss at the end of last business year.

The advance payment system is common practice not only at English language schools, but also at aesthetic salons and cram schools. Tuition fees paid for in advance are used for business operating costs, including salaries for lecturers and staff, rent for classrooms and office expenses.


Preparing for the worst

A case like Nova was just waiting to happen, albeit perhaps on a smaller scale. To help prevent a repeat, related business industries should consider pooling a certain amount of money from students’ advance payments.

Some observers have proposed a fiduciary refund preparation scheme be established in cooperation with financial institutions, in which a certain amount of money from advance payments is managed separately from the operator.

An industry organization for foreign language schools has a self-regulatory rule to keep a contract for classes to less than one year. However, Nova set the term of its contracts for up to three years, as it did not belong to the organization. This was one major factor behind the sheer scale of losses suffered by students who paid in advance for their classes. This issue should be carefully examined.

Leaving this rule to the discretion of business operators and the industry will do little to dispel anxieties whipped up by Nova’s demise.

The Economy, Trade and Industry Ministry should actively be involved in formulating an industry guideline and other necessary measures.

From the viewpoint of protecting customers, measures allowing administrative punishment to be dished out if necessary also should be introduced.