New Financial Responsibility Requirements from U.S. Department of Education

The U.S. Department of Education (Department) has identified college closures and institutional financial instability as creating significant costs for students and taxpayers. From 2013 to 2022, the Department sought more than $1.6 billion in liabilities from institutions participating in federal financial aid programs but collected only $344 million. To address this issue, the Department released new Financial Responsibility regulations that authorize it to impose safeguards, such as a letter of credit, when an institution of higher education self-discloses specified financial warning signs or "triggering events." The Biden-Harris Administration intends for the regulations to make it easier to assess an institution's financial stability, dissuade risky behavior and ensure taxpayers are better protected from the cost of sudden closures. The regulations take effect on July 1, 2024. View a Department press release and fact sheet detailing the regulations.

Triggering Events

The Department will determine whether to intervene and require additional financial protections on a case-by-case basis. Some triggering events will require Department intervention, and others will be discretionary.

Events mandating intervention include:

• failing the financial responsibility composite score, which might result from excessive debt or other liabilities or risk from a lawsuit by federal or state actors
• failing to satisfy a condition of federal aid participation; this standard could be triggered by high cohort default rates, failing the 90/10 revenue requirement or having a significant portion of aid inputted into failing gainful employment programs. (See Holland & Knight's previous alert, "New Gainful Employment Rules Impact For-Profit and Nonprofit Colleges and Universities," Oct. 17, 2023.)
• improperly manipulating their composite score or otherwise discouraging Department oversight; for example, if an institution makes a contribution that results in a passing score, only to distribute that amount after the fiscal year ends
• entering into debt covenants that could cause adverse conditions if the Department adds limitations to the institution's federal financial aid, or
• declaring federal exigency or entering into a receivership

Discretionary triggers include:

• adverse accreditor actions, including orders to show cause or imposing probationary status
• significant fluctuations in federal student aid volume
• closing programs or locations that enroll a significant number of students
• adverse actions by state and federal agencies

The new law imposes new self-reporting obligations. Each school will have 21 days to report triggering events to the Department. Importantly, in their disclosures, institutions may show how mandatory triggering events have been resolved.

Open Questions

To comply with these new Financial Responsibility regulations, especially the self-reporting obligations, higher education institutions will need to develop and administer strict internal controls and regular review of financial data and trends. To date, the Department has not provided any guidance on what those controls and practices should look like.

On the enforcement end, the Department has not yet explained what form required disclosures should take, what the enforcement mechanisms will look like, what forms of "financial protection" might be imposed beyond letters of credit and what happens when there is a dispute about whether a situation constitutes a triggering event that must be reported.

For more information about compliance with the new Financial Responsibility regulations, please contact the authors or a member of Holland & Knights Education Team.

Also in This Series

• New Administrative Capability Requirements Announced for Colleges and Universities, Nov. 7, 2023
• U.S. Department of Education Issues New Certification Procedures for Federal Financial Aid, Nov. 13, 2023

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.