Memorandum

To: U.S. Department of Education

From: Carolyn Fast, Jaylon Herbin, Adam Welle, Yael Shavit, and Deborah Cochrane

Date: February 1, 2022 

Re: Issue Paper 4: Financial Responsibility - Proposed Language

The above-listed negotiators submit this proposed language for your review: 

SUBPART L - FINANCIAL RESPONSIBILITY

§ 668.23 Compliance audits and audited financial statements.

(a) General -

(1) Independent auditor. For purposes of this section, the term “independent auditor” refers to an

independent certified public accountant or a government auditor. To conduct an audit under this

section, a government auditor must meet the Government Auditing Standards qualification and

independence standards, including standards related to organizational independence.

(2) Institutions. An institution that participates in any title IV, HEA program must at least 

annually have an independent auditor conduct a compliance audit of its administration of that 

program and an audit of the institution's general purpose financial statements.

(3) Third-party servicers. Except as provided under this part or 34 CFR part 682, with regard to

complying with the provisions under this section a third-party servicer must follow the 

procedures contained in the audit guides developed by and available from the Department of 

Education's Office of Inspector General. A third-party servicer is defined under § 668.2 and 34 

CFR 682.200.

(4) Submission deadline. Except as provided by the Single Audit Act, Chapter 75 of title 31, 

United States Code, an institution must submit annually to the Secretary its compliance audit and 

its audited financial statements no later thanby the earlier of 30 days following the date of the 

auditor’s report or six months after the last day of the institution's fiscal year.

(5) Audit submission requirements. In general, the Secretary considers the compliance audit and 

audited financial statement submission requirements of this section to be satisfied by an audit 
conducted in accordance with the Office of Management and Budget Circular A-133, Audits of 

States, Local Governments, and Non-Profit Organizations, or the audit guides developed by and 

available from the Department of Education's Inspector General, whichever is applicable to the 

entity, and provided that the Federal student aid functions performed by that entity are covered in 

the submission. (Both OMB circulars are available by calling OMB's Publication Office at (202) 

395-7332, or they can be obtained in electronic form on the OMB Home Page 

(http://www.whitehouse.gov).

* * *

SUBPART L -

§ 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 make payroll obligations per its published payroll schedule;

(v) It borrows funds from retirement plans or restricted funds without authorization; or
(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, tThe institution is required to pay any 

debt or incurs any liability from a settlement, final judgment in a judicial 

proceeding, or finala determination arising from an administrative or judicial 

action or proceeding initiated by a Federal or State entityproceeding, 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 1.5 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 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 

Commented [1]: This change is intended to make this 

provision consistent with 668.171(b)(1), which provides 

that an institution is deemed financially responsible if its 

composite score is at least 1.5. A composite score 

below 1.5 indicates a financial risk, and triggers 

protections. A recalculated composite score is less 

than 1.5 should be subject to the same protections.
(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

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 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 is less than 1.5 1.0, as determined by the Secretary under paragraph (e) of this

section.

(iii) 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), 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 may or will withdraw or

terminate, decline to renew, or place restrictions on the institution's licensure or authorization if 

the institution does not take the steps necessary to come into compliance with that requirement

and abate any violations as ordered by the agency;

(2v) Publicly traded institutions. AFor 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

Commented [2]: This change is proposed to ensure 

that all proprietary schools with recalculated composite 

scores below the financial responsibility benchmark 

would be subject to imposition of protections. 

Otherwise, this provision would not provide protections 

for schools that start off financially healthy but are 

rendered unstable due to withdrawal of equity.

Commented [3]: As set forth above, a recalculated 

score below 1.5 should trigger the same protections 

that ordinarily apply to institutions with scores below 

1.5. 
Section 12(k) of the Exchange Act.; or

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

securities are traded listed notifies the institution 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 SECinstitution 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.

(vi) 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 

surety provided under this requirement will remain in place until the institution passes the 

90/10 revenue requirement for two consecutive years;

(vii) 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 that

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.

(viii) Contributions and distributions.

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

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

institution's composite scoreFor the period described in (c)(1) of this section, when the institution 

is subject to two or more 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.

(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 is or was placed on probation or issued a 

show-cause order, or placed 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 standardsaccrediting 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 agreement.

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

agreement with a creditor; and

(ii) As provided under the terms of that security 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, 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.

(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) 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) The institution discontinues a significant share of its academic programs; or

(8) 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.

(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 -

(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 -

(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

(3) 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, no later than 10 

days after the date of written notification to the institution of the final judgment or final 

determination;

(ii) For a lawsuit under paragraph (c)(1)(i)(B) of this section, no later than 10 days after 

the institution is served with the complaint 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 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 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. 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)(viii), not later than 10 days

following each transaction.

(iiiv) For the provisions relating to a publicly traded institution under paragraph 

(c)(12)(v) of this section, no later than 10 days after the date that -

(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)(iii), (c)(1)(iv), or (d)(1) of 

this section, 10 days after the date on which the institution is notified by its State or

accrediting agency of that action;

(vii) For the loan agreement provisions in paragraph (d)(2) of this section, 10 days after a 

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

or penalties 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

(viii) For the non-title IV revenue provision in paragraph (c)(1)(vi) (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

(ix) For the discontinuation of academic programs provision in paragraph (d)(7), no later 

than 10 days after the discontinuation of programs in the institution’s fiscal year affecting 

at least 25 percent of enrolled students.

(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)

(i) 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;

(B) 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;

(C) 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

(D) 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

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

(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

(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, the 

opinion expressed by the auditor was an adverse, qualified, or disclaimed opinion, or the 

institution was required to include financial statements contain a disclosure in the notes to the 

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

ability to continue operationsas a going concern as required by accounting standards, 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 substantial doubt about the institution's ability 

to continue as going concernoperations has 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;

(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.

* * *

§ 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 surety 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. 

(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 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 or recalculated composite score under § 

668.171(c) or (d) 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

or recalculated composite score under § 668.171(c) or (d), 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 -

Commented [c4]: This change is proposed so that 

recalculated composite scores in the "zone" range 

would be subject to the same protections as other 

"zone" schools. 

Commented [c5]: This change is proposed so that 

recalculated composite scores in the "zone" range 

would be subject to the same protections as other 

"zone" schools. 
(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

(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 -

Commented [6]: The Department indicated that in 

some cases, the Department renews institutions' 

provisional certification repeatedly after the 

expiration of the three-year period. We are concerned 

that repeated renewals fail to protect students and 

taxpayers from situations in which a school hovers on 

the edge of collapse for years, while continuing to take 

additional Title IV funds and enroll additional students. 

We propose adding language here to prohibit renewal 

in provisional status after a three-year provisional 

period expires, or alternatively, imposing additional 

automatic protections, such as a 50% letter of credit, 

upon provisional recertification after three consecutive 

years in a provisional PPA. 
(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 

total of: 

(a) the title IV, HEA program funds received by the institution during its most 

recently completed fiscal year, and

(b) adjudicated claims in favor of borrowers under the loan discharge 

provisions in 34 CFR part 685.

except that tThis 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

(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 600.31 must 

submit audited financial statements of its two most recently completed fiscal years, 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 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 -

(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 two-year period. The Secretary may calculate an operating loss 

for an institution byexcluding: 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; or 

(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;

(B) For a nonprofit institution -

(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 current fund expenditures over current 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 restrictions 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; or

(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

(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 Accounting Office;

(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 restrictions 

the day after the change in ownership. The calculation of net asset without donor restrictions 

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.