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Rule2023-22785

Financial Responsibility, Administrative Capability, Certification Procedures, Ability To Benefit (ATB)

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Published

October 31, 2023

Effective

July 1, 2024

Issuing agencies

Education Department

Abstract

The Secretary amends the regulations implementing title IV of the Higher Education Act of 1965, as amended (HEA), related to financial responsibility, administrative capability, certification procedures, and ATB. We amend the financial responsibility regulations to increase the Department of Education's (Department) ability to identify high-risk events at institutions of higher education and require financial protection as needed. We amend and add administrative capability provisions to enhance the capacity for institutions to demonstrate their ability to continue to participate in the financial assistance programs authorized under title IV of the HEA (title IV, HEA programs). Additionally, we amend the certification procedures to create a more rigorous process for certifying institutional eligibility to participate in the title IV, HEA programs. Finally, we amend the ATB regulations related to student eligibility for non-high school graduates.

Full Text

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<title>Federal Register, Volume 88 Issue 209 (Tuesday, October 31, 2023)</title>
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[Federal Register Volume 88, Number 209 (Tuesday, October 31, 2023)]
[Rules and Regulations]
[Pages 74568-74710]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-22785]

[[Page 74567]]

Vol. 88

Tuesday,

No. 209

October 31, 2023

Part II

Department of Education

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34 CFR Part 668

Financial Responsibility, Administrative Capability, Certification
Procedures, Ability To Benefit (ATB); Final Regulations

Federal Register / Vol. 88, No. 209 / Tuesday, October 31, 2023 /
Rules and Regulations

[[Page 74568]]

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DEPARTMENT OF EDUCATION

34 CFR Part 668

[Docket ID ED-2023-OPE-0089]
RIN 1840-AD51, 1840-AD65, 1840-AD67, and 1840-AD80

Financial Responsibility, Administrative Capability,
Certification Procedures, Ability To Benefit (ATB)

AGENCY: Office of Postsecondary Education, Department of Education.

ACTION: Final regulations.

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SUMMARY: The Secretary amends the regulations implementing title IV of
the Higher Education Act of 1965, as amended (HEA), related to
financial responsibility, administrative capability, certification
procedures, and ATB. We amend the financial responsibility regulations
to increase the Department of Education's (Department) ability to
identify high-risk events at institutions of higher education and
require financial protection as needed. We amend and add administrative
capability provisions to enhance the capacity for institutions to
demonstrate their ability to continue to participate in the financial
assistance programs authorized under title IV of the HEA (title IV, HEA
programs). Additionally, we amend the certification procedures to
create a more rigorous process for certifying institutional eligibility
to participate in the title IV, HEA programs. Finally, we amend the ATB
regulations related to student eligibility for non-high school
graduates.

DATES: These regulations are effective July 1, 2024. The incorporation
by reference of certain publications listed in the rule is approved by
the Director of the Federal Register as of July 1, 2024.

FOR FURTHER INFORMATION CONTACT: For financial responsibility: Kevin
Campbell. Telephone: (214) 661-9488. Email: <a href="/cdn-cgi/l/email-protection#307b5546595e1e73515d4052555c5c7055541e575f46">[email&#160;protected]</a>. For
administrative capability: Andrea Drew. Telephone: (202) 987-1309.
Email: <a href="/cdn-cgi/l/email-protection#97d6f9f3e5f2f6b9d3e5f2e0d7f2f3b9f0f8e1">[email&#160;protected]</a>. For certification procedures: Vanessa Gomez.
Telephone: (202) 987-0378. Email: <a href="/cdn-cgi/l/email-protection#4c1a2d22293f3f2d620b232129360c2928622b233a">[email&#160;protected]</a>. For ATB: Aaron
Washington. Telephone: (202) 987-0911. Email: <a href="/cdn-cgi/l/email-protection#edac8c9f8283c3ba8c9e8584838a998283ad8889c38a829b">[email&#160;protected]</a>.
If you are deaf, hard of hearing, or have a speech disability and
wish to access telecommunications relay services, please dial 7-1-1.

SUPPLEMENTARY INFORMATION:

Executive Summary

Incorporation by Reference

In Sec. [thinsp]668.175(d)(2), we reference the following
accounting standard: Accounting Standards Codification (ASC) 850. ASC
850 provides for accounting and reporting issues concerning related
party transactions and relationships. It is already approved for
incorporation by reference in Sec. 668.23.
This standard is available at <a href="http://www.fasb.org">www.fasb.org</a>, registration required.

Purpose of This Regulatory Action

These final regulations address four areas: financial
responsibility, administrative capability, certification procedures,
and ATB. The Institutional and Programmatic Eligibility Committee
(Committee) reached consensus on ATB at its final session on March 18,
2022.
The financial responsibility regulations at Sec. Sec. 668.15
668.23, 668.171, and 668.174 through 668.177 will increase our ability
to identify high-risk events and require the financial protection we
believe is needed to protect students and taxpayers.
We strengthened institutional requirements in the administrative
capability regulations at Sec. 668.16 to improve the administration of
the title IV, HEA programs and address concerning practices that were
previously unregulated.
The certification procedures regulations in Sec. Sec. 668.13,
668.14, and 668.43 will create a more rigorous process for certifying
institutions to participate in the title IV, HEA programs. We expect
these regulations to better protect students and taxpayers through the
Program Participation Agreement (PPA), our written agreement with
institutions.
Finally, we amend the regulations for ATB at Sec. Sec. 668.156 and
668.157 to clarify the requirements for the State process to determine
eligibility for programs serving non-high school graduates and the
documentation requirements for eligible career pathway programs.
Financial Responsibility
The Department amends Sec. Sec. 668.15 and 668.23 and subpart L of
part 668. We are removing all regulations under Sec. 668.15 and
reserving that section. We have revised the financial responsibility
factors applicable to institutional changes in ownership, currently in
Sec. 668.15, and moved them to Sec. 668.176. As a result, all
financial responsibility requirements are located in subpart L.
The Department also amends Sec. 668.23 to update references to the
Office of Management and Budget's (OMB) Circular A-133, Audits of
States, Local Governments, and Non-Profit Organizations. As this
circular is no longer used, we update the reference to 2 CFR part 200,
subpart F. Further, we establish the submission deadline for an
institution to submit its compliance audit and audited financial
statements as the earlier of six months after the last day of the
institution's fiscal year or 30 days after the date of the later
auditor's report. This new submission deadline will not impact
submission deadlines established by the Single Audit Act.
Finally, we amend regulations under subpart L of part 668 to
improve our ability to assess whether institutions are able to meet
their financial obligations. We establish new mandatory and
discretionary triggers that will provide the Department earlier notice
that an institution may not be able to meet its financial
responsibilities. We revise the regulations governing our assessment of
financial responsibility for institutions undergoing a change in
ownership to better align with current Departmental practices and
consolidate all related regulations in Sec. 668.176.
Administrative Capability
The Department amends Sec. 668.16 to improve our ability to
evaluate the capability of institutions to participate in the title IV,
HEA programs. The changes will benefit students by strengthening
financial aid communications to include the institution's cost of
attendance, the source and type of aid offered, whether aid must be
earned or repaid, the net price, and deadlines for accepting,
declining, or adjusting award amounts.
The regulations also state that administrative capability means
that an institution is providing students adequate career services and
clinical or externship opportunities, as applicable. Under the final
regulations, administrative capability also means that an institution
is making timely disbursements of funds to students and that less than
half of an institution's total title IV, HEA revenue in the most recent
award year comes from programs that fail to meet gainful employment
(GE) requirements under the GE program accountability framework. Being
administratively capable also means not: engaging in aggressive
recruitment, making misrepresentations, being subject to negative
action by a State or Federal agency, or losing eligibility to
participate in another Federal educational assistance program due to an
administrative action against the institution.
Additionally, under the final regulations, institutions must
certify

[[Page 74569]]

when they sign the PPA that no principal or affiliate has been
convicted of or committed fraud. Finally, institutions must have
adequate procedures to evaluate the validity of a student's high school
diploma and outline criteria to identify an invalid high school
diploma.
Certification Procedures
The Department amends Sec. Sec. 668.13 and 668.14 so that
certification is not automatically renewed after 12 months without a
decision from the Department and adds new events that cause an
institution to become provisionally certified and new requirements for
provisionally certified institutions. We also expand the entities that
must sign a PPA to include higher level owners of institutions.
Institutions must also certify that they meet additional requirements
when signing the PPA, as applicable. For example, institutions must
certify that their gainful employment programs are not longer than 100
percent of the length required for licensure in a recognized occupation
in either the State where the institution is located or another State
if the institution establishes that certain criteria apply.
Institutions must also certify that, in each State where they are
located or where they enroll students through distance education, they
meet applicable programmatic accreditation and licensure requirements
and comply with all State laws related to closure. We also amend Sec.
668.43 to clarify how provisions in the certification procedures
section interact with existing institutional disclosure requirements
related to informing students about the States in which a given program
meets the educational requirements for licensure or certification.
In addition, institutions must certify that they will not withhold
transcripts or take other negative actions against a student due to an
error on the school's part, and that upon a student's request, they
will provide an official transcript that includes all the credit or
clock hours for payment periods in which the student received title IV,
HEA funds and for which all institutional charges were paid at the time
the request is made. Institutions must also certify that they will not
maintain policies and procedures that condition institutional aid or
other student benefits in a manner that induces a student to limit the
amount of Federal student loans that the student receives. We also add
conditions for institutions initially certified as a nonprofit or that
seek to become one following a change in ownership. These additional
conditions will help address the consumer protection concerns that have
occurred when some for-profit institutions converted to nonprofit
status for improper benefit.
Ability To Benefit (ATB)
In Sec. Sec. 668.2, 668.32, 668.156, and 668.157, the Department
amends the student eligibility requirements for individuals who do not
have a high school diploma or a recognized equivalent.
Specifically, in these regulations, we (1) codify the definition of
an ``eligible career pathway program,'' which largely mirrors the
statutory definition, (2) make technical updates to the student
eligibility regulations, (3) amend the State ATB process (``State
process'') to allow time for participating institutions to collect
outcomes data while establishing new safeguards, (4) establish
documentation requirements for institutions that want to begin or
maintain eligible career pathway programs for ATB use, and (5)
establish that the Secretary will verify at least one career pathway
program at each postsecondary institution intending to use ATB to
increase regulatory compliance.

Summary of the Major Provisions of This Regulatory Action

The final regulations make the following changes.

Financial Responsibility (Sec. Sec. 668.15, 668.23, 668.171, and
668.174 Through 668.177)

<bullet> Remove and reserve Sec. 668.15 and consolidate all
financial responsibility factors, including those dealing with changes
in ownership, under subpart L of part 668.
<bullet> Amend Sec. 668.23 to require that audit reports are
timely submitted, by the earlier of 30 days after the completion of the
report or six months after the end of the institution's fiscal year.
<bullet> Amend Sec. 668.23 to require that, for any domestic or
foreign institution that is owned directly or indirectly by any foreign
entity holding at least a 50 percent voting or equity interest in the
institution, the institution must provide documentation of the entity's
status under the law of the jurisdiction under which the entity is
organized.
<bullet> Amend Sec. 668.171, which requires institutions to
demonstrate that they are able to meet their financial obligations, by
adding events that constitute a failure to do so, including failure to
make debt payments for more than 90 days, failure to make payroll
obligations, or borrowing from employee retirement plans without
authorization.
<bullet> Amend in Sec. 668.171 the set of conditions that require
an institution to post financial protection if certain events occur.
These mandatory triggers are certain external events, financial
circumstances that may not be reflected in the institution's regular
financial statements, and financial circumstances that are not yet
reflected in the institution's composite score.
<bullet> Amend in Sec. 668.171 the set of conditions that may, at
the discretion of the Department, require an institution to post
financial protection. These discretionary triggers are external events
or financial circumstances that may not appear in the institution's
regular financial statements and are not yet reflected in the
institution's calculated composite score.
<bullet> In Sec. 668.174, clarify the language related to
compliance audit or program review findings that lead to a liability of
at least 5 percent of title IV, HEA volume at the institution, to more
clearly state that the relevant reports are those issued in the two
most recent years, rather than reviews conducted in the two most recent
years.
<bullet> Add a new Sec. 668.176 to consolidate the financial
responsibility requirements for institutions undergoing a change in
ownership in subpart L of part 668.
<bullet> Redesignate the existing Sec. 668.176, establishing
severability, as Sec. 668.177.

Administrative Capability (Sec. 668.16)

<bullet> Amend Sec. 668.16(h) to require institutions to provide
adequate financial aid counseling to enrolled students that includes
more information about the cost of attendance, sources and amounts of
each type of aid separated by the type of aid, the net price, and
instructions and applicable deadlines for accepting, declining, or
adjusting award amounts.
<bullet> Amend Sec. 668.16(k) to require that an institution not
have any principal or affiliate that has been subject to specified
negative actions, including being convicted of or pleading nolo
contendere or guilty to a crime involving governmental funds.
<bullet> Add Sec. 668.16(n) to require that an institution has not
been subject to a significant negative action by a State or Federal
agency, a court, or an accrediting agency and has not lost eligibility
to participate in another Federal educational assistance program due to
an administrative action against the institution.
<bullet> Amend Sec. 668.16(p) to strengthen the requirement that
institutions must

[[Page 74570]]

develop and follow adequate procedures to evaluate the validity of a
student's high school diploma.
<bullet> Add Sec. 668.16(q) to require that institutions provide
adequate career services to eligible students who receive title IV, HEA
program assistance.
<bullet> Add Sec. 668.16(r) to require institutions to provide
students with geographically accessible clinical or externship
opportunities related to and required for completion of the credential
or licensure in a recognized occupation, within 45 days of the
completion of other required coursework.
<bullet> Add Sec. 668.16(s) to require institutions to disburse
funds to students in a timely manner consistent with the students'
needs.
<bullet> Add Sec. 668.16(t) to require that, for institutions that
offer GE programs, less than half of their total title IV, HEA revenue
comes from programs that are ``failing'' under subpart S.
<bullet> Add Sec. 668.16(u) to require that an institution does
not engage in misrepresentations or aggressive recruitment.

Certification Procedures (Sec. Sec. 668.13, 668.14, and 668.43)

<bullet> Amend Sec. 668.13(b)(3) to eliminate the requirement that
the Department approve participation for an institution if the
Department has not acted on a certification application within 12
months.
<bullet> Amend Sec. 668.13(c)(1) to include additional events that
lead to provisional certification.
<bullet> Amend Sec. 668.13(c)(2) to require provisionally
certified schools that have major consumer protection issues to
recertify after three years.
<bullet> Add Sec. 668.13(e) to establish supplementary performance
measures the Secretary may consider in determining whether to certify
or condition the participation of the institution.
<bullet> Amend Sec. 668.14 to establish, in new paragraph (a)(3),
the requirement for an authorized representative of any entity with
direct or indirect ownership of a private institution to sign a PPA.
<bullet> Amend Sec. 668.14(b)(17) to include all Federal agencies
and State attorneys general on the list of entities that have the
authority to share with each other and the Department any information
pertaining to an institution's eligibility for or participation in the
title IV, HEA programs or any information on fraud, abuse, or other
violations of law.
<bullet> Amend Sec. 668.14(b)(26)(ii) to limit the number of hours
in a GE program to the greater of the required minimum number of clock
hours, credit hours, or the equivalent required for training in the
recognized occupation for which the program prepares the student, as
established by the State in which the institution is located, or the
required minimum number of hours required for training in another
State, if the institution provides documentation of that State meeting
one of three qualifying requirements to use a State in which the
institution is not located that is substantiated by the certified
public accountant who prepares the institution's compliance audit
report as required under Sec. [thinsp]668.23. This provision does not
apply to fully online programs or where the State entry level
requirements include the completion of an associate or higher-level
degree.
<bullet> Add Sec. 668.14(b)(32)(i) and (ii) to require all
programs that prepare students for occupations requiring programmatic
accreditation or State licensure to meet those requirements.
<bullet> Add Sec. 668.14(b)(32)(iii) to require all programs to
comply with all State laws related to closure of postsecondary
institutions, including record retention, teach-out plans or
agreements, and tuition recovery funds or surety bonds.
<bullet> Add Sec. 668.14(b)(33) to provide that an institution may
not withhold official transcripts or take any other negative action
against a student related to a balance owed by the student that
resulted from an error in the institution's administration of the title
IV, HEA programs, or any fraud or misconduct by the institution or its
personnel.
<bullet> Add Sec. 668.14(b)(34) to require an institution to
provide an official transcript that includes all the credit or clock
hours for payment periods in which a student received title IV, HEA
funds and for which all institutional charges were paid at the time the
request is made.
<bullet> Add Sec. 668.14(b)(35) to prohibit institutions from
maintaining policies and procedures to encourage, or that condition
institutional aid or other student benefits in a manner that induces, a
student to limit the amount of Federal student aid, including Federal
loan funds, that the student receives, except that the institution may
provide a scholarship on the condition that a student forego borrowing
if the amount of the scholarship provided is equal to or greater than
the amount of Federal loan funds that the student agrees not to borrow.
<bullet> Amend Sec. 668.14 to establish, in new paragraph (e), a
non-exhaustive list of conditions that the Secretary may apply to
provisionally certified institutions.
<bullet> Amend Sec. 668.14 to establish, in new paragraph (f),
conditions that may apply to institutions seeking to convert from a
for-profit institution to a nonprofit institution following a change in
ownership.
<bullet> Amend Sec. 668.14 to establish, in new paragraph (g),
conditions that apply to any nonprofit institution or other institution
seeking to convert to a nonprofit institution.
<bullet> Amend Sec. 668.43(a)(5) to require all programs that
prepare students for occupations requiring State licensure or
certification to list all the States where the institution has
determined, including as part of the institution's obligation under
Sec. 668.14(b)(32), that the program does and does not meet such
requirements.

Ability-To-Benefit (Sec. Sec. 668.2, 668.32, 668.156, and 668.157)

<bullet> Amend Sec. 668.2 to codify the definition of ``eligible
career pathway program.''
<bullet> Amend Sec. 668.32 to differentiate between the title IV,
HEA aid eligibility of non-high school graduates who enrolled in an
eligible program prior to July 1, 2012, and those who enrolled after
July 1, 2012.
<bullet> Amend Sec. 668.156 to separate the State process into an
initial two-year period and a subsequent period for which the State may
be approved for up to five years.
<bullet> Amend Sec. 668.156 to require, with respect to the State
process, that: (1) The application contain a certification that each
eligible career pathway program intended for use through the State
process meets the definition of an ``eligible career pathway program.''
(2) The application describes the criteria used to determine student
eligibility for participation in the State process. (3) The withdrawal
rate for a postsecondary institution listed for the first time on a
State's application does not exceed 33 percent. (4) Upon initial
application the State will enroll no more than the greater of 25
students or one percent of enrollment of each participating
institution.
<bullet> Amend Sec. 668.156 to remove the support services
requirements from the State process, including orientation, assessment
of a student's existing capabilities, tutoring, assistance in
developing educational goals, counseling, and follow up by teachers and
counselors, which duplicate the requirements in the definition of
``eligible career pathway program.''
<bullet> Amend the monitoring requirement in Sec. 668.156 to
provide a participating institution that has failed to achieve the 85
percent success rate up to three years to achieve compliance.

[[Page 74571]]

<bullet> Amend Sec. 668.156 to require that the State prohibit an
institution from participating in the State process for at least five
years if the State terminates its participation.
<bullet> Amend Sec. 668.156 to: clarify that the State is not
subject to the success rate requirement at the time of the initial
application but is subject to the requirement for the subsequent
period; reduce the required success rate from 95 percent to 85 percent;
require the success rate to be calculated for each participating
institution; and amend the comparison groups to include the concept of
``eligible career pathway programs.''
<bullet> Amend Sec. 668.156 to require that States report
information on race, gender, age, economic circumstances, education
attainment, and such other information that the Secretary specifies in
a notice published in the Federal Register.
<bullet> Amend Sec. 668.156, with respect to the Secretary's
ability to revise or terminate a State's participation in the State
process, by providing that the Secretary may (1) approve a State
process once for a two-year period if the State is not in compliance
with the regulations, and (2) lower the success rate to 75 percent if
50 percent of the participating institutions across the State do not
meet the 85 percent success rate.
<bullet> Add a new Sec. 668.157 to clarify the documentation
requirements for eligible career pathway programs.

Costs and Benefits

As further detailed in the Regulatory Impact Analysis (RIA), this
final rule provides significant benefits for the Department and
students and some lesser benefits for institutions of higher education.
It will create costs for institutions and some smaller costs for the
Department and students.
Benefits for the Department include significantly stronger
oversight tools that could help reduce the costs of discharges
associated with closed schools or borrower defense to repayment. The
Department will also benefit from funding fewer postsecondary credits
that cannot be applied toward students' educational goals.
Benefits for students include: a greater likelihood that
institutions will act more responsibly and not close or will conduct
orderly closures when they occur; improved access to transcripts;
greater assurances that their programs will prepare them for licensure
or certification; and better information about their financial aid
packages.
Benefits for institutions include a more even playing field for
institutions that do not engage in risky behavior, which may assist
with student recruitment.
Institutions will largely bear the costs of these regulations. The
most significant cost will be to provide additional financial
protection, especially if the Department collects on that protection.
Institutions not currently in compliance with these rules will also
have costs to come into compliance. This could include verifying that
their online programs meet educational requirements for State licensure
or certification, financial aid communications are clear, and they
offer sufficient career services.
The Department will also have increased oversight costs. There may
also be a decrease in transfers between the Federal Government and
students because their prospective career pathway program may have lost
or been denied title IV, HEA program eligibility based on the new
documentation standards.
Public comments: On May 19, 2023, the Secretary published a notice
of proposed rulemaking (NPRM) for these regulations in the Federal
Register.\1\ These final regulations contain changes from the NPRM,
which we explain in the Analysis of Comments and Changes section of
this document. The NPRM included proposed regulations on five topics:
financial value transparency and gainful employment (GE), financial
responsibility, administrative capability, certification procedures,
and ATB. The Department has already published a final rule for
financial value transparency and GE. This final rule contains the
remaining four topics.
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\1\ 88 FR 32300.
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In response to our invitation in the NPRM, 7,583 parties submitted
comments. We discuss substantive issues under the sections of the
proposed regulations to which they pertain. Generally, we do not
address technical or other minor changes (such as renumbering
paragraphs or correcting typographical errors) or recommendations that
are out of the scope of this regulatory action or that would require
statutory changes. We also do not address comments related to GE and
financial value transparency (Sec. Sec. 600.10, 600.21, 668.43, and
668.98 and subparts Q and S of part 668), which were included in the
NPRM but are not included in this final rule. Comments and responses
related to those topics are in the final rule published in the Federal
Register on October 10, 2023 (88 FR 70004).

Analysis of Public Comment and Changes

Analysis of the comments and of any changes in the regulations
since publication of the NPRM follows.
Public Comment Period
Comments: Several commenters asked the Department to extend the
public comment period and argued that 30 days was insufficient time to
properly analyze the NPRM. Commenters asked for between 15 and 60
additional days, for a total comment period between 45 and 90 days.
These commenters pointed out that the length of the proposed rule
required more time to review it if they were to provide an informed
comment. The commenters also observed that Executive Orders 12866 and
13563 cite 60 days as the recommended length for public comment.
Discussion: The Department believes the public comment period was
sufficient for commenters to review and provide meaningful feedback on
the NPRM. In response to the NPRM we received comments from more than
7,500 individuals and entities, including many detailed and lengthy
comments. Those comments have helped the Department identify many areas
for improvements and clarification that result in an improved final
rule.
Moreover, the negotiated rulemaking process provided significantly
more opportunity for public engagement and feedback than notice-and-
comment rulemaking without multiple negotiation sessions. The
Department began the rulemaking process by inviting public input
through a series of public hearings in June 2021. We received more than
5,300 public comments as part of the public hearing process. After the
hearings, the Department sought non-Federal negotiators for the
negotiated rulemaking committee who represented constituencies that
would be affected by our rules. As part of these non-Federal
negotiators' work on the rulemaking committee, the Department asked
that they reach out to the broader constituencies for feedback during
the negotiation process. During each of the three negotiated rulemaking
sessions, we provided opportunities for the public to comment,
including after seeing draft regulatory text, which was available prior
to the second and third sessions. The Department and the non-Federal
negotiators considered those comments to inform further discussion at
the negotiating sessions, and we used the information to create our
proposed rule. Additionally, the proposed regulations for ATB were the
regulations

[[Page 74572]]

agreed to by consensus on March 18, 2022, providing the public with
additional time to review the Department's proposed regulations. The
Executive orders recommend an appropriate time for public comment, but
they do not require more than 30 days, nor do they consider the
Department's process for regulating under the HEA.
Changes: None.
General Opposition
Comments: Some commenters said we should withdraw the entire NPRM.
Discussion: We disagree with the commenters. As we discuss in
further detail in the sections related to the specific provisions, we
believe these regulations are important for many reasons, including to
protect students and taxpayers from institutions at risk of closure and
other instances where there are financial risks to students and
taxpayers.
Comments: A few commenters expressed concern that the proposed
rules would create additional delays in Federal Student Aid's program
review and institutional eligibility actions. They noted that the
proposed rules added additional duties and review for the Department's
School Eligibility and Oversight Service Group within Federal Student
Aid (FSA), but there is not a prospect for additional funding necessary
to expand the team and streamline the operations of the review process
to offset the additional labor.
Discussion: We appreciate the commenters' concern. However, the
Department believes that the changes in these final regulations are
critical to ensure that the Department can act as a proper steward of
Federal funds. Budgetary resources for the Department are a function of
the annual appropriations process. The Department makes requests for
additional resources through the normal budget process and has
accounted for these changes in its most recent requests.
Changes: None.
Comments: Some commenters worried that the cost of the regulations
would result in a need for additional staffing and resources for
schools which would mean an increase in the cost of the degree for
students.
Discussion: The regulatory impact analysis (RIA) of this final rule
discusses the costs and benefits of these changes. The Department feels
that any additional costs to institutions are justified by the
benefits, particularly for increased protection of taxpayer funds and
reduced number of students exposed to sudden closures or who are
experiencing negative outcomes. The Department also provides estimates
of the additional paperwork costs from some provisions of these rules
in the RIA.
Changes: None.
General Support
Comments: A few commenters pointed out that the proposed rules will
strengthen our higher education system. They said these rules will also
safeguard taxpayer money that goes into the title IV, HEA programs by
ensuring those Federal dollars only go to schools that demonstrate
positive outcomes for their students.
A few additional commenters applauded the Department for writing an
NPRM that will significantly improve the outcomes for veterans and
military-connected students.
Discussion: We thank the commenters for their support.
Changes: None.
Legal Authority
Comments: Several commenters stated broadly that the NPRM failed to
address the ``major questions doctrine'' and, relatedly, did not
establish clear congressional authority for the proposed rules. Most of
those commenters focused on the GE rules, particularly the GE
accountability framework in subpart S.\2\
---------------------------------------------------------------------------

\2\ The Department addresses comments on the major questions
doctrine related to its proposed GE regulations in a separate GE
final rule published in the Federal Register on October 10, 2023 (88
FR 70004). By this cross-reference, we adopt that discussion here.
---------------------------------------------------------------------------

Discussion: We disagree with the commenters. For these rules,
commenters did not attempt to establish the extraordinary circumstances
under which courts have used the major questions doctrine to raise
doubts about agency statutory authority. Commenters did not, for
example, explain how any one of the regulations constitutes agency
action of such exceptional economic and political significance that the
doctrine should apply. Although these final rules are significant to
implementing the title IV, HEA programs, none of them is a topic of
widespread controversy or transforms the field of higher education. Nor
did commenters show that these rules are beyond the Department's
expertise, or that the relevant statutory provisions are somehow
ancillary to the statutory scheme. The statutory bases for these final
rules are not subtle. As we discuss elsewhere, title IV of the HEA is
quite clear that, to participate in the relevant student aid programs
and among other demands, institutions must complete a certification
process, must meet certain standards of administrative capability, and
must meet certain standards of financial responsibility; the ATB rules
likewise are grounded in the HEA provisions on that subject.\3\
---------------------------------------------------------------------------

\3\ See, e.g., 20 U.S.C. 1091(d); 20 U.S.C 1094; 20 U.S.C.
1099c.
---------------------------------------------------------------------------

Furthermore, the statutes plainly authorize the Secretary to adopt
regulations pertaining to those provisions, and these rules build on
the Department's experience and previous initiatives in these
fields.\4\ Some commenters do disagree with various details in these
rules, and any set of final rules will add something to preexisting
regulations. But the presence of commenter disagreement over new rules
is insufficient to trigger the major questions doctrine.
---------------------------------------------------------------------------

\4\ We address the specific provisions of the rule elsewhere in
this document. To the extent that other commenters suggest that they
may combine all rules in a rulemaking proceeding, or combine rules
of their choosing, and then base a major questions determination on
a holistic evaluation of that package, we disagree. The Department
is unaware of any authority for that position, which would treat the
major questions doctrine regarding statutory authority for a given
agency action in this manner. Among other problems, that position
offers no apparent method for selecting the appropriate bundle of
rules or for analyzing agency statutory authority at an
undifferentiated, wholesale level.
---------------------------------------------------------------------------

Changes: None.
Negotiated Rulemaking
Comments: Several commenters expressed a concern about the lack of
representation from the beauty and wellness industry during the
negotiated rulemaking process which raises doubts about the adequate
consideration of industry-specific interests and concerns. They stated
that the proposed regulations could be potentially debilitating for the
beauty and wellness industry.
Similarly, a few commenters argued that the negotiated rulemaking
committee was not representative of all the stakeholders who would be
impacted by the proposed rule, and it therefore violated both the
Administrative Procedure Act (APA) and the Negotiated Rulemaking Act of
1996. Specifically, several commenters pointed to the fact that there
were no representatives from cosmetology schools or small proprietary
schools.
Discussion: The negotiated rulemaking committee that the Department
convened represented a broad range of constituencies, including
proprietary institutions, which encompasses most cosmetology
institutions. Negotiators were expected to consult with members of
their constituency to represent the views of a range of the
stakeholders they represent. The Department's regulations must

[[Page 74573]]

consider the effects on institutions and recipients of title IV, HEA
aid, as well as other members of the regulatory triad (States and
accreditation agencies) with whom we interact on these issues. We have
no authority to regulate private employers and do not believe that
would have been appropriate to include representation from the beauty
and wellness industry on this negotiated rulemaking committee. In
response to commenters that claimed that the Department violated the
APA and the Negotiated Rulemaking Act of 1996, the Department notes
that the HEA is the applicable law governing our negotiated rulemaking
process. As such, under the HEA we are not required to include
representatives from every conceivable type of trade school.
Changes: None.
Comments: Several commenters stated that the regulation did not
include State authorization experts and argued that the issue of State
authorization was embedded within the Certification Procedures
discussion. They felt that the State authorization reciprocity should
have been discussed as its own section in the negotiated rulemaking
process. Some commenters were concerned about the language that was
used in the NPRM. They urged the Department to delay any regulatory
changes related to State authorization so that revisions could be
addressed in the next round of negotiated rulemaking.
Discussion: The Department disagrees with the commenters. The
provisions in question are not a negotiation around the regulatory
sections that include State authorization or distance education. We did
not regulate the conditions, structure, or other elements of State
reciprocity agreements or the organizations that operate them, nor did
we set requirements that States must follow to oversee institutions
enrolling students in a State where they have no physical presence.
Rather, we addressed two narrow issues related to frequently observed
problems and are requiring institutions to address them.
One issue of concern for the Department is the continued challenge
of sudden closures that leave students without a plan for how to
continue their education. To that end, we are requiring institutions to
certify that they are complying with State laws specific to issues
related to closure: teach-out requirements, record retention policies,
and tuition recovery funds or surety bonds, as applicable. The extent
to which States have these laws, what they require, and to whom they
apply them to is up to the States.
A second area of concern is that students are using Federal money
to pay for credits that they cannot use because the program lacks
necessary State approval for licensure or certification. To that end,
we are requiring that, for each academic program that an institution
offers that is designed to meet educational requirements for a specific
professional license or certification that is required for employment
in an occupation, institutions must provide a list of all States where
it has determined that the program does and does not meet such
requirements.
The Department will consider broader issues related to distance
education and State authorization in future rulemaking efforts, during
which we will consider the need for representation such as what the
commenters requested.
Changes: None.
Comments: Several commenters expressed concern that the negotiated
rulemaking session was conducted remotely, despite a lack of public
health justifications for this style of session.
Discussion: The HEA does not require that negotiated rulemaking
sessions be held in person, and we have received compliments on our use
of technology and the efficiency of the virtual sessions. The sessions
encompassed all necessary components of negotiated rulemaking. We
considered different perspectives and received comparable or more input
than during in-person sessions. The virtual sessions were much more
accessible to people with disabilities and people who could not afford
to or were unable to travel. The virtual sessions have also allowed a
far greater number of members from the public to participate than would
be possible if they had to travel to a physical location. Interested
parties can more easily follow the sessions online as each speaker
occupies their own space on the screen compared to a static image of a
table. We display documents discussed on the screen and make them
available on our website.
Changes: None.
Comments: A few commenters pointed out that the negotiated
rulemaking process did not allow sufficient time for research, impact
analysis, and thoughtful discussion. The commenters stated that one
contributing factor was the NPRM combining negotiations for GE with six
other major topics, which they deemed to be too much.
Discussion: The Department conducted 3 negotiated rulemaking
sessions over a total of 14 days. We believe that was sufficient time
for robust and thoughtful discussion. This was the fourth time we
negotiated the topic of GE and the third for financial responsibility
triggers in the last few years, so two of these issues were already
known to the higher education community.
Changes: None.
Comments: One commenter argued that the NPRM rule should be
rescinded in favor of a more open and transparent rulemaking process
that includes all key stakeholders.
Discussion: The Department feels that the rulemaking process was
quite open and transparent. It involved many key stakeholders and
allowed room for public comment during multiple steps in the process.
Changes: None.
Need for Regulation
Comments: One commenter pointed out that oversight is important to
protect student interests, but it is equally important to strike a
balance with giving autonomy to schools and institutions. They stated
that too much oversight can hurt an institution's ability to respond to
the needs of the labor market.
Discussion: The Department agrees that it is important to strike a
balance between oversight and giving autonomy to schools. However, the
Department feels that this NPRM protects students, which is a
worthwhile component of oversight.
Changes: None.
Impact on Students
Comments: Several commenters stated that they believe this
regulation will impact students at career schools who are likely to be
from underserved communities.
Discussion: The Department believes that the NPRM regulations will
help protect all individuals including students at career colleges.
Most provisions of this final rule do not distinguish between private
for-profit and private nonprofit institutions. Several provisions do
not distinguish between institution types at all.
Changes: None.
Comments: Among the many commenters who suggested the Department
move the discussion of State consumer laws and licensure and
certification requirements to the next round of rulemaking, two of them
suggested a few topics to include in the future rulemaking.
Specifically, these commenters encouraged the Department to include the
issue of professionals obtaining their original license due to severe
shortages of qualified and licensed professionals in service
professions and mobility and regional workforce concerns. These
commenters contended that the next round of rulemaking could include
discussion of

[[Page 74574]]

paths to State licensure that would include licensure compacts, State
license portability, universal licensing, licensure by reciprocity or
endorsement, and specialized or programmatic accreditation and its
impact on meeting State licensure requirements. According to these
commenters, institutions require the flexibility to properly educate
students about these expanding licensure pathways, and regulators
should collaborate with the different licensing boards to learn the
various processes for professions.
Discussion: The Department has already held public hearings on
other topics for negotiated rulemaking, which include distance
education. We can consider these ideas during that regulatory process.
Changes: None.

Financial Responsibility (Sec. Sec. 668.15 and 668.23 and Subpart L
(Sec. Sec. 668.171, 668.174, 668.175, 668.176, and 668.177)) (Section
498(c) of the HEA)

General Support

Comments: Several commenters expressed support for the Department's
proposal to establish more safeguards in the audit submission and
financial responsibility standards. These commenters asserted that the
proposed regulations would provide the necessary accountability in the
system to ensure the Department becomes aware of institutions suffering
from financial situations that may inhibit their ability to maintain
financial stability and to adequately administer the Federal student
aid programs.
One commenter stated that the proposed regulations would strengthen
the Department's ability to monitor institutions and protect students
against precipitous school closures. Another commenter opined that the
proposal would implement much stronger taxpayer protections, which are
needed to prevent losses from high-risk institutions that suddenly
close and incur liabilities they cannot, or will not, repay.
One commenter supported the enhanced list of financial
responsibility triggering events and associated reporting requirements.
That commenter believed the changes will help protect student veterans,
military-connected students, and their family members from high-risk
institutions.
Discussion: We thank these commenters for their support.
Changes: None.

General Opposition

Comments: Many commenters opposed the overall financial
responsibility regulations stating that the entire framework is unclear
and should be simplified. Some of those commenters went so far as to
say that institutions would need to retain legal counsel to understand
the financial responsibility requirements. Those commenters also opined
that the entire set of financial responsibility regulations is
unworkable, and compliance would be difficult or even impossible. Along
similar lines, many commenters criticized the financial responsibility
regulatory package due to what they believe to be an unbearable burden
to postsecondary institutions. One commenter suggested that the
Department would be better served by pursuing a more discretionary
approach to determining institutions' financial responsibility by
evaluating the unique circumstances faced by any one institution. Other
commenters pointed out that the burden on the Department, as it sought
to ensure compliance with the financial responsibility regulations,
would be such that the Department would not be able to fulfill its
compliance obligation. Other commenters believed that this increased
Department oversight would yield no positive impact on the financial
health of participating institutions and that the cost incurred by the
Department would waste taxpayer funds.
Discussion: We disagree with the commenters. We believe the
financial responsibility regulations are important so that the
Department can act to minimize the impact of an institution's financial
decline or sudden closure, which protects students and taxpayers. We
further believe that the mandatory and discretionary triggers are very
clear in describing what action or event has to happen for the trigger
to activate. We explain the reasons for the triggers' necessity in
greater detail in response to more specific comments.
Changes: None.
Comments: Several commenters recommended that we delay
implementation or withdraw the proposed financial responsibility
regulations.
Discussion: We disagree with these commenters. The financial
responsibility regulations are a critical set of changes that enable
the Department to more closely monitor institutions who may be moving
toward a level of financial instability or precipitous closure. We have
seen numerous examples of institutional closures that harmed students,
their families, and taxpayers. In many of those instances, we were
hampered in our efforts to obtain information and financial protection
from the impacted institution in a timely manner which would have
softened the impact on students. The inability to act also has
financial consequences for the Department and taxpayers, as we are
often unable to offset the cost of loan discharges for closed schools
or borrower defense.
Changes: None.
Comments: Individual commenters expressed a variety of concerns
with the financial responsibility regulatory package. One commenter
criticized the regulations as an attempt by the Department to secure
the maximum number of letters of credit from institutions rather than
an attempt to increase awareness of potential financial instability.
Another lamented that the regulations did not address the financial
scoring formula, which the commenter saw as flawed. One commenter
criticized the general financial responsibility process since there is
not a mechanism for an institution to provide a response before the
Department determines that an institution is not financially
responsible.
Discussion: The Department's goal is to obtain the amount of
financial protection necessary to safeguard taxpayer investments and
discourage risky behavior, not simply maximize letters of credit from
institutions. We seek to have the tools necessary to identify at the
earliest point that is reasonably possible when an institution is
financially unstable or moving toward closure. Our interest is in
protecting the impacted students and the taxpayers who fund the title
IV, HEA programs.
Regarding the decision not to address the rules governing how to
calculate the composite score, this issue was not included in the
topics that were negotiated and therefore is not included in these
regulations.
We disagree with the commenter who contended there was no mechanism
for an institution to respond to the Department prior to a
determination that the institution was not financially responsible. The
Department believes that the provisions in Sec. 668.171(f)(3) strike
the balance between giving an institution an opportunity to provide
additional information to the Department without creating a process
where risky institutions avoid providing financial protection due to
extended discussions. First, Sec. 668.171(f)(3)(i)(A) allows the
institution to show that the discretionary trigger related to creditor
events need not apply if it has been waived by the creditor. Section
668.171(f)(3)(i)(B) allows the institution to show that when it reports
the triggering event, it has been resolved.

[[Page 74575]]

Coupled with changes discussed later that give institutions 21 days to
report triggering events instead of 10 days, we believe this will give
institutions a larger window to show that the triggering event is no
longer a concern. Finally, Sec. 668.171(f)(3)(i)(C) notes that the
institution can provide additional information for the discretionary
triggers to determine if they represent a significant negative
financial event. As discussed later in this final rule, we changed this
language to only reference discretionary triggers.
The result of this language is that institutions will have an
opportunity to show that the trigger is resolved and for discretionary
triggers to provide more information to show why the situation is not
of sufficient concern to merit financial protection. For mandatory
triggers, institutions will have the opportunity to share additional
information when they provide notification that the trigger occurred in
order for the Department to determine if the triggering event has been
resolved.
The Department believes this situation gives institutions the
ability to swiftly raise concerns about triggers but allows the
Department to act quickly if the situation warrants it. This is
particularly important as several of the triggering conditions could
indicate a fast and significant degradation of a school's financial
situation, such as the declaration of receivership. Preserving the
Department's ability to act rapidly is, therefore, critical to
protecting taxpayers from potential losses.
Changes: None.
Comments: One commenter said the Department should maintain
important provisions required by statute which would not be reflected
if Sec. 668.15 is removed and reserved.
Discussion: The Department disagrees with the commenter. This
change was an effort to streamline the text and amended Sec.
[thinsp]668.14(b)(5) will now refer to all factors of financial
responsibility in an expanded subpart L.
Changes: None.
Legal Authority
Comments: Several commenters expressed that the Department does not
have statutory authority to enact these regulations. Commenters cited
20 U.S.C. 1099c(c) (HEA section 498(c)) to support their position that
the Department, in determining an institution's financial
responsibility, is limited to the methods prescribed in the HEA.
Commenters also asserted that the Department does not have authority
under 20 U.S.C. 1099c(c) (HEA section 498(c)) or its regulations (Sec.
668.171(f)) to establish triggers.
Discussion: We disagree with the commenters. HEA section 498(c)(1)
provides the authority for the Secretary to establish standards for
financial responsibility. HEA section 498(c)(3) authorizes the
Secretary to determine an institution to be financially responsible in
certain situations if the institution has met standards of financial
responsibility, prescribed by the Secretary by regulation, that
indicate a level of financial strength not less than those required in
paragraph (2) of the same section. It is this provision of the statute
that directs the Secretary to ensure through regulation that an
institution is financially responsible to protect the students
attending the institution and the taxpayers who have made the funding
possible for the title IV, HEA programs. Additionally, 20 U.S.C.
1099c(c)(1)(C) provides that an institution is financially responsible
if it is able to meet all of its financial obligations. The mandatory
triggers we have laid out are all situations that represent
considerable risk to an institution's operations that might not be
reported to the Department in an annual audit for over a year. These
risks require financial protections and constructive engagement with an
institution about plans to address and mitigate that risk. The same
could potentially be true of discretionary triggers, which is why they
are reviewed on a case-by-case basis. The triggers, in fact, fill an
important gap that exists in the current financial responsibility
regulations, which are heavily reliant upon the composite score to
assess an institution's financial health. While the score provides
useful information, it also inherently lags. New composite scores are
only produced after a fiscal year ends and the audit finishes, and the
due dates are six months (proprietary) or nine months (non-profit)
after the end of the institution's fiscal year. That means the annual
composite score is not adequate to provide a real-time analysis of an
institution's health. The triggers, meanwhile, provide a more immediate
way to assess whether something has occurred that could threaten an
institution's financial viability without waiting for the next
composite score calculation when it may be too late to seek financial
protection.
Furthermore, HEA section 487(c)(1)(B) \5\ authorizes the Secretary
to issue necessary regulations to provide reasonable standards of
financial responsibility for the administration of title IV, HEA
programs in matters not governed by specific program provisions. The
provision in the HEA also recognizes the Secretary's authority to set
financial responsibility standards that include ``any matter the
Secretary deems necessary to the sound administration of the financial
aid programs, such as the pertinent actions of any owner, shareholder,
or person exercising control over an eligible institution.'' As
discussed above, these triggers are providing clarity to institutions
about how the Department will assess whether an institution is meeting
the requirements spelled out in 20 U.S.C. 1099c(c)(1). This provides
protection to the Federal Government against unpaid financial
liabilities. These triggers are not addressing matters that are
governed by existing statutory program provisions, which is how we
interpret the language in 20 U.S.C. 1094(c)(1)(B). For instance, the
matter addressed by the program provisions for the 90/10 rule is the
maximum share of revenue a proprietary institution may receive from
Federal educational assistance programs. The matter addressed by cohort
default rates is the percentage of borrowers who default on their
loans. The matter addressed by institutional refunds in 20 U.S.C. 1091
is how an institution calculates amounts to be returned. None of those
program provisions address the overall threat to an institution's
financial health and the prospect that it cannot fulfill the provisions
in 20 U.S.C. 1099c(c)(1) due to the program non-compliance. The program
provisions referenced in in 20 U.S.C. 1094(c)(1)(B) do not limit the
Department from addressing risks to the overall financial health of the
institution that are not directly dealt with in the statutory program
requirements.
---------------------------------------------------------------------------

\5\ 20 U.S.C. 1094(c)(1)(B).
---------------------------------------------------------------------------

By contrast, we view the language in 20 U.S.C. 1094(c)(1)(B) as
preventing the Department from creating provisions that duplicate or
contradict statutory program provisions. This would include changes
such as establishing a maximum threshold for the share of revenue
coming from Federal educational assistance programs that is lower than
the 90/10 test, or a cohort default rate threshold that is below the 30
percent one established in the HEA.
Changes: None.
Comments: Commenters argued that the concept of a trigger that
immediately results in the request for financial protection is
contradicted by 20 U.S.C. 1099c(c)(3), which lays out four conditions
in which an institution may still show that it is financially
responsible even if it does not meet the requirements in subsection
(c)(1) of that same section. They argued that at the very least an
institution that shows it meets one of the criteria in 20 U.S.C.

[[Page 74576]]

1099c(c)(3) should not be subject to a trigger.
Discussion: The Department believes the structure of the triggers
in this final rule comports with the requirements in 20 U.S.C.
1099c(c)(3). For one, institutions that are subject to a trigger still
have the option under 20 U.S.C. 1099c(c)(3)(A) to demonstrate that they
meet the financial responsibility standards by providing a larger
letter of credit. Those that provide such a letter of credit would not
be subject to the trigger but instead would have to provide a larger
amount of financial protection to mitigate the risks associated with
the reported activity. Second, as discussed elsewhere in this final
rule, we are not applying the financial protection requirements
stemming from a trigger for institutions that have full faith and
credit backing as described in 20 U.S.C. 1099c(c)(3)(B). Third, the
provision in 20 U.S.C. 1099c(c)(3)(C) is one of the issues the
Department is seeking to address. The triggers allow us to capture
situations that occur in between the submission of such financial
statements. The Department does not believe it is acceptable to wait
the potentially extended period in between an event that could put an
institution out of business and the submission of another round of
financial statements. For instance, if an institution enters
receivership two months after the submission of its financial
statements, then it could be a year or more before the Department
receives financial statements that would meet the requirements of this
paragraph. Other reporting directly addresses instances where funds may
have been temporarily held by an entity to bolster its composite ratio
for the annual financial statement audit but subsequently removed.
Similarly, an institution that is at risk of losing access to financial
aid due to high default rates or a high 90/10 ratio or that has
significant revenue tied to failing GE programs could lose eligibility
for those programs before it submits another financial statement. These
time lags are also why the Department believes it is appropriate to
maintain the financial protection from a trigger for at least two
years, so it is possible to ensure we receive updated financial
statements to assess the institution's situation. The reporting
includes significant financial events that may happen during the two-
year window following a change in ownership for an institution where
additional financial protections can mitigate risks from unforeseen
events during that period. The reporting provisions and accompanying
requirements also constitute an alternative standard of financial
responsibility under 20 U.S.C. 1099(c)(2)(D) that considers information
that will in most cases be reported more promptly than available under
the financial statement audits that are submitted at least half a year
after the end of the fiscal year being used for the institution.
Changes: None.
Comments: Several commenters argued that HEA section 487 (20 U.S.C.
1094(c)(1)(B)), must be considered alongside section 498 of the HEA and
that this former section prohibits the use of triggers. Paragraph (c)
of that section states ``[n]otwithstanding any other provisions of this
subchapter, the Secretary shall prescribe such regulations as may be
necessary to provide for . . . ``(B) in matters not governed by
specific program provisions, the establishment of reasonable standards
of financial responsibility and appropriate institutional capability
for the administration by an eligible institution of a program of
student financial aid under this subchapter, including any matter the
Secretary deems necessary to the sound administration of the financial
aid programs.'' The commenters argued that there are specific program
provisions for the elements of the composite score, cash reserves,
institutional refunds and return of title IV funds, borrower defense
claims, change in ownership, gainful employment, teach-out plans, State
actions/citations, the 90/10 rule, the cohort default rate,
fluctuations in title IV volume, high annual dropout rates,
discontinuation of programs, closure of programs, and program
eligibility. Commenters argued that because there are existing program
provisions for those items, the Department may not prescribe
regulations establishing reasonable standards of financial
responsibility based upon whether institutions meet those program
requirements. In a footnote to this comment, the commenters also noted
that ``a more logical reading'' of what the term ``specific program
provision'' means would only affect institutional refunds and return of
title IV funds, teach-outs, State actions, accrediting agency actions,
and gainful employment.
Discussion: As discussed above, we disagree with the commenters'
interpretation of the interplay with section 487 and section 498 and
have explained how the Department views those two items interacting.
The commenters seem to argue that any matter touched on in the HEA
is precluded from use in any other form as a financial responsibility
trigger. But this reading is so broad as to be non-sensical, and
inconsistent with the statutory text itself. As discussed above,
section 487 specifically ensures that the Department does not impose
financial responsibility provisions that are inconsistent with or
contradict statutory program provisions. Other program provisions that
are not inconsistent with the financial responsibility triggers in the
Department's regulations are not implicated.
But even under the commenters' line of argumentation, the items
they claim are existing program requirements that prevent the use of a
mandatory trigger are not in fact program requirements that govern the
matter addressed by the trigger. The triggers relate to how the
Department can assess the requirements that exist in 20 U.S.C.
1099c(c)(1). That section mentions the need for the Secretary to
determine if the institution has the financial responsibility based
upon the institution's ability to do three things. First, to provide
the services described in its official publications and statements.
Second, to provide the administrative resources necessary to comply
with the requirements of title IV of the HEA. And third, for the
institution to ``meet all of its financial obligations, including (but
not limited to) refunds of institutional charges and repayments to the
Secretary for liabilities and debts incurred in programs administered
by the Secretary.'' The triggers are thus not regulating on those
specific program provisions; rather, we are including them as the
Department considers the holistic picture of an institution's financial
health and compliance with financial responsibility requirements.
Several examples under the commenters' initial interpretation of
section 487 show that even what they identify as program requirements
is incorrect. For instance, the commenters cite 20 U.S.C. 1094(a)(21)
as proof there are program requirements for State citations or actions
as well as accrediting agency actions. That paragraph says institutions
will meet requirements related to accrediting agencies or associations
and that the institution has authority to operate within a State. Those
are basic elements of institutional eligibility and participation.
However, that does not prohibit the Department from considering the
impact of accreditor or State agency actions on the participating
institution's financial health. For example, a program that represented
a

[[Page 74577]]

substantial portion of an institution's enrollment could lose State
authorization and the related loss of Federal student aid revenue could
imperil the institution's overall financial strength. Similarly, facing
actions from accrediting agencies also could threaten an agency's
financial health, as they would lose access to eligibility for the
title IV, HEA programs and risk having their degrees viewed as
illegitimate, making it harder to attract students. The citation
provided for teach-outs is 20 U.S.C. 1094(f), which applies to a very
specific circumstance where the Secretary must seek a teach-out upon
initiation of an emergency action or a limitation, suspension, or
termination action. That is a much narrower situation than the
reporting trigger for the teach-out provision in this final rule and
encompasses teach-outs that could also be sought by States or
accreditation agencies. Those matters are not governed by the provision
cited by the commenters. The commenters point to 20 U.S.C. 1099c-1 for
fluctuations in title IV volume and high annual dropout rates, where
the HEA lists indicators the Department should use to prioritize
program reviews. Identifying items that may warrant program reviews is
distinct from establishing financial protection triggers for those
items. It is not the same thing as a program requirement.
Accepting some of the program specific rules cited by the commenter
would create paradoxes. For example, commenters point to Sec. 668.172
to say there are already program requirements for equity, primary
reserve ratio, and income ratios. But those are regulations established
by the Department to determine if an institution has a failing
composite score, which is only one part of determining financial
responsibility under section 498(c) of the HEA.
The commenters' argument based upon what they identify as ``a more
logical reading'' that limits their critique to institutional refunds
and return of title IV funds, teach-outs, State actions, accrediting
agency actions, and gainful employment is also flawed. We have already
discussed the citation related to teach-out plans, State actions, and
accrediting agency actions so we turn to the other triggers mentioned.
The commenters cite 20 U.S.C. 1091b and 1094(a)(24) as program
provisions that prevent the presence of triggers related to
institutional refunds and return of title IV funds. The former
establishes requirements for how institutions are to calculate refunds
and return of title IV, while the latter is a program participation
requirement saying that the institution will abide by the refunds
requirements in 20 U.S.C. 1091b. Neither of those is a program
requirement in the manner that the trigger is operating. The
Department's concern with the trigger is that failure to pay refunds is
a sign that the institution may not meet the standards of 20 U.S.C.
1099c(c)(1)(C), related to meeting all of its obligations, which
includes an explicit mention of refunds. The trigger is thus directly
connected to the Department's way of assessing if an institution meets
that statutory requirement.
The commenters cite 20 U.S.C. 1094(a)(24) as the program
requirement related to the 90/10 rule. That is the section that spells
out the 90/10 rule's requirements. But this financial responsibility
trigger does not address how schools must calculate their Federal and
non-Federal revenue. Instead, this rule addresses the potential effects
of failing this provision on the financial health of the institution.
The commenters cite Sec. 668.14(b)(26) as the program requirement
that prevents a trigger related to gainful employment. Those provisions
are related to limiting the maximum length of such a program and
establishing the need for the training. As with the statutory
requirements discussed above, the regulatory requirements relating to
gainful employment set forth conditions of participation. They do not
address the potential financial risk--the risk of closure--if the
regulatory requirements are not met. The trigger is intended to address
the financial risk. Though not cited by commenters, the same would be
true of the gainful employment program accountability framework in part
668, subpart S. Those items are concerned with whether programs are
able to maintain access to title IV, HEA programs. The purpose of the
trigger is to provide a way to for the Department to assess whether the
institution is at risk of not being able to meet the requirements of 20
U.S.C. 1099c(c)(1).
Changes: None.
Comments: Commenters argued that because 20 U.S.C. 1094(c)(1)(B)
says the Secretary should establish reasonable standards of financial
responsibility that means any financial responsibility requirements
must meet the ``substantial evidence'' standard under the
Administrative Procedure Act (APA). The commenter reached this
conclusion by pointing to Dickinson v. Zurko, 527 U.S. 150, 162 (1999)
to argue that the best corollary to a reasonableness standard in
administrative law is the concept of ``substantial evidence'' because
that is considered to be a degree of evidence that a reasonable person
would accept as adequate. The commenter argued the substantial evidence
standard is a higher bar than arbitrary and capricious. Commenters then
proceeded to assert that many elements of the financial responsibility
requirements are unreasonable, such as the triggers related to
lawsuits, changes in ownership, Securities and Exchange Commission
(SEC) events, and creditor events. Commenters also used the word
unreasonable to describe the reporting requirements associated with the
triggers, though this framing appeared to use the word differently as a
stand in for excessive in terms of the amount of burden.
Discussion: The Department disagrees with the commenters' legal
arguments. The ``substantial evidence'' standard of the APA applies
only to record-based factual findings resulting from formal rulemaking
under sections 556 and 557. Dickinson v. Zurko, 527 U.S. 150, 164
(1999). For informal rulemakings, which the Department conducted here,
the arbitrary and capricious standard of review applies when
determining whether the resulting regulation is lawful. There is no
evidentiary threshold with respect to what regulations the Department
may propose during the negotiated rulemaking process and publication of
the proposed and final regulations. We also disagree with the argument
that triggers such as lawsuits, changes in ownership, SEC events, and
creditor events are unreasonable either in the manner of the legal
standard the commenters argued or as excessive. We therefore disagree
with the argument that the triggers are unreasonable based on the
comments about there being a legal standard of reasonableness. Nor do
we think those triggers are unreasonable in terms of being excessive.
The triggers laid out here are all areas that indicate substantial risk
to an institution's financial health. They are easily ascertainable and
the events that do not require a recalculation of the composite score
are not particularly common. We thus believe they are appropriate
triggers to adopt.
Changes: None.
Comments: One commenter argued that the Department's regulatory
language around letters of credit amounts resulted in requesting
insufficient levels of financial protection. They argued that Sec.
668.175(b) is contrary to the statutory requirements, because it says
that an institution must provide financial protection equal to at least
50 percent of title IV, HEA funds received in a year, whereas section
498(c)(3)(A) of the HEA says that the Secretary must receive one-half
of the annual financial liabilities

[[Page 74578]]

from the institution. The commenter argued that the amount of liability
could be much greater than the amount of aid received, meaning that the
amount of financial protection received by calculating based on title
IV, HEA aid received would be insufficient.
The same commenter similarly argued that the Department has not
sufficiently explained why 10 percent is the appropriate minimum amount
for financial protection instead of using a higher amount to cover
potential losses.
Discussion: We disagree with the commenter. The 50 percent and 10
percent figures are minimum amounts. The Department always has the
ability to request a higher amount if we believe that is necessary.
However, we believe setting minimum amounts based upon annual title IV,
HEA volume creates a simple and straightforward way for the Department
to determine the amount and the institution to know the minimum amount
of financial protection that might be needed. Setting the amount of
financial protection based on ``annual potential liabilities'' is
difficult because the Department may not be able to predict future
liabilities at the time financial protection is required. The
Department believes that using annual title IV, HEA funding, as it has
historically done, provides a more straightforward formula for setting
the amount of financial protection. With respect to the 10 percent
amount, we similarly note that the Department can and does request
higher amounts when we believe it is warranted. As we noted in the 2016
final rule that also addressed financial triggers (81 FR 75926), the 10
percent minimum is rooted in the 1994 regulations regarding provisional
certification of institutions that did not meet generally applicable
financial responsibility standards (34 CFR 668.13(d)(1)(ii) (1994)).
Changes: None.
Comments: Commenters argued that the language in Sec. 668.171(b)
appears to create a new form of financial responsibility standards that
are distinct from the statutory framework and are unclear how they
would be applied.
Discussion: The provisions in Sec. 668.171(b)(3) lay out the
situations in which an institution is not able to meet its financial
obligations. These lay out additional detail for how the Department
implements the statutory requirement in 20 U.S.C. 1099c(c)(1)(C) that
says one factor the Secretary uses when determining if an institution
is financially responsible is its ability to meet all of its financial
obligations. The items in Sec. 668.171(b)(3) are all key indicators of
an institution that is not meeting its financial obligations. These are
all critical types of financial obligations where the Department is
concerned that past instances of these situations are strongly
associated with massive financial challenges.
We also disagree that the standards of these provisions are
unclear. All the items in paragraphs (b)(3)(i) through (v) are laid out
clearly. The only one that has perhaps the most area of variability is
paragraph (b)(3)(i), where the Department would not consider a single
incorrect refund as evidence of a lack of financial responsibility but
would instead be considering patterns of this behavior. Paragraph
(b)(3)(vi), meanwhile, is a reference to the triggers in Sec.
668.171(c) and (d), which we describe in detail throughout this final
rule as connecting to concerns about financial responsibility.
Changes: None.
Comments: Commenters argued that the potential for stacking letters
of credit from triggering conditions violates section 498(e) of the
HEA, which only requires financial guarantees sufficient to protect
against the potential liability.
Discussion: We disagree with the commenters. We view each of these
triggers as representing risks to an institution through different
channels. As we note elsewhere in this final rule, if multiple triggers
occur as a result of the same underlying event, we could consider that
situation and choose to request a lower level of financial protection.
However, an institution that is truly facing multiple independent
triggers is going to be in precarious financial shape. For instance, an
institution that has entered into a receivership, declared financial
exigency, and is being required to make a significant debt payment that
results in a failed composite score recalculation is exhibiting
multiple warning signs that it could be headed toward a closure. In
such situations, the institution could incur liabilities equal to or
even more than 30 percent of one year of title IV, HEA volume just from
closed school discharges. In other situations, it is possible that the
associated liabilities could easily exceed a single year of title IV,
HEA funds received. For example, an institution that is now subject to
a recoupment action under borrower defense because it engaged in
substantial misrepresentations for a decade could be looking at a
liability that is equal to what they received for years.
Changes: None.

Compliance Audits and Audited Financial Statements (Sec. 668.23)

Comments: A few commenters opposed the Department's proposal in
Sec. [thinsp]668.23(a)(4) that the submission deadline for compliance
audits and audited financial statements be modified to the earlier of
six months after the institution's fiscal year end or 30 days after the
completion of the audit. These commenters pointed out that this change
would increase the burden on schools and auditors.
Some of the commenters believed that the benefit of early
identification of financial concerns would be far offset with the
administrative burden and possible missed deadlines that many schools
would encounter.
A few commenters expressed opposition to the modified deadline,
saying it was unfair to proprietary institutions as the modified
requirement has no impact on institutions subject to the Single Audit
Act.
Some commenters opined that the deadline of 30 days after the
completion of the audit was not a clearly defined date. The reason
cited by the commenters was that accounting firms differ on how they
define completion of the audit. This would result in different
deadlines being established depending on what firm calculated the date.
The commenters also stated that the review and finalization of a final
audit report by the accounting firm occurs after the audit work has
been completed thereby using part of the institution's period for
submission. The commenters believed that the 30-day deadline had too
many variables outside of the audited institution's control to be able
to submit a timely audit to the Department.
One commenter expressed the opinion that the issue was more about
how quickly the Department processes the audits it receives and
suggested that a collaborative relationship between the Department and
institutions would be a better way to achieve the desired outcome
rather than a more restrictive deadline.
Discussion: The Department declines to adopt the changes suggested
by the commenters. This provision aligns the treatment of audit
submission deadlines for all institutions regardless of whether they
are public, private nonprofit, or proprietary. In particular, public
and private nonprofit institutions have already been complying with
this requirement under deadlines that exist for institutions subject to
the Single Audit Act. Under 2 CFR 200.512(a)(1), audits must be
submitted at the earlier of 30 calendar days after receipt of the audit
report, or nine months after the end of the audit period (plus
extension). This provision thus creates equitable treatment across
institution types. When there are separate auditor signature dates on
the audited financial

[[Page 74579]]

statements and the compliance audit, the relevant date is the later of
those two dates.
Providing 30 days for the submission of these statements is
sufficient time. At this point, the auditor is doing limited further
work on the audit. This change gives institutions approximately 30 days
to complete the simple task of uploading the finished document. That
can easily be completed in this window.
Overall, the Department maintains the importance of this provision.
Having up-to-date financial information is critical for properly
enforcing financial responsibility requirements needed to conduct
proper oversight of institutions participating in the title IV, HEA
programs. Allowing institutions to wait months after an audit is
completed to submit it would delay the Department learning critical
information, particularly if an institution is exhibiting signs of
financial distress. This provision does not change the overall
deadlines that affect the latest point an audit can be submitted. It
simply ensures that audits must be sent to the Department shortly after
completion.
Changes: None.
Comments: Several commenters objected to the proposed requirement
in Sec. 668.23(d)(1) that an institution's fiscal year, used for its
compliance audit and audited financial statements, match the year used
for its U.S. Internal Revenue Service (IRS) tax returns. One of those
commenters expressed the concern that the IRS does not permit changes
in tax years or will only permit such a change after a long approval
process. Another of those commenters stated that it was common for one
entity to have a particular fiscal year for tax purposes and a
corporate parent may have a different tax fiscal year. Another
commenter suggested that this change was an attempt to force all
institutions to use a December 31 fiscal year end date.
Discussion: Requiring the institution to match its fiscal year to
its owner's tax year (the entity at which the institution submits its
audited financial statements) allows the Department to conduct
consistent oversight. Some of the Department's requirements (for
financial protection or following changes of ownership, for example)
are based on one or two complete years of audited financial statements.
Requiring the institution's fiscal year end to match the owner's tax
filing deadline prevents institutions from manipulating the required
timelines, and it relieves the Department from having to make case by
case determinations. The practice of determining if the use of
different fiscal years for Departmental and IRS purposes is done for
manipulative reasons also takes time and resources from the
Department's ability to review other institutions. We believe that the
occurrence is common enough to warrant this change. This rule is not
dictating to institutions which date they must use but is just
requiring institutions to be consistent and align the end dates for
fiscal and tax years. This rule applies to fiscal years that begin
after the effective date of these regulations and we believe that
institutions will have sufficient time to comply.
Changes: None.
Comments: Several commenters objected to the proposal in Sec.
[thinsp]668.23(d)(1) to require the reporting of all related-party
transactions. One of those commenters believed that with no limitation
on the size of the transactions to be reported, such a provision would
be problematic because accounting processes would have to change to
capture and report such de minimis expenses as lunches for board
members. The commenter went on to suggest that the Department use the
publicly available IRS form 990 that nonprofits must already complete
annually to address this concern, rather than creating a regulatory
requirement. Another commenter inquired as to how a related party
disclosure, required in the annual audited financial statements, would
be reported if no transactions occurred during the current year. The
commenter stated that related parties may exist due to ownership
affiliations while no transactions between the companies may be
occurring in the current year. The commenter wondered if such a
relationship still needed to be disclosed. One of these commenters
objected to requiring auditors to disclose related parties since that
is not required in generally accepted accounting principles (GAAP) and
goes beyond the level of assurance provided by audited financial
statements.
Discussion: The requirement that an institution must report its
related party disclosures is not a new proposal in this regulation.
Rather, the NPRM clarified that the items currently listed as possible
to include when disclosing related party transactions must be included.
That means including identifying information about the related party
and the nature and amount of any transactions. The existing reference
to related entities in Sec. 668.23(d)(1) requires the institution to
submit a detailed description of related entities based on the
definition of a related entity set forth in Accounting Standards
Codification (ASC) 850. However, the disclosures under the existing
regulations require a broader set of disclosures than those in ASC 850.
Those broader disclosure requirements include the identification of all
related parties and a level of detail that would enable the Secretary
to readily identify the related party, such as the name, location and a
description of the related entity, the nature and amount of any
transactions between the related party and the institution, financial
or otherwise, regardless of when they occurred and regardless of
amount. To the commenter concerned with disclosing de minimis
transactions, such as meals for a board member, we do not intend to
require reporting on such transactions. Routine items such as meals
provided to all board members during a working lunch would not be a
related party transaction since the meals would be incidental to
supporting a board meeting. Transactions with individual board members
for other services provided to the institution or a related entity
would be reportable. We agree with the commenter that the existing
regulatory text was unclear about what an institution should do if they
do not have any related party transactions for that year. To clarify
this issue, we have added an additional sentence to the end of
paragraph (d)(1) noting ``If there are no related party transactions
during the audited fiscal year or related party outstanding balances
reported in the financial statements, then management must add a note
to the financial statements to disclose this fact.''
We are adding this provision as well as adopting the changes
already mentioned in the NPRM because it is critical that the
Department receive accurate and identifiable information about related
party transactions, including by an affirmative confirmation when no
related party transactions exist. These transactions are relevant to
whether audited financial statements should be submitted on a
consolidated or combined basis. Related party transactions may also
require adjustments to the calculation of an institution's composite
score. In addition, when a school is participating as a nonprofit
institution, or seeks to participate as a nonprofit institution,
related party disclosures help the Department identify financial
relationships that could be an impediment to nonprofit status for title
IV, HEA purposes.
The Department does not believe the information provided on a Form
990 is sufficient for this purpose. In fact, we have seen situations
where the

[[Page 74580]]

Department uncovered related party transactions existed, but they had
not been reported on the entity's 990s.
If no transactions occurred during the year, and no current
receivable or liability is included in the financial statements then
institutions would not need to include anything related to this
relationship in the financial statements for that year.
Changes: We have added a requirement in Sec. 668.23(d)(1) for
management to add a note to the financial statements if there are no
related party transactions for this year.
Comments: A few commenters expressed that changes to Sec.
668.23(d)(1) say that financial statements must now be ``acceptable''
and sought clarification on what the Department means by acceptable.
Two commenters sought assurance that financial statements completed
in accordance with GAAP and generally accepted government auditing
standards (GAGAS) were acceptable and that there was not some
additional requirement.
Another commenter suggested that we remove any requirement beyond
GAAP and GAGAS from these final regulations and negotiate it
separately.
Discussion: To adequately evaluate the financial position of an
institution, not only must the financial statements meet the
requirements of GAAP and GAGAS, but they must be at the level of the
correct entity and show actual operations to be acceptable. As already
discussed, the Department strongly believes the triggers and other
provisions in these final regulations related to financial
responsibility that go beyond GAAP and GAGAS are necessary to carry out
the statutory requirement that institutions are financially responsible
and do not have to be negotiated separately. These provisions were
negotiated, albeit without consensus, in the negotiated rulemaking
process leading to the proposal of these regulations.
Changes: None.
Comments: One commenter stated that the NPRM violates the OMB
Memorandum M-17-12 which discourages making personally identifiable
information (PII) publicly available. The commenter referred in part to
the requirement that institutions disclose related party transactions
under Sec. 668.23(d)(1).
Discussion: The Department disagrees. The requirement to disclose
related party transactions is already in existing regulations. No
provision of these final regulations involves releasing PII nor
requiring institutions to disclose PII to parties other than the
Department.
Changes: None.
Comments: Many commenters supported the Department's proposed
requirement in Sec. [thinsp]668.23(d)(5) that institutions disclose
amounts spent on recruiting, advertising, and pre-enrollment
activities. Relatedly, other commenters said the Department should
require institutions to disclose in their financial statements the
amounts spent on instruction and instructional activities at the
program level. One of those commenters further believed that the
disclosure should include amounts spent by the institution on academic
support and support services.
Many other commenters, however, objected to this proposal. Several
commenters said these items are not linked to the institution's actual
financial stability. Many of the commenters stated that the Department
did not define these terms and sought clarification on exactly what
activities would be included in recruiting, advertising, and pre-
enrollment activities. Commenters also raised concerns about auditors
attesting to these items for the year prior to the one being audited.
Discussion: We appreciate the commenters' input. After careful
consideration of the comments received, we removed the provision in
Sec. 668.23(d)(5) that required a footnote in an institution's audited
financial statements that stated the amounts spent on recruiting
activities, advertising, and other pre-enrollment expenditures. We also
removed the cross-reference to this audited financial statement
requirement in the certification requirements in proposed Sec.
668.13(e)(iv). However, we will retain the language in proposed Sec.
668.13(e)(iv), now renumbered as Sec. 668.13(e)(2) in the final rule,
stating that the Department may consider these items in its
determination whether to certify, or condition the participation of, an
institution. We discuss the reason for continuing to include that
provision in greater detail in that section of the preamble to this
final rule.
The Department is removing the provision in Sec. 668.23 because we
are persuaded by the concerns raised by commenters about the lack of
clear standards for what auditors would need to attest to as well as
the timing of the periods covered by audits versus this requirement.
Moreover, the requirement in Sec. 668.23 was added to provide a data
source for the supplementary performance measures in Sec. 668.13(e),
which are designed to lay out indicators the Department could consider
on a case-by-case basis. Since that issue would be considered for
individual institutions, the Department believes it would be better to
request these data when deemed necessary for a given institution rather
than requiring all institutions to disclose them.
The Department declines to adopt the additional disclosures on
amounts spent on instruction for similar reasons. We believe this issue
is better considered on a case-by-case basis in Sec. 668.13(e) as
concerns about excessive spending on marketing or recruitment compared
to instruction have in the past been limited to a minority of
institutions.
Changes: We have omitted proposed Sec. 668.23(d)(5) as well as the
reference to that proposed paragraph in proposed Sec. 668.13(e)(iv),
now renumbered as Sec. 668.13(e)(2) in the final rule.
Comments: One commenter objected to the Department's requirements
that financial statements be audited using GAAP and GAGAS. The
commenter pointed out that a number of institutions have one or more
upper-level foreign owners who may have financial statements prepared
in accordance with International Financial Reporting Standards (IFRS)
and are audited in accordance with the European Union (EU) Audit
Regulations. As an example, the commenter stated that the SEC has
accepted from foreign private issuers audited financial statements
prepared in accordance with IFRS without reconciliation to U.S. GAAP.
The commenter questioned the Department's authority for requiring
upper-level owners' financial statements be prepared in accordance with
GAAP/GAGAS and requested that we provide in the final rule that we
permit IFRS/EU standards with respect to financial statements of upper-
level foreign owners.
Discussion: The Department's regulations maintain different
financial statement requirements for foreign and domestic institutions.
For foreign institutions, we spell out when financial statements may be
prepared and audited under different standards in Sec. 668.23(h).
However, for domestic U.S. institutions we believe GAAP or GAGAS is
appropriate for ensuring we are reviewing all domestic institutions
consistently. The Department's longstanding policy is not to accept
IFRS/EU standards for domestic U.S. institutions, and we think the loss
of comparability that would occur from starting to do so would make it
hard to apply the financial responsibility requirements consistently.
Changes: None.

[[Page 74581]]

Financial Responsibility--General Requirements (Sec. 668.171(b))

Comments: One commenter opined that the requirements proposed in
paragraph (b) appeared to occupy a category of financial responsibility
separate from the other requirements proposed in Sec. 668.171. The
commenter said there was little explanation of how the general
requirements in paragraph (b) would be applied to institutions and what
the consequences for noncompliance would be.
Discussion: The consequences for non-compliance under Sec.
668.171(b) are the same as any other failure of the financial
responsibility standards, including the composite score. That is how
this provision has always been applied. Institutions would be given the
options as outlined under Sec. 668.175.
Changes: None.
Comments: One commenter expressed support for the provision in
Sec. 668.171(b)(3)(i) that an institution is not financially
responsible if it has failed to pay title IV, HEA credit balances to
students who are owed those funds. Another commenter, however,
requested the Department to confirm that minor infractions of the
credit balance rule would not result in an institution being deemed
financially irresponsible. The commenter pointed that student credit
balance deficiencies has been a top program review and audit finding
for some years. The commenter believed that this finding alone did not
and should not subject institutions with this finding as automatically
not financially responsible. The commenter concluded with supporting
language for this provision when it is determined that an institution
is withholding title IV, HEA credit balances to utilize those funds for
purposes other than paying them to the students owed those funds.
Discussion: An institution's failure to pay necessary refunds or
credit balances of title IV, HEA funds to students has been a strong
sign in the past of institutional financial distress. The Department
has seen institutions hold onto these funds to keep themselves in
better financial shape, even as it harms students. As it reviews
instances that fall under this category the Department will consider if
it is an isolated instance or evidence of a larger pattern and consider
that in making determinations of financial responsibility.
Changes: None.
Comments: Several commenters took issue with the provision stating
that an institution is not financially responsible if it fails to make
debt payments for 90 days. These commenters were concerned that in some
instances delayed payments were the result of external factors and did
not indicate that the institution was financially irresponsible. The
commenters stated that the proposed regulation lacks clarity and does
not distinguish between intentional non-payment and instances where the
delay is linked to some administrative or logistical challenge. For
example, commenters believed that in certain cases, delayed debt
payments could arise from factors beyond an institution's control, such
as delays in invoice processing or delivery, and this could place an
institution in the status of being not financially responsible.
On a similar note, one commenter raised a concern over the
provision whereby an institution would be financially irresponsible if
it failed to satisfy its payroll obligations in accordance with its
published payroll schedule. The commenter suggests that the Department
add language to the final regulation establishing a grace period of 10
calendar days so that if an institution resolved its payroll
obligations during the grace period, it would remain financially
responsible.
Discussion: Since participating institutions typically have title
IV, HEA funding as their primary revenue source, ``external factors''
should not negatively impact the institution or owner entity's
obligation to make a required debt payment within 90 days. As to the
other comment, the failure to satisfy payroll obligations in accordance
with a published schedule is an early and very significant indicator of
financial instability. To that end, we do not believe a 10-day grace
period as suggested by the commenter would be appropriate as that could
simply result in the institution moving money across accounts to hide
issues.
Changes: None.
Comments: Many commenters requested clarification on whether there
was a materiality threshold for any provision in Sec. 668.171 and what
we meant when we used the term ``material'' in the proposed regulatory
text.
Discussion: It would be inappropriate to adopt a materiality
standard for Sec. 668.171. A materiality threshold commonly depends
upon determinations made by auditors, often in response to information
provided by management. Adopting a materiality standard would move the
discretion away from the Department to the auditor and the
institution's management. Doing so would undercut our ability to
quickly seek financial protection when needed. However, we agree with
the commenters that use of the word material in the NPRM implies a
materiality threshold is in place when it is not. Therefore, we will
replace ``material'' with ``significant'' in describing ``adverse
effect'' or ``change in the financial condition'' in Sec. 668.171. A
significant adverse effect is an event or events impacting the
financial stability of an institution that the Department has
determined poses a risk to the title IV, HEA programs.
Changes: We have replaced ``material'' with ``significant'' in
Sec. Sec. 668.171(b), (d), and (f) and 668.175(f), where we refer to
adverse effects or changes in financial condition.

Financial Responsibility--Triggering Events (Sec. 668.171(c) and (d))

Comments: Several commenters supported the Department's proposed
financial triggers, believing that they allow us to swiftly act to
protect students when a postsecondary institution's financial stability
is called into question. Another commenter expressed that taxpayers
would be better protected by the proposed financial triggers in that
liabilities arising from school closures would be partially or wholly
offset with the financial protection obtained due to the financial
trigger regulations.
Discussion: We thank the commenters for their support.
Changes: None.
Comments: Many commenters objected to the proposed financial
triggers for a variety of reasons. Several of those comments raised the
objection that the financial triggers, as proposed, exceed the
Department's statutory authority to ensure an institution participating
in the Federal student aid programs is financially responsible.
Discussion: We disagree with the commenters and explain our
rationale in greater detail in response to summaries of more specific
comments. But overall, we believe the financial responsibility
regulations are a proper exercise of the Department's authority under
the HEA to protect taxpayers from potential losses from closures or
other actions that create a liability owed to the Department.
Changes: None.
Comments: Many commenters objected to the mandatory financial
triggers due to their belief that the triggers exceed the authority
granted the Department by statute. Some of these commenters cited 20
U.S.C. 1099c(c) (HEA section 498(c)) to support their position that the
Department is limited to the prescribed methods in determining an
institution's financial responsibility. Commenters also stated that the
proposed trigger events are not

[[Page 74582]]

related to financial responsibility. Several commenters also argued
that mandatory triggers go against Congress's directions that the
Secretary determine an institution is not financially responsible.
Discussion: As discussed previously, HEA section 498(c)(1) provides
the Department with the authority to establish standards for financial
responsibility, and that authority goes beyond ``ratios'' in section
498(c)(2) of the HEA. Our determination that an institution is or is
not financially responsible is not solely about composite scores. That
is only one component of it. Another important factor in our
determination is whether an institution participating in the title IV,
HEA programs is financially unstable beyond, and since, what its most
recent composite score revealed. HEA section 498(c)(3) authorizes the
Secretary to determine an institution to be financially responsible in
certain situations if the institution has met standards of financial
responsibility, prescribed by the Secretary by regulation, that
indicate a level of financial strength not less than those required in
paragraph (2) of the same section. It is this provision of the statute
that directs the Secretary to ensure through regulation that an
institution is financially responsible sufficient to protect the
students attending the institution and the taxpayers who have made the
funding possible for the title IV, HEA programs. The financial triggers
are examples of just such requirements.
Financial instability may be caused by an event that occurs after
the most recent composite score, and the purpose of the triggers is to
identify those events which might impact the viability of the
institution. For example, an event that could lead to closure or
serious financial instability may not have occurred during the fiscal
year upon which the most recent composite score is based. The inability
of the composite score to be predictive in this regard also results
from the fact that the due date for audited financial statements is up
to 6 or 9 months, depending on the type of institution, after the close
of the fiscal year.
Overall, we believe all the mandatory triggers have a clear nexus
to financial risk. The financial triggers represent several
circumstances of obvious concern. There are some, such as 90/10, cohort
default rates (CDR), and gainful employment, where the institution
could be at imminent risk of loss of title IV, HEA funds from
compliance factors administered by the Department. While that does not
guarantee a closure, loss of title IV, HEA funding often does relate to
closure. The declaration of financial exigency and receivership are
also signs of significant financial distress and possible closure.
Lawsuits and debt payments involve composite score recalculations that
could cause an institution to subsequently fail the composite score.
The State actions and teach-out requirements are again proof that there
are imminent concerns about financial impairment if not outright
closure. Finally, there are several triggers that are designed to
support the integrity of the Department's financial responsibility
composite score methodology, such as triggers related to financial
contributions followed by a financial distribution as well as creditor
events.
We also note that each of these triggers operate independently of
each other. They have their own reporting requirements, and it is
possible for an institution to activate a single trigger without
activating others. As a result, they each provide a unique and separate
value in assessing financial health. This is even the case when the
single underlying event activates multiple triggers. In such
situations, the event is activating triggers for different reasons.
Changes: None.
Comments: Many commenters said the Department should adopt a
materiality threshold in the triggering conditions. One commenter used
an example of a triggering event representing $1 requiring the
imposition of a financial protection instrument and felt that result
was unreasonable.
Several of the commenters felt the lack of a materiality threshold
would result in determinations that an institution was not financially
responsible when the causal factor was not one that had a material
adverse effect on the institution's ability to meet its financial
obligations. The commenters further stated that the Department should
be required to use clear criteria to determine that an institution's
action or event would, in fact, negatively impact the institution's
ability to meet its financial obligations.
Commenters similarly argued that the lack of a materiality
requirement was unreasonable. This was incorporated in a larger
argument about how a reasonableness standard is akin to the concept of
substantial evidence under the APA.
Discussion: We disagree with commenters that it would be
appropriate to adopt a materiality standard for the triggering events
for several reasons. A materiality threshold commonly depends upon
determinations made by auditors, often in response to information
provided by management. The goal of the triggers is to identify
situations that occur between financial audits that could represent a
significant adverse financial effect on an institution. Adopting a
materiality standard would move the discretion away from the Department
to the auditor and the institution's management. Doing so would
undercut our ability to quickly step in and seek financial protection
when needed. While commenters have presented hypothetical examples of
an unidentified triggering event tied to $1, they have not outlined a
concrete example of how that would occur. While it is possible that
settlements or judgments could result in $1 payments, those triggers
involve a recalculation of the composite score, and it is unlikely that
$1 would cause a score to fail. However, as discussed previously, we
will replace ``material'' with ``significant'' in describing adverse
effect and the financial condition of an institution. We crafted the
mandatory triggers to identify situations that would represent
significant financial threats to an institution's overall health, while
the discretionary triggers leave room for us to consider whether the
situation poses a significant adverse financial effect. While
Departmental consideration is not a materiality threshold, which was
suggested by some commenters, it does provide institutions an
opportunity in Sec. 668.171(f) to explain why they think the
discretionary trigger should not result in a request for financial
protection. One example of such an explanation might be that the
financial impact upon the institution is negligible or nonexistent. We
believe that process addresses the commenters' concerns.
Each of the mandatory triggers has a clear connection to
significant financial concerns. The triggers related to receivership
and financial exigency capture situations where an institution has
declared that it is at risk of being unable to afford its financial
obligations. The GE, 90/10, and CDR triggers indicate situations where
an institution might lose some or all access to title IV, HEA funds in
a year.
The triggers for SEC actions and teach-out plans represent
situations where there are serious concerns about either an
institution's financial health or it is at risk of losing its public
listing, which is often a sign of weak finances.
The triggers around distributions followed by a contribution and
creditor conditions address a different type of financial risk. In
those situations, we are concerned an institution is manipulating its
composite score to hide what might otherwise be a failure. We treat the
distribution following the

[[Page 74583]]

contribution as a failure because we do not have an accurate picture of
an institution's finances and this information will allow us to assess
the effects of these transactions on an institution's financial health.
For the creditor actions, we take the fact that they are worried enough
about the institution to insert such a condition as evidence that the
Department should also be concerned about institutional financial
health.
Finally, the triggers related to legal and administrative actions
allow us to recalculate the composite score to determine if the
monetary consequences of the actions negatively impacted the
institution. This recognizes that there could be gradations within
those events that have greater or less financial implications.
As discussed later in the mandatory triggers section, we have also
altered some mandatory triggers to make them more clearly connected to
financial concerns or shifted them to discretionary triggers if we are
concerned that they may not result in a significant adverse financial
effect. We believe the result is that the mandatory triggers capture
the most concerning financial events, and the discretionary triggers
result in a request for protection if they show a negative effect. That
will address concerns about institutions being subject to letters of
credit for immaterial events.
We also object to the commenters' argument that the lack of a
materiality threshold is unreasonable. We have addressed the arguments
about reasonableness and substantial evidence in the legal authority
section of this preamble related to financial responsibility. In terms
of unreasonableness as a general concept, as explained above, we
believe the mandatory triggers all represent either common sense areas
that can indicate an institution is facing significant financial
problems or more complicated ways that an institution is trying to
manipulate its results. The greater variability in the discretionary
triggers is why they involve a case-by-case determination. But we
believe the items identified for discretionary triggers represent
obvious and sensible indications that an institution could be seeing
negative effects on its finances, which leads to relevant questions
about how large the negative effect might be.
Changes: As discussed previously, we have changed ``material'' to
``significant'' in Sec. Sec. 668.171(b), (d), and (f) and 668.175(f)
where we refer to adverse effects or changes in financial condition.
Comments: Many commenters said the Department must provide a
process by which institutions would have the opportunity to provide
input for the Department to evaluate before making any determination
affecting the institution's financial responsibility status. Some of
those commenters included said the ``automatic'' aspect of the
financial triggers was inconsistent with the statutory requirements in
HEA section 498(c)(3). Several of these commenters elaborated on their
concerns by noting that the lack of any interim decision and challenge
process means institutions will be required to immediately provide
financial protection until the institution continues to pursue
dismissal of the cause of the trigger even though the Department may
make a final determination that financial protection is not necessary.
They contended that some of the mandatory financial triggers were not
automatically reflective of an institution's financial stability but if
it found itself in violation of one or more of the mandatory triggers
would automatically be deemed to be not financially responsible. The
commenters asserted that the following triggers did not reflect
financial instability: (1) A suit by a Federal or State agency, or a
qui tam lawsuit in which the Federal Government has intervened; (2) The
institution received at least 50 percent of its title IV, HEA funding
in its most recently completed fiscal year from GE programs that are
failing the GE program accountability framework: (3) Failing the
threshold for non-Federal educational assistance funds; and (4) High
CDRs.
Discussion: Section 498(c)(1) of the HEA provides the authority for
the Secretary to establish standards for financial responsibility, and
it is not limited by the reference to ``ratios'' in section 498(c)(2).
Our determination that an institution is or is not financially
responsible is not solely about a formula with a composite score. That
is only one piece of it. Another important piece factoring into our
determination is whether an institution participating in the title IV,
HEA programs is financially unstable beyond, and since, what its most
recent composite score revealed. Financial instability may be caused by
an event that occurs after the most recent composite score, and the
purpose of the triggers is to identify those events which might impact
the viability of the institution. The Department believes that the
provisions in Sec. 668.171(f)(3) strike the balance between giving an
institution an opportunity to provide additional information to the
Department without creating a process where risky institutions avoid
providing financial protection due to extended discussions. First,
Sec. 668.171(f)(3)(i)(A) allows the institution to show that the
discretionary trigger related to creditor events need not apply if it
has been waived by the creditor. Section 668.171(f)(3)(i)(B) allows the
institution to show that when it reports the triggering event, it has
been resolved. Coupled with changes discussed later that give
institutions 21 days to report triggering events instead of 10 days, we
believe this will give institutions a larger window to show that the
triggering event is no longer a concern. Finally, Sec.
668.171(f)(3)(i)(C) notes that the institution can provide additional
information for the discretionary triggers to determine if they
represent a significant negative financial event. As discussed later in
this final rule, we changed this language to only reference
discretionary triggers.
The result of this language is that institutions will have an
opportunity to show that the trigger had been quickly resolved and for
discretionary triggers provide more information to show why the
situation is not of sufficient concern to merit financial protection.
For mandatory triggers, institutions will have the opportunity to share
additional information when they provide notification that the trigger
occurred in order for the Department to determine if the triggering
event has been resolved.
The Department believes this situation gives institutions the
ability to swiftly raise concerns about triggers but allow the
Department to act quickly if the situation warrants it. This is
particularly important as several of the triggering conditions could
indicate a fast and significant degradation of a school's financial
situation, such as the declaration of receivership. Preserving the
Department's ability to act rapidly is, therefore, critical to
protecting taxpayers from potential losses.
Changes: We changed Sec. 668.171(f)(3)(i)(C) to clarify that the
provisions contained therein apply to the discretionary triggers
contained in Sec. 668.171(d) and not the mandatory triggers contained
in Sec. 668.171(c).
Comments: Several commenters said the financial triggers do not
appear to result from complete and careful Departmental analysis and
expressed concerns about unintended consequences as a result of the
financial triggers. Some commenters thought that an unintended
consequence would be that some institutions would be thrust into a
status of financial instability, including possible closure, due to the
burden of complying with these

[[Page 74584]]

financial responsibility regulations when they would not have been so
categorized under existing rules. Some of those comments opined that
the triggers would especially impact private nonprofit and private for-
profit institutions. Another commenter maintained that the Department
performed no analysis to identify unintended consequences of these
regulations. Another commenter was concerned that the Department did
not share its analysis on the necessity of these regulatory changes and
additions. Commenters called upon the Department to provide the data
used to determine that the existence of these proposed financial
triggers would put an institution at a higher risk of closure as stated
in the NPRM.
Discussion: The Department disagrees with the commenters.
Institutions act in a fiduciary capacity on behalf of the Department
when they administer the title IV, HEA programs, and they must meet the
Department's financial responsibility requirements to perform that
role. As discussed in the sections of this document related to the
mandatory and discretionary triggers, based on the Department's
experience, we have concluded that the mandatory triggering events
represent situations of significant financial concern, including the
potential for either immediate closure, loss of access to aid after
another year of performance results on certain measures, or other
sufficient warning signs. Seeking financial protection in these
situations represents the Department exercising its proper
responsibility for overseeing taxpayer investments in the title IV, HEA
programs. Mandatory triggers represent events where there are negative
financial effects to an institution's financial health and therefore
warrant financial protection while further review of an institution's
financial condition can take place. Moreover, discretionary triggers
will only result in Department requests for financial protection after
a determination by the Department that they represent a significant
negative financial effect. As such, we are not persuaded that the
triggers will cause the kinds of unintended consequences discussed by
commenters. The point of exercising the triggers is to protect
taxpayers and ensure that the institutions that students choose to
attend are financially responsible. As discussed in the RIA, we
recognize that seeking financial protection creates costs for
institutions, but we believe those costs are necessary and justified.
As further discussed in the RIA, we provided information on the scope
of effect for every trigger where we currently collect the data and
addressed which elements related to costs we are and are not able to
model. Insofar as commenters suggest that the Department must have
perfect data and certainty as to consequences before adopting these
protective measures, we disagree. At the same time, having reviewed
commenters' predictions regarding unintended consequences, we cannot
conclude that those predictions are supported by reasonable judgments
and available evidence.
We also disagree with the commenters who argue that the Department
should not pursue financial responsibility due to concerns about
closure. Section 498(c) of the HEA \6\ outlines financial
responsibility standards, and the language around the Secretary's
determination in section 498(c)(3)(C) requires an institution prove
that it has sufficient resources to ensure against the precipitous
closure of the institution and to provide the services it has promised
its students. Furthermore, the Department has an obligation to
safeguard taxpayers' investments including by efforts to minimize costs
to taxpayers from student loan discharges and from having to seek
repayment from the institutions that generated those costs.
Historically, the Department has struggled to secure funds from
institutions before they closed, which has left many discharges
unreimbursed. For instance, FSA data show that closures of for-profit
institutions that occurred between January 2, 2014, to June 30, 2021,
resulted in $550 million in closed school discharges. This figure
excludes the additional $1.1 billion in closed school discharges
related to ITT Technical Institute that was announced in August 2021.
Of that $550 million amount, the Department recouped just over $10.4
million from institutions.\7\ The Department also included data in the
NPRM that are repeated in the RIA of this final rule showing that from
2013 to 2022 the Department assessed $1.6 billion in liabilities
against institutions. During that same period, the Department collected
just $344 million from institutions. These amounts do not include any
unestablished liabilities, such as those from closed school discharges
that are not established against an institution. The approach in these
rules will generate more financial protection upfront to increase the
likelihood that the Department is reimbursed for liabilities assessed
against institutions.
---------------------------------------------------------------------------

\6\ 20 U.S.C. 1099c(c).
\7\ The budgetary cost of these discharges is not the same as
the amount forgiven.
---------------------------------------------------------------------------

Changes: None.
Comments: Several commenters raised concerns about the financial
triggers generally saying they were broad, unclear, required
definitions, and were subjective. The broadness, in the view of the
commenters, allowed for an institution violating numerous triggering
events simultaneously leading to the imposition of multiple instruments
of financial protection, e.g., letters of credit. Another commenter
criticized the financial triggers due to a belief that the triggers
delegated the role of determining an institution's financial
responsibility to third parties, including States.
Discussion: We disagree with the commenters. The mandatory triggers
all represent clear situations that an institution will be able to know
if they have met a triggering condition. The discretionary triggers are
intentionally crafted to be broader so that they provide flexibility
for consideration with input from the institution to determine whether
the situation does in fact represent a significant negative financial
situation for the school. For instance, that is why there is not a
single standard for withdrawal rates or change in title IV, HEA volume.
When these discretionary triggers may apply, the institution will have
an opportunity to discuss why they think the triggering event should
not merit financial protection.
We also disagree that the triggers are delegating oversight to the
States or other third parties. Successful oversight of postsecondary
institutions requires coordination among the States and accreditation
agencies that make up other components of the regulatory triad. The
triggers that relate to their actions ensure that the Department is
able to respond swiftly to actions by other regulators, because those
actions could either cause, or be predictive of, financial risk.
Changes: None.
Comments: A few commenters opined that the proposed financial
triggers have no bearing on financial responsibility. They stated that
the entire concept of a trigger granted the Department the authority to
require unreasonable, even impossible, financial restrictions be placed
on an institution.
Discussion: We disagree with the commenters. All mandatory triggers
have explicit linkages to financial concerns. The discretionary
triggers are structured so that they could in certain situations have
financial implications, which is why we would review them on a case-by-
case basis to determine

[[Page 74585]]

whether to seek financial protection or not. Below we discuss each
trigger in turn and how they connect to financial responsibility.
Legal and administrative actions are intrinsically related to an
institution's financial health. These represent situations that can be
a sudden financial impairment to an institution or change its financial
position significantly. An institution with a low composite score that
has to pay an additional debt or liability from a legal or
administrative action may not be able to afford those added expenses.
Costs from judgments or lawsuits may be significant and may place
institutions in an impaired financial condition. As could the act of
seeking repayment of borrower defense to repayment discharges, given
that most approvals to date have been in the tens of millions of
dollars. We are also concerned about how added costs from a final
monetary judgment or award, or from a monetary settlement which results
from a legal proceeding, including from a lawsuit, arbitration, or
mediation, might make a change in ownership financially riskier than it
seemed at first.
The withdrawal of owner's equity and the distribution following a
contribution both are potentially destabilizing transactions initiated
by a school's owner when they pay themselves. The withdrawal of equity
causes a score recalculation, whereas the concern with a distribution
following a contribution is a school attempting to manipulate its
composite score.
The revisions to teach-out plans will capture situations where
there are concerns about an institution's finances meriting a teach-out
plan for the entire institution. That suggests a risk of closure and
the need to plan for it. Just as we want to make sure schools plan for
students, we must also plan for the possibility of taxpayer
liabilities.
The triggers for publicly listed entities represent situations
where they could lose access to public markets by having their stocks
being delisted, having their registration being revoked, or being taken
to court. All those situations could place the institution at risk of
losing the benefits that come from being publicly traded and make it
much harder for them to raise the funds necessary to stay in business.
This is even the case for failing to provide quarterly or annual
reporting, including considering an extended deadline. This is not a
common occurrence for large and healthy companies and research shows
that shareholders punish this occurrence significantly.\8\ Shareholders
react negatively when publicly traded companies miss filing deadlines
for quarterly and annual reports. The Department should react
negatively in this circumstance too, given that participating
institutions act in the nature of a fiduciary in administering the
title IV, HEA programs. The provisions related to foreign exchanges are
similar.
---------------------------------------------------------------------------

\8\ <a href="http://clsbluesky.law.columbia.edu/2017/11/27/how-missing-sec-filing-deadlines-affects-a-companys-stock-value">clsbluesky.law.columbia.edu/2017/11/27/how-missing-sec-filing-deadlines-affects-a-companys-stock-value</a>.
---------------------------------------------------------------------------

The triggers related to a school failing 90/10, having high CDRs,
or at least 50 percent of an institution's title IV, HEA volume coming
from failing GE programs represent situations where an institution will
lose access to title IV, HEA assistance the next time we generate those
numbers unless they can improve. While institutions can and do survive
without access to those funds, many institutions do close when they
lose access to such aid. Protecting taxpayers when there is a
possibility of aid loss is thus the responsible course of action.
The declaration of financial exigency and receivership are
inherently worrisome financial situations. They are strong statements
that an institution will not be able to continue in its current state
and will need significant changes. These two are reasonable situations
to be worried about that directly connect to finances.
Finally, the trigger related to creditor events ensures that
institutions cannot leverage their financial agreements to try and
dissuade the Department from its financial monitoring. We are concerned
about past situations where institutions have conditions in their
agreements with creditors that make debts fully payable if the
Department were to take steps like require a letter of credit of a
certain size or place the institution on heightened cash monitoring 2.
We are concerned that the presence of such conditions is designed to
place private creditors ahead of the Department and to also dissuade us
from engaging in proper oversight and monitoring. The Department is
thus treating the presence of those types of conditions as if they will
occur and signal from the private market that there are financial
concerns. We are thus seeking financial protection when such creditor
conditions are present to ensure that we have the funds we need to
safeguard taxpayers' investments.
We do not discuss the discretionary triggers in the same level of
detail because as we have noted these all have the requirement that
they show a significant financial effect.
Changes: None.
Comments: A few commenters raised concerns about the language in
Sec. 668.171(c) noting that the Department would request separate
financial protection for each trigger if an institution ends up with
multiple trigger events. Commenters questioned why this was necessary
since the Department already has authority under the regulations to
require letters of credit for institutions that fail the general
standards of financial responsibility or that have a failing composite
financial ratio score. These commenters thought that in those
circumstances the Department has the ability to set the financial
protection amount to be greater than the minimum levels established in
the regulations. Some commenters suggested that the proposal to seek
multiple financial protection requests would limit the Department's
discretion to determine the amount of financial protection needed to
deal with one or more triggering events without regard to whether
asking for multiple instances of financial protection would overstate
the amount of financial protection warranted for many situations. One
commenter reviewed prior letters of credit required by the Department
and noted that there were very few instances where the Department
required institutions to provide letters of credit in amounts greater
than 50 percent of an institution's annual Federal student aid funding
and expressed concern about the significant financial burdens could be
imposed on institutions requiring to provide much larger letters of
credit under the proposed regulations.
Commenters also raised concerns about the possibility that multiple
triggering events could be the result of one underlying action and that
such situations should be viewed as only a single request for financial
protection.
Discussion: The Department acknowledges that the current
regulations do not place limits on the amounts of financial protection
that may be required. The revised regulation will provide more
notifications to the Department about significant developments relevant
to an institution's financial responsibility since the period covered
by the last annual audited financial statement submitted to the
Department. These notifications will in many instances require the
institution to provide financial protections or increase financial
protections already in place.
With regard to the frequency with which the Department requests
financial

[[Page 74586]]

protection in excess of 50 percent of an institution's annual title IV,
HEA funding, we note that is an option for institutions that are not
financially responsible to continue participating in the Federal
student aid programs without becoming provisionally certified. We also
remind commenters that part of the impetus for this final rule is the
Department is concerned about having insufficient amounts of financial
protection to offset liabilities incurred. With regard to the comments
about one event causing multiple triggers, the Department's intent is
not to make multiple financial protection requests for triggering
events that all stem from the same event. We would thus review the
triggering events when they occur to determine whether they are all
tied to one event.
Changes: None.
Comments: Many commenters pointed out that in the 2019 Borrower
Defense Regulations,\9\ the Department stated that financial triggers
that are speculative, abstract, and unquantifiable, are not reliable
indicators of an institution's financial condition. Some of those
commenters called upon the Department to eliminate any proposed
financial trigger from the final rule that was speculative, abstract,
or unquantifiable.
---------------------------------------------------------------------------

\9\ 84 FR 49861.
---------------------------------------------------------------------------

Discussion: The Department addressed these concerns from the
commenters in the NPRM.\10\ As we noted there, since the elimination of
those mandatory triggers we have repeatedly encountered institutions
that appear to be at significant risk of closure where we lacked the
ability to obtain financial protection due to the more limited nature
of triggers that are still in regulation. We also noted that the items
that were proposed as mandatory triggers were situations that were
clear to identify and represent significant financial risk. We have
further refined that standard in this final rule by converting several
mandatory triggers into discretionary ones. We also disagree with the
implication by the commenters that triggers must be quantifiable so
that they fit within the construct of the composite score. The
composite score is not designed to be the only way to judge an
institution's financial responsibility. It is one measure that captures
some issues. But the presence of the triggers, as well as other items
in Sec. 668.171(b) that speak to issues like missing payroll
obligations or failing to pay refunds, show there are other critical
indicators of financial responsibility that the Department should
consider while performing its statutorily mandated function to oversee
the Federal student financial aid programs.
---------------------------------------------------------------------------

\10\ 88 FR 32300.
---------------------------------------------------------------------------

Changes: None.
Comments: Several commenters suggested that all mandatory financial
triggers be made discretionary and that a specific determination be
made by the Department with an explanation of how the triggering event
has a material impact on the financial responsibility of the
institution.
Discussion: The Department disagrees with the commenters. As
discussed, the mandatory triggers are situations that we believe
represent the most significant threats to an institution's financial
circumstances. As such, we believe it is prudent as part of overseeing
the Federal student financial aid programs to seek additional
protection when those events occur. As already noted above, we do not
think it would be appropriate to adopt a materiality standard for these
triggers and believe they represent significant negative financial
situations.
Changes: None.
Comments: Some commenters raised questions around the requirements
for financial protection, e.g., letters of credit, remaining in place
for two full fiscal years. For example, one commenter requested
clarification on whether this would be applicable in a situation where
the institution has resolved the action or event that associated with
the financial trigger. Another commenter stated that the Department
should have the discretion to continue requiring financial protection
even if the triggering event has been resolved because the existence of
a triggering event that results in the Department requesting financial
protection could also highlight other areas of concern.
Discussion: Under final Sec. 668.171(c), the Department will
consider whether the financial protection can be released after two
fiscal years' worth of audited financial statements following the
notice of the requirement for financial protection. The Department's
goal with the two fiscal year requirement is to give us enough time to
have confidence that the institution has demonstrated that the event
has ceased or been resolved. We believe two years is more appropriate
than only requiring it for a year because that allows us to reduce the
likelihood that the events recur. For instance, an institution may have
failing 90/10 rates for a year, pass for a year, and then fail again.
Or a school could be asked to submit a teach-out agreement, then
improve its finances and suddenly see them deteriorate again.
Maintaining financial protection for two years strikes the balance
between determining if the triggering event has been truly corrected
with not keeping financial protection for unnecessarily long periods.
It is possible that financial protection will need to continue
after the two years. That would be the case if the triggering event has
still not been resolved.
To the commenter requesting the Department to require financial
protection beyond the two-year requirement after a triggering event has
been resolved, we do not believe we can do that based on the potential
for a triggering event. If the Department identifies another triggering
event, we would still be able to require financial protection related
to that event.

Financial Responsibility--Mandatory Triggering Events (Sec.
668.171(c))

General

Comments: Several commenters strongly recommended that some or all
of the mandatory financial triggers be eliminated from the final rule
and short of that, some or all should be made discretionary. While some
commenters addressed this critique to all of the mandatory triggers,
some limited their recommendation to the following proposed financial
triggers: (1) the trigger concerning lawsuits in proposed Sec.
668.171(c)(2)(i)(B), (2) the trigger addressing change in ownership in
proposed Sec. 668.171(c)(2)(i)(D), (3) the trigger applicable to GE
programs in proposed Sec. 668.171(c)(2)(iii), (4) the trigger dealing
with teach-out plans in proposed Sec. 668.171(c)(2)(iv), (5) the
triggering event describing State actions in proposed Sec.
668.171(c)(2)(v), and (6) the trigger concerning publicly listed
entities in proposed Sec. 668.171(c)(2)(vi).
Discussion: We disagree with the commenters, in part. As discussed
in greater detail under the subheading that applies to that trigger, we
have elected to make State actions a discretionary trigger and clarify
that teach-outs must be related to the whole institution and for
financial reasons. We also have determined that an institution that
loses eligibility to participate in another Federal educational
assistance program will not be subject to a mandatory trigger. Instead,
the discretionary trigger addressing a program that loses eligibility
to participate in another Federal educational assistance program will
be expanded to include when the institution, itself, loses that
eligibility. We believe that making this a discretionary trigger will
remove the burden of a mandatory trigger when the

[[Page 74587]]

loss to the institution is minimal and gives the Department the ability
to make a determination if the loss of another Federal educational
program will have a financial impact on the institution. We elected to
move the State action and loss of eligibility provisions due to
concerns about the varied effect of events that would cause those
triggers. Some of those events were presented by commenters and
included examples of a State taking a minor action for collection of a
small sum of money or to rectify a minor health related infraction.
Regarding the loss of another Federal educational program, examples
were provided by commenters where a school may lose eligibility for a
program with no enrollees or a very small number of enrollees and the
loss of that program had little or no negative impact on the financial
condition of the institution. Meanwhile, we think the narrower focus of
the revised teach-out trigger will capture the most serious situations.
We will also have the change in ownership trigger require a
recalculation of the composite score that results in a failure. This
aligns Sec. 668.171(c)(2)(i)(D) with the triggers in Sec.
668.171(c)(2)(i)(A) and (C).
We, however, disagree with the other changes recommended by
commenters. As also discussed in greater detail throughout this
section, we are concerned that institutions that have half their
revenue in failing GE programs could face significant financial
challenges if they lose half or more of their title IV, HEA revenue.
The lawsuit trigger represents serious legal actions taken by
government actors, which are not common and can result in very serious
judgments against institutions. Similarly, the triggers related to
publicly traded entities represent situations where those companies can
face the possible loss of access to financial markets or other forms of
serious financial consequences that could be a sign of a lack of
stability. We believe those items are all serious enough to merit
keeping them as mandatory triggers.
Changes: We have removed the mandatory triggers that were proposed
in Sec. 668.171(c)(2)(v) and (ix) and have moved the provision in
proposed Sec. 668.171(c)(2)(v) to the discretionary trigger in Sec.
668.171(d)(9) and have moved the provision in proposed Sec.
668.171(c)(2)(ix) to the discretionary trigger in Sec. 668.171(d)(10).
We reserved Sec. 668.171(c)(2)(v) and (ix). We have narrowed the scope
of the teach-out trigger in Sec. 668.171(c)(2)(iv) and we will
recalculate the composite score for the trigger under Sec.
668.171(c)(2)(i)(D) related to institutions that have undergone a
recent change in ownership and have monetary obligations arising from
certain legal and administrative actions.
Comments: Many commenters expressed the view that some of the
mandatory triggers were duplicative of other areas which the Department
monitors for compliance. Some examples put forth by the commenters to
justify their view included the financial triggers concerning GE
programs, high CDRs, and the 90/10 rule. The commenters believed that
the imposition of a potentially debilitating mandatory letter of credit
in these situations, without a determination by the Department that the
institution is unable to rectify the triggering event, or that the
triggering event will have an immediate impact on the institution's
financial responsibility, could cause a precipitous financial crisis at
the institution when one would have otherwise not been present.
Discussion: The Department disagrees with the commenters. The goal
of the mandatory triggers is to identify situations where the
institution is facing a significant negative threat to its financial
health, which puts the institution at an elevated risk of closure or a
higher likelihood of generating liabilities such as through approved
borrower defense to repayment claims. To that end, the examples
highlighted by commenters show that the Department is aligning its
financial accountability policies with other oversight and monitoring.
For instance, an institution with high CDRs, failing 90/10 results, or
at least half of its title IV, HEA funds coming from failing GE
programs is a year away from losing access, in whole or in part, to the
Federal student aid programs. While institutions can and do stay in
business after leaving the Federal student aid programs, losing access
to such a large stream of revenue represents an inarguable major
financial risk to the institution. Ensuring that taxpayers are
protected when the Department knows such a risk could occur is prudent
oversight.
The Department also disagrees with the commenters about the effects
of seeking financial protection. The Department's job is to safeguard
taxpayer funds, minimize losses for discharges such as those tied to
closed schools, and protect students. These triggering situations
indicate events where the warning signs are significant enough that
they immediately impact the institution's financial responsibility,
regardless of any mitigating circumstances. In these situations, the
Department must immediately exercise greater oversight to ensure it is
carrying out its mission.
Changes: None.
Comments: One commenter recommended that the Department align
financial trigger reporting with accreditors which, in the commenter's
opinion, were monitoring the same financial factors for accreditation
purposes.
Discussion: The Department disagrees with the commenter.
Postsecondary oversight is predicated on the idea of the regulatory
triad of States, accreditation agencies, and the Federal Government.
Having complementary but distinct efforts is useful for ensuring that
each party is holding up its part of that accountability relationship.
To that end, it is important for the Department to have its own set of
financial standards that are particularly concerned with the title IV,
HEA programs. Accreditors, by contrast, can and do have varying
standards for financial oversight that reflect what each deems
important. We do not think ceding that financial oversight work to
accreditors would be appropriate, nor would it be allowed under the
HEA.
Changes: None.
Comments: One commenter pointed out that some mandatory triggers
are applicable only to institutions with a composite score of less than
1.5 while others are applicable to all institutions. The commenter
recommended that all of the mandatory triggers only be applicable to
institutions with a composite score of less than 1.5.
Discussion: We disagree with the commenter. Composite scores are
only one element of financial responsibility analysis. In this
situation we are concerned that events occur after the composite scores
are calculated and, therefore, they need to be considered immediately
so we can obtain financial protection when necessary. Moreover, there
are many triggering situations where the threat to the institution is
so great that the last completed composite score is not appropriate to
consider for the trigger. For instance, if an institution has a
composite score of 3.0, the highest available, but still declares
financial exigency or is poised to lose access to aid unless it
improves its CDRs, the Department should step in and act in response to
those warning signs.
Changes: None.

Legal and Administrative Actions (Sec. 668.171(c)(2)(i))

Comments: Section 668.171(c)(2)(i) specifies four mandatory
triggers related to legal and administrative actions, designated as
paragraphs (c)(2)(i)(A) through (D). For the purpose of this

[[Page 74588]]

discussion, we refer to the four separate financial triggers by those
letters. A few commenters objected to paragraphs (c)(2)(i)(A) and (B),
both of which address possible legal proceedings. The commenters
suggested that these two triggers discouraged institutions from
reaching settlements with the parties, be they private or governmental,
because such a settlement may be a financial trigger, itself. The
commenters opined that discouraging parties from resolving legal issues
with an agreed upon settlement was bad public policy.
Discussion: We disagree with the commenters. The mere presence of a
settlement does not result in a trigger. Rather, a settlement that
results in a recalculated composite score that is less than 1.0 results
in a trigger. Moreover, settlements arise as an alternative to
litigating a case, which has the risk of ending in a judgment against
the institution, which would also be captured as a trigger if a
recalculation produces a composite score of less than 1.0. Settlements
are generally designed to benefit both parties and avoid further
litigation, which carries its own costs and risks, including the
possibility of judgments against the institution that are larger than
amounts paid in the settlement. Accordingly, we see no reason to think
this trigger discourages institutions working to resolve litigation in
the manner that works best for them.
We note that the reference to debts, liabilities, and losses may
have contributed to some confusion about what causes the triggers
described in this section. Accordingly, we have changed the heading of
this paragraph to ``Legal and administrative actions'' which more
accurately describes the actions described. We have also modified the
regulatory text in paragraphs (c)(2)(i)(A) and (D) to describe more
accurately the actions and resulting monetary judgments or awards, or
monetary settlements which result from a legal proceeding that will
result in a financial trigger. Those changes are explained in detail
below.
Changes: We have changed the heading of Sec. 668.171(c)(2)(i) to
``Legal and administrative actions.'' We have changed the text in Sec.
668.171(c)(2)(i)(A) to more accurately state the types of monetary
actions that are linked to this financial trigger. They are when an
institution has entered against it a final monetary judgment or award
or enters into a monetary settlement which results from a legal
proceeding, including from a lawsuit, arbitration, or mediation,
whether or not the judgment, award or settlement has been paid. In
addition, we have modified paragraph (c)(2)(i)(D) of this section which
describes a financial trigger applicable to institutions that have
recently undergone a change in ownership. The revised language more
accurately describes the monetary actions that will lead to the
financial trigger and those actions are when the institution has
entered against it a final monetary judgment or award or enters into a
monetary settlement which results from a legal proceeding, including
from a lawsuit, arbitration, or mediation whether or not the obligation
has been paid.
Comments: A few commenters argued that paragraphs (c)(2)(i)(A),
(B), and (D) gave too much leverage to claimants and government
agencies in that they could use the threat of a financial trigger being
imposed as part of resolving their grievance with the institution.
Discussion: We disagree with the commenters. With respect to the
provisions in paragraphs (c)(2)(i)(A) and (D), these are elements that
result in the composite score being recalculated and which has to
result in a failure. The events that are described in paragraphs
(c)(2)(i)(A) and (D) result from an actual adjudication of a monetary
judgment or award, or the institution's agreement to be bound by a
monetary settlement. That means there has been some process in which an
institution would have had an opportunity to defend themselves and they
are still being asked to pay some kind of amount. With a settlement,
that represents a negotiated situation in which an institution has
decided it is in its benefit to reach that agreement.
With respect to the government enforcement actions in paragraph
(c)(2)(i)(B), the provision does not, as commenters claim, create risks
of regulators wielding baseless and frivolous enforcement actions to
extort participating institutions. The risks commenters invoke more
accurately describe the incentives of lawsuits by private litigants--
which are not covered--rather than government enforcement actions.
Unlike private litigants, government enforcement actions are tools for
enforcing laws and regulations. They lack the incentives associated
with lawsuits that can result in private financial gain. Likewise, the
government can employ investigative tools of compulsory process to
gather evidence and has options outside of civil discovery for
obtaining relevant information. Similarly, government regulators'
decisions to pursue enforcement are ordinarily informed by
considerations in statute, rules, or agency guidance and based on the
probability of ultimate success and efforts at resolution without
litigation.\11\ Those considerations and the practicalities of
allocating limited resources make commenters' fears unlikely. Indeed,
neither commenters' submissions nor the Department's experience suggest
any examples of frivolous enforcement actions against title IV, HEA
participants. And in the unlikely event of one, the provision's
triggers may be avoided through filing a motion to dismiss--which
provides ample opportunity to filter out actions that are frivolous or
facially deficient. Contrary to commenters' speculative fears, the
presence of this trigger ensures the Department is acting when there
are warning signs about potential negative effects to the financial
health of institutions.
---------------------------------------------------------------------------

\11\ See, e.g., 15 U.S.C. 53(a) (enforcement actions predicated
on Federal Trade Commission having a ``reason to believe'' there is
an existing or impending violation of relevant law and that the
remedy sought ``would be in the interest of the public''); U.S.
Dep't of Just., Just. Manual sec. 9-27.220 (2018) (Federal
prosecutions informed by a determination that the conduct violates
Federal law, that admissible evidence that is probably ``sufficient
to obtain and sustain a conviction,'' that action is in the public
interest, and that there alternatives remedies are inadequate); E.O.
12988, 61 FR 4729 (Feb. 5, 1996) (civil litigation must be preceded
by pre-suit notice, settlement efforts, and attempts at alternative
dispute resolution in order to, among other factors, limit suits to
``only meritorious civil claims'').
---------------------------------------------------------------------------

Changes: None.
Comments: A few commenters took issue with the provision in
paragraph (c)(2)(i)(B) that includes as a trigger a qui tam lawsuit, in
which the Federal Government has intervened, and which has been pending
for 120 days, that would constitute a mandatory trigger. They opined
that the mere filing of a qui tam lawsuit, regardless of government
intervention, should not be a financial trigger. Those commenters went
on to object to the 120-day period proposed in the regulation that says
that the mandatory trigger applies if there has been no motion to
dismiss within 120 days of government intervention or if there was such
a motion and it was denied. The commenters stated that 120 days was
insufficient in addressing the deprivation of the institution's due
process and believed that motions to dismiss at such early stages of a
lawsuit are limited to the face of the pleadings without consideration
of the factual merits of the claims. They believed the trigger would be
activated without due regard to the merits of the claims or the
institution's defenses to those claims.
Discussion: The commenters misinterpret the standards by which a
qui tam lawsuit would become a triggering condition under this
paragraph. The mere filing of a qui tam

[[Page 74589]]

does not result in a trigger. It is only if the government intervenes
that a qui tam could be considered under paragraph (c)(2)(i)(B).
According to the U.S. Department of Justice, such interventions only
occur in about one-quarter of qui tam cases,\12\ and intervention
decisions are informed by an express determination of the case's
merits.\13\ These are not steps that are taken lightly or that occur
commonly in the postsecondary education space. Indeed, actions
involving institutions of higher education represent only a small
fraction of qui tam lawsuits, most of which relate to programs like
those administered by the U.S. Department of Health and Human Services
(HHS). Statistics from the U.S. Department of Justice show that 61
percent of the 15,246 qui tam lawsuits brought from 1987 to 2022 were
related to HHS.\14\ Another 12 percent were related to the U.S.
Department of Defense.
---------------------------------------------------------------------------

\12\ <a href="http://www.justice.gov/sites/default/files/usao-edpa/legacy/2012/06/13/internetWhistleblower%20update.pdf">www.justice.gov/sites/default/files/usao-edpa/legacy/2012/06/13/internetWhistleblower%20update.pdf</a>.
\13\ See U.S. Dep't of Just., Just. Manual sec. 4-4.110 (2018).
\14\ <a href="http://www.justice.gov/d9/press-releases/attachments/2023/02/07/fy2022_statistics_0.pdf">www.justice.gov/d9/press-releases/attachments/2023/02/07/fy2022_statistics_0.pdf</a>.
---------------------------------------------------------------------------

The Department believes the 120 days are appropriate because it
gives sufficient time for a defendant to file a motion to dismiss. At
the same time, this captures potential lawsuits early enough in
progress that the Department would not be seeking financial protection
at the same time an institution has lost a case, which could be the
case if we were to instead consider timing related to motions for
summary judgment.
The Department does, however, recognize that the phrasing of the
trigger related to lawsuits in the NPRM was confusing as it was not
fully clear how the 120-day requirements applied to different types of
lawsuits. Accordingly, we have clarified in the regulatory text that
the trigger applies to lawsuits that have been pending for 120 days or
qui tam lawsuits that have been pending for 120 days since U.S.
intervention and there has been no motion to dismiss filed or such a
motion was filed and denied within 120 days. This update clarifies that
this trigger is predicated on the decision by a governmental official
with regulatory or law enforcement authority that the school committed
the conduct alleged in circumstances warranting an enforcement action
and the case having proceeded past the motion-to-dismiss stage. We have
also indicated that this would cover motions to dismiss or equivalent
motions under State law, such as demurrers.
Changes: We have changed the text in Sec. 668.171(c)(2)(i)(B) to
more clearly convey how the 120-day requirements work for lawsuits as
described above.
Comments: One commenter sought clarification regarding the
financial trigger in paragraph (c)(2)(i)(B) that states that an
institution that is sued by a Federal or State authority to impose an
injunction, establish fines or penalties, or to obtain financial relief
such as damages would have the mandatory trigger implemented. The
commenter inquired if more than one entity is suing the institution for
the same act or event, would that generate one requirement for
financial protection or multiple requirements due to there being
multiple agencies involved in the proceedings. The commenter supported
treating such a circumstance as a single event with a single
requirement for financial protection.
Discussion: As discussed earlier, the Department will review the
triggering conditions to determine if what appears to be multiple
triggering situations is attributed to a single instance, such as
multiple States suing one institution. We will consider whether to
treat multiple triggering situations as a single requirement for
financial protection on a case-by-case basis as we examine the specific
facts.
Changes: None.
Comments: One commenter recommended that the trigger described in
paragraph (c)(2)(i)(B) be modified to be based on summary judgment. The
commenter urged the Department to modify the trigger so that it is
premised on the agency surviving a motion for summary judgment rather
than a motion to dismiss, as proposed. The commenter posited that a
motion to dismiss is too low a bar and does not reflect judicial
consideration of the merits of the claim. The commenter contends that
an agency surviving a summary judgment motion is a better indicator
that the agency has a viable claim and that the subject institution is
at some financial risk. The commenter acknowledged that premising this
trigger on a summary judgment would extend the timeframe somewhat, but
nevertheless would occur well before a trial or any appeals.
Discussion: The Department disagrees with the commenter. Refraining
from any trigger until after the point at which the institution is
facing trial makes the Department likely to face circumstances in which
much-needed financial protections are not available until it is too
late. Similarly, in cases where both parties file cross-motions for
summary judgment, and summary judgment on liability is granted to the
agency, it may be too late to obtain financial protection. Instead, the
regulations strike the appropriate balance by providing the needed
financial protections after a government official with regulatory or
law enforcement authority decides, often after an investigation, that
the circumstances warrant an enforcement action and, furthermore, after
that action has proceeded past the motion-to-dismiss stage.
Changes: None.
Comments: One commenter suggested that we limit paragraph
(c)(2)(i)(B) to Federal and State agencies with specific oversight of
postsecondary institutions rather than the proposed language that
simply says, ``sued by a Federal or State authority.'' The commenter
gave an example of the IRS or a state taxing authority suing the
institution, thereby initiating the mandatory trigger, even though
these agencies have no particular oversight of the educational
operations of the institution.
Discussion: The purpose of the mandatory trigger is to identify
situations where the financial health of an institution is at risk. For
example, any action lawsuit from the Federal or State government based
upon that alleges significant liabilities due to unpaid back taxes
could represent just as great a risk to an institution's finances as a
lawsuit that is specific to Federal financial aid. We, therefore,
decline to adopt the commenter's suggestion.
Changes: None.
Comments: A number of commenters objected to the triggers related
to lawsuits. They argued that the requirement that an institution's
unfounded lawsuit that fails on the merits might require the
institution to post substantial financial protection. One commenter
opined that this established a situation where the institution was
``guilty until proven innocent.'' Other commenters believed that the
elimination of arbitration agreements and the class action lawsuits in
the Borrower Defense regulations creates an environment where frivolous
lawsuits against institution will be encouraged with needless financial
triggers being activated.
Discussion: We disagree with the commenters whose arguments do not
accurately capture the nature of the trigger related to lawsuits in
Sec. 668.171(c)(2)(i)(A) and (B). For the situations in paragraph
(c)(2)(i)(A) of this section, financial protection requirements only
occur if the institution is required to pay a debt or incurs a
liability from a settlement, arbitration proceeding or a final judgment
in a judicial proceeding. Moreover, this trigger is only activated

[[Page 74590]]

if the legal determination results in the impacted institution having a
recalculated composite score of less than 1.0, the failing threshold.
The focus of this trigger is on the financial consequences to the
institution originating from those legal or administrative actions.
The triggering event described in paragraph (c)(2)(i)(B),
meanwhile, does not include just any lawsuit filed. It only occurs if
the institution is sued by a Federal or State authority to impose an
injunction, establish fines or penalties or to obtain financial relief
or if the Federal Government decides to intervene in a qui tam lawsuit.
Government lawsuits against institutions of higher education are not
common events and are not actions undertaken lightly. While qui tam
lawsuits are brought by private individuals, they are only a triggering
event if joined by the Federal Government, which is also a rare
occurrence. None of these are frivolous actions. It is incorrect to
claim that the elimination of mandatory arbitration agreements and
preventing institutions from forcing students to waive their right to
participate in a class action lawsuit create an environment supporting
frivolous lawsuits would lead to an increase in the number of mandatory
triggering events tied to lawsuits. The mere filing of a class action
or other private litigation (other than a qui tam where the government
has intervened) are not captured under the mandatory trigger.
The provisions related to borrower defense are also not triggered
by the mere presence of claims. They are related to recovery efforts
for approved claims as a mandatory trigger or the formation of a group
process by the Department for a discretionary trigger. For the
discretionary trigger related to borrower defense, the Department must
determine that the circumstances create a significant adverse effect on
the institution. These are standards that depend upon actions by the
Department that are informed by either the approval of claims, which
follows a determination based upon a preponderance of the evidence that
the institution engaged in conduct that merits a borrower defense
approval, or signs that it may have engaged in such conduct for the
formation of a group.
Changes: None.
Comments: One commenter sought clarification on paragraph
(c)(2)(i)(C) which describes a trigger that is activated if the
Department initiates an action against an institution to recover the
costs of adjudicated claims in favor of borrowers under the loan
discharge provisions in 34 CFR part 685. The commenter wanted to ensure
that this trigger applied to borrower defense loan discharges and not
to other loan discharges like a closed school discharge.
Discussion: We agree with the commenter that the trigger described
in Sec. 668.171(c)(2)(i)(C) is applicable to borrower defense loan
discharges, as we conveyed in the preamble discussion of the NPRM.
Changes: We modified the regulatory language in Sec.
668.171(c)(2)(i)(C) to clarify that this trigger is initiated by the
Department initiating an action to recover the cost of adjudicated
claims in favor of borrowers under the borrower defense to repayment
provisions.
Comments: A few commenters objected to the provision in paragraph
(c)(2)(i)(D) by which institutions undergoing a change in ownership
would be subject to a mandatory trigger if the institution is required
to pay a debt or incurs a liability from a settlement, arbitration
proceeding, final judgment in a judicial proceeding, or an
administrative proceeding determination. They also voiced an objection
based on the process of a change in ownership being closely monitored
and strictly controlled by the Department and therefore the Department
can quantify the exact impact of any debt or liability as part of the
Department's process. The commenter believed that this ability rendered
the financial trigger unnecessary.
Discussion: We disagree with the commenters, in part. Each of the
actions in paragraphs (c)(2)(i)(A) through (C) of Sec. 668.171 show
that an institution is facing a serious legal and administrative action
that can result in financial instability of an institution. These
events are more concerning after a change in ownership and creates
uncertainty around the new owner's ability to operate the institution
in a financially responsible way.
Moreover, although the Department reviews the same day balance
sheet and financial statements for the new owner and institutions in
the course of its review of changes in ownership, those financial
statements reflect specific points in time (the day of the transaction
and the two fiscal years prior to the transaction). As a result, those
financial statements do not capture litigation outcomes that occur
subsequently, but which could have a significant negative impact on the
institution's finances. Therefore, we do believe that it would be
appropriate to also treat this trigger as one that requires a
recalculation of the composite score. This aligns the change in
ownership requirements with Sec. 668.171(c)(2)(i)(A), except in
paragraph (c)(2)(i)(D) we would perform the recalculation for all
situations that are captured in paragraph (c)(2)(i)(D) and not limit it
just to those with a composite score of less than 1.5. We think that is
appropriate given the concerns about changes in ownership. This means
that every action under Sec. 668.171(c)(2)(i) except for paragraph
(c)(2)(i)(B) results in a recalculation. We do not recalculate
paragraph (c)(2)(i)(B) because the litigation may not indicate a
specific dollar amount that would form the basis of a recalculation.
Changes: We have indicated in the regulation that institutions
subject to paragraph (c)(2)(i)(D) of Sec. 668.171 will have their
composite score recalculated.

Withdrawal of Owner's Equity (Sec. 668.171(c)(2)(ii))

Comments: One commenter posited that an institution with a score of
less than 1.5 that paid a dividend or engaged in a stock buyback which
resulted in a recalculated score of less than 1.0 should not be
automatically subject to a financial protection requirement. The
commenter stated that institutions in this situation should be
evaluated to determine if the activity poses financial risk to the
institution.
Discussion: We disagree with the commenter. In the situation
presented as an example, the institution, after engaging in the
financial activity, has a failing composite score of less than 1.0. By
that measure, the institution is not financially responsible and that
results in the need for financial protection, e.g., a letter of credit.
Changes: None.
Comments: Some commenters objected to the provision in Sec.
668.171(c)(2)(ii) where a proprietary institution with a composite
score of less than 1.5 or any proprietary institution through the end
of its first full fiscal year following a change in ownership would be
subject to the financial trigger. That trigger occurs when an
applicable institution has a withdrawal of owner's equity by any means,
including a dividend, unless the withdrawal is a transfer to an entity
included in the affiliated entity group or is the equivalent of wages
in a sole proprietorship or general partnership or a required dividend
or return of capital. The requirement for financial protection would
only be initiated if the institution, as a result the withdrawal of
equity, has a recalculated composite score of less than 1.0, the
threshold for failure. The commenters opined that this regulation would
create a burden for the Department in that it would be

[[Page 74591]]

reviewing many institutions which fall subject to this trigger, but it
is then determined that the financial event did not drive the
institution's composite score to below 1.0. The commenters further
stated that current regulations governing this matter were sufficient
and did not require modification.
Discussion: We disagree with the commenters. We believe the
administrative burden placed on the Department is acceptable because of
the significant risk faced by taxpayers when institutions now have a
failing composite score as a result of the owner's equity withdrawal.
As noted in paragraph (c)(2)(ii)(B) of this section, these institutions
would now have a failing composite score and that necessitates
obtaining financial protection.
Changes: None.

Significant Share of Federal Aid in Failing GE Programs (Sec.
668.171(c)(2)(iii))

Comments: Several commenters opposed the financial trigger in Sec.
668.171(c)(2)(iii) for institutions that receive at least 50 percent of
their title IV, HEA funds from GE programs that are failing under
subpart S of part 668. The commenters stated that this trigger did not
correlate to the financial stability of the institution. One of those
commenters believed that this trigger would be an extraordinary burden
to an institution that offered a limited number of programs. Another
stated that the GE calculation has a look back period of several years
and that data are not indicative of the institution's current financial
status. Some of the commenters believed that the GE provisions in
subpart S are sufficient in themselves for Departmental monitoring
without adding an additional financial trigger linked to GE.
Discussion: We disagree with the commenters. The purpose of the
financial triggers is to alert the Department of an institution's
financial instability as soon as it is reasonable to know of that
situation. An institution with at least half of its title IV, HEA funds
coming from failing programs is at risk of a significant loss of
revenue if those programs continue to fail and lose title IV
eligibility. The projected cessation of these funds creates a situation
where the institution's financial health could be negatively impacted.
Such a situation is exactly what the financial triggers, as opposed to
the GE regulations, are designed to counteract so that financial
protection can be obtained to protect current and prospective students
at the institution as well as protecting taxpayers' interests. The
issues about the age of the data and the number of programs offered are
not relevant for these concerns. The focus of this trigger is about the
potential for the effect on the revenue. Whether half of the title IV,
HEA revenue comes from one, 10, or 100 programs is not relevant since
the overall threat to revenue in percentage terms is the same.
Similarly, the Department's concern is about how a program failing the
gainful employment requirements could lead to the loss of Federal aid
and what that means for the institution's ability to meet its financial
obligations. We are worried about the forward-looking implications of
that provision, and issues related to the age of the data are addressed
by the Department in the separate final rule related to gainful
employment.
Changes: None.

Teach-Out Plans (Sec. 668.171(c)(2)(iv))

Comments: Several commenters expressed concerns around the
mandatory trigger in Sec. 668.171(c)(2)(iv) tied to when an
institution is required to submit a teach-out plan or agreement
required by a State or Federal agency, an accreditor, or any other
oversight entity. The commenters expressed the view that institutions
are sometimes required to submit a teach-out plan as a normal course of
business and not due to any fear of closure, institutional misconduct,
or financial instability. A few of the commenters observed that teach-
out plans can increase the financial strength of the institution rather
than decrease it. A few commenters observed that some institutions may
be reluctant to enter a teach-out so that they would not bear the
burden of the financial trigger. One of the commenters asserted that
the Department could be the Federal agency requiring the teach-out
plan, which then in turn would initiate the mandatory trigger
associated with submitting a teach-out plan due to changes being made
in the certification procedures part of this rule to request a teach-
out for a provisionally certified institution deemed at risk of
closure. Some commenters argued that mandatory triggers should only be
applied to teach-out agreements requested for financial reasons.
Other commenters raised concerns that the trigger as written could
require a school to provide financial protection if it voluntarily
chose to discontinue a program and was asked by the accreditor to
create a teach-out as part of that process.
Discussion: The Department agrees with the commenters, in part,
that the teach-out trigger as included in the NPRM may capture
instances that are not sufficiently concerning enough to merit a
mandatory trigger. However, we maintain that circumstances may exist
where a teach-out request is a sign of financial instability that
merits the Department's action. These required submissions are often
associated with institutions facing imminent closure or other financial
catastrophe where students are negatively impacted.
Therefore, the Department is clarifying the scope of the mandatory
teach-out trigger in paragraph (c) of this section and adding a
separate discretionary trigger in paragraph (d) of this section. We are
modifying the mandatory trigger to include teach-outs that are
requested due, in whole or in part, to financial concerns and that
cover the entire institution. This could include situations where the
institution is requested to provide separate teach-outs for all its
programs. This will capture the most serious situations in which teach-
outs are requested and will exclude situations where the teach-out
requirement is part of a routine matter.
Given the narrower scope of this mandatory trigger, we have added a
separate discretionary trigger in Sec. 668.171(d)(13) to capture other
types of teach-out requests. This trigger is important because there
may be other types of teach-outs that still represent significant
negative financial consequences. For instance, an institution that is
required to submit a teach-out agreement to cover a program that
enrolls half its students because of concerns about misrepresentations
may merit a financial protection request because of the extent of
possible revenue loss. By contrast, a teach-out request for a single
small program being phased out by the institution would not merit a
financial protection request.
Changes: We changed Sec. 668.171(c)(2)(iv) to clarify that the
mandatory trigger is initiated when the institution is required to
submit a teach-out plan or agreement, for reasons related to, in whole
or in part, financial concerns. We have also added new Sec.
668.171(d)(13) that establishes a discretionary trigger which applies
to institutions required to submit other teach-out plans or agreements,
including programmatic teach-outs, by a State, the Department or
another Federal agency, an accrediting agency, or other oversight body
that are not covered by the mandatory trigger in paragraph (c) of this
section.

State Actions (Sec. 668.171(c)(2)(v))

Comments: A few commenters objected to the mandatory trigger in
proposed Sec. 668.171(c)(2)(v) tied to when a State licensing or
authorizing agency

[[Page 74592]]

notifies an institution that it must comply with some requirement, or
its licensure or authorization will be terminated. The commenters
argued that this trigger was too far reaching and would be
unnecessarily activated when an institution had the most minor
infraction with a State oversight agency. A few of the commenters
pointed out that some State oversight agencies include in all
compliance related correspondence pro forma language that authorization
can be revoked. Some of the commenters believed that this trigger gave
too much leverage to State agencies in that those agencies could use
the threat of the Departmental trigger in their interactions with
institutions. Two commenters believed that institutions offering
instruction in multiple States were particularly burdened by this
regulation. One of those commenters believed that any State citation
should be a discretionary trigger and not a mandatory one. The other
commenter believed that a State action initiated by a State that was
not the institution's home State did not present a financial concern to
the institution. That commenter suggested that a State action from the
institution's home State be a mandatory trigger but a State action by
another State be a discretionary trigger.
Discussion: We agree with the commenters, in part, and have
combined this triggering event with the discretionary trigger in Sec.
668.171(d)(9) that is also related to State citations. We believe that
State authorization or licensure for an institution is a fundamental
factor of eligibility for institutions seeking to participate or
participating in the title IV, HEA programs and that the threat of
removal of a State's authorization or licensure poses a financial risk
to the institution participating in the title IV, HEA programs.
However, we are persuaded by the commenters that States may express
these concerns with varying levels of severity and that connecting
these actions to a mandatory trigger would risk being over inclusive.
Therefore, we made this a discretionary trigger to account for the
issues raised by the commenters. Making this a discretionary trigger
means that issues raised by commenters about whether the State action
is the institution's home State or not can be considered in reviewing
the event.
Changes: We have removed the mandatory trigger at Sec.
668.171(c)(2)(v) and instead modified the discretionary trigger at
Sec. 668.171(d)(9) to include situations where the State licensing or
authorizing agency has given notice that it will withdraw or terminate
the institution's licensure or authorization if the institution does
not take the steps necessary to come into compliance with that
requirement. We have reserved Sec. 668.171(c)(2)(v).

Publicly Listed Entities (Sec. 668.171(c)(2)(vi))

Comments: Many commenters objected to the mandatory trigger
detailed in proposed Sec. 668.171(c)(2)(vi)(D) whereby a late annual
or quarterly report required by the SEC activates the mandatory
trigger. Some of the commenters opined that there was not meaningful
rationale that a late submission of an SEC report indicated any lack of
financial stability by the institution or any necessity for financial
protection being obtained. One commenter stated that the proposed
trigger was speculative, abstract, and unqualifiable and should be
eliminated.
Discussion: We disagree with the commenters. Submissions of SEC
reports are a requirement with a well-known and anticipated deadline so
when an entity is late to comply with this requirement, it could be an
indicator of the entity's impaired financial stability. We do agree,
however, that a minor infraction is not necessarily indicative of
financial instability. Such a minor infraction can be easily resolved
when the institution reports the late submission of the SEC report to
the Department, assuming it has submitted the report in the 21-day
period following the SEC due date. Notably, as explained in our
discussion of changes to Sec. 668.171(f), we changed the reporting
requirements in Sec. 668.171(f) to allow 21 days to report the
required events to the Department (rather than 10 as originally
proposed) and Sec. 668.171(f)(3)(i)(B) allows the institution to show
that the triggering event has been resolved.
Changes: None.

Non-Federal Educational Assistance Funds (Sec. 668.171(c)(2)(vii))

Comments: Several commenters opined that the mandatory trigger in
proposed Sec. 668.171(c)(2)(vii) is unreasonable and unnecessary. This
trigger is linked to an institution that did not receive at least 10
percent of its revenue from sources other than Federal educational
assistance as provided in Sec. 668.28(c), often referred to as the 90/
10 rule. The commenters believed that since this is a regulated event
under Sec. 668.28 with sanctions for non-compliance, that there is no
need for inclusion in Sec. 668.171(c) as a mandatory trigger. One
commenter thought that this trigger was particularly burdensome on
distance education providers since they are prevented from including
funds generated through non-eligible distance education programs as
part of their non-Federal revenue.
Discussion: We disagree with the commenters. Failure of the 90/10
rule is a serious issue of non-compliance with statutory and regulatory
requirements. Failing this requirement twice in consecutive years
results in an institution losing access to Federal student financial
aid for two years. That risk of Federal student aid loss can have an
immediate negative impact on the financial stability of the affected
institution. This trigger allows us to seek financial protection as far
in advance of the potential second failure as we can.
We also disagree with the comment about the burden on distance
education providers. The exclusion of non-eligible distance education
courses is part of the requirements for 90/10 compliance. Institutions
should be able to meet this requirement without counting that revenue,
which many distance education providers do. Compliance with the 90/10
rule is important for proprietary institutions to maintain access to
title IV student aid. If an institution fails to comply with the rule,
there can be serious implications for the institution's financial
stability.
Changes: None.

Cohort Default Rates (Sec. 668.171(c)(2)(viii))

Comments: Many commenters expressed concerns over the mandatory
trigger proposed in Sec. 668.171(c)(2)(viii) where an institution is
at risk of losing access to Federal aid due to high cohort default
rates (CDRs). Many of these commenters believed it is unfair to hold
institutions accountable for students' inability to repay their student
loans. One commenter posited that the return to normalized student loan
repayments, following the COVID-19 national emergency pause in
repayments, may not be a smooth transition and that should be factored
into any financial trigger linked to CDRs. One commenter stated that
this was another example of information that the institution was
required to report to the Department when it was already aware of the
information.
Discussion: We disagree with the commenters. An institution subject
to this trigger will lose access to Pell Grants and Direct Loans the
next time CDRs are calculated unless they can lower their rates or
successfully appeal their results. It is that threat of pending loss of
financial aid that merits the inclusion of a mandatory trigger,
regardless of the reason why an

[[Page 74593]]

institution has a high CDR. While it is true that institutions can and
do continue operating without access to Federal student aid, it is also
the case that many institutions are heavily dependent on Federal
student aid and close when they lose access to it. This trigger is thus
a prudent step to protect the taxpayers from potential losses that
could occur if the CDR issue is not resolved by the institution.
Regarding the transition to a return to normal repayments following
the COVID-19 national emergency, the Department notes that the effects
of the pause will continue to keep default rates low for several years.
The Department has also implemented multiple policy solutions to help
students avoid default during the return to repayment. This includes a
temporary 12-month ``on ramp'' where students who are unable to make
payments will not go into default. We have also implemented a new
income-driven repayment plan that is more affordable, including the
automatic enrollment of delinquent borrowers if we have their approval
for the disclosure of the information needed to calculate their payment
on income-driven repayment. We agree with the commenter who pointed out
that the Department is aware of CDRs as it is the Department that
calculates them. We point out that Sec. 668.171(f) does not require
institutions to report their CDRs to the Department.
Changes: None.

Loss of Eligibility (Sec. 668.171(c)(2)(ix))

Comments: We received a few comments objecting to the mandatory
trigger proposed in Sec. 668.171(c)(2)(ix) when an institution loses
eligibility to participate in a Federal educational assistance program
other than those administered by the Department. The commenters
believed that the trigger would encourage institutions to not
participate in programs that would otherwise assist students. One of
the commenters posited that the trigger should be made discretionary
and only result in financial protection if the loss or revenue from
losing the program's eligibility be determined to be material to the
institution.
Discussion: We are concerned that an institution's loss of
eligibility to participate in another Federal agency's educational
assistance program could be a significant indicator that an institution
will face financial instability. For instance, an institution that
receives significant revenue from serving veterans could be financially
destabilized by losing access to a U.S. Department of Veterans Affairs
educational assistance program (e.g., the GI Bill). However, we are
persuaded by commenters that some losses of eligibility for other
Federal programs could be from programs that represent a small amount
of revenue or that only persist for a couple of weeks. Accordingly, we
believe making this a discretionary trigger will allow the Department
to consider the magnitude of the effect from a loss of eligibility.
Therefore, we have modified the discretionary trigger in Sec.
668.171(d)(10) to include loss of institutional eligibility as well as
loss of program eligibility related to participation in another Federal
educational assistance program.
Changes: We removed the mandatory trigger in Sec.
668.171(c)(2)(ix), and we broadened the discretionary trigger in Sec.
668.171(d)(10) to include loss of institutional eligibility to
participate in another Federal educational assistance program. Proposed
Sec. 668.171(c)(2)(ix) applied only to loss of program eligibility. We
reserved Sec. 668.171(c)(2)(ix).

Contributions and Distributions (Sec. 668.171(c)(2)(x))

Comments: Some commenters supported making the trigger in Sec.
668.171(c)(2)(x) discretionary instead of mandatory. This trigger
occurs when an institution's financial statements reflect a
contribution in the last quarter of its fiscal year, and then an entity
that is part of the financial statements makes a financial distribution
during the first two quarters of the next fiscal year, which would not
be captured in the current financial statements.
One commenter believed the trigger should be discretionary because
the described action is not always manipulative or results in a lack of
financial responsibility. Another commenter stated he or she realizes
that the Department's goal is to prevent manipulation of composite
scores and to ensure the composite score is demonstrating an accurate
level of institutional financial resources available to the
institution. The commenter opined that the trigger does not achieve
that goal because the Department's recalculation of the composite score
would only adjust it downward based on the distribution without
consideration of other financial factors that impact the score. The
commenter provided an example where an institution has an infusion of
capital in the fourth quarter which it used to purchase equipment for a
new program. The example continued with the school enjoying a full
cohort of students in the new program with the institution achieving an
increase in revenues in the first two quarters of the institution's
next fiscal year during which time the institution generated a
distribution. According to the proposed trigger, the Department would
only consider the contribution in the last quarter of the first fiscal
year and the distribution in the first two quarters of the second
fiscal year with no consideration of the increase in revenue which may
keep their composite score at a passing level. For this reason, the
commenter urged that this trigger be discretionary.
Discussion: The Department disagrees with the commenters and will
keep this as a ma

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