Industry Insights

New Financial Accountability Rules for Private Institutions

December 2016
Author:  Jackson Magdy

Jackson Magdy

Senior Associate II

Audit

Not-for-Profit & Government

200 E. Main Street, Suite 700
Fort Wayne, IN 46802-1900

Fort Wayne
260.460.4000

On November 1, the U.S. Department of Education (ED) issued final rules on borrower defense regulations. These rulings were issued in response to a number of for-profit institutions going through a closing or teach-out process and the associated borrower defense claims. The regulations also included new institutional accountability and financial responsibility standards that will create “triggering events” for private colleges and universities. Public institutions backed by their states are assumed to be financially responsible and won’t be affected.

Under the new regulations, the ED implemented a number of “trigger” conditions that would require institutions to notify the ED and force a recalculation of the institution’s most recent composite score. The ED would perform this recalculation using actual or potential losses associated with the triggering event. In addition to increased ED oversight, institutions can be subject to provisional certification and will be required to provide a letter of credit or other financial protection if the recalculated score drops to zone or failing levels. The ED categorized triggering events into two classes:  automatic and discretionary.

Automatic Triggers

There are four common automatic triggers that would force a recalculation of the most recent composite score and require notifying the ED. They are:

  1. Borrower defense and debt-related lawsuits
  2. Other litigation—required to pay a debt or incur any liability arising from a final judgment
  3. Submitting a teach-out plan that covers the closing of the institution, any of its branches or additional locations, as required by an accrediting agency
  4. Gainful employment programs that are one year from losing eligibility for Title IV aid

Besides the above, any institution with a cohort default rate of 30 percent or higher for the most recent two years is deemed unable to meet the financial responsibility standards. If an institution can demonstrate to the ED that the above automatic triggering event will not financially affect it (except for the cohort default rate trigger), the education secretary—at his or her discretion—can waive the recalculation requirement of your composite score.

Discretionary Triggers

The new regulations include a number of discretionary triggers. As the name implies, these triggers are discretionary and may cause a recalculation of the composite score and notification to the ED. They are:

  1. Significant fluctuation of federal direct loan or Pell Grant award amounts between years
  2. Institution is cited for failing to meet state or agency requirements
  3. Failure of a financial stress test administered by the secretary
  4. High annual dropout rates
  5. Changes in accreditation status
    • Issued a show-cause order
    • Placed on probation
  6. Violating a loan agreement’s terms
  7. Pending claims for borrower relief discharge or the expectation of significant claims-related borrower relief discharge

The new regulations take effect July 1, 2017. View a copy of the final rules here.

Contact your BKD higher education specialist if you have any questions.

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