U.S. Department of Education Issues Proposed Regulations
Formal Package Addresses Gainful Employment and Financial Value Transparency, Financial Responsibility, Administrative Capability, Certification and Ability to Benefit
On May 19, 2023, the U.S. Department of Education (the “Department”) released a formal package of proposed regulations addressing gainful employment (“GE”) and financial value transparency, financial responsibility and administrative capability issues, certification, and ability to benefit. Included within the certification topic are proposed new regulations regarding state authorization that would impact current reciprocity agreements between the various states.
Other than the GE proposals, these regulations apply to virtually all programs and all institutions. The proposed GE regulations apply to all programs at for-profit institutions and all nondegree programs at private nonprofit and public institutions.
The proposed regulations are the result of negotiated rulemaking sessions conducted in early 2022. Because the negotiators did not reach consensus on any of these issues other than ability to benefit, the Department had a free hand when it drafted most of the proposals. The final result spans 212 pages in the Federal Register.
The Department released a fact sheet summarizing the GE regulations and new financial transparency and disclosure proposals. It also released several documents modeling the impact of these proposals, including a Data Set Spreadsheet (note – this is a large file), a 2022 Program Performance Data Description and a Data Codebook. Finally, it published a separate fact sheet describing the changes to other topics addressed in these proposed regulations.
The Department will accept comments on the proposed regulations through June 20, 2023. Comments must be filed online via the Federal e-Rulemaking Portal at https://www.regulations.gov/document/ED-2023-OPE-0089-0001. The Department intends to issue final regulations no later than November 1, 2023, so that they will be effective as of July 1, 2024.
Gainful Employment and Financial Value Transparency
The Department announced the new GE proposal (“Draft GE Rule”) with a press release that touted it as “the strongest set of safeguards ever to protect students from unaffordable debt or insufficient earnings from career training programs” that “would terminate access to Federal financial aid for career training programs that routinely leave graduates with unaffordable debt burdens or with earnings that are no higher than workers without any education beyond high school.” As previously noted, the Draft GE Rule would apply to virtually all programs offered by for-profit institutions and to nondegree programs at public and private nonprofit institutions.
In addition to the Draft GE Rule, the Department also proposes new financial value transparency and disclosure requirements that would apply to all programs at all institutions. According to the press release, this new push for transparency “includes disclosures of what students and families are likely to pay out-of-pocket for a given program and a requirement that students acknowledge this information before receiving federal financial aid to attend programs that consistently leave participants with high debt burdens.”
That Draft GE Rule is reminiscent of earlier efforts to promulgate GE regulations, although there are notable differences. The new proposal would establish two separate metrics on which GE programs would be assessed.
The first metric is the familiar debt-to-earnings (“D/E”) ratio, which measures whether borrowers can afford to repay their student loans. In this new iteration, however, a GE program would have to show that the median debt obligations of its completers who received federal student aid do not exceed either 8% of the completers’ median annual earnings or 20% of the completers’ median discretionary earnings. Discretionary earnings are defined as annual earnings minus 150% of the federal poverty level for an individual. The Draft GE Rule refers to programs that fail to meet one or both of these metrics as “high-debt-burden” programs.
Rather than the loan repayment rate used in earlier versions of GE regulations, the second metric outlined in the Draft GE Rule is a new earnings premium test. A GE program would pass this test if the median annual earnings of its completers exceed the median annual earnings of high school graduates ages 25-34 in the state where the institution is located, or nationally if fewer than 50% of the GE program’s students are located in the same state as the institution. Programs that fail this metric are deemed “low-earning” programs.
A GE program that fails either one or both metrics must issue a notice to its current and prospective students that warns of the possible loss of the program’s Title IV eligibility. The notice must (a) describe the academic and financial options available to students to continue their education at other programs at the institution; (b) indicate whether, in the event the program loses Title IV eligibility, the institution intends to (i) allow students to complete the program, and (ii) refund tuition and fees paid by or on behalf of students; and (c) explain whether students could transfer credits to another institution under an articulation agreement or teachout plan. If the GE program fails the same metric twice in three consecutive years, its Title IV eligibility will be revoked.
The new financial value transparency regulations use the same metrics as the Draft GE Rule. However, the penalties described above for failing these metrics apply only to GE programs. Non-GE programs that fail the D/E test and are deemed high-debt-burden (but not low-earning) will have to provide disclosures to all students prior to disbursing Title IV aid through a system developed by the Department.
Debt and earnings ratios will be calculated for institutions at the six-digit OPEID level and for programs at the six-digit CIP code level, unless fewer than 30 students completed the program in a two-year or four-year cohort or if the applicable federal agency does not provide median earnings data for the program. The Department will publish the GE and transparency information, including the high-debt-burden and low-earning designations, on a publicly available website. Institutions will be required to notify students how to access the website prior to enrollment.
A GE program that fails either metric may initiate an appeal if it believes that the Department did not calculate its D/E ratio or earnings premium correctly. The loss of eligibility for failing a metric, however, is not appealable.
The Department proposes to amend the current mandatory and discretionary triggers to restore many of the provisions removed by the Trump Administration. The proposal also includes additional indicators that an institution is not financially responsible, and it revises the regulations dealing with changes of ownership.
Under the proposal, in addition to the general financial responsibility requirements already outlined in 34 CFR § 668.171(b), such as having a composite score above 1.5 and making refunds and Return-to-Title-IV payments, an institution would not be financially responsible if it fails to pay credit balances timely or meet payroll obligations. It also would fail the financial responsibility test if it borrows from retirement plans or restricted funds without authorization, trips one of the mandatory triggers, or experiences a discretionary triggering event that the Department determines has material adverse effect on the institution’s financial condition.
The list of mandatory triggering events is substantially expanded to include the following:
- institutional loss of eligibility to participate in other federal educational assistance programs such as education funding for veterans;
- federal or state litigation or federal intervention in a qui tam action to obtain an injunction or financial relief;
- Department action to seek recovery for loans discharged under a successful borrower defense claim;
- a Department determination that at least 50% of the institution’s Title IV funds are for programs that fail the GE requirements;
- the institution is required by an oversight body to submit a teachout plan or teachout agreement;
- the institution is placed in receivership; and
- the institution is subject to a default or other adverse condition under a credit or financing agreement as a result of actions taken by the Department.
The proposal also moves several triggers from discretionary to mandatory. These include notification from a state oversight agency that it will terminate the institution’s authorization unless the institution takes steps to come into compliance following a citation of violation of state requirements; failure of a for-profit institution to comply with the 90/10 rule; and two consecutive years of official cohort default rates of 30% or more.
The list of discretionary triggering events also is expanded under the proposal. These new events include:
- a probation order by a regulator or accrediting agency;
- any default or other condition, penalty, or adverse action under a credit or financing agreement for any reason other than action by the Department;
- any judgment awarding monetary relief that is subject to or under appeal;
- significant fluctuations in Title IV funds received by the institution;
- borrower defense claims that the Department is processing as a group that could be subject to recoupment if approved;
- the institution discontinues academic programs that affect more than 25% of its students;
- the institution closes more than half of its locations or closes locations that enroll more than 25% of its students;
- a citation by a state oversight agency that the institution is failing to meet state requirements;
- one or more programs lose eligibility to participate in another federal educational assistance program due to administrative action; and
- a publicly traded entity that owns at least 50% of an institution discloses that it is under investigation for possible violations of applicable law.
Institutions will be required to notify the Department of these various events, generally within 10 days. If appropriate, the Department will recalculate the financial responsibility score or take additional action as deemed necessary.
The Department also proposes to eliminate the regulation currently found in 34 CFR § 668.15, which contained the acid-test ratio and other conditions typically used in assessments of changes of ownership, and to consolidate all financial responsibility requirements in Part 668, Subpart L. As a result, it creates a new Section 668.176 that would deem a for-profit institution financially responsible in a change of ownership, when evaluated at the ownership level required by the Department for the new owner, only if it did not have operating losses and had positive tangible net worth in the last two fiscal years, as well as a passing composite score in the last fiscal year. A nonprofit institution evaluated at the ownership level required by the Department for the new owner would be financially responsible in a change of ownership if, for the last two years, it had positive net assets without donor restrictions and did not have an excess of expenditures over revenues, along with a passing composite score in the last fiscal year.
The Department proposes to revise and supplement its administrative capability regulations. The proposal would amend the current requirements regarding financial aid counseling to increase the types of information an institution must provide. The list of individuals who cannot be principals and affiliates of institutions would be expanded to include individuals responsible for prior misconduct or institutional closure that contributed to significant liabilities to the federal government. And, the institution’s responsibilities for validating high school diplomas would be enhanced substantially.
The proposed regulations also introduce several new administrative capability requirements. An institution will be required to provide adequate career services to its Title IV recipients, which the Department will determine based on the institution’s enrollment in GE programs, the number of career services staff, the career services the institution promises to its students, and partnerships with employers and recruiters. Appropriate externship and clinical sites needed to satisfy graduation requirements must be available within 45 days of completion of course work. An institution must make timely disbursements of funds as needed by students, may not have more than half of its full-time Title IV students in or half of its Title IV revenues from programs that fail the Draft GE Rule, or engage in misrepresentation or aggressive and deceptive recruitment.
The package of proposed regulations includes new provisions that will impact certification and recertification procedures. According to the Department’s fact sheet, these changes “would strengthen the Department’s ability to increase scrutiny of institutions that exhibit concerning signs and allow [it] to impose conditions to mitigate the risk posed to students and taxpayers.”
With the proposed changes, the Department would expand the reasons why it may place an institution on provisional certification. When making a decision about provisional certification, the Department may consider an institution’s withdrawal rates, D/E rates and earnings premium test results, instructional and marketing expenditures, and licensure pass rates.
The proposal also makes several changes to the Program Participation Agreement (“PPA”). In the case of for-profit and private nonprofit institutions, an authorized representative of any entity with direct or indirect ownership that can exercise control will be required to sign the PPA, along with an institutional representative. All federal agencies and state attorneys general would be authorized to share information about an institution. Additional restrictions will be placed on the ability of an institution to employ, affiliate with, or contract with a person or entity that has committed fraud or misconduct or that was affiliated with an institution that owes a liability to the Department. The length of GE programs is limited to the minimum number of hours or credits mandated by the institution’s home state or another nearby state where a majority of institution’s students reside. Finally, an institution may not withhold a transcript due to a debt owed to the institution if the debt was caused by administrative error or Return-to-Title-IV requirements.
The PPA revisions also address new state authorization requirements. Under the proposal, for each state where the institution or its students are located, the institution must determine that each of its programs (a) meets any programmatic accreditation requirement for employment or otherwise, and (b) satisfies any requirements to seek professional licensure or certification if needed to work in the field in that state.
The proposal also would create a new wrinkle in the current policies regarding reciprocity agreements between states. The PPA would be amended under new Section 668.14(b)(32)(iii) to require institutions to comply “with all State consumer protection laws related to closure, recruitment, and misrepresentations, including both generally applicable State laws and those specific to educational institutions” in all states where either the institution or its students are located.
Ability to Benefit
The Department proposes to amend the regulations regarding the Title IV eligibility of non-high school graduates under an ability-to-benefit (“ATB”) determination. Negotiators achieved consensus on the ATB topic during negotiated rulemaking, and the proposal reflects the consensus language.
ATB students must be enrolled in eligible career pathway programs in order to receive Title IV funds. The proposal would revise the regulations under which the Department would consider completion of an approved state process in lieu of passing an approved ATB test and the requirements for enrollment in an eligible career pathway program through the approved state process. They also would revise monitoring and institutional participation requirements and update reporting and documentation obligations.
# # #
Maynard Nexsen is a full-service firm with attorneys experienced in all regulatory and operational aspects of higher education, including federal and state oversight, accreditation, cybersecurity, employee and benefits issues, and real estate concerns.
Roger Swartzwelder advises regionally and nationally accredited institutions of higher education, investors, and accrediting agencies regarding legal, administrative, regulatory, accreditation, transactional and operational matters.
About Maynard Nexsen
Maynard Nexsen is a full-service law ﬁrm with more than 550 attorneys in 23 offices from coast to coast across the United States. Maynard Nexsen formed in 2023 when two successful, client-centered firms combined to form a powerful national team. Maynard Nexsen’s list of clients spans a wide range of industry sectors and includes both public and private companies.
Chief Marketing Officer