UNITED STATES DEPARTMENT OF EDUCATION

OFFICE OF POSTSECONDARY EDUCATION

Issue Paper 4: Financial Responsibility

Session 3: March 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: 

§ 668.15 Factors of financial responsibility. [Reserved]

(a) General. To begin and to continue to participate in any Title IV, HEA program, an institution must 

demonstrate to the Secretary that the institution is financially responsible under the requirements 

established in this section. 

(b) General standards of financial responsibility. In general, the Secretary considers an institution to be 

financially responsible only if it -

(1) Is providing the services described in its official publications and statements; 

(2) Is providing the administrative resources necessary to comply with the requirements of this subpart; 

(3) Is meeting all of its financial obligations, including but not limited to -

(i) Refunds that it is required to make; and 

(ii) Repayments to the Secretary for liabilities and debts incurred in programs administered by 

the Secretary; 

(4) Is current in its debt payments. The institution is not considered current in its debt payments if -

(i) The institution is in violation of any existing loan agreement at its fiscal year end, as disclosed 

in a note to its audited financial statement; or 

(ii) the institution fails to make a payment in accordance with existing debt obligations for more 

than 120 days, and at least one creditor has filed suit to recover those funds; 

(5) Except as provided in paragraph (d) of this section, in accordance with procedures established by the 

Secretary, submits to the Secretary an irrevocable letter of credit, acceptable and payable to the 

Secretary equal to 25 percent of the total dollar amount of Title IV, HEA program refunds paid by the 

institution in the previous fiscal year; 

(6) Has not had, as part of the audit report for the institution's most recently completed fiscal year -

(i) A statement by the accountant expressing substantial doubt about the institution's ability to 

continue as a going concern; or 

(ii) A disclaimed or adverse opinion by the accountant; 
Financial Responsibility 2

(7) For a for-profit institution -

(i) 

(A) Demonstrates at the end of its latest fiscal year, an acid test ratio of at least 1:1. For 

purposes of this section, the acid test ratio shall 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 shall exclude all unsecured or 

uncollateralized related party receivables; 

(B) 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 by excluding from net 

income: extraordinary gains or losses; income or losses from discontinued operations; 

prior period adjustment; and, the cumulative effect of changes in accounting principle. 

For purposes of this section, the calculation of tangible net worth shall exclude all assets 

defined as intangible in accordance with generally accepted accounting principles; and 

(C) Had, for its latest fiscal year, 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 shall exclude all assets classified as 

intangible in accordance with the generally accepted accounting principles; or 

(ii) Demonstrates to the satisfaction of the Secretary that it has currently issued and outstanding 

debt obligations that are (without insurance, guarantee, or credit enhancement) listed at or 

above the second highest rating level of credit quality given by a nationally recognized statistical 

rating organization; 

(8) For a nonprofit institution -

(i) 

(A) Prepares a classified statement of financial position in accordance with generally 

accepted accounting principles or provides the required information in notes to the 

audited financial statements; 

(B) Demonstrates at the end of its latest fiscal year, an acid test ratio of at least 1:1. For 

purposes of this section, the acid test ratio shall 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 shall exclude all unsecured or 

uncollateralized related party receivables. 

(C) 

(1) Has, at the end of its latest fiscal year, a positive unrestricted current fund 

balance or positive unrestricted net assets. In calculating the unrestricted 

current fund balance or the unrestricted net assets for an institution, the 

Secretary may include funds that are temporarily restricted in use by the 

institution's governing body that can be transferred to the current unrestricted 

fund or added to net unrestricted assets at the discretion of the governing body; 

or 
Financial Responsibility 3

(2) Has not had, an excess of current fund expenditures over current fund 

revenues over both of its 2 latest fiscal years that results in a decrease 

exceeding 10 percent in either the unrestricted current fund balance or the 

unrestricted net assets at the beginning of the first year of the 2-year period. 

The Secretary may exclude from net changes in fund balances for the operating 

loss calculation: Extraordinary gains or losses; income or losses from 

discontinued operations; prior period adjustment; and the cumulative effect of 

changes in accounting principle. In calculating the institution's unrestricted 

current fund balance or the unrestricted net assets, the Secretary may include 

funds that are temporarily restricted in use by the institution's governing body 

that can be transferred to the current unrestricted fund or added to net 

unrestricted assets at the discretion of the governing body; or 

(ii) Demonstrates to the satisfaction of the Secretary that it has currently issued and outstanding 

debt obligations which are (without insurance, guarantee, or credit enhancement) listed at or 

above the second highest rating level of credit quality given by a nationally recognized statistical 

rating organization. 

(9) For a public institution -

(i) Has its liabilities backed by the full faith and credit of a State, or by an equivalent 

governmental entity; 

(ii) Has a positive current unrestricted fund balance if reporting under the Single Audit Act; 

(iii) Has a positive unrestricted current fund in the State's Higher Education Fund, as presented 

in the general purpose financial statements; 

(iv) Submits to the Secretary, a statement from the State Auditor General that the institution 

has, during the past year, met all of its financial obligations, and that the institution continues to 

have sufficient resources to meet all of its financial obligations; or 

(v) Demonstrates to the satisfaction of the Secretary that it has currently issued and outstanding 

debt obligations which are (without insurance, guarantee, or credit enhancement) listed at or 

above the second highest rating level of credit quality given by a nationally recognized statistical 

rating organization. 

(c) Past performance of an institution or persons affiliated with an institution. An institution is not 

financially responsible if -

(1) A person who exercises substantial control over the institution or any member or members of the 

person's family alone or together -

(i) 

(A) Exercises or exercised substantial control over another institution or a third-party 

servicer that owes a liability for a violation of a Title IV, HEA program requirement; or 

(B) Owes a liability for a violation of a Title IV, HEA program requirement; and 

(ii) That person, family member, institution, or servicer does not demonstrate that the liability is 

being repaid in accordance with an agreement with the Secretary; or 
Financial Responsibility 4

(2) The institution has -

(i) 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; 

(ii) Had -

(A) An audit finding, during its two most recent audits of its conduct of the Title IV, HEA 

programs, that resulted in the institution's being required to repay an amount greater 

than five percent of the funds that the institution received under the Title IV, HEA 

programs for any award year covered by the audit; or 

(B) A program review finding, during its two most recent program reviews, of its 

conduct of the Title IV, HEA programs that resulted in the institution's being required to 

repay an amount greater than five percent of the funds that the institution received 

under the Title IV, HEA programs for any award year covered by the program review; 

(iii) Been cited during the preceding five years for failure to submit acceptable audit reports 

required under this part or individual Title IV, HEA program regulations in a timely fashion; or 

(iv) Failed to resolve satisfactorily any compliance problems identified in program review or 

audit reports based upon a final decision of the Secretary issued pursuant to subpart G or 

subpart H of this part. 

(d) Exceptions to the general standards of financial responsibility. 

(1) 

(i) An institution is not required to meet the standard in paragraph (b)(5) of this section if the 

Secretary determines that the institution -

(A) 

(1) Is located in, and is legally authorized to operate within, a State that has a 

tuition recovery fund that is acceptable to the Secretary and ensures that the 

institution is able to pay all required refunds; and 

(2) Contributes to that tuition recovery fund. 

(B) Has its liabilities backed by the full faith and credit of the State, or by an equivalent 

governmental entity; or 

(C) As determined under paragraph (g) of this section, demonstrates, to the satisfaction 

of the Secretary, that for each of the institution's two most recently completed fiscal 

years, it has made timely refunds to students in accordance with § 668.22(j), and that it 

has met or exceeded all of the financial responsibility standards in this section that were 

in effect for the corresponding periods during the two-year period. 

(ii) In evaluating an application to approve a State tuition recovery fund to exempt its 

participating schools from the Federal cash reserve requirements, the Secretary will consider 

the extent to which the State tuition recovery fund: 

(A) Provides refunds to both in-state and out-of-state students; 
Financial Responsibility 5

(B) Allocates all refunds in accordance with the order delineated in § 668.22(i); and 

(C) Provides a reliable mechanism for the State to replenish the fund should any claims 

arise that deplete the funds assets. 

(2) The Secretary considers an institution to be financially responsible, even if the institution is not 

otherwise financially responsible under paragraphs (b)(1) through (4) and (b)(6) through (9) of this 

section, if the institution -

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

Secretary equal to not less than one-half of the Title IV, HEA program funds received by the 

institution during the last complete award year for which figures are available; or 

(ii) Establishes to the satisfaction of the Secretary, with the support of a financial statement 

submitted in accordance with paragraph (e) of this section, that the institution has sufficient 

resources to ensure against its precipitous closure, including the ability to meet all of its financial 

obligations (including refunds of institutional charges and repayments to the Secretary for 

liabilities and debts incurred in programs administered by the Secretary). The Secretary 

considers the institution to have sufficient resources to ensure against precipitous closure only if 

-

(A) The institution formerly demonstrated financial responsibility under the standards of 

financial responsibility in its preceding audited financial statement (or, if no prior 

audited financial statement was requested by the Secretary, demonstrates in 

conjunction with its current audit that it would have satisfied this requirement), and 

that its most recent audited financial statement indicates that -

(1) All taxes owed by the institution are current; 

(2) The institution's net income, or a change in total net assets, before 

extraordinary items and discontinued operations, has not decreased by more 

than 10 percent from the prior fiscal year, unless the institution demonstrates 

that the decreased net income shown on the current financial statement is a 

result of downsizing pursuant to a management-approved business plan; 

(3) Loans and other advances to related parties have not increased from the 

prior fiscal year unless such increases were secured and collateralized, and do 

not exceed 10 percent of the prior fiscal year's working capital of the institution; 

(4) The equity of a for-profit institution, or the total net assets of a non-profit 

institution, have not decreased by more than 10 percent of the prior year's total 

equity; 

(5) Compensation for owners or other related parties (including bonuses, fringe 

benefits, employee stock option allowances, 401k contributions, deferred 

compensation allowances) has not increased from the prior year at a rate higher 

than for all other employees; 

(6) The institution has not materially leveraged its assets or income by becoming 

a guarantor on any new loan or obligation on behalf of any related party; 

(7) All obligations owed to the institution by related parties are current, and 

that the institution has demanded and is receiving payment of all funds owed 
Financial Responsibility 6

from related parties that are payable upon demand. For purposes of this 

section, a person does not become a related party by attending an institution as 

a student; 

(B) There have been no material findings in the institution's latest compliance audit of 

its administration of the Title IV HEA programs; and 

(C) There are no pending administrative or legal actions being taken against the 

institution by the Secretary, any other Federal agency, the institution's nationally 

recognized accrediting agency, or any State entity. 

(3) An institution is not required to meet the acid test ratio in paragraph (b)(7)(i)(A) or (b)(8)(i)(B) of this 

section if the institution is an institution that provides a 2-year or 4-year educational program for which 

the institution awards an associate or baccalaureate degree that demonstrates to the satisfaction of the 

Secretary that -

(i) There is no reasonable doubt as to its continued solvency and ability to deliver quality 

educational services; 

(ii) It is current in its payment of all current liabilities, including student refunds, repayments to 

the Secretary, payroll, and payment of trade creditors and withholding taxes; and 

(iii) It has substantial equity in institution-occupied facilities, the acquisition of which was the 

direct cause of its failure to meet the acid test ratio requirement. 

(4) The Secretary may determine an institution to be financially responsible even if the institution is not 

otherwise financially responsible under paragraph (c)(1) of this section if -

(i) The institution notifies the Secretary, in accordance with 34 CFR 600.30, that the person 

referenced in paragraph (c)(1) of this section exercises substantial control over the institution; 

and 

(ii) 

(A) The person repaid to the Secretary a portion of the applicable liability, and the 

portion repaid equals or exceeds the greater of -

(1) The total percentage of the ownership interest held in the institution or 

third-party servicer that owes the liability by that person or any member or 

members of that person's family, either alone or in combination with one 

another; 

(2) The total percentage of the ownership interest held in the institution or 

servicer that owes the liability that the person or any member or members of 

the person's family, either alone or in combination with one another, represents 

or represented under a voting trust, power of attorney, proxy, or similar 

agreement; or 

(3) Twenty-five percent, if the person or any member of the person's family is or 

was a member of the board of directors, chief executive officer, or other 

executive officer of the institution or servicer that owes the liability, or of an 

entity holding at least a 25 percent ownership interest in the institution that 

owes the liability; 
Financial Responsibility 7

(B) The applicable liability described in paragraph (c)(1) of this section is currently being 

repaid in accordance with a written agreement with the Secretary; or 

(C) The institution demonstrates why -

(1) The person who exercises substantial control over the institution should 

nevertheless be considered to lack that control; or 

(2) The person who exercises substantial control over the institution and each 

member of that person's family nevertheless does not or did not exercise 

substantial control over the institution or servicer that owes the liability. 

(e) [Reserved] 

(f) Definitions and terms. For the purposes of this section -

(1) 

(i) 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, institution's parent corporation, a 

third-party servicer, or a third-party servicer's parent corporation. 

(ii) The term “ownership interest” includes, but is not limited to -

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

(B) A partnership; and 

(C) An interest in a trust. 

(iii) 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) A mutual fund that is regularly and publicly traded; 

(B) An institutional investor; or 

(C) A profit-sharing plan, provided that all employees are covered by the plan; 

(2) The Secretary generally considers a person to exercise substantial control over an institution or thirdparty servicer, if the person -

(i) Directly or indirectly holds at least a 25 percent ownership interest in the institution or 

servicer; 

(ii) Holds, together with other members of his or her family, at least a 25 percent ownership 

interest in the institution or servicer; 

(iii) Represents, either alone or together with other persons, under a voting trust, power of 

attorney, proxy, or similar agreement one or more persons who hold, either individually or in 

combination with the other persons represented or the person representing them, at least a 25 

percent ownership in the institution or servicer; or 

(iv) Is a member of the board of directors, the chief executive officer, or other executive officer 

of -
Financial Responsibility 8

(A) The institution or servicer; or 

(B) An entity that holds at least a 25 percent ownership interest in the institution or 

servicer; and 

(3) The Secretary considers a member of a person's family to be a parent, sibling, spouse, child, spouse's 

parent or sibling, or sibling's or child's spouse. 

(g) Two-year performance requirement. 

(1) The Secretary considers an institution to have satisfied the requirements in paragraph (d)(1)(C) of 

this section if the independent certified public accountant, or government auditor who conducted the 

institution's compliance audits for the institution's two most recently completed fiscal years, or the 

Secretary or a State or guaranty agency that conducted a review of the institution covering those fiscal 

years -

(i) 

(A) For either of those fiscal years, did not find in the sample of student records audited 

or reviewed that the institution made late refunds to 5 percent or more of the students 

in that sample. For purposes of determining the percentage of late refunds under this 

paragraph, the auditor or reviewer must include in the sample only those title IV, HEA 

program recipients who received or should have received a refund under § 668.22; or 

(B) The Secretary considers the institution to have satisfied the conditions in paragraph 

(g)(1)(i)(A) of this section if the auditor or reviewer finds in the sample of student 

records audited or reviewed that the institution made only one late refund to a student 

in that sample; and 

(ii) For either of those fiscal years, did not note a material weakness or a reportable condition in 

the institution's report on internal controls that is related to refunds. 

(2) If the Secretary or a State or guaranty agency finds during a review conducted of the institution that 

the institution no longer qualifies for an exemption under paragraph (d)(1)(C) of this section, the 

institution must -

(i) Submit to the Secretary the irrevocable letter of credit required in paragraph (b)(5) of this 

section no later than 30 days after the Secretary or State or guaranty agency notifies the 

institution of that finding; and 

(ii) Notify the Secretary of the guaranty agency or State that conducted the review. 

(3) If the auditor who conducted the institution's compliance audit finds that the institution no longer 

qualifies for an exemption under paragraph (d)(1)(C) of this section, the institution must submit to the 

Secretary the irrevocable letter of credit required in paragraph (b)(5) of this section no later than 30 

days after the date the institution's compliance audit must be submitted to the Secretary. 

(h) Foreign institutions. The Secretary makes a determination of the financial responsibility for a foreign 

institution on the basis of financial statements submitted under § 668.23(h). 

§ 668.23 Compliance audits and audited financial statements.

(a) General -
Financial Responsibility 9

(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 date that is the earlier of (i) 30 days following the date of the auditor’s 

report or six months after the last day of the institution's fiscal year; or (ii) 30 days after the date of the 

later auditor’s report with respect to the compliance audit and audited financial statements. 

(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).

* * * 

(d) Audited financial statements -

(1) General. To enable the Secretary to make a determination of financial responsibility, an institution 

must, to the extent requested by the Secretary, submit to the Secretary a set of acceptable financial 

statements for its latest complete fiscal year, as well as any other documentation the Secretary deems 

necessary to make that determination. Financial statements submitted to the Secretary must be 

prepared on an accrual basis in accordance with generally accepted accounting principles, and audited 

by an independent auditor in accordance with generally accepted government auditing standards, 

issued by the Comptroller General of the United States and other guidance contained in the Office of 

Management and Budget Circular A-133, Audits of States, Local Governments, and Non-Profit 

Organizations; or in audit guides developed by, and available from, the Department of Education's Office 

of Inspector General , whichever is applicable. As part of these financial statements, the institution must 

include a detailed description of related entities based on the definition of a related entity as set forth in 

the Statement of Financial Accounting Standards (SFAS) 57. The disclosure requirements under this 

provision extend beyond those of SFAS 57 to include all related parties and a level of detail that would 

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

to, the name, location and a description of the related entity including the nature and amount of any 

transactions between the related party and the institution, financial or otherwise, regardless of when 

they occurred. If there are no related party transactions, then a footnote must be added to disclose this 

fact.
Financial Responsibility 10

(2) Submission of additional financial statementsinformation. 

(i) To the extent requested by the Secretary in determining whether an institution is financially 

responsible, the Secretary may also require the submission of audited consolidated financial 

statements, audited full consolidating financial statements, audited combined financial 

statements or the audited financial statements of one or more related parties that have the 

ability, either individually or collectively, to significantly influence or control the institution, as 

determined by the Secretary.

(ii) For a domestic or foreign institution that is owned directly or indirectly by any foreign entity 

or individual holding at least a 50 percent voting or equity interest in the institution, the 

institution must provide documentation of the entity’s status under the law of the jurisdiction 

under which the entity is organized, to include, at a minimum, the date of organization, a 

current certificate of good standing and a copy of the authorizing statute for such entity status. 

The Secretary may also require the submission of additional documents related to the entity’s 

status under the foreign jurisdiction as needed to assess the entity’s financial status. Documents 

must be translated into English. 

* * *

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)(ii2); 

(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 11

(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 has determineds 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 For an institution’s with a composite 

score was of less than 1.5, or theany institution or any individual or entity described in 

subparagraph (c)(1)(i)(B) or (C) of this section,, the institution the institution or entity, 

after the end of the fiscal year for which the Secretary has most recently calculated 

the institution’s or entity’s composite score, 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 

(c)(1)(i)(B) or (C) of this section, and, as a result of the debts or, liabilityies, or losses 

that have stemmed from those actions or events, the institution’s recalculated 

composite score for the institution or entity 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 § 600.20(g) or (h), § 668.23, or subpart L of this 

part or in the year following a change in ownership, the entity whose financial 

statements were submittedto 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.
Financial Responsibility 12

(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 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 hasreceived at least 10 

percent of its title IV, HEA program funds in its most recently completed fiscal year 

from gainful employment (GE) programs that are “failing” under subpart Q of this 

part., 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. If aAn institution that is directly or indirectly 

owned at least 50 percent by an entity whose securities are that is listed on a domestic or 

foreign exchange, the entity 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 any of the institution's entity’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 entity’s securities on any national 

securities exchange pursuant to Section 12(k) of the Exchange Act.; or

(B) Other SEC actions. The SEC files an action against the entity in district court or 

issues an order instituting a cease-and-desist or administrative proceeding against the 

entity.
Financial Responsibility 13

(iiBC) 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. 

(iiiCD) 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.

(DE) Foreign eExchanges. 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 

paragraphs (c)(1)(vi)(A)–(CD) above of this section. 

(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.

(viiix) 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 offset of such distribution against the 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 in the current or prior fiscal year under §

600.20(g) or (h), § 668.23, or subpart L of this part is subject to a default or other 

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

financing arrangement; or
Financial Responsibility 14

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

agreement, or other financing arrangement or calls due a balance on a line of credit. 

(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, that remain 

unresolvedthose 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.

(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 the Secretary 

determines that any of the following events is likely to have a material adverse effect on the financial 

condition of the institution, including but not limited to any of the following events: -

(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 paragraph (c)(1)(xi) of this section, the institution 

or any entity included in the financial statements submitted in the current or prior fiscal year 

under § 600.20(g) or (h), § 668.23, or subpart L of this part 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 occurs, that triggers or enables the creditor to require 

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

current or prior fiscal year under § 600.20(g) or (h), § 668.23, or sSubpart L of this part, 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); 
Financial Responsibility 15

(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 sSubpart 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. There are Secretary has pending claims for borrower relief 

discharge under § 685.206 from students or former students of the institution and the Secretary 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, affecting at least 25 percent of enrolled students;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 bBorrowing. An institution's financial statements required to be submitted under §

600.20(g) or (h), 668.23, or sSubpart L of this part included a line of credit or loan borrowing in the last 

quarter of the fiscal year, and was then that was repaid the loan during the first two quarters of the 

next fiscal year.

(11) Loss of program eligibility. One or more programs at the institution has lost eligibility to 

participate in another Federal educational assistance program due to an administrative action against 

the school or its programs.

(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;, or accounting for the amount of the contribution and distribution under paragraph (c)(1)(x),

and accounts for that expense or withdrawal by -
Financial Responsibility 16

(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 under § 600.20(g) or (h) 

(in the year following a change in ownership), 668.23, subpart L of this part 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 

(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 described underin 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 
Financial Responsibility 17

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 underdescribed in paragraph (c)(1)(viiix) of this section

andor a repayment of the short-term borrowing provisiondescribed in paragraph (d)(610) of 

this section, not later than 10 days following each transaction.

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

(c)(12)(vi) of this section, no later than 10 days after the date that thesuch 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)(59) 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 described in paragraph (c)(1)(xi) of this section, 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 
Financial Responsibility 18

or penalties, including sanctions or penalties imposed in exchange for 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 underdescribed 

in paragraph (c)(1)(ix) or (d)(11) of this section, not later than 10 days following the action;

(ixxi) For thea discontinuation of academic programs provisiondescribed in paragraph (d)(7) of 

this section, not later than 10 days after the discontinuation of programs in the institution’s 

fiscal year affecting at least 25 percent of enrolled students;. and

(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) 

(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;

(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 
Financial Responsibility 19

demonstrates that the triggering event has not had, 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. 

(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-

(i) Iinclude an, the opinion expressed by the auditor that was an adverse, qualified, or 

disclaimed opinion, unless the Secretary determines that the adverse, qualified, or disclaimed 

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

(ii) Iinclude 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 
Financial Responsibility 20

has not been alleviated even if the auditor states disclosure in any way provides 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; 

(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

* * *
Financial Responsibility 21

(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. 

(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) 
Financial Responsibility 22

(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 

(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 -
Financial Responsibility 23

(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

(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 
Financial Responsibility 24

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;

(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
Financial Responsibility 25

(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).

(cD) Acquisition debt. Notwithstanding paragraphs (b)(3)(i)(A)-(C) of this sectionthe 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. 

(dc) 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 

Government Accountability 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;
Financial Responsibility 26

(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 on 3/8/2022