On March 23, 2022, the U.S. Department of Education (ED) announced its intention to hold corporate owners, investors and controlling parties of private institutions of higher education directly liable for the school’s conduct.
This announcement means the ED may take direct administrative action against the school’s corporate owners for the school’s liabilities, and other third parties may sue the corporate owners under various laws such as the federal False Claims Act, unfair and deceptive acts and practices statutes, or other consumer protection laws. Although the ED’s new policy applies to all private, postsecondary institutions, the policy targets proprietary colleges and universities, which typically are owned or controlled by publicly traded corporations or private equity firms.
To receive federal financial student aid under Title IV of the Higher Education of 1965, as amended, a participating school must enter into the ED’s program participation agreement, or PPA. (See 34 C.F.R. § 668.14.) A PPA outlines the terms by which the school must abide or risk termination of funding from the ED.
As acknowledged in the guidance, the ED has required that a PPA need only be signed by an authorized representative of the school itself. With the new policy, however, the ED could require a signature from any entity that has “or could have a direct or indirect effect on the institution’s administrative capability or financial responsibility.” The ED already has been selectively requiring corporate owners of certain proprietary colleges and universities to endorse an appendix to a PPA, including a provisional program participation agreement (PPPA) or temporary provisional program participation agreement (TPPPA). The appendix states that the corporate owners agree to be held jointly and severally liable for the conduct of schools they own or control.
The ED for the first time announced that it will use a rebuttable presumption to assume that entities have a direct or indirect effect on a school if they:
- 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 (directly or indirectly) substantial control over the institution, (“Substantial control is generally presumed to be any direct or indirect equity, membership, or voting interest of 50 percent or more in the institution, including in combination with other interest holders, whether by affiliation, contract, proxy, or other arrangement.”); or
- provide the audited financial statements or other financial submissions on behalf of the institution.
If the ED requires an entity to sign a PPA, that entity’s signature will be a necessary condition of the ED’s approval or continuance of the institution’s participation in Title IV programs. To that end, the ED essentially creates a second rebuttable presumption that an entity will be required to sign a PPA in the following situations:
- 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 ED;
- if the institution is on HCM2;
- if the institution goes through a change of ownership;
- if the ED 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 ED 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.
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