U.S. Department of Education’s Final Rule Related to Financial Responsibility and Other Matters — Effective Date Approaching
In October 2023, the U.S. Department of Education issued a
final rule1 that becomes effective July 1, 2024. The final rule affects numerous provisions of the Code of Federal Regulations
(CFR) that apply to institutions of higher education that receive Title IV funding from the Department of
Education and use the eZ-Audit system to file their financial statements.
Specifically, the final rule affects sections within 34 CFR 6682 related to:
- Financial responsibility, including required related-party disclosures.
- Administrative capability.
- Certification procedures.
- Ability to benefit.
Institutions should closely review the final rule’s changes to these sections and
implement any new or incremental policies, procedures, and internal controls to
ensure that they are compliant with the requirements.
Financial Responsibility — Clarifications to Related-Party Disclosures and Changes to Mandatory and Discretionary Triggers
Related-Party Disclosures
The final rule amends 34 CFR 668.23.3 As modified, 34 CFR 668.23(d)(1) states, in part:
As
part of [the] financial statements [that an institution is required to
provide to the Department of Education], the institution must include a
detailed description of related entities based on the definition of a
related entity as set forth in Accounting Standards Codification (ASC) 850.
The disclosure requirements under this paragraph (d)(1) extend beyond those
of ASC 850 to include all related parties and a
level of detail that would enable the Department to readily identify the
related party. Such information must include, but is not
limited to, the name, location and a description of the related entity
including the nature and amount of any transactions between the related
party and the institution, financial or otherwise, regardless of when
they occurred. 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. [Emphasis
added]
Institutions should review their policies, procedures, and
internal controls associated with gathering related-party information because reports issued on or after July 1, 2024, are subject to
these requirements. As indicated above, the Department of Education expects
all related-party transactions to be reported, which appears to imply that
institutions may not perform materiality assessments or apply judgment with
respect to these disclosures.
With the July 1, 2024, deadline in mind, institutions
should discuss their disclosure plan with their
auditors as soon as possible.
Mandatory Triggers
The Department of Education will deem that an institution is not financially
responsible on the basis of certain “triggers.” Some triggers apply
automatically (mandatory triggers) while others are based on judgment
(discretionary triggers). Although additional repercussions may vary, upon the
occurrence of each mandatory or discretionary triggering event, an institution
must provide a letter of credit or cash in escrow that cannot be released until
the triggering event has ceased or been cured for a period of two years, as
documented in its audited financial statements.
An institution is deemed not financially responsible if its
recalculated composite score is less than 1.0 or if it is subject to any of the
following actions described in 34 CFR 668.171(c)4 as mandatory triggering events:
- A legal or administrative action has been taken against the institution.
- A proprietary school has withdrawn owners’ equity in the first year following a change in ownership.
- An institution that received most of its funding from Title IV funds has failing gainful employment programs.
- A state, the Department of Education, or another federal agency requires the institution to submit an institutional teach-out plan or agreement because of financial concerns.
- The SEC or other exchange has taken action against a publicly listed entity.
- The proprietary institution did not receive at least 10 percent of its revenue from nonfederal education assistance funds (90/10 requirement).
- The institution’s two most recent cohort default rates are 30 percent or greater.
- Contributions and distributions at the end of the fiscal year and the beginning of the next fiscal year are used to manipulate the composite score (offset of contribution against distribution would yield a composite score less than 1.0).
- As a result of action taken by the Department of Education, the institution is subject to a creditor event.
- The institution has declared fiscal exigency.
- The institution has entered into receivership.
Discretionary Triggers
An institution may be deemed not financially responsible at the Department
of Education’s discretion if it is subject to any of the following actions
described in 34 CFR 668.171(d) as discretionary triggering events:
- An accrediting agency or government agency has taken action against the institution.
- There have been other defaults, delinquencies, creditor events, or judgments by or against the institution.
- There are fluctuations in Title IV volume between consecutive award years or a period of years.
- Annual dropout rates are high, as calculated by the Department of Education.
- Interim reporting (as required by the Department of Education because of a failure to meet financial responsibility standards) indicates negative cash flows, failure of financial ratios, failure to achieve financial projections, increases in withdrawal rates, or other negative indicators of a change in financial condition.
- Borrower defense claims are pending, and the Department of Education has formed a group process for considering whether recoupment is possible.
- Programs that enroll more than 25 percent of students receiving Title IV funds are discontinued.
- Locations that enroll more than 25 percent of students receiving Title IV funds are closed.
- There have been state actions and citations, including citation of the institution or one or more of its programs by a state licensing or authorizing agency for failing to meet state agency requirements.
- The institution has lost eligibility to participate in another federal educational assistance program because of administrative action against the institution or its programs.
- The institution is publicly listed and discloses in a public filing that it is under investigation for possible violations of state, federal, or foreign law.
- Actions have been taken by another federal agency that cause the institution to face a loss of education assistance funds.
- The institution is required by a state, the Department of Education, another federal agency, an accrediting agency, or another oversight body to submit other teach-out plans or agreements not addressed in 34 CFR 668.171(c).
- Other events have occurred that are likely to have a significant adverse effect on the institution’s financial condition, as determined by the Department of Education.
Frequently Asked Questions
For more information about implementing the final rule’s requirements related to
financial responsibility, see the questions and answers published by the Department of
Education on October 31, 2023 (updated May 21, 2024).
Other Matters
The final rule also modifies sections of 34 CFR 668 related to administrative
capability, certification procedures, and the ability to benefit. While such
sections may have no direct impact on financial statement reporting, institutions
should be aware of changes under the final rule and take inventory of their
processes and procedures to ensure that they are compliant with the final rule’s
requirements.
Administrative Capability
The final rule adds procedures for determining the validity of high school
diplomas for distance education students as a requirement of an institution’s
administrative capability to show financial responsibility.
Certification Procedures
The following are required or affected by the final rule:
- Provisional certification stemming from lack of financial responsibility.
- Maximum certification length of three years for institutions with consumer protection concerns.
- Supplementary performance measures, including the removal of the debt-to-earnings ratio and the earnings premium as measures that the Department of Education may consider when determining whether to certify or conditionally certify the participation of an institution.
- Limiting excessive hours for general education programs.
- Licensure or certification requirements.
- Compliance with state laws related to closure.
- Prohibition of transcript withholding when balances are owed because of school error or when credits are funded with Title IV funds.
- Informing the Department of Education of government investigations for provisionally certified institutions at risk of closure.
- Disclosures about whether a program meets the educational requirements for licensure or certification in a state.
Ability to Benefit
The final rule requires the Department of Education to “verify
at least one career pathway program at each postsecondary institution intending
to use [the state ‘ability to benefit’ process] to increase regulatory
compliance.”
Contacts
|
|
Kelly Chamberlin
Audit & Assurance
Managing Director
Deloitte & Touche LLP
+1 214 840 1321
|
|
Tracey Guidry Cooley
Audit & Assurance
Managing Director
Deloitte & Touche LLP
+1 512 226 4440
|
|
|
Bridget Flint
Audit & Assurance
Managing Director
Deloitte & Touche LLP
+1 312 486 1836
|
|
Eric Morse
Audit & Assurance
Managing Director
Deloitte & Touche LLP
+1 317 656 4334
|
Footnotes
1
U.S. Department of Education Final Rule (GEN-24-07),
Financial Responsibility, Administrative Capability, Certification
Procedures, Ability to Benefit (ATB).
2
34 CFR 668, “Student Assistance General Provisions.”
3
34 CFR 668.23, “Compliance Audits and Audited Financial Statements.”
4
34 CFR 668.171, “General.”