On March 23, 2022, the U.S. Department of Education (Department) published an Electronic Announcement notifying institutions of higher education (institutions) that, in certain circumstances, it would require additional signatures on an institution’s Program Participation Agreement (PPA) from individuals representing corporations or other legal entities that have, or could have, direct or indirect effects on the institution’s administrative capability or financial responsibility. The Department took this action to increase the accountability of corporations and other entities with substantial control over institutions.
To further strengthen accountability and better ensure that taxpayers are protected in the event of school closures, approved borrower defense claims, or outstanding liabilities owed to the Department, the Department is issuing this Electronic Announcement to clarify its process for considering when to require certain individuals who exercise substantial control over institutions to assume personal liability for financial losses which may be incurred by the federal government. This Electronic Announcement describes the process the Department will use when it considers imposing signature requirements for PPAs that will apply to individuals in their personal capacity, rather than corporations and other entities. This process will provide the Department with additional tools for ensuring compliance with the legal requirements of the Title IV programs and recouping funds to cover financial losses incurred by the federal government.
Personal Liability for Losses Related to the Title IV Programs Under the Higher Education Act
Section 498 of the Higher Education Act of 1965, as amended (HEA), (20 U.S.C. § 1099c), gives the Department the authority to require the assumption of personal liability (or financial guarantees) from individuals who own or exercise substantial control over institutions. 20 U.S.C. 1099c(e)(1)(B) provides that the Secretary may, to the extent necessary to protect the financial interest of the United States, require the assumption of personal liability by an individual who exercises substantial control over an institution participating in Title IV programs. Under these provisions, personal liability may be imposed for financial losses to the federal government, student assistance recipients, and other program participants for funds under Title IV, and for civil and criminal monetary penalties authorized under Title IV.
Additionally, 20 U.S.C. § 1099c(e)(2)(A) specifies that the Department may determine that an individual exercises substantial control over a participating institution if the Department determines that the individual:
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directly or indirectly controls a substantial ownership interest in the institution;
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either alone or together with other individuals, represents, under a voting trust, power of attorney, proxy, or similar agreement, one or more persons who have, individually or in combination with the other persons represented or the individual representing them, a substantial ownership interest in the institution; or
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is a member of the board of directors, the chief executive officer, or other executive officer of the institution or of an entity that holds a substantial ownership interest in the institution.
“Ownership interest” is defined in 20 U.S.C. § 1099c(e)(3) and in the Department’s regulations under 34 CFR 600.31(b).
As noted, the Secretary has wide discretion to require the assumption of personal liability by an individual who exercises substantial control over a participating institution “to the extent necessary to protect the financial interest of the United States.” 20 U.S.C. § 1099c(e)(4) also provides that the Secretary shall not impose the requirement on an individual who exercises substantial control if the institution:
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has not been subjected to a limitation, suspension, or termination action by the Secretary or a guaranty agency within the preceding five years;
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has not had, in the two most recent audits of the institution’s conduct of programs under Title IV, an audit finding that resulted in the institution being required to repay an amount greater than five percent of the funds the institution received from programs under Title IV for any year;
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meets and has met for the preceding five years the Department’s financial responsibility requirements under 34 CFR Subpart L; and
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has not been cited during the preceding five years for failure to submit audits required under Title IV in a timely fashion.
If any one of these conditions is not satisfied (for example, an institution was subjected to a limitation, suspension, or termination action within the preceding five years), the Secretary may require an individual to assume personal liability as a condition of the institution’s continued participation in Title IV programs, to the extent necessary to protect the financial interest of the United States.
Determining Whether to Require Assumption of Personal Liability
For institutions that fail to meet any of the conditions set forth in 20 U.S.C. § 1099c(e)(4)(A)-(D), the Department will consider, on a case-by-case, individualized basis, a variety of factors in evaluating whether requiring an individual exercising substantial control over an institution to assume personal liability is necessary to protect the financial interest of the United States. The Department anticipates it is most likely to request signatures from individuals at institutions or groups of affiliated institutions that pose the largest financial risk to the United States—for example, those institutions that annually receive tens or even hundreds of millions of dollars of Title IV funds or institutions with serious and significant sets of concerns related to their compliance with federal financial aid rules. The Department will consider factors including but not limited to:
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Whether the institution (when considered individually or in combination with other institutions under common ownership or control) receives a significant amount of Title IV funding;
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Whether the Department has approved a significant number of borrower defense to repayment (borrower defense) or false certification claims for the institution or for another institution where the individual has or had substantial control;
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Whether the institution or the individual has a record of civil or criminal lawsuits or settlements or disciplinary or legal actions by the Department or other state or federal agency involving federal student aid or involving claims of dishonesty, fraud, misrepresentation, consumer harm, or financial malfeasance;
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Whether the institution or the individual has a history of noncompliance with the requirements of the HEA;
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Whether the institution has substantial problems with financial responsibility, which may be indicated by things such as repeated financial responsibility composite scores below 1.0 or a going concern disclosure issued by its auditor;
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Whether a for-profit institution has failed to meet the legal requirements for the 90/10 threshold;
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Whether the Title IV funding received by the institution (when considered individually or in combination with other institutions under common ownership or control) has substantially increased or decreased recently;
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Whether the institution has high withdrawal or low retention rates;
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Whether the individual is subject to executive compensation or a bonus structure that could significantly affect the financial health of the institution;
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Whether the Department has identified significant findings of a lack of administrative capability at the institution;
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Whether the Department has recently notified the institution that it has identified systemic or significant audit or program review findings or whether the institution has unpaid fines or liabilities resulting from an audit or program review;
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Whether there have been recent state or accrediting agency actions against the institution, including show cause or suspension actions, or recent state or accrediting agency actions against other institutions related to the individual’s involvement at that institution; or
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Any other factors specific to the institution or the individual that are relevant for the Department to determine whether an individual assuming personal liability is necessary to protect the financial interest of the United States.
The Department’s evaluation will not necessarily result in requiring an individual to assume personal financial liability in every instance where one of the conditions set forth in 20 U.S.C. § 1099c(e)(4) is not satisfied. Similarly, the Department anticipates there may be many instances where an institution or individual meets one or more of the Department’s evaluation factors described above but an individual is not required to assume personal liability. However, if more than one of the conditions set forth in 20 U.S.C. § 1099c(e)(4) is not satisfied, or the institution and individual collectively meet several of the evaluation factors, there is a greater likelihood that the Department may deem it necessary for an individual to assume personal liability to protect the financial interest of the United States.
When the Department determines that an individual or individuals exercising substantial control over an institution should assume personal liability for losses related to the Title IV programs (that is, for some or all the financial losses to the federal government, as well as for civil and criminal monetary penalties authorized under the HEA), it will typically effectuate the requirement for the individual to assume personal liability through a signature on the PPA.
An individual’s signature, to the extent required, will be a condition of an institution’s initial or continuing participation in the Title IV programs. If more than one individual exercising substantial control over an institution is required to sign the PPA and assume personal liability, an institution’s initial or continuing participation is contingent on each such individual cosigning the PPA.
Alternatives to Requiring an Individual to Sign the PPA
As part of this analysis, the Secretary may determine, on a case-by-case basis, that instead of requiring a controlling individual to sign the PPA, other financial protections can be provided by the individual to minimize the risk of financial losses in lieu of the signature.
Contact
If you have questions about this announcement, please contact the School Participation Division using the contact information on FSA Partner Connect.