The Department of Education (ED) last week issued proposed regulations on standards of financial responsibility for postsecondary institutions.
ED negotiated this section of the regulations in a rulemaking session held in early 2022, where it also discussed institutional and programmatic eligibility topics including the 90/10 rule, ability to benefit, administrative capability, certification procedures, and gainful employment. This is the third article in series delving deeper into specific provisions of the proposed rules. See previous coverage on the 90/10 rule, released as a final rule on Oct. 28, 2022, and on the proposed gainful employment and ability to benefit rules also released last week.
Negotiators failed to reach consensus on standards of financial responsibility, leaving ED free to craft its own language for public comment. The proposal largely matches ED’s proposals from last year and reflects feedback the department considered during negotiations.
ED cited in its proposal an overarching desire for better oversight tools to allow the department to more proactively identify institutions at risk of sudden closure due to financial instability. ED believes the proposed rules will allow them to encourage low-performing schools to improve while also dissuading students from attending risky schools and, ultimately, to protect taxpayers and students from the financial and other costs of sudden school closures.
While the requirement to provide ED with documentation that public and foreign institutions of higher education are backed by the full faith and credit of the state or government where it is located already exists in regulation, ED proposes to add a number of circumstances under which such documentation must also be submitted, including:
When the institution applies for recertification following provisional certification
After any change in institutional status resulting in the institution no longer being backed by the full faith and credit of the state
Upon request by ED
ED also amends rules describing when an institution is not considered to be financially responsible, adding to existing conditions like failure to make refunds or return unearned Title IV funds in accordance with Return to Title IV (R2T4) regulations. Under the proposed rule, if the institution fails to satisfy payroll obligations, fails to make a payment in accordance with an existing undisputed financial obligation for 90 days, or borrows funds from retirement plans or restricted funds without authorization it would also be considered not financially responsible.
Another new provision is that institutions must submit compliance audits and audited financial statements by the earlier of 30 days after the audit report is issued or six months from the last day of the fiscal year. ED added this provision to address concerns that under the current rules schools may be aware of financial issues for months before they are required to notify ED, delaying ED’s ability to secure financial protection while the institution could be on the brink of sudden closure.
Institutions will also be required to include a footnote to their audited financial statements disclosing the amounts they spent on recruiting, advertising, and other pre-enrollment expenditures, with ED explaining that it believes excessive spending in these areas is indicative of a pattern for financially struggling institutions that feel pressure to increase enrollments to improve their financial situation.
The proposal includes several changes to mandatory and discretionary triggering events in the financial responsibility regulations. ED uses triggering events to monitor financial responsibility because the composite score, which is ED’s primary way to monitor institutions’ financial health, is insufficient on its own to measure financial responsibility due to the fact that it represents only a snapshot of circumstances at the end of the institution’s fiscal year. ED first introduced the concept of triggering events in the 2016 regulations to identify mid-year circumstances that could contribute to an institution’s financial instability.
Mandatory triggers result in automatic determination that the institution is not financially responsible and require the institution to post financial protection of at least 10% of the institution’s prior year Title IV funds received. If multiple triggers are reported, ED will require separate financial protection for each trigger. Triggers that require a recalculation of the composite score only require financial protection if the recalculated composite score establishes that the institution is failing to meet the financial responsibility rules.
Discretionary triggers do not result in immediate consequences. Rather, they prompt ED to evaluate the circumstances and decide whether the triggering event is likely to have a material adverse effect on the financial condition of the institution, at which point they would require the institution to post financial protection.
In 2019, many of the triggering events from the 2016 rules were eliminated or moved from mandatory to discretionary. ED claims that after those changes became effective, the department identified instances where it felt institutions were at risk of closure, but lacked the ability to seek financial protection to protect students and taxpayers from the consequences of sudden closure.
In developing the newest proposed regulations, ED reinstates many of the triggering events, with some modifications, from the 2016 regulations. ED also proposes to reclassify some discretionary triggers as mandatory, and also proposes several new triggers. Mandatory triggers would now include:
Institution-level loss of eligibility to participate in another federal educational assistance program, such as veterans education benefits
Instances where ED has adjudicated borrower defense claims in favor of borrowers and is seeking to recoup the cost of the discharges, and the potential liability results in a composite score of less than 1.0
An institution receiving at least half of its Title IV revenue from failing gainful employment programs
When an institution is required by an oversight entity to submit a teach-out plan
When an institution is cited by a state licensing or authorizing agency for failing to meet state or licensing agency requirements and the agency has issued notice it will withdraw or terminate the institution’s license or authorization (moved from discretionary)
Failure of the 90/10 rule in the most recently completed fiscal year (moved from discretionary)
Cohort default rate of 30% or greater (moved from discretionary)
When an institution declares a state of financial exigency to a federal, state, tribal, or foreign governmental agency or its accrediting agency
When an institution is placed in receivership
Removed from mandatory triggers is the provision from current regulations that two simultaneous and unresolved discretionary triggering events cause those events to automatically become mandatory triggers.
Changes are also proposed to the discretionary triggering events. Discretionary triggering events would now include:
When an institution’s accrediting agency or government authority places the institution on probation or issues a show-cause order (current regulations limit this trigger only to show-cause orders and not probation)
Significant fluctuation in amount of Direct Loan or Pell Grant funds received by the institution that cannot be accounted for by changes in those Title IV, Higher Education Act (HEA) programs
Pending borrower defense claims for which ED has formed a group process and that could be subject to recoupment for some or all of the costs associated with the approved group claim
When an institution discontinues academic programs that affect 25% or more of enrolled students
When an institutions closes more than 50% of its locations or closes locations that enroll more than 25% of its students
High annual drop-out rates
When an institution is cited by a state licensing or authorizing agency for failing to meet state requirements
When an institution has one or more programs that has lost eligibility to participate in another federal educational assistance program due to an administrative action
Additions and changes to mandatory and discretionary triggering events necessitate new reporting by institutions to notify ED when these events take place so the department can take appropriate action. Reporting time frames vary by the triggering event, but are mostly 10 days after the event, as is the case in current regulations.
The proposal is open for public comment until June 20, 2023. If ED publishes a final rule by Nov. 1, 2023, the rule would become effective July 1, 2024. Read Today’s News for more coverage of the remaining issues for which proposed regulations were released in this package.
Publication Date: 5/24/2023