March 14, 2023

U.S. Department of Education Announces Personal Liability Requirements for Postsecondary Institutions Participating in Title IV Programs

On March 1, 2023, the U.S. Department of Education (ED) published Electronic Announcement GENERAL-23-11 (EA) notifying institutions that participate in the Title IV federal student aid programs (Title IV) that it is establishing certain personal liability requirements for individuals who exercise “substantial control” over an institution. The EA clarifies ED’s procedures and considerations when determining when, or whether, to require such persons to co-sign the institution’s Title IV Program Participation Agreement (PPA) in their individual capacity, thus assuming personal liability for Title IV program losses the federal government would otherwise incur if the institution is unable to appropriately resolve such liabilities.

This new guidance meaningfully broadens ED’s position on PPA signatories of nearly one year ago, when ED published Electronic Announcement GENERAL-22-16, which expanded PPA signature requirements to include entities exercising substantial control over private non-profit and for-profit institutions participating in the Title IV programs, but stopped short of imposing any additional personal signatory or liability requirements. (While these actions reflect a significant expansion of PPA co-signature requirements, we note that personal liability is not entirely new to the Title IV regulatory regime, as longstanding regulations provide that individuals who exercise substantial control over a participating institution are potentially liable to ED for fines in connection with the improper retention of Title IV program funds under the “return to Title IV” rules. See 34 CFR 668.93(d)(1).)

Below is a detailed summary of the EA, as well as the key provisions and relevant contextual considerations affecting participating institutions and any individuals exercising substantial control over such institutions.

Individuals Who Exercise Substantial Control

Under the pertinent provisions of the Higher Education Act of 1965, as amended, ED may determine that an individual exercises substantial control over an institution that participates in the Title IV programs if any of the following is true:

  • The individual controls a substantial ownership interest (as “ownership” is defined in statute and regulations) in the institution, whether direct or indirect;
  • The individual, either separately or together with others, “represents, under a voting trust, power of attorney, proxy, or similar agreement, one or more persons who have, individually or in combination with the other persons represented or the individual representing them, a substantial ownership interest in the institution;” or
  • The individual serves on the board of directors, as chief executive officer, or as another executive officer either of the institution or of an entity which itself holds a substantial ownership interest in the participating institution.

Statutory Prerequisites for ED to Impose the Personal Liability Requirement

Although the EA describes ED as having “wide discretion to require the assumption of personal liability by an individual who exercises substantial control over a participating institution,” it also notes certain statutory limitations on its authority to impose a personal liability requirement. Specifically, the HEA provides that ED “shall not impose” such a requirement on such an individual if the following four conditions are true for the pertinent institution, namely:

  • Within the last five years, the institution has not been subject to a limitation, suspension, or termination action by ED or by a guaranty agency;
  • Within the two most recent Title IV audits of the institution, no audit finding has resulted in a required repayment to ED that exceeds 5% of the institution’s Title IV funds for any year;
  • For the preceding five years, the institution has met ED’s financial responsibility requirements under 34 CFR Subpart L; and
  • For the preceding five years, the institution has not been cited for failure to timely submit its required Title IV audits.

As a result, it appears that ED may not require an assumption of personal liability where an institution satisfies all four of the above statutory criteria. However, the reference to ED’s financial responsibility requirements is general in nature and is not limited only to the composite score requirements of 34 CFR 668.172. It therefore is unclear whether an institution’s failure to meet any of the other provisions of 34 CFR Subpart L, including various general standards and “financial responsibility triggers,” refund reserve standards (including timely returns of Title IV funds for students that withdraw) or the “past performance” standards, would overcome the above statutory limitations and permit ED to require assumption of personal liability.

ED’s Determination to Require an Assumption of Personal Liability

In cases where ED asserts the statutory prerequisites to exist, the EA states that ED will further consider “on a case-by-case, individualized basis,” whether to require individuals with substantial control to assume personal responsibility for the participating institution’s Title IV losses. ED states that “anticipates it is most likely to request signatures from individuals at institutions or groups of affiliated institutions that pose the largest financial risk to the United States — for example, those institutions that annually receive tens or even hundreds of millions of dollars of Title IV funds or institutions with serious and significant sets of concerns related to their compliance with federal financial aid rules.” It does not rule out, however, requiring personal assumption of liability in any other circumstances.

Among the factors which ED states it will consider when making such a determination are the following, several of which are broadly stated and thus raise additional questions as to their future application in practice:

  • Whether the institution — by itself, or together with other institutions under common ownership or control — receives a “significant amount” of Title IV funds;
  • Whether ED has approved a “significant number” of BDR claims or false certification claims for that institution, or for another institution over which a given individual also exercises (or previously exercised) substantial control;
  • Whether the institution or individual “has a record of” legal actions involving Title IV funds or “claims of dishonesty, fraud, misrepresentation, consumer harm, or financial malfeasance,” whether criminal, civil, or disciplinary, and whether filed with or by ED or other state or federal enforcement agencies, including those resulting in a settlement;
  • Whether there is a history of noncompliance with HEA requirements by the institution or individual;
  • Whether the institution has “substantial problems” with financial responsibility, as reflected by multiple financial responsibility composite scores under 1.0, or by a “going concern” disclosure by the institution’s auditor;
  • Whether a proprietary institution has failed to meet legal requirements of the 90/10 revenue rule for such institutions;
  • Whether the institution’s Title IV funding “has substantially increased or decreased recently,” whether considered as a standalone institution or in connection with commonly owned or controlled institutions;
  • Whether the institution has high withdrawal rates or low retention rates;
  • Whether the individual in question receives executive compensation, or is subject to a bonus structure, that could change the institution’s financial health;
  • Whether ED has identified significant administrative capability findings at the institution;
  • Whether ED has identified the institution as having “systemic or significant audit or program review findings,” or the institution has unpaid fines or liabilities from such findings;
  • Whether state agencies or accreditors have recently taken action against the institution (including but not limited to show cause or suspension actions), or such agencies have taken actions against another institution relating to the “involvement” of the individual in question; or
  • Any other factors specific to the institution or the individual that are relevant for ED to determine whether an individual assuming personal liability is necessary to protect the financial interest of the United States.”

The EA states that ED will not necessarily nor automatically impose a personal financial liability requirement in every case where both (a) the institution does not meet the conditions for statutory bar on such personal liability, and (b) at least one of the above evaluative factors is also met. The EA goes on to state, however, that if any statutory barriers are not present, and “the institution and individual collectively meet several of the evaluation factors,” then “there is a greater likelihood” that ED will require an individual with substantial control over the institution to assume personal liability. for the institution’s administration of Title IV funds.

As previously indicated, where a personal assumption of liability is required, ED will likely effectuate the requirement by mandating the pertinent individual co-sign the institution’s PPA, and as a condition of the institution’s initial or continuing participation in the Title IV programs. If the personal liability requirement is imposed upon multiple individuals, each individual’s signature will be a mandatory condition of the institution’s initial or ongoing Title IV participation.

Alternatives to Individual PPA Signatories

Finally, the EA notes that in instances where ED determines that an individual with substantial control must co-sign the institution’s PPA, it may instead accept “other financial protections” from the individual. The specific nature of such “other financial protections” is not specified, and ED states that it will make such determinations on a “case-by-case basis.”

Please do not hesitate to contact John Przypyszny, Jonathan Tarnow, Cindy Irani or Sarah Pheasant if you have any questions regarding either of the matters discussed above, or other education regulatory matters.

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