Early this year, the Department of Education (ED) initiated negotiated rulemaking primarily to establish a new federal standard and process for determining whether a borrower has a defense to repayment on a loan based on an act or omission of a school. The Notice of Proposed Rulemaking (NPRM) released by ED also includes proposed revisions to the financial responsibility standards and additional disclosure requirements for schools.
This article is the fourth and final one in a series that describes the proposed rules. It addresses proposed changes to the financial responsibility rules that in part determine institutional eligibility to participate in the Title IV programs. The other articles, which can all be found on our Notice of Proposed Rulemaking - 2016 page, addressed the following issues:
The deadline for commenting on all of these proposed rules is August 1.
Current Financial Responsibility Rules
To be eligible for participation in the Title IV student financial aid programs, an institution must demonstrate both administrative capability and financial responsibility. Violation of the standards under either area can cause an institution to lose its eligibility. This NPRM proposes changes to only the financial responsibility standards.
Currently, financial responsibility for a private non-profit or for-profit institution is based on four metrics:
An institution that fails to meet all of the financial responsibility standards may qualify to participate under an alternative standard if certain conditions are met. Alternative standards may involve:
Public institutions are financially responsible essentially by virtue of their state backing.
In addition, ED can consider any institution to fail the financial responsibility requirement due to certain past performance issues of the institution or certain persons affiliated with the institution.
Proposed Changes to Financial Responsibility Standards
ED states that it is proposing new requirements because it “seeks to identify, and take action regarding, material actions and events that are likely to have an adverse impact on the financial condition or operations of an institution.” The proposed rules would give ED authority to determine at the time a material action or event (a “trigger”) occurs that the institution is not financially responsible, rather than wait to see an institution’s annual audited financial statements. ED also notes that the current regulations did not serve to provide financial protection to either borrowers or ED for the effects of recent school closures. ED wants to “develop more effective ways to identify events or conditions that signal impending financial problems and secure financial protection while the institution has resources sufficient to provide that protection either by a letter of credit, or, by arranging a set-aside from current payables of Federal funds that could defray losses that may arise.”
ED is not proposing changes to the composite score requirements, the refund reserve, or past performance rules. However, it does propose a substantial list of triggers that would result in an institution being considered unable to meet its financial or administrative obligations. Some factors that were previously listed as a general standard of financial responsibility would now be a triggering event that would necessitate immediate action. The institution would be required to notify ED of the occurrence of a triggering event within 10 days, but could show that certain actions or events are not material, or that those actions are resolved. Briefly (more detail is in the NPRM preamble), triggers would encompass:
Proposed Changes to Financial Responsibility Alternatives
The proposed rules would also amend the current regulations regarding alternatives to the standard measures of financial responsibility.
The zone alternative would continue to be available only when an institution is not financially responsible solely because its composite score is less than 1.5, as long as it is not less than 1.0. (The composite score is meant to represent the strength of an institution’s margin against adversity and resources necessary to meet its operating needs.) Institutions under the zone alternative would be subject to most of the same requirements as under the current rules, such as disbursement under the heightened cash monitoring or reimbursement methods. However, some of the conditions that could affect an institution’s continuing permission to participate in the Title IV programs under this alternative would be moved into the list of triggers that would automatically negate the institution’s designation as financially responsible to begin with, and require permit more immediate action by ED. Institutions that fall afoul of those factors would not have the zone alternative available at all, but could fall under the provisional certification alternative.
The provisional certification alternative would continue to be available to institutions that are not financially responsible because they do not satisfy the general standards, because of an audit opinion, or because of a past performance issue. In addition, it would be available if one of the proposed new triggers applies.
In lieu of a letter of credit requirement under the alternatives as financial protection for ED, the proposed rules would allow an institution to provide cash or to agree to a set-aside from reimbursement claims payable to the institution. The amount of the financial protection that an institution must provide to ED under the provisional certification alternative would be tied to the trigger that the institution tripped.
Financial Protection Disclosures
An institution would have to disclose that is required to provide financial protection to ED, and why, to enrolled and prospective students in the same manner as would be prescribed for student warnings about low loan repayment rates.
Severability of the Regulatory Provisions
The proposed rules also include a declaration by ED that if any provision of the financial responsibility subpart of the regulations or its application to any person, act, or practice is held invalid (e.g., by a court), the remainder of the subpart or the application of its provisions to any person, act, or practice would not be affected.
This is the final article in a series of four articles describing the proposed rules. The other articles in the series can be found on our Notice of Proposed Rulemaking - 2016 page.
Publication Date: 7/27/2016