At a Glance

• The U.S. Department of Education has issued a final rule that significantly revises its financial responsibility, administrative capability, certification and ability-to-benefit regulations.
• These regulatory changes create significant new compliance obligations for higher education institutions that participate in the Title IV federal student aid programs.
• This final rule reflects a second comprehensive package of Title IV regulations that are scheduled to take effect July 1, 2024.

On October 31, 2023, the U.S. Department of Education (ED) published in the Federal Register a Final Rule that significantly revises the financial responsibility, administrative capability and certification requirements applicable to higher education institutions that participate in federal student financial aid programs under Title IV of the Higher Education Act (Title IV). The Final Rule also amends Title IV participation requirements for ability-to-benefit (ATB) programs. Most of the revisions are consistent with ED’s earlier Proposed Rule, which was published in May 2023, and we discussed in a prior alert. (The Proposed Rule also included ED’s new Financial Value Transparency and Gainful Employment regulations, which ED finalized in a separate final rule on October 10, 2023, and which we summarized here.) All of these important regulatory changes take effect on July 1, 2024.

Financial Responsibility

As expected, the Final Rule adopts most of ED’s proposed changes, which it describes as being necessary to more closely monitor institutions that may be facing challenges to their continued financial viability. It therefore enacts a number of new general standards of financial responsibility, as well as revised mandatory and discretionary triggers that can require an institution to post financial protection (typically, a letter of credit) to ED in order to maintain Title IV participation:

• General Standards of Financial Responsibility — In addition to the existing standards, ED will consider an institution not financially responsible if it:
  • Fails to make refunds under its refund policy, return Title IV programs funds for which it is responsible, or pay Title IV credit balances;
  • Fails to make repayments to the Department for any debt or liability arising from Title IV program administration;
  • Fails to make a payment in accordance with an existing undisputed financial obligation for more than 90 days;
  • Fails to satisfy payroll obligations in accordance with its published payroll schedule;
  • Borrows funds from retirement plans or restricted funds without authorization; or
  • Is subject to a mandatory triggering event or a discretionary triggering event that ED has determined to have a significant adverse effect on the financial condition of the institution.

• Mandatory Triggering Events — Financial protection to ED will be automatically required when:
  • For an institution with a composite score of less than 1.5, there is a final monetary judgment, award or settlement that results from a legal proceeding (including a lawsuit, arbitration or mediation) for which the resulting recalculated composite score is less than 1.0;
  • The institution is sued by a federal or state authority, for which the action has been pending for 120 days, and (1) no motion to dismiss has been filed; or (2) a motion to dismiss was filed and denied;
  • ED initiates an action to recoup Borrower Defense to Repayment (BDR) amounts, and the resulting recalculated composite score would be less than 1.0;
  • The institution 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 resulting recalculated composite score is less than 1.0;
  • For a proprietary institution with a composite score of less than 1.5, or for a proprietary institution during the first full fiscal year following a change in ownership, there is a withdrawal of owner’s equity by any means, including by declaring a dividend, for which the resulting recalculated composite score would be less than 1.0 (subject to limited exceptions);
  • As determined by ED, an institution received at least 50% of its Title IV program funds from Gainful Employment (GE) programs that fail the accountability metrics under the final GE regulations; 
  • The institution is required — “in whole or in part” due to financial concerns — to submit a teach-out plan/agreement by ED or another federal agency, an accrediting or state agency, or other oversight body;
  • A proprietary institution fails the 90/10 rule in a single fiscal year;
  • An institution’s cohort default rate on federal student loans exceeds 30% in each of the two prior fiscal years;
  • The 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 then makes a distribution during the first two quarters of the next fiscal year, whereby the offset of the distribution against the contribution results in a recalculated composite score of less than 1.0;
  • As a result of an action taken by ED, 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 institution declares a financial exigency to any federal, state, tribal, or foreign governmental agency, or to the institution’s accrediting agency; or
  • The 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.

• Discretionary Triggering Events — Financial protection to ED may be required, at the discretion of ED when:
  • The institution is placed on probation, show-cause, or a comparable status that poses an equivalent or greater risk to its accreditation, authorization, or eligibility;
  • Unrelated to any action taken by ED (as under the mandatory trigger), 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. Such actions may include (1) increased collateral, a change in contractual obligations, increased interest rates or payments or other sanction, penalty, or fees; (2) 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 is or becomes subject to a default or other adverse condition by the creditor, as a result of any action taken by ED; or (4) a judgment awarding monetary relief is entered against it, even if subject to appeal;
  • 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;
  • As calculated by ED, based on its case-by-case assessment of 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;
  • For institutions required to provide additional financial reporting, there are negative cash flows, failure of other financial ratios, cash flows that significantly miss projections previously submitted to ED, withdrawal rates that increase significantly or other indicators of a significant change in the financial condition of the institution;
  • ED initiates a group claim process under the 2022 BDR regulations;
  • The institution discontinues programs that enroll more than 25% of its enrolled students who receive Title IV funds, or closes locations that enroll more than 25% of its students who receive Title IV funds;
  • A state licensing or authorizing agency cites the institution for failing to meet applicable requirements, including notice that it will withdraw or terminate the institution’s licensure or authorization if the necessary corrective measures are not taken to achieve compliance;
  • The 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;
  • An owner of 50% or more of an institution 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;
  • The institution is cited and faces the loss of education assistance funds from another federal agency if it does not comply with the agency’s requirements;
  • The institution is required for any reason to submit a teach-out plan or agreement (including a programmatic teach-out), by a state, ED or another federal agency; an accrediting agency; or other oversight body; or
  • Any other event or condition that ED determines is likely to have a “significant adverse effect” on the financial condition of the institution.

For most of the above mandatory and discretionary triggers, the Final Rule requires institutions to notify ED within 21 days of their occurrence (as contrasted with 10 days under the currently effective triggers). 

The Final Rule also amends current financial responsibility regulations on “past performance,” which in addition to current provisions will deem an institution not financially responsible if:

• In either of its two most recently submitted compliance audits or in an ED-issued report (e.g., final program review determination), the institution was required to repay an amount exceeding 5% of Title IV funds received during the pertinent year; or
• An owner who exercises substantial control, or the owner’s spouse, has defaulted on a federal student loan (including a PLUS loan) within the preceding five years (subject to limited exceptions).

These regulations also enact additional financial responsibility requirements in the context of an institutional change in ownership and control, including:

• The institution’s “materially complete” application for a change in ownership must include audited financial statements of both the institution and the new owner, in each case for the two most recently completed fiscal years prior to the change;
• The financial statements provided for the change in ownership and control must meet additional criteria, including lack of operating losses, positive tangible net worth (or positive net assets without donor restrictions, as applicable), and passing composite scores;
• A failure to provide acceptable financial statements, or the institution otherwise not meeting financial responsibility requirements, will result in ED requiring financial protection; and
• Notwithstanding any other provisions, ED may determine an institution is not financially responsible if an amount of debt assumed to complete a change in ownership requires payments (either periodic or balloon) that are inconsistent with available cash, based on enrollments for the pertinent period.

In a more technical change, the Final Rule requires proprietary institutions to submit annual financial statements and Title IV compliance audits by the earlier of 30 days after the completion of the audit or six months following the institution’s fiscal year end. (As under current regulations, nonprofit and public institutions subject to the Single Audit Act must still submit their annual audits by the earlier of 30 days after audit completion or nine months following the fiscal year end.)

Administrative Capability

In order to participate in Title IV programs, higher education institutions must maintain “administrative capability” in accordance with ED regulations. When ED determines an institution is not administratively capable, among other things it may place the institution’s Title IV participation on provisional certification status (which itself carries other consequences and risks) or place the institution on the heightened cash monitoring type 2 form of payment (which can have severe effects on institutional cash flow and operations). The Final Rule amends ED’s administrative capability standards in several significant ways:

• An 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% of its Title IV” funds in the award year in which the liabilities arose or were imposed.
• An institution must provide adequate financial aid counseling, including “clear and accurate” information regarding: cost of attendance; sources, amounts of types of financial aid offered; the institution’s net price; 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; and the rights and responsibilities of the student with respect to enrollment and receipt of financial aid, including various specific policy requirements. 
• An institution must offer adequate career services, to be determined by ED based on, among other things, the following considerations: (1) share of students enrolled in programs designed to prepare students for gainful employment in a recognized occupation; (2) number and distribution of career services staff; (3) career services promised to prospective and current students; and (4) institutional partnerships with recruiters and employers who regularly hire graduates of the institution.
• Clinical and externship opportunities must be: (1) available within 45 days of the successful completion of required program coursework; and (2) “geographically accessible,” which shall be determined by ED based on factors such as urban versus rural “commuting zones,” the degree level and whether a program is highly specialized. 
• The institution may not have any “significant negative actions” or “findings” by a state or federal agency, a court or an accrediting agency where the basis of the action is repeated or unresolved.
• The institution must appropriately validate high school diplomas pursuant to ED-specified standards and procedures.
• Title IV disbursements must be completed in a “timely manner” that “best meets the students’ needs.”
• At least 50% of the institution’s total Title IV funds during the most recent award year are not associated with “failing” GE programs.
• The institution does not engage in substantial misrepresentation (as defined in 34 CFR subpart F) or aggressive and deceptive recruitment tactics or conduct (as defined in 34 CFR subpart R).

Certification and Program Participation Agreements

The Final Rule contains numerous provisions related to the certification of higher education institutions to participate in the Title IV programs, including new signatory requirements for an institution’s Title IV program participation agreement (PPA); new substantive PPA requirements related to program lengths, the availability of Title IV aid, the withholding of transcripts, and programs offered via distance education; new standards that ED may consider when deciding whether to certify or recertify an institution, or whether to certify or recertify on only a provisional basis; and newly explicit conditions that ED may impose under a provisional PPA or when an institution seeks to convert for Title IV purposes from proprietary to nonprofit status. 

• Program Participation Agreement Signatories — In addition to the chief executive officer of the institution, the PPA for any proprietary or private nonprofit institution must be signed by the authorized representative of any entity with ownership or control, including: (1) entities having at least 50% control through direct or indirect ownership; (2) entities having the power to block significant actions; (3) any entity that is the 100% direct or indirect interest holder of the institution; or (4) any entity that is required to provide financial statements to ED to satisfy requirements relating to a change in ownership, certification or ongoing financial responsibility compliance.
• Inter-agency Communications — Institutions must agree that ED and other federal agencies, guaranty agencies, lenders, accrediting 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 programs or any information on fraud, abuse, or other violations of law.
• Parties With Current or Prior Title IV Liabilities — Institutions must not knowingly employ certain individuals, or contract with certain parties, who owe Title IV liabilities or who were connected with an institution that incurred liabilities exceeding 5% of that institution’s annual Title IV funds.
• Length of GE Programs — The maximum length of any GE program is generally limited to the required number of clock hours, credit hours or the equivalent required for training in the recognized occupation for which the program prepares the student, to the extent such a requirement is established by the state in which the institution is located (rather than 150% of such state minimum requirements, as permitted under current regulations), with limited exceptions.
• Availability of Transcripts — An institution cannot withhold official transcripts or take any other negative action against a student related to a balance owed by the student that resulted from an error in the institution’s administration of Title IV programs, or any fraud or misconduct by the institution or its personnel. Also, upon request by a student, an institution must provide an official transcript that includes all the credit or clock hours for payment periods: (1) in which the student received Title IV funds; and (2) for which all institutional charges were paid or included in an agreement to pay at the time the request is made.
• Availability of Title IV Aid — An institution cannot maintain policies and procedures to encourage, or that condition institutional aid or other student benefits in a manner that induces, a student to limit the amount of federal student aid received, with limited exception for institutional scholarships that exceed the amount of federal student aid declined by a student.
• Eligibility of Programs — Both in the state where an institution is located and where distance education students are located, in order to be Title IV-eligible a program must: (1) be programmatically accredited or pre-accredited, as applicable, if such is required by any state or federal agency, including as a condition for employment in the occupation for which the program prepares the student; (2) satisfy the state’s educational prerequisites for professional licensure or certification; and (3) comply with all state laws related to closure, including record retention, teach-out plans or agreements, and tuition recovery funds or surety bonds.
• Program Disclosures — If an educational program is designed to meet educational prerequisites for a specific professional license or certification that is required for employment in an occupation, or is advertised as meeting such requirements, the institution must provide students with a list of all states where the institution has determined that the program does and does not meet such requirements. 
• Supplementary Performance Measures — When deciding whether to certify or recertify an institution, ED may consider: (1) the institution’s withdrawal rate; (2) educational and pre-enrollment expenditures, determined by comparing the amounts spent on instructional and other academic activities against the amounts spent on recruiting, advertising and other pre-enrollment activities; and (3) licensure pass rate for applicable programs.
• Provisional Certification Events — Circumstances warranting provisional certification are expanded to include: (1) ED determining that an institution is at risk of closure; (2) the institution triggers one or more of the financial responsibility events and ED has required financial protection; (3) an owner or interest holder of the institution with control over that institution owes a Title IV liability to ED.
• Conditions in Provisional PPAs — Provisional certification may include one or more of the following conditions: 
  • Submission of an acceptable teach-out plan or agreement;
  • Submission to ED of an acceptable records retention plan;
  • Restrictions or limitations on the addition of new programs or locations;
  • Restrictions on the rate of growth and new enrollment of students;
  • Restrictions on the institution providing a teach-out on behalf of another institution;
  • Restrictions on the acquisition of another participating institution;
  • Additional reporting requirements;
  • Limitations on the institution’s entry into written arrangements with other eligible institutions, or with ineligible institutions or organizations;
  • For institutions found to have engaged in substantial misrepresentations to students, engaged in aggressive recruiting practices or violated incentive compensation rules, requirements to hire a monitor and to submit marketing and other recruiting materials (e.g., call scripts) for the review and approval by ED; and
  • Reporting to ED 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.
• Institutions Converting From Proprietary to Nonprofit Status — In addition to any other conditions that ED deems appropriate, the institution must:
  • Not advertise that it operates as a nonprofit institution until ED approves the conversion to nonprofit status for Title IV purposes;
  • Continue to satisfy the 90/10 rule and GE program accountability requirements until ED has accepted, reviewed, and approved the institution’s audited financial statements and compliance audits that cover two complete consecutive fiscal years, or until ED approves the conversion to nonprofit status, whichever is later;
  • Submit reports to ED on accreditor and state authorization agency actions within 10 business days of notice of the action, and similarly within 10 business days of entering any new servicing agreements;
  • Submit regular and timely reports to ED regarding any agreements with former owners or affiliates of former owners; and
  • Submit a report and copy of the communication from the IRS, or from any state or foreign country, related to tax-exempt or nonprofit status within 10 business days of receipt.

Additionally, the Final Rule repeals a provision adopted only a few years ago that required automatic recertification if an institution submitted a timely recertification application and ED did not act on that application within one year.

Ability-to-Benefit

Students who do not have a high school diploma or a recognized equivalent — “ability to benefit” or “ATB” students — unless grandfathered under a limited statutory provision, must be enrolled in an Eligible Career Pathway Program (ECPP) in order to receive Title IV funds, either through a state-approved ECPP or through an ECPP offered independently by an institution. The Final Rule includes the following with respect to ATB eligibility of ECPPs:

• Codifies the definition of a Title IV-eligible ECPP, consistent with the existing statutory definition;
• Makes technical amendments to differentiate eligibility of non-high school graduates who enrolled in an eligible program prior to July 1, 2012, and those who enrolled on or after July 1, 2012.
• Revises the state ATB process to allow time for participating institutions to collect outcomes data while establishing new safeguards; 
• Establishes new documentation and procedural requirements for institutions that want to begin or maintain one or more ECPPs; and

Provides that ED will verify at least one ECPP at each institution to increase regulatory compliance.