Financial Responsibility 1

UNITED STATES DEPARTMENT OF EDUCATION

OFFICE OF POSTSECONDARY EDUCATION

Issue Paper 4: Financial Responsibility

Session 2: February 14-18, 2022

Issue: Financial Responsibility

Statutory cites: §498(c) of the Higher Education Act of 1965, as amended

Regulatory cites: 34 CFR 668.15, 668.23, Subpart L, 668.174

Proposed Regulation Redline:

SUBPART L - FINANCIAL RESPONSIBILITY

§ 668.171 General.

* * *

(b) General standards of financial responsibility. Except as provided under paragraphs (c), (d), and (h) of

this section, the Secretary considers an institution to be financially responsible if the Secretary

determines that -

(1) The institution's Equity, Primary Reserve, and Net Income ratios yield a composite score of at least

1.5, as provided under § 668.172 and appendices A and B to this subpart;

(2) The institution has sufficient cash reserves to make required returns of unearned title IV, HEA

program funds, as provided under § 668.173;

(3) The institution is able to meet all of its financial obligations and provide the administrative resources

necessary to comply with title IV, HEA program requirements. An institution is not deemed able to meet

its financial or administrative obligations if -

(i) It fails to make refunds under its refund policy, or return title IV, HEA program funds for

which it is responsible under § 668.22, or pay title IV credit balances as required under

§668.164(h)(ii);

(ii) It fails to make repayments to the Secretary for any debt or liability arising from the

institution's participation in the title IV, HEA programs;

(iii) It fails to make a payment in accordance with an existing undisputed financial obligation for

more than 90 days;

(iv) It fails to satisfy make payroll obligations per in accordance with its published payroll

schedule;

(v) It borrows funds from retirement plans or restricted funds without authorization; or
Financial Responsibility 2

(viii) It is subject to an action or event described in paragraph (c) of this section (mandatory

triggering events), or an action or event that the Secretary determines is likely to have a

material adverse effect on the financial condition of the institution under paragraph (d) of this

section (discretionary triggering events); and

(4) The institution or persons affiliated with the institution are not subject to a condition of past

performance under § 668.174(a) or (b).

(c) Mandatory triggering events. An institution is not able to meet its financial or administrative

obligations under paragraph (b)(3)(viiiii) of this section if -

(1) After the end of the fiscal year for which the Secretary has most recently calculated an institution's

composite score, oOne or more of the following occurs:

(i) Debts, liabilities, and losses.

(A) After the end of the fiscal year for which the Secretary has most recently calculated an

institution’s composite score if the institution’s composite score was less than 1.5, or the

institution or any individual or entity described in subparagraph (B) or (C) of this section, the

institution is required to pay any debt or incurs any liability from a settlement, arbitration

proceeding, final judgment in a judicial proceeding, or finala determination arising from an

administrative or judicial action or proceeding initiated by a Federal or State entity proceeding

described in subparagraph (B) or (C), and as a result of the debts, liabilities, or losses that have

stemmed from those actions or events, the institution’s recalculated composite score is less

than 1.0, as determined by the Secretary under paragraph (e) of this section.

A determination arising from an administrative action or proceeding initiated by a Federal or

State entity means the determination was made only after an institution had notice and an

opportunity to submit its position before a hearing official. A final determination arising from an

administrative action or proceeding initiated by a Federal entity includes a final determination

arising from any administrative action or proceeding initiated by the Secretary. For purposes of

this section, the liability is the amount stated in the final judgment or final determination. A

judgment or determination becomes final when the institution does not appeal or when the

judgment or determination is not subject to further appeal;

(B) The institution or any entity whose financial statements were submitted in the prior

fiscal year to meet the requirements of § 668.23, or in the year following a change in

ownership, the entity whose financial statements were submitted to meet the

requirements of § 600.20(g) or (h), is being sued for financial relief in an action brought

on or after July 1, 2023, by a Federal or State authority, or through a qui tam lawsuit in

which the Federal government has intervened, and the suit has been pending for 120

days; or

(C) The Secretary has adjudicated claims in favor of borrowers under the loan discharge

provisions in 34 CFR part 685 and the total amount of the loans discharged since July 1,

2023, is equal to or greater than 5 percent of the title IV, HEA program funds received

by the institution during its most recently completed fiscal year.

(Bii) Withdrawal of owner’s equity.

(A) For a proprietary institution whose composite score is less than 1.5, there is a

withdrawal of owner's equity from the institution by any means, including by declaring a
Financial Responsibility 3

dividend (e.g., a capital distribution that is the equivalent of wages in a sole

proprietorship or partnership, a distribution of dividends or return of capital, or a

related party receivable), unless the withdrawal is a transfer to an entity included in the

affiliated entity group on whose basis the institution's composite score was calculated;

or is the equivalent of wages in a sole proprietorship or general partnership or a

required dividend or return of capital; and

(iiB) As a result of that liability or withdrawal, the institution's recalculated composite

score, or in the year following a change in ownership, the recalculated composite score

for the entity whose financial statements were submitted to meet the requirements of §

600.20(g) or (h) is less than 1.0, as determined by the Secretary under paragraph (e) of

this section.

(iii) Gainful employment.

(A) As determined annually by the Secretary, the institution has gainful employment

programs that, under § 668.403, could become ineligible based on their final D/E rates

for the next award year; and

(B) The title IV, HEA program funds in those program funds total at least 10 percent of

the title IV, HEA program funds the institution received in its most recently completed

fiscal year for those GE programs.

(ivii) Teach-out plans. The institution is required to submit a teach-out plan and/or agreement,

for a reason described in 34 CFR 602.24(c)(1) and (c)(2)(ii)-(v), that covers the closing of the

institution or any of its branches or additional locations.

(iv) State actions. The institution is cited by a State licensing or authorizing agency for failing to

meet State or agency requirements and the agency provides notice that it will withdraw or

terminate the institution's licensure or authorization if the institution does not take the steps

necessary to come into compliance with that requirement;

(2vi) Publicly listedtraded entities institutions. An institution that is directly or indirectly owned

at least 50 percent by an entity that is listed on a domestic or foreign exchange A publicly traded

institution is subject to one or more of the following actions or events:

(iA) SEC actions. The U.S. Securities and Exchange Commission (SEC) issues an order

suspending or revoking the registration of the institution's securities pursuant to Section

12(j) of the Securities and Exchange Act of 1934 (the “Exchange Act”) or suspends

trading of the institution's securities on any national securities exchange pursuant to

Section 12(k) of the Exchange Act.; or

(iiB) Exchange actions. The national securities exchange on which the

entity’sinstitution's securities are traded listed notifies the entityinstitution that it is not

in compliance with the exchange's listing requirements and, as a result, the

institution'sor its securities are delisted, either voluntarily or involuntarily, pursuant to

the rules of the relevant national securities exchange.

(iiiC) SEC reports. The entityinstitution failed to file a required annual or quarterly is not

in timely receipt of a required report with the SEC within the time period prescribed for

that report or by any extended due date under 17 CFR 240.12b-25.and did not issue an

extension to file the report.

Commented [EG1]: Our biggest concern regarding this is 

the ability of an institution to appeal the D/E rates. We want 

institutions to be held accountable, but we also want to 

make sure that the data is accurate before any action is 

taken. 

Commented [EG2]: This gives us pause if the professional 

licensure issue is not corrected in the certification 

procedures issue paper. 
Financial Responsibility 4

(D) Foreign Exchanges. If the entity is subject to an event, notification, or condition by a

foreign exchange that the Secretary determines is equivalent to those identified in (A)–

(C) above.

(vii) Non-Federal educational assistance funds. For its most recently completed fiscal year, a

proprietary institution did not receive at least 10 percent of its revenue from sources other than

Federal educational assistance, as provided under § 668.28(c). The suretyfinancial protection

provided under this requirement will remain in place until the institution passes the 90/10

revenue requirement for two consecutive years;

(viii) Cohort default rates. The institution's two most recent official cohort default rates are 30

percent or greater, as determined under subpart N of this part, unless -

(A) The institution files a challenge, request for adjustment, or appeal under subpart N

of this part with respect to its rates for one or both of those fiscal years; and

(B) That challenge, request, or appeal remains pending, results in reducing below 30

percent the official cohort default rate for either or both of those years, or precludes

the rates from either or both years from resulting in a loss of eligibility or provisional

certification.; or

(ix) Loss of eligibility. The institution has lost eligibility to participate in another Federal

educational assistance program due to an administrative action against the school.

(xvi) Contributions and distributions.

(A) An institution's financial statements required to be submitted under § 668.23 reflect

An institution made a contribution in the last quarter of the fiscal year, and the

institution then made a distribution during the first two quarters of the next fiscal year;

and

(B) The removal of such contribution up to the amount of the distribution results in a

recalculated composite score of less than 1.0, as determined by the Secretary under

paragraph (e) of this section.

(xi) Creditor events.

(A) As a result of an action taken by the Department, the institution or any entity

included in the financial statements submitted under § 668.23 is subject to a default or

other condition under a line of credit, loan agreement, security agreement, or other

financing arrangement; or

(B) Any creditor terminates, withdraws, limits, or suspends any line of credit, loan

agreement, or other financing arrangement.

(32) After the end of the fiscal year for which the Secretary has most recently calculated an institution’s

composite score, whenIn the fiscal year following the fiscal year for which the Secretary has most

recently calculated an institution's composite score, if the institution is becomes subject to two or more

unresolved discretionary triggering events, as defined in paragraph (d) of this section, those events

become mandatory triggering events, unless a triggering event is resolved before any subsequent

event(s) occurs. 60 days following the second triggering event if both triggering events remain

unresolved. All further discretionary triggering events during that fiscal year become mandatory

triggering events, even if both of the two original triggering events are resolved. Commented [EG3]: We like the preceding language that 

allows institutions to resolve any discretionary triggers 

before they become mandatory. We believe that this given 

timeframe allows the Department to determine whether or 

not there was a material adverse affect. We are proposing 

to strike the last sentence to continue to allow for the 

ability of discretionary triggers to be resolved. 
Financial Responsibility 5

(d) Discretionary triggering events. The Secretary may determine that an institution is not able to meet

its financial or administrative obligations under paragraph (b)(3)(iiivi) of this section if any of the

following events is likely to have a material adverse effect on the financial condition of the institution -

(1) Accrediting agency actions. The institution’s is or was accrediting agency has placed or places the

institution on probation or issued a show-cause order, or placed or places the institution on an

accreditation status that poses an equivalent or greater risk to its accreditation, by its accrediting agency

for failing to meet one or more of the agency's accrediting agency for the institution issued an order,

such as a show cause order or similar action, that, if not satisfied, could result in the withdrawal,

revocation or suspension of institutional accreditation for failing to meet one or more of the agency's

standards;

(2) Violation of a loan agreementCreditor events.

(i) The institution violated a provision or requirement in a security or loan agreement with a

creditor; and (i) Except as provided above in (c)(1)(xi), the institution or any entity included in

the financial statements submitted under § 668.23 is subject to a default or other condition

under a line of credit, loan agreement, security agreement, or other financing arrangement; and

(ii) As provided under the terms of that line of credit, loan agreement, security agreement, or

other financing arrangementsecurity or loan agreement, a monetary or nonmonetary default or

delinquency event occurs, or other events occur, that trigger or enable the creditor to require or

impose on the institution or any entity included in the financial statements submitted under §

668.23 or Subpart L, an increase in collateral, a change in contractual obligations, an increase in

interest rates or payments, or other sanctions, penalties, or fees;

(3) The institution's State licensing or authorizing agency notified the institution that it has violated a

State licensing or authorizing agency requirement and that the agency intends to withdraw or terminate

the institution's licensure or authorization if the institution does not take the steps necessary to come

into compliance with that requirement;

(4) For its most recently completed fiscal year, a proprietary institution did not receive at least 10

percent of its revenue from sources other than title IV, HEA program funds, as provided under §

668.28(c);

(3) Fluctuations in Title IV volume. There is a significant fluctuation between consecutive award years, or

a period of award years, in the amount of Direct Loan or Pell Grant funds, or a combination of those

funds, received by the institution that cannot be accounted for by changes in those programs;

(45) High annual dropout rates. As calculated by the Secretary, the institution has high annual dropout

rates; or

(6) The institution's two most recent official cohort default rates are 30 percent or greater, as

determined under subpart N of this part, unless -

(i) The institution files a challenge, request for adjustment, or appeal under that subpart with

respect to its rates for one or both of those fiscal years; and

(ii) That challenge, request, or appeal remains pending, results in reducing below 30 percent the

official cohort default rate for either or both of those years, or precludes the rates from either

or both years from resulting in a loss of eligibility or provisional certification.
Financial Responsibility 6

(5) Interim reporting. For an institution required to provide additional financial reporting to the

Department due to a failure to meet the financial responsibility standards in Subpart L or due to a

change in ownership, there are negative cash flows, failure of other liquidation ratios, cash flows that

significantly miss the projections submitted to the Department, or withdrawal rates that increase

significantly; or other indicators of a material change in the financial condition of the institution;

(6) Pending borrower defense claims. The Secretary has pending claims for borrower relief discharge

under § 685.206 and has formed a group process to consider claims under § 685.402;

(7) Discontinuation of programs. The institution discontinues a significant share of its academic

programs;or

(8) Closures of locations. The institution closes most of its locations, or obtains approval from the

Department to close most or all of its ground-based locations while maintaining an online program.

(9) State citations. The institution is cited by a State licensing or authorizing agency for failing to meet

State or agency requirements; or

(10) Short-term borrowing. An institution's financial statements required to be submitted under §

668.23 or Subpart L include a line of credit or loan borrowing in the last quarter of the fiscal year, and

was then repaid the loan during the first two quarters of the next fiscal year.

(e) Recalculating the composite score. The Secretary recalculates an institution's most recent composite

score by recognizing the actual amount of the liability, or cumulative liabilities, incurred by an institution

under paragraph (c)(1)(i)(A) of this section as an expense or accounting for the actual withdrawal, or

cumulative withdrawals, of owner's equity under paragraph (c)(1)(ii)(B) of this section as a reduction in

equity, and accounts for that expense or withdrawal by -

(1) For liabilities incurred by a proprietary institution, liabilities incurred by the entity whose financial

statements were submitted in the prior fiscal year to meet the requirements of § 668.23, or in the year

following a change in ownership, the entity whose financial statements were submitted to meet the

requirements of § 600.20(g) or (h) will be adjusted as follows:

(i) For the primary reserve ratio, increasing expenses and decreasing adjusted equity by that

amount;

(ii) For the equity ratio, decreasing modified equity by that amount; and

(iii) For the net income ratio, decreasing income before taxes by that amount;

(2) For liabilities incurred by a non-profit institution--, liabilities incurred by the entity whose financial

statements were submitted in the prior fiscal year to meet the requirements of § 668.23, or in the year

following a change in ownership, the entity whose financial statements were submitted to meet the

requirements of § 600.20(g) or (h) will be adjusted as follows:

(i) For the primary reserve ratio, increasing expenses and decreasing expendable net assets by

that amount;

(ii) For the equity ratio, decreasing modified net assets by that amount; and

(iii) For the net income ratio, decreasing change in net assets without donor restrictions by that

amount; and
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(3) For a proprietary institution, the withdrawal of equity in the entity whose financial statements were

submitted in the prior fiscal year to meet the requirements of 668.23, or in the year following a change

in ownership, the entity whose financial statements were submitted to meet the requirements of

600.20(g) or (h) will be adjusted as follows: For the amount of owner's equity withdrawn from a

proprietary institution -

(i) For the primary reserve ratio, decreasing adjusted equity by that amount; and

(ii) For the equity ratio, decreasing modified equity by that amount.

(f) Reporting requirements.

(1) In accordance with procedures established by the Secretary, an institution must notify the Secretary

of the following actions or events -

(i) For a liability incurred under paragraph (c)(1)(i)(A) of this section, not later than 10 days after

the date of written notification to the institution or entity of the final judgment or final

determination;

(ii) For a lawsuit under paragraph (c)(1)(i)(B) of this section, not later than 10 days after the

institution or entity is served with the complaint, and an updated notice must be provided and

10 days after the suit has been pending for 120 days;

(iii) For a withdrawal of owner's equity described in paragraph (c)(1)(ii)(B) of this section -

(A) For a capital distribution that is the equivalent of wages in a sole proprietorship or

general partnership, no later than 10 days after the date the Secretary notifies the

institution that its composite score is less than 1.5. In response to that notice, the

institution must report the total amount of the wage-equivalent distributions it made

during its prior fiscal year and any distributions that were made to pay any taxes related

to the operation of the institution. During its current fiscal year and the first six months

of its subsequent fiscal year (18-month period), the institution is not required to report

any distributions to the Secretary, provided that the institution does not make wageequivalent distributions that exceed 150 percent of the total amount of wageequivalent distributions it made during its prior fiscal year, less any distributions that

were made to pay any taxes related to the operation of the institution. However, if the

institution makes wage-equivalent distributions that exceed 150 percent of the total

amount of wage-equivalent distributions it made during its prior fiscal year less any

distributions that were made to pay any taxes related to the operation of the institution

at any time during the 18-month period, it must report each of those distributions no

later than 10 days after they are made, and the Secretary recalculates the institution's

composite score based on the cumulative amount of the distributions made at that

time;

(B) For a distribution of dividends or return of capital, no later than 10 days after the

dividends are declared or the amount of return of capital is approved; or

(C) For a related party receivable, not later than 10 days after that receivable occurs;

(iv) For a contribution and distribution under paragraph (c)(1)(viiix) and the short-term

borrowing provision in paragraph (d)(6), not later than 10 days following each transaction.
Financial Responsibility 8

(vi) For the provisions relating to a publicly traded entityinstitution under paragraph (c)(12)(vi)

of this section, no later than 10 days after the date that the event described under paragraph

(c)(1)(vi) occurs. -

(A) The SEC issues an order suspending or revoking the registration of the institution's

securities pursuant to Section 12(j) of the Exchange Act or suspends trading of the

institution's securities on any national securities exchange pursuant to Section 12(k) of

the Exchange Act; or

(B) The national securities exchange on which the institution's securities are traded

listed warnsnotifies the institution of noncompliance with the rules of the relevant

national securities exchange or involuntarily delists its securities, or the institution

voluntarily delists its securities, pursuant to the rules of the relevant national securities

exchange;

(ivvi) For a State or agencyn action under paragraphs (c)(1)(iiiiv), (c)(1)(iv), or (d)(1), or (d)(5) of

this section, not later than 10 days after the date on which the institution is notified by its State

or accrediting agency of that action;

(vii) For the creditor events in paragraph (c)(xi), not later than 10 days after the date on which

the institution is notified of the action by its creditor;

(viii) For the loan agreementcreditor events described provisions in paragraph (d)(2) of this

section, not later than 10 days after the event occurs, with an update not later than 10 days

after a loan violation occurs, the creditor waives the violation, or the creditor imposes sanctions

or penalties, including sanctions or penalties imposed in exchange or as a result of granting the

waiver; and

(vi) For a State agency notice relating to terminating an institution's licensure or authorization

under paragraph (d)(3) of this section, 10 days after the date on which the institution receives

that notice; and

(viiiix) For the non-title IVFederal educational assistance funds revenue provision in paragraph

(c)(1)(vii) (d)(4) of this section, no later than 45 days after the end of the institution's fiscal year,

as provided in § 668.28(c)(3);. and

(x) For the loss of eligibility for another Federal educational assistance program, not later than

10 days following the action;

(ixxi) For the discontinuation of academic programs provision in paragraph (d)(7), not later than

10 days after the discontinuation of programs in the institution’s fiscal year affecting at least 25

percent of enrolled students;.

(xiii) For a failure to meet any of the standards in paragraph (b) of this section, not later than 10

days after the institution ceases to meet the standard.

(2) The Secretary may take an administrative action under paragraph (i) of this section against an

institution, or determine that the institution is not financially responsible, if it fails to provide timely

notice to the Secretary as provided under paragraph (f)(1) of this section, or fails to respond, within the

timeframe specified by the Secretary, to any determination made, or request for information, by the

Secretary under paragraph (f)(3) of this section.

(3)
Financial Responsibility 9

(i) In response to a preliminary determination by the Secretary that the institution is not financially 

responsible because the institution's composite score does not yield that of at least 1.5, as 

provided under § 668.172 and appendices A and B to this subpart, and the institution’s calculation 

of the score and the Secretary’s calculation differ, the institution may –

(A) Explain or provide information about the conditions of the calculation that precipitated 

a passing score when calculated by the Institution.

(B) The Secretary can respond to this institutional appeal by examining the current 

financial condition of the institution and may request interim financial information that is 

reviewed by an independent financial expert such as an external audit firm.

(ii) In its notice to the Secretary under this paragraph, or in its response to a preliminary

determination by the Secretary that the institution is not financially responsible because of a

triggering event under paragraph (c) or (d) of this section, in accordance with procedures

established by the Secretary, the institution may -

(A) Demonstrate that the reported withdrawal of owner's equity under paragraph

(c)(1)(ii)(B) of this section was used exclusively to meet tax liabilities of the institution or

its owners for income derived from the institution;

(AB) Show that the creditor waived a violation of a loan agreement under paragraph

(d)(2) of this section. However, if the creditor imposes additional constraints or

requirements as a condition of waiving the violation, or imposes penalties or

requirements under paragraph (d)(2)(ii) of this section, the institution must identify and

describe those penalties, constraints, or requirements and demonstrate that complying

with those actions will not adversely affect the institution's ability to meet its financial

obligations;

(BC) Show that the triggering event has been resolved, or demonstrate that the

institution has insurance that will cover all or part of the liabilities that arise under

paragraph (c)(1)(i)(A) of this section; or

(CD) Explain or provide information about the conditions or circumstances that

precipitated a triggering event under paragraph (c) or (d) of this section that

demonstrates that the triggering event has not or will not have a material adverse effect

on the institution.

(ii) The Secretary will consider the information provided by the institution in determining

whether to issue a final determination that the institution is not financially responsible.

(g) Public institutions.

(1) The Secretary considers a domestic public institution to be financially responsible if the institution -

(i)

(A) Notifies the Secretary that it is designated as a public institution by the State, local,

or municipal government entity, Ttribal authority, or other government entity that has

the legal authority to make that designation; and

(B) Provides a letter from an official of that State or other government entity confirming

that the institution is a public institution and is backed by the full faith and credit of the

State, local, or municipal government entity, Tribal authority, or other government

entity; and

(ii) Is not subject to a condition of past performance under § 668.174.

Commented [EG4]: This is language that we have 

proposed before. We strongly believe that institutions 

should have the ability to appeal their composite score 

before any score is final and made public. 
Financial Responsibility 10

(2) The Secretary considers a foreign public institution to be financially responsible if the institution -

(i)

(A) Notifies the Secretary that it is designated as a public institution by the country or

other government entity that has the legal authority to make that designation; and
Financial Responsibility 11

(B) Provides documentation from an official of that country or other government entity

confirming that the institution is a public institution and is backed by the full faith and

credit of the country or other government entity; and

(ii) Is not subject to a condition of past performance under § 668.174.

(h) Audit opinions and disclosures. Even if an institution satisfies all of the general standards of financial

responsibility under paragraph (b) of this section, the Secretary does not consider the institution to be

financially responsible if, in the institution's audited financial statements (i) include an, the opinion

expressed by the auditor that was an adverse, qualified, or disclaimed opinion;, or (ii) include

theinstitution was required to includefinancial statements contain a disclosure in the notes to the

financial statements that contains informationthere is substantial doubt about the institution's or

entity’s diminished liquidity, ability to continue operationsas a going concern as required by accounting

standards, or ability to continue as a going concern; unless the Secretary determines that a qualified or

disclaimed opinion does not have a significant bearing on the institution's financial condition, or that the

diminished liquidity, ability to continue operations, or ability to continue as a going concern substantial

doubt about the institution's ability to continue as going concernoperations has been alleviated. The

Secretary may conclude that diminished liquidity, ability to continue operations, or ability to continue as

a going concern has not been alleviated even if the auditor states that those concerns have been

alleviated.

(i) Administrative actions. If the Secretary determines that an institution is not financially responsible

under the standards and provisions of this section or under an alternative standard in § 668.175, or the

institution does not submit its financial and compliance audits by the date and in the manner required

under § 668.23, the Secretary may -

(1) Initiate an action under subpart G of this part to fine the institution, or limit, suspend, or terminate

the institution's participation in the title IV, HEA programs;

(2) For an institution that is provisionally certified, take an action against the institution under the

procedures established in § 668.13(d); or

(3) Deny the institution's application for certification or recertification to participate in the title IV, HEA

programs.

* * *

§ 668.174 Past performance.

(a) Past performance of an institution. An institution is not financially responsible if the institution -

(1) Has been limited, suspended, terminated, or entered into a settlement agreement to resolve a

limitation, suspension, or termination action initiated by the Secretary or a guaranty agency, as defined

in 34 CFR part 682, within the preceding five years;

(2) In either of its two most recent compliance audits had an audit finding, or in a report issued by the

Secretary had a program review finding for its current fiscal year or either of its preceding two fiscal

years had a program review finding, that resulted in the institution's being required to repay an amount

greater than 5 percent of the funds that the institution received under the title IV, HEA programs during

the year covered by that audit or program review;
Financial Responsibility 12

(3) Has been cited during the preceding five years for failure to submit in a timely fashion acceptable

compliance and financial statement audits required under this part, or acceptable audit reports required

under the individual title IV, HEA program regulations; or

(4) Has failed to resolve satisfactorily any compliance problems identified in audit or program review

reports based upon a final decision of the Secretary issued pursuant to subpart G or H of this part.

* * *

(b) Past performance of persons or entities affiliated with an institution.

* * *

(2) The Secretary may determine that an institution is financially responsible, even if the institution is

not otherwise financially responsible under paragraph (b)(1) of this section, if -

(i) The institution notifies the Secretary, within the time permitted and in the manner provided

under 34 CFR 600.2130, that the person or entity referenced in paragraph (b)(1) of this section

exercises substantial control over the institution; and

* * *

(c) Ownership interest.

(1) An ownership interest is a share of the legal or beneficial ownership or control of, or a right to share

in the proceeds of the operation of, an institution, an institution's parent corporation, a third-party

servicer, or a third-party servicer's parent corporation. The term “ownership interest” includes, but is

not limited to -

(i) An interest as tenant in common, joint tenant, or tenant by the entireties;

(ii) A partnership; and

(iii) An interest in a trust.

(2) The term “ownership interest” does not include any share of the ownership or control of, or any

right to share in the proceeds of the operation of a profit-sharing plan, provided that all employees are

covered by the plan.defined in 600.31(b).

* * *

§ 668.175 Alternative standards and requirements.

(a) General. An institution that is not financially responsible under the general standards and provisions

in § 668.171, may begin or continue to participate in the title IV, HEA programs by qualifying under an

alternate standard set forth in this section.

(b) Letter of cCredit or cash escrowsurety alternative for new institutions. A new institution that is not

financially responsible solely because the Secretary determines that its composite score is less than 1.5,

qualifies as a financially responsible institution by submitting an irrevocable letter of credit that is

acceptable and payable to the Secretary, or providing other surety described under paragraph (h)(2)(i)

of this section, for an amount equal to at least one-half of the amount of title IV, HEA program funds

that the Secretary determines the institution will receive during its initial year of participation. A new

institution is an institution that seeks to participate for the first time in the title IV, HEA programs.
Financial Responsibility 13

(c) Financial protection alternative for participating institutions. A participating institution that is not

financially responsible, either because it does not satisfy one or more of the standards of financial

responsibility under § 668.171(b), (c), or (d), or because of an audit opinion or going concern disclosure

about the institution’s liquidity, ability to continue operations, or ability to continue as a going concern

described under § 668.171(h), qualifies as a financially responsible institution by submitting an

irrevocable letter of credit that is acceptable and payable to the Secretary, or providing other financial

protection surety described under paragraph (h)(2)(i) of this section, for an amount determined by the

Secretary that is not less than one-half of the title IV, HEA program funds received by the institution

during its most recently completed fiscal year, except that this requirement does not apply to a public

institution. For purposes of a failure under § 668.171(b), the institution must also remedy the issue(s)

that gave rise to the failure.

(d) Zone alternative.

(1) A participating institution that is not financially responsible solely because the Secretary determines

that its composite score under § 668.172 is less than 1.5 may participate in the title IV, HEA programs as

a financially responsible institution for no more than three consecutive years, beginning with the year in

which the Secretary determines that the institution qualifies under this alternative.

(i)

(A) An institution qualifies initially under this alternative if, based on the institution's

audited financial statement for its most recently completed fiscal year, the Secretary

determines that its composite score is in the range from 1.0 to 1.4; and

(B) An institution continues to qualify under this alternative if, based on the institution's

audited financial statement for each of its subsequent two fiscal years, the Secretary

determines that the institution's composite score is in the range from 1.0 to 1.4.

(ii) An institution that qualified under this alternative for three consecutive years, or for one of

those years, may not seek to qualify again under this alternative until the year after the

institution achieves a composite score of at least 1.5, as determined by the Secretary.

(2) Under the zone alternative, the Secretary -

(i) Requires the institution to make disbursements to eligible students and parents, and to

otherwise comply with the provisions, under either the heightened cash monitoring or

reimbursement payment method described in § 668.162;

(ii) Requires the institution to provide timely information regarding any of the following

oversight and financial events -

(A) Any event that causes the institution, or related entity as defined in Accounting

Standards Codification (ASC) 850, to realize any liability that was noted as a contingent

liability in the institution's or related entity's most recent audited financial statement; or

(B) Any losses that are unusual in nature or infrequently occur, or both, as defined in

accordance with Accounting Standards Update (ASU) No. 2015-01 and ASC 225;

(iii) May require the institution to submit its financial statement and compliance audits earlier

than the time specified under § 668.23(a)(4); and
Financial Responsibility 14

(iv) May require the institution to provide information about its current operations and future

plans.

(3) Under the zone alternative, the institution must -

(i) For any oversight or financial event described in paragraph (d)(2)(ii) of this section for which

the institution is required to provide information, in accordance with procedures established by

the Secretary, notify the Secretary no later than 10 days after that event occurs; and

(ii) As part of its compliance audit, require its auditor to express an opinion on the institution's

compliance with the requirements under the zone alternative, including the institution's

administration of the payment method under which the institution received and disbursed title

IV, HEA program funds.

(4) If an institution fails to comply with the requirements under paragraph (d)(2) or (3) of this section,

the Secretary may determine that the institution no longer qualifies under this alternative.

(e) [Reserved]

(f) Provisional certification alternative.

(1) The Secretary may permit an institution that is not financially responsible to participate in the title IV,

HEA programs under a provisional certification for no more than three consecutive years if -

(i) The institution is not financially responsible because it does not satisfy the general standards

under § 668.171(b), its recalculated composite score under § 668.171(e) is less than 1.0, it is

subject to an action or event under § 668.171(c), or an action or event under paragraph (d) that

has an adverse material effect on the institution as determined by the Secretary, or because of

an audit opinion or going concern disclosure described in § 668.171(h); or

(ii) The institution is not financially responsible because of a condition of past performance, as

provided under § 668.174(a), and the institution demonstrates to the Secretary that it has

satisfied or resolved that condition; and

(2) Under this alternative, the institution must -

(i) Provide to the Secretary an irrevocable letter of credit that is acceptable and payable to the

Secretary, or provide other financial protection described under paragraph (h) of this section,

for an amount determined by the Secretary that is not less than 10 percent of the title IV, HEA

program funds received by the institution during its most recently completed fiscal year, except

that this requirement does not apply to a public institution that the Secretary determines is

backed by the full faith and credit of the State;

(ii) Remedy the issue(s) that gave rise to its failure under § 668.171(b);Demonstrate that it was

current on its debt payments and has met all of its financial obligations, as required under §

668.171(b)(3), for its two most recent fiscal years; and

(iii) Comply with the provisions under the zone alternative, as provided under paragraph (d)(2)

and (3) of this section.

* * *

§ 668.176 Change in Ownership
Financial Responsibility 15

(a) Purpose. To continue participation in the title IV, HEA programs during and following a change in

ownership, institutions must meet the financial responsibility requirements in this section.

(b) Materially complete application. To meet the requirements of a materially complete application as

required in 34 CFR 600.20(g)(2)(iii) and (iv)-

(1) An institution undergoing a change of ownership and control as provided under 34 CFR 600.31 must

submit audited financial statements of its two most recently completed fiscal years prior to the change

in ownership, at the level of the change in ownership or the level of financial statements required by the

Secretary, that are prepared and audited in accordance with the requirements of §668.23(d);.

(2) The institution must submit audited financial statements of the institution’s new owner’s two most

recently completed fiscal years prior to the change in ownership that are prepared and audited in

accordance with the requirements of §34 CFR 668.23 at the highest level of unfractured ownership or at

the level required by the Secretary.

(i) If the institution’s new owner does not have two years of acceptable audited financial

statements, the institution must provide financial protection in the form of a letter of credit or

cash to the Secretary in the amount of 25 percent of the title IV, HEA program funds received by

the institution during its most recently completed fiscal year; or

(ii) If the institution’s new owner only has one year of acceptable financial statements, the

institution must provide financial protection in the form of a letter of credit or cash to the

Secretary in the amount of 10 percent of the title IV, HEA program funds received by the

institution during its most recently completed fiscal year.;

(3) The institution must—

(i) Meet the financial responsibility requirements. In general, the Secretary considers an

institution to be financially responsible only if it –

(A) For a for-profit institution evaluated at the ownership level required by the

Secretary-

(1) Has not had operating losses in either or both of its two latest fiscal years

that in sum result in a decrease in tangible net worth in excess of 10 percent of

the institution’s tangible net worth at the beginning of the first year of the twoyear period. The Secretary may calculate an operating loss for an institution by

excluding: prior period adjustment and the cumulative effect of changes in

accounting principle. For purposes of this section, the calculation of tangible net

worth must exclude all related party accounts receivable/other assets and all

assets defined as intangible in accordance with the composite score;

(2) Has, for its two most recent fiscal years, a positive tangible net worth. In

applying this standard, a positive tangible net worth occurs when the

institution’s tangible assets exceed its liabilities. The calculation of tangible net

worth excludes all related party accounts receivables/other assets and all assets

classified as intangible in accordance with the composite score; orand

(3) Has a passing composite score and meets the other financial requirements of

34 CFR 668 subpart L for its most recently completed fiscal year;
Financial Responsibility 16

(B) For a nonprofit institution evaluated at the ownership level required by the

Secretary-

(1) Has, at the end of its two most recent fiscal years, positive net assets without

donor restrictions. The Secretary will exclude all related party receivables/other

assets from net assets without donor restrictions and all assets classified as

intangibles in accordance with the composite score;

(2) Has not had an excess of net assets without donor restriction current fund

expenditures over net assets without donor restrictioncurrent fund revenues

over both of its two latest fiscal years that results in a decrease exceeding 10

percent in either the net assets without donor restrictions from the start to the

end of the two-year period or the net assets without donor restriction in either

one of the two years. The Secretary may exclude from net changes in fund

balances for the operating loss calculation: prior period adjustment and the

cumulative effect of changes in accounting principle. In calculating the net

assets without donor restriction, the Secretary will exclude all related party

accounts receivables/other assets and all assets classified as intangible in

accordance with the composite score; orand

(3) Has a passing composite score and meets the other financial requirements of

34 CFR 668 subpart L for its most recently completed fiscal year; or

(C) For a public institution, has its liabilities backed by the full faith and credit of a State,

or by an equivalent governmental entity.; or

Notwithstanding the foregoing, the Secretary may determine that the institution is not

financially responsible following a change in ownership if the amount of debt assumed

to complete the change in ownership requires payments (either periodic or balloon)

that are inconsistent with available cash to service those payments based on

enrollments for the period prior to when the payment is or will be due.

(ii) For a for-profit or nonprofit institution that is not financially responsible under paragraph

(b)(3)(i) of this section, provide financial protection in the form of a letter of credit or cash in an

amount that is not less than 10 percent of the prior year title IV funding or an amount

determined by the Secretary; and must follow the zone requirements of § 668.175(d).

(c) Terms of the extension. To meet the requirements for a temporary provisional Program Participation

Agreement following a change in ownership, as described in 34 CFR 600.20(h)(3(i)—

(1)(i) The institution provides the Secretary with—

(A) A “same day” balance sheet for a proprietary institution or a statement of financial

position for a nonprofit institution that shows the financial position of the institution

under its new owner, as of the day after the change in ownership, at the level required

by the Secretary;

(B) The “same day” balance sheet or statement of financial position must be prepared in

accordance with Generally Accepted Accounting Principles (GAAP) published by the

Financial Accounting Standards Board and audited in accordance with Generally

Accepted Government Auditing Standards (GAGAS) published by the U.S. General

Accountability Accounting Office;
Financial Responsibility 17

(C) As part of the “same day” financial statement, the institution must include a

disclosure that includes all related-party transactions and such details as would enable

the Secretary to identify the related party. Such information may include, but is not

limited to, the name, location, and description of the related entity, including the nature

and amount of any transaction between the related party and the institution, financial

or otherwise, regardless of when it occurred; and

(ii) Such financial statement must be a consolidated “same day” financial statement at the level

of highest unfractured ownership or at a level determined by the Secretary for an ownership of

less than 100 percent;

(2) The “same day” financial statement must demonstrate an acid test ratio of at least 1:1. The acid test

ratio must be calculated by adding cash and cash equivalents to current accounts receivable and dividing

the sum by total current liabilities. The calculation of the acid test ratio must exclude all related party

receivables/other assets and all assets classified as intangibles in accordance with the composite score;.

(3) A proprietary institution’s submission must demonstrate a positive tangible net worth the day after

the change in ownership. A positive tangible net worth occurs when the financial statements tangible

assets exceed its liabilities. The calculation of tangible net worth must exclude all related party accounts

receivables or other assets and all assets classified as intangible in accordance with the composite score;

(4) A nonprofit institution’s submission must have a positive net assets without donor restriction the day

after the change in ownership. The calculation of net assets without donor restriction must exclude all

related party accounts receivables/other assets and all assets classified as intangible in accordance with

the composite score;

(5) If an institution fails to meet the standards of paragraphs (c)(2), (3), or (4) of this section, the

institution must provide financial protection in the form of a letter of credit or cash to the Secretary in

the amount of at least 25 percent of the title IV, HEA program funds received by the institution during its

most recently completed fiscal year, or an amount determined by the Secretary, and must follow the

zone requirements of § 668.175(d); and

(6) A public institution must have its liabilities backed by the full faith and credit of a State, or by an

equivalent governmental entity, or must follow the requirements of this section for a nonprofit or

proprietary institution.

§ 668.1767 Severability.

If any provision of this subpart or its application to any person, act, or practice is held invalid, the

remainder of the subpart or the application of its provisions to any person, act, or practice will not be

affected thereby.

Last updated 2/4/2022