In recent years, tens of thousands of students have been harmed by the closures of predatory colleges where—despite years of unheeded warnings—the closures were described as “abrupt” or “precipitous” or caused by sudden financial or oversight-related events. The costs of closures are dramatic, both for the students whose academic and personal lives are upended and for taxpayers who often bear the substantial costs associated with closed school loan discharges.

At the same time, the U.S. Department of Education (“Department”) is tasked by Congress to play the chief “gatekeeping” role over the federal student aid programs authorized under Title IV of the Higher Education Act (“HEA”). Among the Department’s responsibilities, it is required to set—and maintain—standards of “Financial Responsibility” that institutions must meet to enable their students to receive federal student loans and grants. See generally HEA § 498(c), 20 U.S.C. § 1099c(c).

As part of its ongoing Institutional and Programmatic Eligibility Rulemaking (“Rulemaking”), the Department has twice released Issue Papers proposing amendments to its Financial Responsibility regulations. Unfortunately, the proposals offered to date are insufficient and ignore the Department’s multi-decade failure to align its regulations and practices with statutory requirements.

This Memorandum highlights certain of those failures and recommends the Department take the following steps to comply with the law:

  1. The Department must change its regulations to comply with statutory, temporal limitations on the use of provisional Title IV participation. The HEA permits the Department, in narrowly prescribed circumstances, to provisionally certify an institution for a maximum of three years. The Department has, by its own admission, often ignored this limitation, allowing institutions to remain on provisional certification for far longer. This has proved costly to students and taxpayers alike. Institutions that do not satisfy the general financial responsibility standards after three years of provisional certification must only be allowed to participate in Title IV if they qualify under a separate statutory and regulatory alternative, and under conditions that reflect and mitigate the underlying failures.
  2. To ensure the Department is obtaining ample financial protections to guard against taxpayer losses from school closures and institutional misconduct, the Department must align its regulations and practices with the statutory financial responsibility standards. Currently, the Department’s regulations tie financial sureties to prior year funding levels, which ignore the full extent of potential liabilities and financial losses. Moreover, the Department’s reliance on a 10% floor as a surety for provisionally certified institutions has no evidentiary basis.
2022.02 Legal Memorandum re Financial Responsibility