Department of Education’s New Guidance on Personal Liability Requirements Leaves Uncertainty for Institutions 

March, 2023 - Nicholas P. Mooney II

On March 1, 2023, the Department of Education (“DOE”) released guidance related to the instances in which it will require assumption of personal liability for an institution’s continued participation in Title IV programs. Last year, the DOE announced updated signature requirements for institutions’ Program Participation Agreements (“PPA”). Institutions entering into PPAs already agree to comply with regulatory requirements related to financial responsibility. The updated signature requirements were encompassed in Electronic Announcement General-22-16 and provided the DOE “may in certain cases require signatures from corporation or other entities that have, or could have, a direct or indirect effect on an institution’s financial responsibility.” The DOE believes that entities that have the following characteristics have or could have that direct or indirect effect:

  • Are the sole member of, or hold a 100 percent direct or indirect equity or voting interest in the institution;
  • Hold less than a 100 percent interest, but otherwise exercise (either directly or indirectly) substantial control over the institution; or
  • Provide the audited financial statements or other financial submissions on behalf of the institution.

Electronic Announcement General-22-16 provided examples of instances in which there was a rebuttable presumption that the DOE would require additional signatures. However, the announcement was clear that the short list of examples was not an exhaustive list. The announcement recognized that other instances could exist in which it would require additional signatures. Further, because the examples created only a rebuttable presumption that it would require additional signatures, they left open the possibility that the DOE may not require additional signatures even if an institution fell within one of the examples. The result of the announcement was an uncertainty as to when an institution and its leadership should anticipate the DOE would require additional signatures as part of its PPA and Title IV participation.
On March 1, 2023, the DOE issued Electronic Announcement General-23-11 that adds some predictability to the instances when the DOE will require additional signatures.  However, institutions should be aware that this new announcement, like last year’s announcement, lets the DOE retain a large amount of discretion as to when to require additional signatures.
The new announcement provides that if an individual exercises substantial control over a participating institution, the DOE may require the individual to personally sign the PPA and assume personal liability “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 V.”
Pursuant to regulation, an individual may be deemed to exercise substantial control over a participating institution if the DOE determines that the individual:

  • Directly or indirectly controls a substantial ownership interest in the institution;
  • 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
  • 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.

In addition to discussing substantial control, the new announcement listed four instances in which the DOE shall not impose the personal liability requirement and 13 factors the DOE may consider in determining whether to impose that requirement.  First, it provided that the DOE shall not require personal signatures and personal liability if the institution:

  • Has not been subjected to a limitation, suspension, or termination action by the Secretary or a guaranty agency within the preceding five years;
  • 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;
  • Meets and has met for the preceding five years the DOE’s financial responsibility requirements under the regulations found in 34 CFR Subpart L; and
  • 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 those conditions (which the DOE considers “risk conditions”) is not satisfied, the DOE may require personal liability. Further, the new announcement included 13 factors it would consider in determining whether to require personal liability. The inclusion of those factors attempts to close the door on the uncertainty left open by last year’s announcement. 
However, the factors include a catch-all that still leaves a fair amount of uncertainty and lack of predictability. More specifically, the DOE will consider the following 13 factors in determining whether to require personal liability:

  • 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 (which the DOE considers tens of millions of dollars or more);
  • Whether the DOE 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 institution or the individual has a record of civil or criminal lawsuits or settlements or disciplinary or legal actions by the DOE or other state or federal agency involving federal student aid or involving claims of dishonesty, fraud, misrepresentation, consumer harm, or financial malfeasance;
  • Whether the institution or the individual has a history of noncompliance with the requirements of the Higher Education Act;
  • 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;
  • Whether a for-profit institution has failed to meet the legal requirements for the 90/10 threshold;
  • 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;
  • Whether the institution has high withdrawal or low retention rates;
  • Whether the individual is subject to executive compensation or a bonus structure that could significantly affect the financial health of the institution;
  • Whether the DOE has identified significant findings of a lack of administrative capability at the institution;
  • Whether the DOE 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;
  • 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
  • Any other factors specific to the institution or the individual that are relevant for the DOE to determine whether an individual assuming personal liability is necessary to protect the financial interest of the United States.

Note that the 13th factor provides that the DOE will consider “[a]ny other factors . . . that are relevant.” And, the DOE will determine what is “relevant.” It is easy to argue this last factor leaves institutions in the same position as they were before this new announcement, that is, unable to completely predict if additional signatures and personal liability will be required.
On March 10, 2023, the National Association of Independent Colleges and Universities presented a webinar in which DOE Deputy Undersecretary Ben Miller explained the new announcement, the DOE’s reasons behind the personal liability requirement, why it included the 13th factor, and more. Deputy Miller first discussed that the impetus for the personal liability requirement was to address instances like ITT Tech and Corinthian in which private, for-profit institutions close their doors, their owners are able to make and retain large amounts of money, and students and the government are left holding the bag. 
Deputy Miller repeated throughout his discussion that the new personal liability requirement was meant to address large, financially risky institutions. He continued that the DOE did not see the type of risky behaviors it was attempting to discourage happening at non-for-profit institutions. NAICU then asked why the DOE included both for-profit and not-for-profit institutions under the personal liability requirement. Deputy Miller explained that this was not a decision the DOE made. Rather, the Higher Education Act from which the DOE obtained the authority for the requirement does not permit the DOE to differentiate between for-profit and not-for-profit institutions in implementing the requirement. Nonetheless, he stated that the personal liability requirement does not fit not-for-profit institutions because those institutions, for example, do not tend to have an individual who is the owner.
NAICU questioned why the DOE did not provide a more definite rule on the instances when personal liability would be required. Deputy Miller explained that a hard rule would be considered a regulation, and the DOE would be required to undergo the entire rulemaking process before implementing such a regulation.
Regarding the 13th factor (that the DOE will consider “[a]ny other factors . . . that are relevant”), Deputy Miller advised that the DOE included this to take into account any additional factors it develops in the future that should be included in the list. He further made clear that the DOE has not developed any additional factors in the last two weeks since the new announcement was made. In this regard, he reminded everyone that the personal liability requirement is governed by a case-by-case analysis. Indeed, though not expressly stated, Deputy Miller’s statement underscored the fact that the new announcement, while bringing some clarity, still leaves much flexibility and uncertainty in the ability to predict if personal liability will be required.
Deputy Miller discussed the notice institutions will receive that additional signatures and personal liability will be required. The extent of advance notice has not yet been decided. However, institutions should be aware that they will be considered for these additional requirements when their PPA is due to be renewed. Deputy Miller admitted that the DOE has no process for giving notice to institutions that it will not be requiring additional signatures and personal liability, but he agreed to consider whether that should be implemented in the future.
At bottom, Undersecretary Miller admitted that the new announcement casts a wide net on the institutions that may be subject to additional signature and personal liability requirements. However, he reminded everyone that the DOE is mostly concerned with large institutions engaging in risky financial behavior. He stressed that institutions should look at the combination of their size, the risk considerations, and all of the 13 factors. He believes if institutions do that, the majority will realize that they do not fit and will have some predictability that the additional requirements will not apply to them.


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