Guidance Puts Private College Leadership at Financial Risk

The Department of Education released guidance it says is intended to give the agency the tools needed to hold leaders of “risky colleges,” that have put the Department at large financial risk, personally liable to the federal government for Title IV student aid program costs.
 
While intended to crack down on large for-profit institutions, the new requirements could also affect private, nonprofit colleges and universities. For a person to be considered liable, they must exercise “substantial control” over a higher education institution. The Department considers a person to have exercised substantial control if they meet one of the following conditions: 

1. The person is a member of the board of directors, the chief executive officer, or other executive officer of the institution (emphasis added) or of an entity that holds a substantial ownership interest in the institution.
2. The person either directly or indirectly controls a substantial ownership interest in the institution.  
3. The person either alone or together with other individuals, represents a substantial ownership interest in the institution.

The guidance gives the Department discretion to require an individual meeting any of these requirements at an institution meeting certain risk factors to add their signature to an institution’s Program Participation Agreement (PPA), making them personally liable financially. Previously, liability was assumed by corporations or other entities.
 
Most concerning for private, nonprofit colleges and universities is the first definition that opens executive officers and members of boards of directors to potential liability. In the private, nonprofit sector, there is not one sole individual who has substantial control of or an ownership interest in the institution.
 
If an institution met the criteria for any of the following risk factors, individuals could be subject to financial liability:

• Any limitation, suspension, or termination action by the Department or a guaranty agency within the preceding five years;
• In the two most recent audits of the institution's conduct of programs under Title IV of the HEA, 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;
• Failing to meet the Department's financial responsibility requirements for the preceding five years; and
• Being cited during the preceding five years for failure to submit audits required under Title IV in a timely fashion.

The Department identified 13 conditions under which they might determine an institution to have a large financial risk, including: 

• 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;
• Whether the Department has approved a significant number of borrower defense to repayment or false certification claims for the institution or for another institution where the individual has or had substantial control;
• 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; and
• Whether the institution has high withdrawal or low retention rates. 

However, the Department says it will determine the need to require a person to assume personal liability by signing the PPA on a case-by case basis. Meeting any or all of the 13 conditions does not trigger any automatic action. 

 

For more information, please contact:
Emmanual A. Guillory