On March 23, 2022, the U.S. Department of Education (“Department”) announced a significant new policy that, in some cases, will require owners, investors, and controlling parties of private colleges and universities to guarantee the regulatory liabilities of the school. This policy extends to all private institutions, including both proprietary and non-profit institutions of higher education, and will be of significant concern for any entity that presently owns or controls a private, postsecondary institution. Organizations contemplating an investment or acquisition in private higher education also will want to consider this development carefully.
The New Policy
As REGucation readers may be aware, institutions are required to enter into a written Program Participation Agreement (“PPA”) with the Secretary of Education that sets forth the terms and conditions for participation in the federal financial aid (“Title IV”) programs. The Department may terminate an institution’s Title IV eligibility if the institution is not performing its specified obligations.
Historically, the PPA has been signed by an authorized representative of the institution. Under the new policy, corporations or other legal entities that “have or could have a direct or indirect effect on the institution’s administrative capability or financial responsibility” may also be required to sign the PPA. There is a rebuttable presumption that the following entities would qualify as having a direct or indirect effect on an institution:
- Are the sole member of, or hold a 100 percent direct or indirect equity or voting interest in the institution;
- Hold less than a 100 percent interest but otherwise exercise (either directly or indirectly) substantial control over the institution; or
- Provide the audited financial statements or other financial submissions on behalf of the institution.
In addition to impacting owners and investors of proprietary institutions, this rebuttable presumption would also appear to capture hospitals, religious denominations, and other organizations that control private, non-profit institutions through direct ownership of the institution’s assets, or sole membership or other governance relationships, or that provide financial statements to the Department in support of the institution.
The Department has indicated that it will require controlling parties to co-sign the PPA in the following circumstances, among others:
- If the institution has had a financial responsibility composite score below 1.5 since its last certification (initial or recertification);
- If the institution is on provisional certification status by the Department;
- If the institution goes through a change of ownership;
- If the institution is on HCM2;
- If the Department has approved a significant number of borrower defense or false certification claims for the institution, or if there are a substantial number of these types of claims under review that, if approved, would result in the potential for significant liability;
- If the Department has recently identified systemic or significant audit or program review findings, or has unpaid liabilities resulting from an audit or program review; or
- If the institution or any of its principals or interest holders has consented to or has a judgment of fraud or misrepresentation entered against it by a federal or state court, foreign tribunal, or arbitration body.
In its announcement, the Department specifically states that by co-signing the PPA, such “entities (but not the individuals who sign as authorized representatives of the entities) agree to assume liability for financial losses to the federal government related to the institution’s administration of the Title IV programs.”
The new policy will be implemented for PPAs of private institutions issued on or after March 23, 2022, in the case of changes of ownership, initial certifications, and reinstatements, and on or…