On October 31, 2023, the U.S. Department of Education published a final rule that included revisions to four different regulatory areas: financial responsibility, administrative capability, certification procedures and ability-to-benefit programs. Together, these regulations significantly enhance the Department’s oversight over institutions of higher education, regardless of their public, nonprofit or proprietary status.

This Alert is more detailed and lengthy than our usual updates because of the significance we place in this latest set of regulations. Coming after three years of steady rulemaking at the Department that has led to some understandable “regulatory fatigue” at many institutions, this set of regulations is worthy nonetheless of detailed review by institutional leaders, financial aid professionals, counsel to institutions, accountants, service providers and others based on the new compliance challenges and hurdles it poses to all types of Title IV participating institutions.

The final rule represents major change on a number of Title IV compliance fronts including, among others:

  • What circumstances constitute financial events that require notification to the Department and the potential consequences;
  • The standards to avoid negative findings based upon a lack of administrative capability; and
  • The manner in which institutions satisfy the qualifications for certification or recertification in Title IV programs.

In response, all institutions will need to modify their internal protocols to ensure that they remain in compliance with the new and revised requirements.

These regulations will go into effect on July 1, 2024. Institutions should be aware, however, that the Department has already been taking policy positions, based on subregulatory guidance or otherwise, consistent with some aspects of these upcoming regulatory changes. In addition, while we have herein addressed the new provisions in the final rule that we think are of interest to most institutions and investors, this Alert does not cover all of the changes in the final rules. We therefore urge institutions to consult with counsel regarding the full impact of these new rules on your institution.

Financial Responsibility

In the Department’s words, the regulations represent “a critical set of changes that enable the Department to more closely monitor institutions who may be moving toward a level of financial instability.” Further, the Department bases these changes upon “numerous examples” of precipitous closures. The Department argues that in those instances, they were “hampered” in their efforts to “obtain information and financial protection from the impacted institution in a timely manner which would have softened the impact on students.” This inability to act also had “financial consequences” for the Department, as the agency was unable “to offset the cost of loan discharges for closed schools or borrower defense.”

The Department does not offer specific explanations of how the regulatory changes would have resulted in different outcomes in those past circumstances. Similarly, the Department does not wrestle with the unintended consequences of the regulatory revisions, including the possibility of increasing the odds of schools closing due to the Department’s demands for additional financial protection, the chilling effect it may have on changes in ownership and other strategic affiliations, including investments by foreign entities, and the resulting limitations on educational options for students.

Among the most noteworthy changes are the revisions to the mandatory and discretionary triggers for financial responsibility. The final rule creates new and revised mandatory and discretionary triggers that are intended to capture financial circumstances that may not be reflected in regular financial statements or in the institution’s composite score, but that require a letter of credit in the case of mandatory triggers and give the Department considerable discretion to require letters of credit in the case of discretionary triggers.

The Department explains that all of the mandatory triggers “have a clear nexus to financial risk,” some of which indicate “imminent risk of loss of Title IV.” Further, the Department concludes that the mandatory triggers represent either: i) commonsense areas that can indicate an institution is facing significant financial problems; or ii) more complicated ways that the school is trying to “manipulate” results.

Similarly, according to the Department, the discretionary triggers represent “obvious and sensible” indications that an institution could be experiencing negative effects on its finances that lead to relevant questions about how large the adverse impacts might be.

The Department concludes that, while risk does not guarantee an institutional closure, loss of Title IV funding often relates to closure. Specifically, the Department points to lawsuits and debt payments that involve composite score recalculations that could cause an institution to subsequently fail that metric. To the Department, state actions and teach-out requirements are proof that there are imminent concerns about financial impairment, if not outright closure.

After the effective date, the Department will require that notifications of triggering events and audit reports be submitted on new timelines. The Department also adds events deemed to constitute a failure of an institution to demonstrate that they are able to meet their financial obligations. Lastly, the final rule consolidates the financial responsibility requirements for institutions undergoing a change in ownership.

Changes to Financial Responsibility

Administrative Capability

Another regulatory area profoundly impacted by the final rule is administrative capability. The Department’s purpose with these revisions is to address issues it has encountered in institutional program reviews. The Department argues that when an institution “exhibits problems,” the agency often lacks the ability to hold institutions accountable. The regulations add several new requirements including clear, more comparable information on financial aid, prohibiting the withholding of transcripts for federally funded courses, requiring adequate career services and intern/externship opportunities, and limiting the employment of individuals with a history of risky management of federal student aid programs.

For institutions, the administrative capability changes will create additional compliance burdens in order to remain in the Title IV program. The Department states that these changes will help students make “informed choices about where to enroll, how much they might borrow, and ensure that students who are seeking a job get the assistance they need to launch or continue their careers.”

In some cases, the new requirements demand additional disclosures to students related to the cost of attendance, net price, available financial assistance, award deadlines and other information. In other circumstances, the regulations expand the requirements for an institution to verify―and have internal criteria to verify―a prospective student’s high school diploma. Still in others, the final rule creates standards for institutions to provide “adequate career services”―and meet the Department’s nonspecific definition of “adequate”―in order to be administratively capable.

The regulations also incorporate cross-compliance concerns from other rulemaking packages, such as: the timely disbursement of Title IV funds (which was also a topic of financial responsibility rulemaking); having at least half of the institution’s Title IV funds not from programs that are failing the gainful employment rule; refraining from engaging in aggressive and deceptive recruitment; committing misrepresentations; being subject to negative action by a state or federal agency; or losing eligibility to participate in another federal educational assistance program due to an administrative action against the school.

Compliance with these new provisions is critically important. An institution that is found to not to be administratively capable runs the risk of being placed on a provisional program participation agreement (PPA)―and the loss of many due process protections as a result―or on heighted cash monitoring 2, which institutions often struggle with and which can lead to institutional closure.

Administrative Capability Regulations Seek to Capture More Noncompliance

Certification Procedures – 34 C.F.R. §§ 668.13, 668.14

Despite mostly flying under the radar of public attention, the revised certification procedures could potentially result in significant changes to the manner in which, and the standards by which, institutions demonstrate eligibility to participate in the Title IV program. Indeed, the regulations raise the bar for institutional participation and create additional scenarios for fully certified institutions to spend extended periods of time on provisional PPAs.

In short, the final rule provides the Department with an enhanced ability to deny initial certifications and recertifications, to force institutions onto provisional PPAs and to impose requirements and limitations on schools as a condition of participation in Title IV.

In addition to new events that cause institutions to become provisionally certified, the final rule creates new requirements for provisionally certified institutions to satisfy while removing others. As an example of the latter, the Department removed performance measures related to debt-to-earnings rates and the earnings premium measure as well as the audit requirement for instructional spending. However, the Department may consider during a recertification:

[T]he amounts an 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.

The final rule also expands the list of entities that must sign a PPA to include higher level ownership. The Department made clear in the preamble that this requirement does not address circumstances where the Department requests signatures in a personal capacity. The requirement does address signatures on behalf of entities that own institutions. In the Department’s approach, if an entity that can profit from or control an institution when times are good, it is prudent that they also accept liability when financial losses cannot be covered solely by that institution.

One of the more significant changes in these regulations are the new supplementary performance measures. The Department will employ these standards when determining whether to certify or condition an institution to participate in title IV. The standards include, but are not limited to: 1) withdrawal rates; 2) educational and pre-enrollment expenditures; and 3) licensure passage rates. Notably, the Department did not create thresholds for institutions to satisfy these standards. Rather, the Department only published these items without notifying institutions about how the Department will judge an institution’s satisfaction of the standards.

The certification procedures package also made changes to the inclusion of accreditor hour requirements, provisions of program length, requirements for out-of-state offerings and an institution’s ability to withhold a student’s transcripts.

Changes to Certification Procedures

Ability-to-Benefit Regulations

Amendments to C.F.R. §§ 668.2; 668.32; 668.156; 668.157

Individuals who do not have a high school diploma or a recognized equivalent (so-called ability to benefit or “ATB” students), unless grandfathered under a limited provision, are required to enroll in an Eligible Career Pathway Program (ECPP) to access federal student aid, either through a state-approved ECPP or through an ECPP offered independently by an institution. An ECPP contains two components: a portion that leads to a postsecondary credential and a portion that leads to a high school diploma (or equivalent).

The final rule:

  1. Codifies the definition of a Title IV eligible ECPP, which largely mirrors the existing statutory definition;
  2. Makes technical updates to the student eligibility regulations;
  3. Amends the state ATB process to allow time for participating institutions to collect outcomes data while establishing new safeguards;
  4. Establishes new documentation requirements for institutions that want to begin or maintain one or more ECPPs; and
  5. Establishes that the Secretary of Education will verify at least one ECPP at each institution to increase regulatory compliance.

The most significant change is the establishment of a new process for the Department to review Title IV compliance of ECPPs offered independently by institutions. As drafted, for institutions offering one or more ECPPs prior to July 1, 2024, the institution would need to apply to have one of its ECPPs reviewed by the Department. For institutions that are not yet offering an ECPP but are planning to do so after July 1, 2024, the institution would need to apply to have its first ECPP reviewed. Institutions will also be required to affirm compliance of all ECPPs it offers, including that the institution satisfies all new documentation requirements. The details and timing of that Department approval process have not yet been announced. The Department made additional changes in the final rule that make clear it has broad discretion to review ECPP compliance beyond the new review process.

The Secretary is required to provide an institution with the opportunity to appeal an adverse eligibility decision regarding an ECPP. The Secretary also maintains the authority to require the approval of additional ECPPs offered by an institution “for any reason” including but not limited to: 1) a rapid increase, as determined by the Secretary, of ECPPs at the institution; or 2) the Secretary determines that other ECPPs do not meet the documentation standards required in the final rule.

It is very important that institutions currently offering one or more ECPPs prepare for the new compliance requirements, including the new documentation requirements. Since the definition of an ECPP has not changed, if the Department finds an ECPP noncompliant in its new review process, it could present backward-looking Title IV liability risk to an institution and could extend to other ECPPs offered by an institution not just the first reviewed.