On May 19, 2023, the U.S. Department of Education (ED) published in the Federal Register a Notice of Proposed Rulemaking (the Proposed Rule) to substantially change or expand a host of regulatory requirements concerning institutional and programmatic eligibility for federal student financial assistance under Title IV of the Higher Education Act (Title IV). In addition to proposing a reinstated and modified Gainful Employment regulation, which we will summarize in a separate alert due to its particular significance and complexity, the Proposed Rule reflects major alterations to ED’s certification, financial responsibility and administrative capability rules for Title IV-participating institutions of higher education. The Proposed Rule also would amend the ability-to-benefit requirements for eligible career pathways programs to be Title IV eligible. All of these topics were considered during a negotiated rulemaking process conducted by the Department between January and March 2022, and the impacts of the Proposed Rule generally will be experienced by all postsecondary institutions that participate in the Title IV programs.

Despite the breadth and import of the matters contained in the Proposed Rule, and notwithstanding requests by higher education community to provide a longer public review and comment period, ED is providing only 30 days following publication — until June 20, 2023 — for public comment through the Federal e-Rulemaking Portal (regulations.gov) under Docket ED-2023-OPE-0089. Based on that limited comment period, we expect that ED will finalize these regulations on or before November 1, 2023, in order to comply with the “master calendar” provision of the Higher Education Act (HEA) and have the final regulations take effect on July 1, 2024. With the above-noted exception of Gainful Employment, and while not exhaustive of all other contents of the Proposed Rule, this alert summarizes its most significant provisions.

Title IV Certification and Program Participation Agreements

An institution’s participation in Title IV programs requires that it be certified by ED and enter into a Program Participation Agreement (PPA). Because ED has broad statutory authority under the HEA to grant or deny certification, or to limit or condition an institution’s Title IV participation, in recent years it has expanded its policies and practices to place institutions on provisional certification, which both carries fewer due process rights for institutions and permits more rigorous oversight conditions within an institution’s PPA. The Proposed Rule would add many of those current sub-regulatory practices and several new requirements to the Title IV certification and PPA regime, including the following:

• Codifying additional reasons that ED may provisionally certify institution, including if:
  • The institution meets any of the mandatory or discretionary “triggers” in the financial responsibility regulations (discussed in more detail below) and, as a result, is required to post a letter of credit or other surety;
  • ED determines the institution is “at risk of closure”; or
  • A controlling owner or interest holder (as defined in ED’s change in ownership regulations) owns another institution with fines or liabilities to ED and is not making payments in accordance with an agreement to repay the liability.
• Establishing supplementary performance measures that ED would consider when determining whether to certify or condition the participation of an institution in Title IV programs, such as the institution’s withdrawal rate, educational and pre-enrollment expenditures and, where applicable, occupational and professional licensure pass rates of graduates. ED also would take into consideration an institution’s debt-to-earnings and earnings premium metrics as calculated under the Gainful Employment regulation.
• Limiting the maximum provisional certification period to two years for institutions with major consumer protection issues or deemed at risk of closure (instead of the usual maximum provisional certification period of three years).
• Permitting ED additional time to make Title IV recertification decisions by removing a current requirement for PPA renewal on existing terms if, following the institution’s submission of timely recertification application, ED does not make recertification determination within 12 months after the previous PPA’s expiration date.
• Codifying and expanding the conditions that ED may impose on provisionally certified institutions, including: the submission of a teach-out plan or agreement and records retention plan; the release of holds on student transcripts; restrictions or limitations on the addition of new programs or locations; restrictions on the rate of growth, new enrollment of students, or Title IV volume in one or more programs; restrictions on the institution providing a teach-out on behalf of another institution; restrictions on the acquisition of other institutions; additional financial reporting requirements; and limitations on the institution entering into written arrangements with other institutions for the provision of educational instruction.
• For institutions alleged or found to have engaged in misrepresentation, aggressive recruiting, or incentive compensation violations, permitting ED to require the institution engage an independent monitor and submit marketing materials to ED for its review and approval.
• For institutions converting from proprietary to nonprofit status, requiring continued compliance with the 90/10 Rule and Gainful Employment requirements for at least two complete consecutive fiscal years, prohibiting the institution from advertising itself as a nonprofit institution until ED has approved that status for Title IV purposes, and imposing several new reporting requirements.
• Requiring PPA co-signatures from authorized representatives of all entities with direct or indirect ownership and that exercise control over a proprietary or nonprofit institution. This provision of the Proposed Rule would supplant ED’s March 2022 electronic announcement, which requires such co-signatures from upper-level ownership entities only in certain circumstances. (This seemingly does not have any effect on ED’s March 2023 policy regarding individual PPA co-signing and personal liability.)
• Limiting the length of Gainful Employment programs to the minimum number of hours or credits required by the state where the institution is located (or an alternate state where a majority of its students reside or meet other criteria), the institution’s accreditor, or any federal agency.
• Requiring institutions to certify that its programs designed for occupational or professional licensure are programmatically accredited (if such accreditation is required for licensure) and meet all other educational prerequisites for licensure or certification. Under current regulations, there is no such affirmative requirement and institutions must only disclose to students (1) states in which each licensure program meets the requirements for licensure, (2) states in which each licensure program does not meet the requirements for licensure, and (3) states for which the institution has not made a determination.
• Require institutions to certify compliance with all state consumer protection laws related to closure, recruitment, and misrepresentations, including both generally applicable State laws and those specific to educational institutions, not only in the state in which the institution is located but each state in which enrolled students are located.
• Expanding the list of entities that have the authority to share information pertaining to an institution’s Title IV eligibility, or any information concerning fraud, abuse, or other violations, to include other federal agencies and state attorneys general.

Financial Responsibility

As occurred under both of the prior administrations, the Proposed Rule again revises ED’s financial responsibility regulations, this time to generally expand both the mandatory and discretionary “trigger” events for requiring an institution to post a letter of credit or other surety. Institutions must also generally report the occurrence of any financial responsibility trigger to ED within ten days of the event.

The Proposed Rule would add the following mandatory triggers (with certain events marked with an asterisk being only discretionary triggers under current regulations):

• Lawsuits by Federal or State authorities for fines, penalties or other financial relief, or qui tam actions where the federal government intervenes, which have been pending for 120 days.
• An institution with a composite score below 1.5 incurs a subsequent debt or other liability that, if retroactively applied to the prior fiscal year composite score, causes the recalculated composite score to be below 1.0.
• ED initiates an action to recover losses from approved Borrower Defense to Repayment claims, and the potential amount of such recovery causes the institution’s composite score on a recalculated basis to fall below 1.0.
• At least 50% of the institution’s Title IV funds are for programs that fail the Gainful Employment metrics for program eligibility.
• A state authorizing agency cites the institution for failing to meet that agency’s requirements and such failure could result in withdrawal or termination of the institution’s authorization.*
• The institution loses eligibility to participate in another Federal education assistance program.
• Any regulatory oversight body requires the institution to submit teach-out plan or teach-out agreement.
• The institution has Cohort Default Rates for two consecutive years of 30% or more.*
• A proprietary institution’s failure to comply with the 90/10 rule in a single fiscal year.*
• The institution is subject to a default or other adverse condition under a credit or financing agreement as a result of actions taken by ED.
• The institution declares a financial exigency.
• The institution, or an owner or an affiliate of the institution that has the power, by contract or ownership interest, to direct or cause direction of the management of policies of the institution, files for a receivership.
• Contributions in final quarter of the institution’s fiscal year, followed by distributions during the first or second quarter of the subsequent fiscal year, where the removal of such contribution from the composite score calculation causes a recalculated composite score below 1.0.
• With limited exceptions, a proprietary institution has a composite score below 1.5 and there is a withdrawal of owner’s equity by any means, including through the declaration of a dividend, which would cause the institution’s composite score on a recalculated basis to fall below 1.0.

Similarly, the Proposed Rule would expand the scope of discretionary triggers to include the following events:

• An accrediting agency or other regulator places the institution on probation, show cause or a comparable status.
• The institution is subject to a default or other adverse condition under a credit or financing agreement unrelated to any actions by ED.
• Any judgment against the institution awarding monetary relief that is subject to or under appeal.
• The institution has high annual dropout rates, as calculated by ED.
• Significant fluctuations in Title IV funds received by the institution.
• The institution is under prior financial reporting obligations to ED and has any of the following occurrences: negative cash flows, failure of other liquidation ratios, cash flows that significantly miss projections, significantly increased withdrawal rates, or other indicators of a material change in the institution’s financial condition.
• There are pending group-based Borrower Defense to Repayment claims involving students or former students of the institution.
• The institution discontinues programs enrolling more than 25% of its students.
• The institution closes more than 50% of its locations, or locations that enroll more than 25% of its students.
• A state authorizing agency cites the institution for failing to meet that agency’s requirements.
• The institution is cited and faces loss of education assistance funds from another Federal agency if it does not comply with the agency’s requirements.
• One or more of the institution’s programs lose eligibility to participate in another Federal educational assistance program.
• If the institution is directly or indirectly owned at least 50 percent by publicly traded entity, that publicly traded entity discloses in a public filing that it is under investigation for possible violations of law.

ED further clarifies that a separate letter of credit requirement of no less than 10% of the institution’s prior year Title IV receipts arises from each mandatory or discretionary triggering event. This means that institutions with multiple triggering events may be subject to substantial cumulative letter of credit obligations.

The Proposed Rule also would codify additional factual circumstances that would deem an institution not financially responsible. Such circumstances include failing to make timely refunds or returns of Title IV funds, failing to make repayments of any Title IV liabilities; failing to make payments on an undisputed financial obligation for more than 90 days; failing to satisfy payroll obligations in accordance with its published payroll schedule; or borrowing funds from retirement plans or restricted funds without appropriate authorization.

With respect to financial responsibility following a change in control, the Proposed Rule would repeal and reserve all of 34 CFR § 668.15, which includes mostly dormant financial responsibility requirements but also includes certain financial ratio tests applied by ED to an institution’s same-day balance sheet upon a change in control. Those provisions would be recodified in a new 34 CFR § 668.176, which also would codify the letter of credit requirements for transactions involving buyers without acceptable historic financial statements, including buyer financial statements that fail specific standards including the composite score. The Proposed Rule would also provide that an institution is not financially responsible following a change in control if the amount of debt assumed by the institution to complete the transaction requires payments (either periodic or balloon) that are inconsistent with available cash to service those payments.

Under the Proposed Rule, institutions’ annual audited financial statements would be required to be submitted to ED within 30 days of completion or 6 months after the fiscal year end, whichever is earlier. Additionally, financial statements submitted to ED would be required to include a new footnote disclosure regarding amounts spent by the institution on recruiting activities, advertising and other pre-enrollment expenditures, as well as more detailed related-party and foreign ownership disclosures.

Administrative Capability

The Proposed Rule would add several new standards to the “administrative capability” regulations that institutions must continually satisfy to remain Title IV eligible. In addition to potential eligibility consequences, an institution determined by ED to be non-compliant with the administrative capability rules can be subject to fines and/or limitations or conditions on its continued Title IV participation. The Proposed Rule would:

• Require institutions to provide adequate financial aid counseling and financial aid communications to advise students and families to accept the most beneficial types of financial assistance available to enrolled students that includes clear information about the cost of attendance, sources and amounts of each type of aid separated by the type of aid, the net price, and instructions and applicable deadlines for accepting, declining, or adjusting award amounts.
• Require that an institution not have any principal or affiliate whose misconduct or closure contributed to liabilities to the federal government in excess of 5 percent of that institution’s Title IV program funds.
• Require that an institution has not been subject to a significant negative action or a finding by any state or federal agency, a court, or an accrediting agency, for which the basis of the action or finding is repeated or unresolved; and to further require that the institution has not lost eligibility to participate in another federal educational assistance program due to an administrative action against the institution.
• Require that institutions provide “adequate career services” to students who receive Title IV assistance. In making that determination, ED will consider (1) the share of students enrolled in GE programs; (2) the number and distribution of career services staff; (3) the services institutions promise to students; and (4) the presence of institutional partnerships with recruiters and employers who regularly hire graduates.
• Require that an institution provide students with “geographically accessible” clinical, or externship opportunities related to and required for completion of the credential or licensure in a recognized occupation, within 45 days of the successful completion of other required coursework.
• Require that an institution timely disburses funds to students consistent with the students’ needs, including prohibitions on certain delayed disbursements.
• Provide that an institution is not administratively capable if 50% of its revenue and 50% of its student enrollments are from programs that fail the Gainful Employment metrics for program eligibility.
• Require that an institution not engage in misrepresentations or “aggressive and deceptive” recruitment activities.

As part of its administrative capability proposals, ED also seeks to define what constitutes “adequate procedures” for institutions to validate a prospective student’s high school diploma if the institution or ED has reason to believe that a high school diploma is not valid. Such procedures may include obtaining specified documentation from the high school or oversight agency, or confirmation that the high school does not appear on any future ED-published list of entities that issue invalid diplomas. The Proposed Rule further establishes certain high school diplomas as presumptively invalid, including those that do not meet applicable requirements in the state where the school is located; those that are determined invalid by ED; the applicable state or through a court proceeding; those obtained from an entity that requires little to no secondary coursework to obtain the diploma; and those issued by entity that is unaccredited and maintains a business relationship or is otherwise affiliated with the institution in which the student enrolls.

Ability-to-Benefit

The Proposed Rule reflects consensus language adopted by the negotiated rulemaking committee with respect to ability-to-benefit (ATB) rules. Under the HEA and current ED regulations, students who do not possess a high school diploma or pass a GED exam may receive Title IV assistance if they are enrolled in an eligible career pathway program and satisfy one of three ATB alternatives. The proposed regulatory changes relate to the detailed requirements by which ED determines a student’s satisfaction of ATB eligibility, and certain oversight requirements applicable to eligible career pathway programs.