U.S. Department of Education Cautions Colleges and Universities on Program Arrangements

To increase enrollments and lower operating costs, many colleges and universities oftentimes partner with outside companies to provide portions of their academic programs online or on-campus. Serious legal risks may arise when those outside companies are not eligible to participate in federal student aid programs under Title IV of the Higher Education Act. Federal law permits such arrangements, but subject to strict conditions. The U.S. Department of Education (Department) has recently released new guidance interpreting those restrictions and highlighting enforcement priorities. Colleges and universities and their counsel should carefully review all contracts with outside firms providing educational programming to ensure regulatory compliance and reduce legal risks.

The Dear Colleague Letter and New Guidance

The Department's new guidance was issued as a Dear Colleague letter (Gen-22-07) on June 16, 2022. The Department identifies two categories of written arrangements that are not compliant with Title IV: 1) where eligible institutions assert incorrectly that an academic program is offered by the eligible institution rather than the ineligible entity, and 2) where eligible institutions partners with an ineligible entity to provide Title IV funds for "gap year" experiences. The Department also addresses accreditation requirements for arrangements involving distance education, disclosure requirements for written arrangements and the penalties for noncompliance.

Noncompliant Arrangements for Academic Programs

Colleges and universities cannot permit federal student aid to pay for academic programs provided by Title IV-ineligible companies. The default rule is that ineligible entities cannot provide more than 25 percent of the eligible institution's academic program. That bar is raised to 50 percent if the ineligible entity and eligible institution are not subject to the same ownership or controlled by the same individual, partnership or corporation, and the eligible institution's accrediting agency approves the arrangement. See 34 CFR § 688.5.

Trouble can arise in determining fairly which institution is "providing" what percentage of the program. The Department highlights the following examples of noncompliance:

• Fraudulent Misrepresentation. The eligible institution intentionally misrepresents an ineligible entity's involvement so that federal funds can be used to pay for an otherwise ineligible program.
• Instructor Compensation. Eligible entities cannot designate one of their own faculty as an "employee of record" when the instruction is actually provided by an employee of the ineligible entity. If the ineligible entity is compensating the instructor, directly or indirectly, then the hours associated with the course must be attributed to the ineligible entity.
• Curriculum. The eligible institution must maintain control over the curriculum. Consequently, the eligible institution cannot purchase curricular materials from an ineligible entity under an agreement never to modify those materials.
• Institution of Record. An eligible institution cannot designate itself as an "institution of record" where an ineligible entity is providing the program instruction.

To prevent such mistakes, colleges and universities should carefully follow the Department's detailed instructions on how to properly calculate the percentage of an academic program provided by the ineligible entity, including the allocation of all clock or credit hours. The eligible institution must maintain control of the program, the instruction, any assessments and the design of the curriculum. See 34 C.F.R. § 668.5(g). 

Noncompliant Arrangements for "Gap Years"

The Department distinguishes between study abroad programs that are credited parts of an enrolled student's credentialing program provided by an eligible institution and "gap year" experiences that do not require enrollment in an eligible institution or that do not provide credits toward a recognized credential. The former is eligible for Title IV funding; the latter is not.

For Title IV fund to be properly applied, colleges and universities must determine that a gap year involves a "regular student" in an eligible "educational program." A "regular student" is a "person who is enrolled or accepted for enrollment for the purpose of obtaining a degree, certificate, or other recognized educational credential offered by that institution." An eligible "educational program" is one provided by an eligible institution. See 34 C.F.R. § 600.2. 

Disclosure Obligations

Title IV requires participating colleges and universities to disclose in their program descriptions certain information about written arrangements with other eligible institution or ineligible institutions. The required disclosures include:

• the name and location of the other institutions
• the portion of the program the other institutions provide
• the method of delivery, and
• estimated additional costs that students may incur

34 C.F.R. § 668.43(a)(12).

Penalties for Noncompliance

If the Department discovers that a program offered through a written agreement with an ineligible entity has surpassed the applicable 25 percent or 50 percent limits proscribed in Title IV, the Department can deem the program is ineligible for Title IV funds and assess liability for all funds improperly disbursed for that program.

If the Department determines that an eligible institution misrepresented the portion of a program offered by an ineligible entity, the Department can initiate an action to impose fines or terminate the institution's Title IV participation.

In light of this new guidance, and to minimize legal risks of noncompliance with Title IV, colleges and universities are well advised to review with counsel their written agreements with outside firms that are providing any part of the educational programming. For additional information or assistance reviewing written agreements, contact the authors or another member of Holland & Knight's Education Team.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.