Modifications since the last rulemaking have taken the form of electronic announcements, Federal Register notices and/or one-off policy changes by the Department. While the final rule includes and expands upon some of these actions, the regulatory changes are substantial and represent a meaningful expansion of the Department’s authority and discretion in the area of monitoring an institution’s finances.

As with the other revisions in the final rule, the changes discussed here become effective on July 1, 2024.

Here we review each regulatory modification to the currently effective financial responsibility regulations, identifying the revision and explaining the changes made in the final rule from the currently enforceable rule, where appropriate. The subsection will close with an analysis of the final rule’s financial responsibility regulations and discuss the potential ramifications of the revisions.

34 C.F.R. § 668.171(b) – General Standards of Financial Responsibility

While maintaining some of the language in currently effective paragraphs of the regulation, the final rule makes a number of changes to the standards by which an institution is deemed unable to meet its financial or administrative obligations. While maintaining some of the language in currently effective paragraphs of the regulation, the Department added standards that institutions must satisfy. The revised paragraphs, with new and revised provisions indicated, now state that an institution is not financially responsible if the school does not satisfy the following new standards:

1. Revised: Fails to make refunds under its refund policy, return Title IV programs funds for which it is responsible, or pay Title IV credit balances;
2. Existing: Fails to make repayments to the Department for any debt or liability arising from Title IV program administration;
3. New: Fails to make a payment in accordance with an existing undisputed financial obligation for more than 90 days;
4. New: Fails to satisfy payroll obligations in accordance with its published payroll schedule;
5. New: Borrows funds from retirement plans or restricted funds without authorization; and
6. Revised: It is subject to a mandatory triggering event or a discretionary triggering event that the Department has determined to have a significant adverse effect on the financial condition of the school.

In addition to the new standards, the most important change here is the switch from “material adverse effect” to “significant adverse effect.” This switch is duplicated wherever in the currently enforceable regulations the language “material adverse effect” appears. In response to a public commentator suggestion, the Department concluded that the current phrase was “insufficiently clear.” The new language also avoids the possibility of a materiality threshold for discretionary triggers that the Department views as taking away federal agency discretion in favor of auditors and institutions.

The Department did explain that the revised language in the discretionary triggers provides institutions an opportunity to show the Department why the condition or event is not significant, but the Department gave no real indication in the preamble to the rules of how it would judge significant versus insignificant conditions. The only guidance provided in the preamble states that a “significant adverse effect” is an event or events impacting the financial stability of an institution that the Department, not the institution, has determined to pose a risk to the Title IV program.

34 C.F.R. § 668.171(c) – Mandatory Triggering Events

The Department made a number of major changes to the mandatory triggering events that will likely result in more instances of institutions failing financial responsibility requirements or being required to retroactively recalculate their institutional composite scores. When a school does fail or has a recalculated composite score of less than 1.0, the Department requires financial protection unless the institution demonstrates that the condition is resolved or that insurance covers the loss. The Department concludes that all of the mandatory triggers represent either “common sense areas” that can indicate an institution is facing significant financial problems or more complicated ways that a school is trying to “manipulate results.”

The minimum financial protection required is 10 percent of the previous year’s Title IV funding. If more than one mandatory or discretionary trigger is activated, the Department will require separate financial protection for each trigger, unless the Department determines that all of the triggers result from the same event.

For automatic triggers, the Department will consider whether the financial protection can be released following the institution’s submission of two full years of audited financial statements following the requirement of the letter of credit. In these determinations, the Department considers whether the administrative or financial risk caused by the event has ceased, been resolved or included full payment of all damages, fines, penalties, liabilities or other financial relief.

For triggers that require a composite score recalculation, the Department will consider whether the financial protection can be released, if subsequent annual submissions pass financial responsibility requirements.

The following section provides snapshots of each mandatory trigger in the new regulations. Where appropriate, we note changes from the Notice of Proposed Rulemaking (NPRM), new triggers in the final rule and triggers carried over from currently enforceable regulations.

Legal and Administrative Actions

The first trigger, previously limited to liabilities resulting from federal or state administrative or judicial proceedings, has been thoroughly overhauled. The result is a trigger that expands in scope to cover not only federal and state actions, but also private actions in certain circumstances.

The trigger is actually four triggers in one. To begin, for an institution with a composite score of less than 1.5, the trigger would capture incidents where a school has a final monetary judgment or award entered against it, or enters into a monetary settlement that results from a legal proceeding, including a lawsuit, arbitration or mediation, and the recalculated composite score is less than 1.0. For this trigger, it is immaterial whether the settlement or award has been paid; the incident requiring Department notification is the determination or settlement itself.

For the second part of this trigger, on or after the effective date, an institution is required to notify the Department when it is sued by a federal or state authority to impose an injunction, establish fines or penalties, or to obtain financial relief or in a qui tam action in which the United States has intervened. The trigger is activated only if the federal/state action has been pending for 120 days or a qui tam action has been pending for 120 days following intervention and: 1) no motion to dismiss has been filed within the applicable 120-day period; or 2) if a motion to dismiss has been filed within 120 days and has been denied.

Third, the trigger covers instances where the Department has initiated an action to recover the cost of adjudicated borrower defense claims against the institution and the recalculated composite score resulting from including the adjudicated claims is less than 1.0. Notably, this trigger activates upon notification of the recoupment action and is based upon the total amount sought. The trigger seems to discount the possibility that the sought-after amount is subject to a proceeding that, if followed properly, could result in the recovery being denied. The practical effect of this trigger, therefore, is a demand for financial protection from an institution prior to the moment where the liability is finalized.

Finally, the trigger covers circumstances when an institution that has gone through a change in ownership has entered against it a final monetary judgment or enters into a settlement within two years after the change and the resultant score is less than 1.0. This trigger applies regardless of the initial composite score calculation.

Withdrawal of Owner’s Equity

The next trigger was only subject to minor changes. The final rule maintains the composite score threshold (less than 1.5) in the current trigger, but adds that the trigger also applies to any proprietary institution during the first full fiscal year following a change in ownership.

Gainful Employment

A new trigger links the Department’s recent gainful employment final rule to the financial responsibility rulemaking. Starting on July 1, 2024, an institution that received at least 50 percent of its Title IV program funds in its most recently completed fiscal year from gainful employment programs that are “failing” would be subject to this trigger. 

We note, however, that the Department is not expected to issue the first set of program-level gainful employment rates until 2025, and no gainful employment program would lose Title IV eligibility until after July 1, 2026. However, if after the first set of gainful employment rates, an institution has failing gainful employment programs that represent at least 50 percent of its Title IV revenues in the most recently completed fiscal year, we read this trigger as presenting the institution with a financial responsibility issue even before any gainful employment program individually loses Title IV eligibility.

Institutional Teach-Out Plans or Agreements

The final rule includes both a mandatory and discretionary trigger on teach-out plans. The mandatory trigger requires Department notification when a school is required to submit a teach-out plan/agreement by a state, the Department or other federal agency, an accrediting agency or other oversight body. Importantly, the trigger is only activated when the requirement to submit is “in whole or in part” due to financial concerns. The Department did not fully explain this limitation.

Mandatory Triggers Applicable to Publicly Listed Entities

This set of triggers underwent only minor changes. The additions include coverage for: 1) incidents where the Security and Exchange Commission (SEC) files an action against an entity in district court or issues an order instituting revocation proceeding under the Exchange Act; and 2) foreign exchange actions that the Department determines to be similar to domestic exchange actions. The contemplated foreign exchange actions mirror proceedings that the SEC could take.

90/10 Rule Violation

Institutions that fail one year of the 90/10 rule would be subject to this mandatory trigger. The financial protection provided―a minimum of 10 percent of the previous year’s Title IV funds―remains in place until the institution passes the 90/10 rule for two consecutive years.

Cohort Default Rates

The final rule turns the previous discretionary trigger for cohort default rates into a mandatory trigger.

Contributions and Distributions

Solidifying current Department policy into regulation, this trigger is activated when an institution’s financial statements reflect a contribution in the last quarter of the fiscal year and an entity that is part of the financial statements makes a distribution during the first two quarters of the next fiscal year. The second part of this trigger is that the offset of such distribution against the contribution results in a recalculated composite score of less than 1.0.

In an effort to support the integrity of the composite score methodology, the Department has determined that such contribution/distribution strategies “game” or “manipulate” the metric. The Department explained that it will treat a distribution following a contribution as a failure, in certain circumstances, because the Department would not have an accurate picture of the institution’s finances as a result of the contribution.

Creditor Events

Beginning on July 1, 2024, institutions will be required to report when, as a result of an action taken by the Department, an institution is made subject to a default or other adverse condition under a line of credit, loan agreement, security agreement or other financial arrangement.

The Department explained that the trigger is intended to ensure that institutions cannot leverage their financial agreements in an effort to dissuade the Department from its financial monitoring. The Department is concerned about past situations where schools had conditions in their agreements with creditors that make debts fully payable if the Department were to take steps such as requiring a letter of credit.

The Department is concerned that the presence of such conditions is designed to “place private creditors ahead of the Department” and to dissuade the agency from engaging in proper oversight and monitoring. As a result, the Department decided to treat the presence of those types of conditions as if they will occur and are a signal from the private market that there are financial concerns.

Declaration of Financial Exigency

Simply stated, the Department demands notification if an institution declares a state of financial exigency to any federal, state, tribal or foreign governmental agency or its accrediting agency.

Receivership

The final mandatory trigger states that notification is required when an institution, owner or affiliate that has the power to direct the management of the institution files for a state or federal receivership or has entered against it an order appointing a receiver.

34 C.F.R. § 668.171(d) – Discretionary Triggering Events

Like the mandatory triggers, the discretionary triggering events underwent a significant overhaul. From a regulatory perspective, the most significant difference between the mandatory and discretionary triggers is that, for the latter, the Department must determine whether the event is “likely to have a significant adverse effect” on the financial condition of the institution. If the Department thinks that it does, the minimum requirement is a 10 percent letter of credit per occurrence. However, due to the 21-day notice timeline, an institution has the ability to either: 1) resolve the condition prior to notification; and 2) make the case to the Department in its notification that the condition will not have a “significant adverse effect.”

The Department considers whether to release the financial protection after the submission of two full fiscal years of audited financial statements following the notice of the required posting. Much like the mandatory triggers, this consideration is governed by whether the administrative or financial risk caused by the event has ceased or been resolved, including full payment of all damages, fines, penalties, liabilities or other financial relief.

There are a total of 14 discretionary triggers.

Accrediting Agency and Governmental Agency Action

The first discretionary trigger expands a currently enforceable trigger on similar actions. The new trigger requires notification when an institution’s accrediting agency or federal, state, local or tribal authority places an institution on probation or issues a show-cause order or places the institution on a comparable status that poses an equivalent or greater risk to its accreditation, authorization or eligibility.

Other Defaults, Delinquencies, Creditor Events and Judgments

This discretionary trigger begins as a mirror image of the creditor events mandatory trigger, but it is not subject to the condition of “as a result of an action taken by the Department.” The trigger also adds four additional action elements:

1. A monetary or nonmonetary default or delinquency or other event occurs that allows the creditor to require or impose an increase in collateral, a change in contractual obligations, an increase in interest rates or payments or other sanction, penalty or fees;
2. Any creditor takes an action to terminate, withdraw, limit or suspend a loan agreement or other financing arrangement or calls due a balance on a line of credit with an outstanding balance;
3. The institution enters into a line of credit, loan agreement, security agreement or other financing arrangement whereby the school may be subject to a default or other adverse condition as a result of any action taken by the Department; and
4. The institution has a judgment awarding monetary relief entered against it that is subject to appeal or under appeal.

Notably, the above conditions also apply to any entity included in the financial statements submitted in the current or prior fiscal year.

Fluctuations in Title IV Volume

For this new trigger, notification to the Department is required when there is a “significant fluctuation” between consecutive award years or a period of award years in the amount of Direct Loan or Pell Grant funds or a combination of those funds received by the institution that cannot be accounted for by change in those programs.

In response to a public commenter who requested standards for significant fluctuations, the Department explained that a single standard would be inappropriate, as the percentage or dollar amount of a fluctuation would look very different depending upon the size of the institution. Rather, the Department concluded that an approach relying upon “discussions with the institution” is more appropriate.

High Annual Dropout Rates

The high annual dropout rates discretionary trigger is carried over from the currently enforceable rule. Regarding what constitutes a “high annual dropout rate,” the Department refused to define the terminology, opting instead for a case-by-case approach to determine whether there are indications of financial concern. In determining whether to impose this trigger, the Department added that, among other factors, it would assess the size of the institution, the number of students who drop out and the cost associated with recruiting new students to replace those who drop out.

Interim Reporting

For schools who are required to provide additional financial reporting, a discretionary trigger was created for circumstances where there are negative cash flows, failure of other financial ratios, cash flows that significantly miss the projections submitted to the Department, withdrawal rates that increase significantly or other indicators of a significant change in the financial condition of the institution. As with other discretionary triggers, the Department declined to provide concrete definitions for these conditions.

Pending Borrower Defense Claims

Another borrower defense-related provision, the discretionary trigger is activated when an institution has pending claims and the Department has formed a group process to consider those claims under provisions of the 2022 Borrower Defense to Repayment final rule. In addition, the trigger also requires that if the claims are approved, the discharged amounts could be subject to a recoupment action.

Discontinuation of Programs

If an institution discontinues academic programs that enroll more than 25 percent of its enrolled students who receive Title IV funds, the school would be subject to a discretionary trigger.

Closure of Locations

If an institution closes locations that enroll more than 25 percent of its students who receive Title IV funds, then the institution would be subject to a discretionary trigger.

State Actions and Citations

A school would be subject to a discretionary trigger when one or more of its programs is cited by a state licensing or authorizing agency for failing to meet state or agency requirements, including notice that it will withdraw or terminate the institution’s licensure or authorization if the school does not take the steps necessary to come into compliance.

Loss of Institutional or Program Eligibility

This discretionary trigger would be activated when an institution or one or more of its programs has lost eligibility to participate in another federal educational assistance program due to an administrative action against the institution or its programs.

Exchange Disclosures

Under the final rule, an institution must notify the Department in circumstances when a 50 percent or more owner of a school whose securities are listed on a domestic or foreign exchange discloses in a public filing that it is under investigation for possible violations of state, federal or foreign law. Neither the rule nor the preamble indicate what the Department means by “under investigation.”

Actions by Another Federal Agency

The Department created this discretionary trigger to cover circumstances where a school is cited and faces the loss of education assistance funds from another federal agency if it does not comply with the agency’s requirements.

Other Teach-Out Plans or Agreements

In concert with the teach-out mandatory trigger, the discretionary teach-out trigger covers circumstances where a school is required to submit a teach-out plan or agreement (including a programmatic teach-out), by a state, the Department or another federal agency, an accrediting agency or other oversight body. Note that this discretionary trigger does not condition the notification on the demand for production due to financial circumstances.

Other Events or Conditions

Finally, the Department created a “catch-all” discretionary trigger that covers:

Any other event or condition that the Department learns about from the institution or other parties, and the Department determines that the event or condition is likely to have a significant adverse effect on the financial condition of the institution.

Reporting Requirements

In addition to the new and revised mandatory and discretionary triggers, the Department created reporting requirement timelines for each trigger and audit report. Previously, the timeline for notifying the Department of a triggering event had been 10 days.

The final rule extends that trigger reporting deadline to 21 days. In response to public commenters that bemoaned the lack of specificity on the triggers, the Department argued that the extended timeline would give institutions the opportunity to cure the condition and/or work to convince the Department that the occurrence does not rise to the level of a “significant adverse event.”

Financial Audit Requirements

Audit reports must now be submitted the earlier of 30 days after the completion of the report or six months after the end of the institution’s fiscal year. In addition, institutions must match their fiscal year to their owner’s tax year (the entity at which the institution submits its audited financial statements).

The Department also further expanded its recent practice of requiring financial audits and testing financial responsibly at the institution’s ultimate parent company level. The Department changed Section 668.23(d)(1) that addresses audited financial statements to say that financial statements must now be "acceptable." In addressing this change in the preamble, the Department explained that “not only must the financial statements meet the requirements of GAAP and GAGAS, but they must be at the level of the correct entity and show actual operations to be acceptable.” More specifically, changes to Section 668.176 dealing with changes in ownership now provide, with respect to proprietary or nonprofit institutions undergoing a change in ownership and control, that: 1) the institution’s new owner’s two most recently completed fiscal years audits; and 2) “same day” balance sheet or statement of financial position must be “at the level of highest unfractured ownership or at a level determined by the Department for an ownership of less than 100 percent.”

These new requirements in the rule, which the Department has already been applying in the context of both changes in ownership and during recertification, has caused unintended consequences for U.S. institutions with upper level foreign ownership that is required to present U.S. GAAP/GAGAS financial statements. This issue was raised and rejected by the Department in the preamble as follows:

Comments: One commenter objected to the Department’s requirements that financial statements be audited using GAAP and GAGAS. The commenter pointed out that a number of institutions have one or more upper-level foreign owners who may have financial statements prepared in accordance with International Financial Reporting Standards (IFRS) and are audited in accordance with the European Union (EU) Audit Regulations. As an example, the commenter stated that the SEC has accepted from foreign private issuers audited financial statements prepared in accordance with IFRS without reconciliation to U.S. GAAP. The commenter questioned the Department’s authority for requiring upper-level owners’ financial statements be prepared in accordance with GAAP/GAGAS and requested that we provide in the final rule that we permit IFRS/EU standards with respect to financial statements of upper-level foreign owners.

Discussion: The Department’s regulations maintain different financial statement requirements for foreign and domestic institutions. For foreign institutions, we spell out when financial statements may be prepared and audited under different standards in § 668.23(h). However, for domestic U.S. institutions we believe GAAP or GAGAS is appropriate for ensuring we are reviewing all domestic institutions consistently. The Department’s longstanding policy is not to accept IFRS/EU standards for domestic U.S. institutions, and we think the loss of comparability that would occur from starting to do so would make it hard to apply the financial responsibility requirements consistently.

Analysis

Taken as a whole, the revisions to the financial responsibility rules represent a significant strengthening of the regulatory regime and a meaningful expansion of the Department’s authority to see into and act upon an institution’s finances.

Despite all of the changes, much is still to be determined. The Department, guarding its own agency discretion, left many issues unresolved: How will it judge “significant adverse effect”? What constitutes “high dropout rates” or “significant fluctuations” in Title IV volume? How will an institution know for certain if it has tripped the mandatory teach-out trigger or the discretionary one? Enforcement of many of the new rules will come down to case-by-case determinations by the Department, which will create compliance challenges, confusion in the sector and the potential for uneven enforcement. Institutions would benefit from additional guidance from the Department, but the agency has not indicated that any such guidance is forthcoming.

Another major element of these regulations is how the provisions impact other recent rulemakings. While crafting cross-compliance networks with borrower defense to repayment regulations, the gainful employment rule and the 90/10 rule, the Department significantly revised those regulations. The result has been to alter the compliance timeline for those regulations. For example, to face the consequence of the 90/10 rule, an institution must fail in two consecutive years. However, the financial responsibility regulations create negative consequences after a failure in one year: at least a 10 percent letter of credit that is in place until the institution satisfies the 90/10 requirement for two consecutive years. A similar situation exists with gainful employment. For borrower defense, institutions will see a letter of credit imposed before a single borrower claim is fully adjudicated and the institution is found responsible for committing a misrepresentation.

Finally, while it may be true, as the Department asserts, that the rules will provide earlier notice of financial issues, it is not necessarily the case that the events identified in the regulations will prevent the next massive institutional failure. On the contrary, the increase in the number of triggering events, the stacking of letters of credit and the cross-compliance provisions discussed above could actually result in increasing the odds of institutional failure. Only time will tell what will come of these regulations, but the rules make financial compliance more difficult, and many institutions―faced with declining enrollments across the sector, economic headwinds and many more issues―may experience difficulty satisfying the new standards.

Although the standards for administrative capability were not subject to the same extensive revisions as the financial responsibility regulations, the Department did include revisions or expansions to existing regulations as well as the addition of new requirements, some of which are significant. This subsection of will go paragraph-by-paragraph through 34 C.F.R. § 668.16 to discuss which provisions the Department maintained, which provisions it revised and which provisions it created. The subsection will close with an analysis of the changes and discuss the potential ramifications of the revisions.

As with the other provisions, the regulations discussed in this section become effective on July 1, 2024.

34 C.F.R. § 668.16(a)-(g)

The Department made no changes to the first seven paragraphs of Section 668.16, which state that to remain administratively capable an institution must demonstrate that it:

1. Administers its program in accordance with statutory and regulatory requirements;
2. Designates a capable individual and adequate number of qualified persons to administer Title IV;
3. Possesses adequate checks and balances;
4. Maintains records in accordance with Department requirements;
5. Has reasonable standards for measuring satisfactory academic progress;
6. Has an adequate system to identify and resolve discrepancies; and
7. Makes referrals to the Office of Inspector General when required.

Enforcement of these provisions will not change.

34 C.F.R. § 668.16(h) – Revised – Financial Aid Counseling

The Department did make significant changes to financial counseling requirements in response to a Government Accountability Office report and the Department’s subsequent conclusion that there are “too many instances in which financial aid information is not clearly communicated” to students and prospective students. Specifically, the Department identified circumstances in which students were advised to take one type of student aid, when another type of student aid would have been more beneficial.

The revised standard now requires that institutions provide adequate financial aid counseling with “clear and accurate information.” In determining whether an institution satisfies this requirement, the Department will require counseling and financial aid communications to advise students to accept the most beneficial types of financial assistance available. Communications must now include the following information:

1. The cost of attendance, including the individual components of those costs and a total of the estimated costs that will be owed to the institution based upon the student’s attendance status;
2. The source and amount of each type of aid offered, separated by the type of aid and whether it must be earned or repaid;
3. The net price, as determined by subtracting the total grant or scholarship aid from the cost of attendance;
4. The method by which aid is determined and disbursed, delivered or applied to a student account as well as the instructions and applicable deadline for accepting, declining or adjusting award amounts;
5. The rights and responsibilities of the student with respect to enrollment at the school and receipt of financial aid, including the institution’s refund policy, the requirements for the treatment Title IV funds when a student withdraws, the school’s standards of satisfactory progress and other conditions that may alter the student’s aid package.

Institutions already provide most of this information in various forms and publications, namely the institutional catalog and website. Institutions will now have to collect this information into a format for students to review and acknowledge they have received it directly from the financial aid office.

34 C.F.R. § 668.16(i) and (j) – No Changes

The Department did not make any changes to paragraphs (i) (production of fiscal reports and financial statements) and (j) (no evidence of significant problems in Department reviews or certain legal proceedings).

34 C.F.R. § 668.16(k) – Revised – Debarred or Suspended Individuals  

The revisions to paragraph (k) expand the scope of the currently enforceable standard, especially with regard to principals or affiliates of the institution. First, the standard requires that the institution not be debarred or suspended under Executive Order 12549 or Federal Acquisition Regulations. Second, institutions are prohibited from engaging in any activity that could be a cause for a debarment or suspension. These requirements exist in currently enforceable regulations.

The regulations also state that an institution may not have any principal or affiliate of the institution or “any individual who exercises or previously exercised substantial control over the institution” who has been convicted of, or has pled nolo contendere or guilty to a crime involving the acquisition, use or expenditure of federal, state, tribal or local government funds, or has been administratively or judicially determined to have committed fraud or any other material violation of law involving those government funds.

Further, the institution may not employ a current or former principal, affiliate or any individual who exercises or exercised substantial control of another institution whose misconduct or closure contributed to liabilities to the federal government “in excess of 5 percent of its title IV” funds in the award year in which the liabilities arose or were imposed.

The Department maintains a master list of debarred or ineligible individuals. Publication of this list is a recent development, and institutions should make sure to consult the list prior to making executive hiring decisions or when contemplating a partnership or change in ownership.

34 C.F.R. § 668.16(l) and (m) – No Changes – Withdraw Rate and Cohort Default Rate

The Department made no changes to paragraph (l) and only made minor grammatical changes to paragraph (m).

34 C.F.R. § 668.16(n) – New – Significant Negative Action or Finding

Paragraph (n) is a new addition to the administrative capability standards. The provision requires that an institution not have been subject to a “significant negative action” or a “finding” by a state or federal agency, a court or an accrediting agency where the basis of the action is repeated or unresolved. This requirement includes noncompliance with a prior enforcement order or supervisory directive and the institution must not have lost eligibility to participate in another federal educational assistance program due to an administrative action against the school.

The Department declined public commenter requests to define “significant negative action.” Other public commenter requests for clarification on particular terminology―for example, “finding,” “repeated,” “unresolved,” among others―were also rejected. Instead, the Department stated:

Generally, we view a significant negative finding as something that poses a substantial risk to an institution’s ability to effectively administer title IV, HEA programs. We would review the circumstances, the fact and issues at hand, and other relevant information related to the institution and finding in our determination of whether the underlying facts pose a substantial risk.

In the preamble, the Department explained that significant negative actions include both final and nonfinal actions by the entities identified in the provision. The Department added that the provision is:

[A]nother method of determining whether an institution is administratively capable by assessing whether the institution has sufficient numbers of properly trained staff, its systems or controls are properly designed, and its leaders are acting in a fiscally responsible manner and with the best interests of students in mind.

Institutions should educate their institutional accreditation liaisons about this new regulation and establish a communication pathway to ensure that the financial aid leadership and legal or compliance offices are informed in a timely manner when an accreditor takes a negative action against the institution. The regulation is not clear whether this is reserved for institutional accreditors or extends to programmatic accrediting agencies, particularly those that are required for students to obtain professional licensure or certification upon graduation. As such, the reporting should include actions from all accrediting bodies and state regulatory agencies. Similarly, the form and substance of this reporting to the Department is not outlined. Institutions should anticipate that accrediting bodies may copy the Department on more communications going forward, not just on final actions.

34 C.F.R. § 668.16(o) – No Changes – Participation in Electronic Processes

The Department made no changes to paragraph (o).

34 C.F.R. § 668.16(p) – Revised – Evaluating High School Diplomas

The Department rewrote and expanded the requirements that apply to institutions regarding the evaluation of high school diplomas. The new standards demand that institutions develop and follow adequate procedures to evaluate the validity of a student’s high school diploma in circumstances where the school or the Secretary of Education has reason to believe that the diploma is not valid or not obtained from an entity that provides secondary school education.

In creating institutional procedures for evaluating diplomas, the Department identified the following requirements:

1. Obtaining documentation from the high school that confirms the validity of the high school diploma, including at least one of: 1) transcripts; 2) written descriptions of course requirements; or 3) written and signed statements by high school principals or executive officers attesting to the rigor and quality of coursework.
2. If the high school is regulated by a government agency, confirming with or receiving documentation from that agency that the high school is recognized or meets requirements established by that agency; and
3. In the future, if the Department publishes a list of high schools that issue invalid high school diplomas, the school must confirm that the high school being evaluated does not appear on that list.

In addition, the Department stated that a high school diploma must be considered invalid if it:

1. Did not meet the applicable requirements established by the appropriate government agency where the high school is located;
2. Has been determined to be invalid by the Department, state agency or through a court proceeding; or
3. Was obtained from an entity that requires little or no secondary instruction or coursework to obtain a high school diploma, including through a test that does not meet the requirements for a recognized equivalent of a high school diploma.

In the preamble, the Department explained that the purpose behind the revised provision is to allow the Department to review institutional procedures and determine whether there is a pattern or practice of repeatedly failing to identify invalid high school diplomas. Regarding the institutional costs associated with these changes, the Department concluded that the potential costs of disbursing unallowable funds and the potential for low success for those students are greater than the administrative costs to schools.

Institutions should examine their current review processes and ensure that they have a written procedure for high school diploma and transcript review in addition to the underlying policy. The process must now include documentation of the institution’s affirmation that the diploma under review is not issued from a high school on the Department’s list.

34 C.F.R. § 668.16(q) – New – Adequate Career Services

The Department created a new administrative capability standard that requires that institutions provide “adequate career services” to students. In determining whether the required services are provided, the Department will consider:

• The share of students enrolled in programs designed to prepare students for gainful employment in a recognized occupation;
• The number and distribution of career services staff;
• The career services promised to prospective and current students; and
• The presence of institutional partnerships with recruiters and employers who regularly hire graduates of the institution.

A number of public commenters had questions and concerns about this provision. In response, the Department explained that it does not contemplate a prescribed ratio between career services staff members and the number of students at the school. Additionally, the Department rejected the proposal of an exception for career-oriented programs focused on advancement within a given employer.

Regarding the connection between the Title IV program and this requirements, the Department pointed to student surveys “repeatedly” showing that obtaining employment is one of the key reasons why students enroll in college and added:

While postsecondary education is not solely about employment, the continued reliance on loans to finance postsecondary education means students need to have a path to successful careers so they can afford their loan payments. Career services thus intrinsically connect to ensuring that the aid programs generate their intended results.

The Department also referenced that misrepresentations regarding career services provided to students could be grounds for a borrower defense discharge and it wishes to avoid that consequence.

Institutions will need to review all of the information provided to students regarding career services to ensure it is complete and accurate. Additionally, institutions will need to begin to include calculations of FTE and student to career services staff ratios in their institutional effectiveness planning and be prepared to defend the ratios that they employ.

34 C.F.R. § 668.16(r) – New – Clinical or Externship Opportunities

In another new standard, the Department will require that institutions provide students, within 45 days of the successful completion of required coursework, “geographically accessible” clinical or externship opportunities related to and required for completion of the credential or licensure in a recognized occupation.

Due to widespread public commenter confusion, the Department explained that the provision only applies to experiences that are required for students to complete their program, such as those in the third or fourth year of a program that are part of credential completion. The Department clarified that opportunities that are optional or occur after program completion, such as residencies, clerkships and other similar post-graduation experiences are not covered by this standard.

Regarding “geographically accessible,” the Department declined to provide specific metrics or create bright-line requirements but, in the preamble, stated that it would consider factors such as urban versus rural “commuting zones,” the level of degree and whether the program is highly specialized. The Department maintained that “geographically accessible” could include an opportunity “in another part of the country” if, for example, a graduate program is in a highly specialized field. However, for what appears to be the program-level target of this requirement―certificate programs―the Department stated that a “commuting zone concept” is likely a better fit where students are more inclined to stay close to where they live.

34 C.F.R. § 668.16(s) – New – Timely Disbursements

Next, the Department created an administrative capability standard that requires disbursements to students be made in a “timely manner” that “best meets the students’ needs.” The Department will not consider the manner of disbursement acceptable if, among other conditions:

1. The Department is aware of multiple valid and relevant student complaints;
2. The institution has high rates of withdrawals attributable to delays in disbursements;
3. The institution has delayed disbursements until after the point at which students have earned 100 percent of their eligibility in accordance with return-to-Title IV requirements; or
4. The institution has delayed disbursements with the effect of ensuring the institution passes the 90/10 rule.

The Department stated that this requirement is necessary because students who do not timely receive the funds to which they are entitled have their ability to persist in their programs negatively impacted and the delay can cause them to withdraw due to an inability to pay for books, housing and other necessities. The Department also specifically pointed to instances where institutions delayed disbursements to favorably “manipulate” their 90/10 ratios.

The Department identified that, in making a finding on this issue, the agency would establish an institutional failure by determining whether any of the express conditions occurred, including evidence that the student’s withdrawal occurred due to, at least in part, delayed disbursement. Further, the Department would look at students who are marked as “withdrawn” and determine whether they had a credit balance owed and, if so, when it was paid. The Department also noted that it interviews students as part of any oversight matter.

Regarding the complaint provision, the Department argued that, historically, most schools do not generate a significant number of student complaints, including at schools with “proven instances of widespread misconduct.” As a result, the Department refused to apply a numerical threshold for complaints. However, the Department did note that it will consider the number and nature of complaints when determining whether an administrative capability finding would be appropriate.

Institutions should continue to monitor their disbursement dates closely. Additionally, institutions should review their student data collection practices regarding a student’s reported reasons for withdrawal. Instances where financial aid processing or payment issues are present should be well documented and student-centered interventions or bridge payment plans should be considered so to reduce or remove the impact of that issue on the decision to withdraw.

34 C.F.R. § 668.16(t) – New – Gainful Employment

Next, the Department added an administrative capability standard requiring that, for institutions that offer gainful employment programs, at least half of the institution’s total Title IV funds in the most recent award year are not from programs that are “failing.” We note that this requirement applies after one set of gainful employment failures, not after program ineligibility occurring after two out of three consecutive year failures. As a result, for institutions that have failing gainful employment programs for one year in which at least half of the institution’s revenue derives, the institution will have an administrative capability issue before such programs become Title IV ineligible.

Referring to the provision and the 50 percent threshold as an “obvious warning sign,” the Department’s goal is to “identify the point” where an institution’s inability to offer programs that prepare students for gainful employment changes from a program level issue to a widespread issue that indicates that there are more systemic problems in the way an institution operates.

In response to public comments, the Department did modify this standard between the NPRM and the final rule, deleting the measurement based upon full-time-equivalent students. This change was made due to the difficulty in converting enrollment to Title IV volume.

34 C.F.R. § 668.16(u) – Revised – Misrepresentation and Aggressive and Deceptive Recruitment

The Department states that it is an administrative capability finding if an institution engages in substantial misrepresentation or aggressive and deceptive recruitment tactics or conduct. This provision incorporates the definitions of these terms from subpart F (substantial misrepresentation) and subpart R (aggressive and deceptive recruitment).

34 C.F.R. § 668.16(v) – No Changes – Catch-All Provision

Finally, the Department includes paragraph (v) of the currently enforceable regulations to round out the last administrative capability standard.

Analysis

As a comprehensive rulemaking package, the additions and revisions to the administrative capability standards represent a significant widening of the Department’s authority to look into, judge the sufficiency of and, if deemed unsatisfactory, take enforcement action against a college or university.

Similar to the financial responsibility provisions, the Department spent a great deal of effort crafting cross-compliance networks with other rulemakings, specifically gainful employment and certain definitions associated with borrower defense to repayment, i.e., substantial misrepresentation and aggressive and deceptive recruitment. Taken together, a potential result of this network is that a finding of misrepresentation could very quickly result in a borrower defense issue, a financial responsibility issue and an administrative capability issue, each consequence leading to some demand from the Department for financial protection. Institutions could struggle with satisfying this regulatory and financial burden.

Speaking of institutional burden, while commenters were quick to mention the costs―including financial, personnel and time―associated with the revised standards, the Department viewed the costs as a necessary, even positive, outcome. While the impact of the new compliance burden will be hard to predict, it is reasonable to conclude that institutions would do well to devote additional resources to their compliance efforts now in order to be prepared for implementation in July 2024. Many of the changes outlined in this Alert will impact work flows and both student facing and back of the house operations. It is also important to point out that, unlike the many of the financial responsibility regulations that are not applicable at nonprofit and public schools, traditional institutions will be impacted by these administrative capability revisions.

Another aspect of the new standards that bears identifying are the numerous areas of Department discretion. With broad undefined terms such as “significant negative actions,” “geographically accessible,” “adequate career services,” the Department staked out authority for case-by-case analyses that will allow the agency to create compliance regimes that may not be uniformly applied across all sectors, will not be precedential and, therefore, will not be reliable. Over time, this could have significant consequences for certain institutions but, potentially, not for others. It will also make challenging adverse Department decisions more difficult as institutions may not necessarily be aware of how the agency is applying the standards across the board.

Below is a section-by-section analysis of the revisions to the certification procedure regulations that are present in the final rule. As with the other provisions, the regulations discussed in this section become effective on July 1, 2024.

34 C.F.R. § 668.13(b)(3) – Removing Automatic Certification Revised

The Department removed the automatic recertification provision that automatically renewed an institution’s certification if the Department was unable to make a decision within 12 months. The elimination of this provision removes the timeframe in which the Department must make a decision in its determination of whether to recertify an institution.

34 C.F.R. § 668.13(c)(1)(i) – Provisional Certification Events Revised

The Department expands the situations under which it may provisionally certify an institution. Under provisional certification, an institution does not have 34 C.F.R. 668 subpart G (fine, limitation, suspension and termination proceeding) appeal rights, and other limitations, and is vulnerable to a PPA revocation action without a hearing. The following additional events now may lead to provisional certification:

1. The Secretary has determined that institution is at risk of closure;
2. The institution triggers one of the financial responsibility events under Section C.F.R. §§ 668.171(c) or (d) and, as a result, the Secretary requires the institution to post financial protection; and
3. The institution is under the provisional certification alternative referenced in the financial responsibility rules;
4. Any owner or interest holder of the institution with control over that institution also owns another institution with fines or liabilities owed to the Department and is not making payments in accordance with its repayment agreement.

34 C.F.R. § 668.13(c)(2)(ii) – Provisional Certification Time Revised

The Department revised the current regulations to extend the maximum period of recertification from two to three years for institutions that are placed on provisional status: 1) related to liabilities owed or potentially owed to the Department for borrower defense to repayment claim discharges or false certification or arising under consumer protection laws; or 2) as a result of a change of ownership, recertification, reinstatement or student eligibility determination failures. The NPRM proposed a two-year limit. However, the Department stated that it believes a three-year limit for provisional certification is more appropriate in these situations. The three-year limit is the maximum time for provisional certification, and the Department has discretion to provisionally certify institutions for a shorter period of time. In defense of the change to a three-year limit, the Department asserted that two years was not enough time to effectively evaluate an institution after being placed on provisional status for these reasons.

34 C.F.R. § 668.13(e) – New – Supplementary Performance Measures

The Department added supplementary performance measures that the Secretary may consider in his decision to certify (or recertify) an institution. The supplementary performance measures include:

1. The withdrawal rate of an institution, which is the percentage of students who withdrew from the institution within 100 percent or 150 percent of the published length of the program;
2. The educational and pre-enrollment expenditures of an institution, which is the amounts the institution spent on instruction and instructional activities, academic support and support services, compared to the amounts spent on recruiting activities, advertising and other pre-enrollment expenditures; and
3. An institution’s licensure pass rate, if a program is designed to meet educational requirements for a specific professional license or certification that is required for employment in an occupation, and the institution is required by an accrediting agency or state to report passage rates for the licensure exam for the program.

In support of the inclusion of this provision, the Department cited the increased flexibility that the supplementary performance measures provides the Department in order to evaluate the varying circumstances at each institution.

34 C.F.R. § 668.14(a)(3) – New – Signature Requirement

The Department added a signature requirement for the PPA for the authorized representative of any entity with ownership or control over a for-profit or private nonprofit institution. The Department defines what constitutes “control” under this requirement as either (i) the entity having at least 50 percent control through direct or indirect ownership; (ii) having the power to block significant actions; (iii) if the entity is the 100 percent direct or indirect interest holder of the institution; or (iv) if the entity is required to provide financial statements to satisfy 34 C.F.R. 600.20(g) or (h), relating to notice and application procedures for certification, or subpart L, concerning the financial responsibility rules.

While prior Department guidance created a rebuttable presumption that a signature was required under certain circumstances, this provision will require these entities to be jointly and severally liable for any liabilities not paid for by the institution. The Department contended that if an ownership entity can profit from or control an institution, it should also accept liability if it cannot be covered by that same institution. The Department did not seem concerned with the effect that this provision will have on outside investors in for-profit institutions or on nonprofit affiliations resulting in one institution acquiring control or a right to control another institution. The Department’s application of this signature requirement under prior guidance, including with respect to nonprofit transactions, has already significantly chilled interest in such transactions. This provision is a significant departure from the current regulations and should be closely monitored by all entities that have significant control over a for-profit institution.

34 C.F.R. § 668.14(b) – Revised – Program Participation Agreement Certifications 

The Department provides additional certifications that an institution must comply with in order to participate in Title IV federal student aid programs. These certifications appear in an institution’s PPA. One of the revised certifications, at Section 668.14(b)(17), requires as a condition of signing the PPA that the institution agrees that:

The Secretary, guaranty agencies, and lenders… nationally recognized accrediting agencies, Federal agencies, State agencies… and State attorneys general have the authority to share with each other any information pertaining to the institution’s eligibility for or participation in the title IV, HEA programs or any information on fraud, abuse, or other violations of law.

The Department revises a previous certification requirement at Section 668.14(b)(26) that imposes a maximum Title IV eligible program length for clock-hour programs that are offered after the effective date of the regulation. Referred to as the 150 percent rule, this revised regulation limits the amount of clock hours for training in the recognized occupation for which the program prepares the student from the current 150 percent limit to 100 percent. Specifically, this revision limits the amount of clock hours for these programs that are Title IV eligible to 100 percent of the state minimum in which the institution is located, or another state if:

1. A majority of students resided in that other state while enrolled in the program during the most recently completed award year;
2. A majority of students who completed the program in the most recently completed award year were employed in that other state; or
3. The other state is part of the same metropolitan statistical area as the institution’s home state and a majority of students, upon enrollment in the program during the most recently completed award year, stated in writing that they intended to work in that other state.

An additional certification requirement that the Department includes in the final rule addresses distance education or correspondence courses. The requirements include that the program is programmatically accredited, satisfies the requirements for licensure for employment in the occupation for which the program prepares the student, and that it complies with state laws related to the closure of the institution.

Another certification provision requires an institution to agree to not withhold official transcripts from students if the balance owed to the institution is the fault of the institution. The Department also adds another requirement providing that the institution will provide its students with official transcripts upon request.

Finally, the Department includes an additional requirement to prevent institutions from inducing, encouraging or otherwise deceiving a student to take a lesser amount of federal student aid.

34 C.F.R. § 668.14(e) – New Conditions for Provisionally Certified Institutions

The Department adds a new section that includes conditions that the Secretary may enforce for institutions participating in Title IV federal student aid programs under a provisional certification. The conditions include:

1. Submission of an acceptable teach-out plan or agreement;
2. Submission to the Department of an acceptable records retention plan;
3. Restrictions or limitations on the addition of new programs or locations;
4. Restrictions on the rate of growth and new enrollment of students;
5. Restrictions on the institution providing a teach-out on behalf of another institution;
6. Restrictions on the acquisition of another participating institution;
7. Additional reporting requirements;
8. Limitations on the institution entering into a written arrangement with another eligible institution or an ineligible institution or organization;
9. Institutions found to have engaged in substantial misrepresentations to students, engaged in aggressive recruiting practices or violated incentive compensation rules are required to hire a monitor and to submit marketing and other recruiting materials (e.g., call scripts) for the review and approval of the Secretary; and
10. Reporting to Department within 21 days if the institution receives a civil investigative demand, a subpoena, a request for documents or information, or other formal inquiry that is related to the marketing or recruitment of prospective students, the awarding of federal financial aid for enrollment at the school, or the provision of educational services for which federal aid is provided.

34 C.F.R. § 668.14(f) – New – Conditions for Proprietary Institutions Conversion to Nonprofit Following Change of Ownership

The Department provides conditions for proprietary institutions seeking to convert to nonprofit status following a change in ownership. The conditions include compliance with the 90/10 rule, the gainful employment regulations, requirements related to affiliates of the institution and a requirement that the institution does not advertise that it operates as a nonprofit institution for purposes of Title IV until its conversion is approved.

34 C.F.R. § 668.14(g) – New – Conditions for Nonprofit Institutions Conversion Following Change of Ownership

This provision provides conditions for institutions initially certified as nonprofit institutions or institutions that have undergone a change in ownership and seeks to convert to nonprofit status. The conditions include submission of reports on accreditor and state authorization agency actions and any new servicing agreements to the Department and, additionally, submission of a report and copy of the communications from the IRS or any state or foreign country related to tax-exempt or nonprofit status.

Analysis

The final rule on certification procedures provides the Department with additional discretion and authority to oversee and regulate institutions participating in Title IV federal student aid programs. Institutions should review the removal of the automatic certification provision in the final rule. This is an example of the Department granting itself additional oversight and control over Title IV institutions. The Department will now have an increased timetable to evaluate institutions. This provision will likely result in the Department not making final determinations for a significant period of time, beyond the previous 12-month limit. As institutions wait for the Department to make its decision, they will be in a period of uncertainty and may have to wait longer on a month-to-month temporary certification status.

The additions of the supplementary performance measures, the signature requirements of the PPA and the conditions for institutions under provisional certification further add to the discretion and oversight authority of the Department. The inclusion of the supplementary performance measures redefines the purpose of the PPA and the certification procedures to force institutions to comply with new conditions to continue to participate in Title IV federal student aid programs. The Department’s ability to factor in the supplementary performance measures raises the bar on what is required in order to be certified to participate in Title IV federal student aid programs. Additionally, institutions operating under provisional status could be forced to comply with numerous conditions that may present significant regulatory burdens for institutions. This is coupled with the additional events that will provide the Secretary with discretion to place institutions under this provisional certification. As more and more institutions are placed under the provisional certification status, this will lead to reduced due process protections for institutions, additional letters of credit requirements and additional conditions on participation in Title IV. The Department will have a more proactive oversight role in the regulation of Title IV programs.

Overall, institutions should closely monitor the revisions and additions to the certification procedures of the final rule. The Department expanded authorities to prevent institutions from entering into the Title IV program and increased authority to regulate institutions once they are eligible to participate in the Title IV program.