Neg Reg Day 3: Negotiators Work Through Financial Responsibility, Change of Ownership Issue Papers

By Owen Daugherty, NASFAA Staff Reporter

The Department of Education’s (ED) Institutional & Programmatic Eligibility Committee on Thursday spent a bulk of the day focusing on the issue of financial responsibility, sifting through ED’s draft regulatory language on the topic, and worked through draft regulatory language on change of ownership in the afternoon as it sought to cover all seven issue papers in the first session. The committee will leave discussion on certification procedures and the 90/10 rule to the last day of this week’s session.

ED is proposing a number of significant changes regarding how it monitors institutions’ financial responsibility, in an effort to protect students and taxpayers from institutions that aren’t financially viable, putting them at risk of closure. Much of the discussion among negotiators in the morning portion focused on what triggers — both discretionary and mandatory — would necessitate requiring a school to provide financial protection to the department. 

Overall, ED is seeking changes to the regulatory language that would enhance its ability to identify high-risk events and require financial protection as needed.

Mandatory trigger events discussed included clarification of which  debts, liabilities, and loss events would constitute a trigger, and adding a new trigger for approved borrower defense claims totalling more than 5% of an institution’s Title IV volume. Also discussed were withdrawal of owner’s equity for for-profit institutions, and restoring and revising a financial protection trigger for cases where the institution is required to submit a teach-out plan, among others. 

Jessica Ranucci, a negotiator on behalf of the legal assistance organizations that represent students or borrowers, said in support of the addition of approved borrower defense claims as a mandatory trigger that if an institution has several borrower defense claims against it, then it likely has other individual lawsuits or state investigations.

She said while these triggers may not directly impact an institution's fiscal bottom line, they nonetheless serve as important indicators of an institution’s financial stability.

The department is proposing changing several triggers from discretionary to mandatory, including major actions by a state authorizer, and triggers related to failure to meet 90/10 requirements or two years of a failed cohort default rate that is not successfully appealed.

ED also reiterated that it is not proposing changes to the composite score calculation, instead noting that the department is aware of issues with the score and is looking into addressing it in a future rulemaking sesion.

Regarding definitions of instances that would trigger financial protection, Brad Adams, a negotiator on behalf of proprietary institutions, said he didn’t conceptually have a problem with institutions providing information to the department on liabilities from settlements, but did question whether it was ED’s intention to require reporting all settlements as opposed to only those deemed material, noting the administrative burden such a provision would bring for both institutions and the department. 

Kelli Perry, a negotiator on behalf of nonprofit institutions, said she interpreted the proposed language as only requiring disclosure of such liabilities if they would impact the school’s composite score, while ED officials indicated they would look into the issue and report back to the committee. 

Adams said an institution could fail the 90/10 rule but still have a strong financial year. He called on ED to move that trigger from mandatory to discretionary, a request ED opted against, noting that while failing 90/10 in and of itself is not necessarily indicative of financial instability, two years of failure leads to loss of Title IV aid eligibility, and that could impact the institution’s financial circumstances.

Following questions from negotiators about how ED selected these triggers, Greg Martin, a federal negotiator, said they were chosen because these events have caused instabilities at institutions in the past and ED is attempting to identify institutions that may be financially unstable before they are forced to close.

Carolyn Fast, a negotiator on behalf of consumer advocacy organizations, said all of the triggers outlined are important and constitute significant steps forward.

However, a temperature check on mandatory triggers did not reach consensus, as Perry and Adams were not in agreement.

The committee then moved on to discussing discretionary triggers, including detailing some of the discretionary triggers that are under consideration to become mandatory.

Consensus was not reached during a temperature check on discretionary triggers, as Adams registered a thumbs down.

The committee then wrapped up the remaining portions of financial responsibility in the afternoon, covering subsections on audit opinions and disclosures, past performance, and alternative standards and requirements.

Fast said she generally supported the changes ED is proposing, but questioned how schools in the past have remained eligible for more than three years under provisional certification even though financial problems were identified. Internal counsel for ED clarified that institutions can be provisionally certified multiple times. Fast suggested there should be a standard to ensure schools cannot indefinitely extend their provisional certification.

A temperature check on these sets of issues brought no thumbs down. The committee then moved onto the last sections of financial responsibility, which cover change of ownership and severability.

A temperature check on these final sections also registered no thumbs down, marking the completion of the financial responsibility issue paper. 

The committee then moved to the changes in ownership issue paper, and generally speaking there was broad agreement among negotiators on this topic. Much of the focus was on the conversion of for-profit institutions to nonprofit status, though the issue paper covers each sector of higher education. 

The first section covered changes on the definition of branch campuses. Yael Shavit, a negotiator on behalf of state attorneys general, suggested that ED consider adding requirements that a nonprofit organization under these regulations be organized for charitable purposes. She also added that she would like to see added to the list of exclusions for the purposes of participating in the federal student loan program instances in which there was a change of ownership from for-profit to nonprofit status where the new entity still has contractual obligations to the prior owner.

Johnson Tyler, a negotiator on behalf of the legal assistance organizations that represent students or borrowers, asked that ED consider expanding the definition when for-profits convert to nonprofits to ensure former owners are not continuing to profit after a conversion.

Adams raised concerns over regulations that would mean a former owner having a single share of stock in an online program management provider that now has a contract with the new converted nonprofit would run afoul of the regulations.

A temperature check was taken and consensus was not reached, as Adams was the sole dissenting vote.

The committee then breezed through the remainder of the change of ownership issue paper, in some instances opting against taking temperature checks on sections with broad agreement and few changes to the languages.

Regarding the section focused on eligibility to participate in Title IV programs after a change in ownership, Adams asserted that institutions needed clarity on requirements and consequences when such a change takes place and the need for ED to process paperwork promptly,  asking if schools could pay processing fees as a way to expedite processing  of pre-acquisition review process.

Barmak Nassirian, a negotiator on behalf of groups representing student veterans, said 90 days is in some instances insufficient time to review changes in ownership—especially complex ones that carry the most risk— and instead suggested that the department move away from a one-size-fits-all approach to cover all changes of ownership.

A temperature check on this section of change of ownership did not bring consensus, as Adams was not in support. Consensus was reached among negotiators on the remaining sections, including terms of an extension if an institution’s completed application is approved, updating application information, and change in ownership resulting in change in control for private nonprofit, for-profit, and public institutions.

The committee will begin the final day of this week’s session on Friday with discussion on certification procedures before attempting to finish with the 90/10 issue paper. Stay tuned to NASFAA’s Today’s News for more coverage of negotiated rulemaking sessions throughout the week, and read up on our previous rulemaking coverage


Publication Date: 1/21/2022

Peter G | 1/21/2022 11:46:01 AM

While somewhat off-topic, reading this particular white paper reminded me that audits are still a weak link in the system for many institutions.

There are certain firms doing audit work that simply don't do quality work, but more commonly, the FA portion of the audit gets fresh, untrained staff assigned and either real issues get overlooked in which case problems don't get resolved early on, and/or non-real issues get identified, sucking up the oxygen in the room. The audit requirement/process is intended to be a critical control, and yet, from my own experience and talking to colleagues, it's often either a rubber stamp or a debacle, but either way not really serving its purpose.

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