90/10 general questions

Under the revised 90/10 – Q2, proprietary institutions are no longer obligated to seek out and identify federal education assistance funds that are not explicitly listed in ED’s December 21, 2022, Federal Register notice. Under the original April 2023 guidance, institutions aware of federal education assistance funds not listed in ED’s December 21, 2022, Federal Register notice (87 Fed. Reg. 78096) were generally required to include those funds in their 90/10 revenue calculations. The updated guidance eliminates this obligation. ED found that, under 34 CFR § 668.28(a)(1)(i), the duty to identify federal education assistance funds rests exclusively with the secretary of education, and that the prior notice language requiring institutions to self-identify unlisted funds “directly contravenes the clear directive to the Secretary” in the regulation. As a result, proprietary institutions need only account for funds explicitly listed in the published Federal Register notice and are no longer required to independently track or report unlisted federal funding sources.

Ineligible programs

The new guidance makes a few helpful updates to the interpretation of how and when ineligible programs can be counted toward an institution’s nonfederal funds (10 money). In response IP – A1(a), the guidance maintains the existing limitation that an ineligible program cannot include any courses offered in a Title IV program if it is to be counted as 10 money; however, the interpretative guidance that limited this further to include any course that can be transferred into an eligible program, or that is required to participate or complete an eligible program, was removed. Presumably, as long as the other provisions of the regulations are met, this opens up the opportunity to count revenue generated for, as an example, an ineligible CPR or phlebotomy certification course that can be used to meet a nursing program requirement, or an ineligible short program that can be transferred as a block into an eligible program to meet elective requirements.

In IP – A1(b), ED clarified that revenues earned on an otherwise qualified ineligible course or program, taught by an instructor engaged by the institution as a contractor or adjunct faculty, as opposed to those classified as an “employee,” may still be considered 10 money. This will provide institutions much more flexibility in their hiring process. Also in this subsection, as was previously announced, ED removed the guidance that excluded revenue from ineligible distance education programs from being counted as 10 money.

Comingled federal and state funds

As reflected in the updated response to 90/10 – Q2, institutions are no longer required to identify or include federal education assistance funds that are not listed in the secretary’s official Federal Register notice when calculating their 90/10 revenue. The revised guidance in CFSF – Q1 extends this principle to funding sources that contain a mix of federal and nonfederal dollars; if the source is not listed in the Federal Register, the institution may exclude it entirely from the calculation. Under the updated CFSF –Q3, when a comingled funding source is listed in the Federal Register, institutions must attempt to determine the federal share by contacting the administering agency. If the agency does not provide the breakdown, the institution’s obligation ends, and it may omit the funds from the 90/10 calculation without taking additional steps to estimate the percentage.

Enrollment limitations

The updated response to question EL – Q1 confirms that institutions may set enrollment limits for a class start based on funding source, including Title IV or other federal education funds, unless restricted by the institution’s Program Participation Agreement. This allows institutions more flexibility to monitor and manage student enrollment to maintain their 90/10 compliance.

This clarification offers institutions flexibility in managing enrollment and federal funding ratios, but any related policies must also consider how the funding type relates to a protected status under nondiscrimination laws and institutional policies.

Schools must exercise caution when applying these funding-based enrollment limits, as they may result in a claim of discrimination under federal law and the institution’s anti-discrimination policy. For instance, if an institution limited the number of veterans and service members it enrolled based on their use of federal veterans’ education benefits, that could create a civil rights claim, as veteran status is considered a protected status under law. Enrollment caps cannot be applied in ways that treat these students differently because of their funding sources related to a protected status.

Disbursement rule

ED’s updates to the responses to questions DR – 1 and DR – 2 clarify that institutions are no longer required to request or draw down Title IV funds by the end of the fiscal year to include them in the 90/10 calculation, as long as the disbursements are posted to students’ accounts by that date. This interpretation is consistent with the flexibility already granted to institutions on Reimbursement and Heightened Cash Monitoring 2 (HCM2) under 34 CFR §668.28(a)(2)(ii)(B), because schools on these payment methods must wait for federal approval before they can receive federal funds.

However, the updated language does not align with the regulatory requirements for schools operating under Advanced Payment or Heightened Cash Monitoring 1 (HCM1) payment methods. Under 34 CFR §668.28(a)(2)(ii)(A), these schools must both request and disburse Title IV funds by the end of the fiscal year in order to include the funds in the 90/10 calculation. The new guidance also conflicts with the requirement to follow the principles of cash?basis accounting, which require institutions to recognize revenue only when cash is actually received.

Importantly, the updated guidance does not distinguish between payment methods, even though the regulations themselves do. Because of this discrepancy, institutions using Advanced Payment or HCM1 payment methods should proceed with caution. ED may update or correct this guidance without notice, and institutions will still be responsible for complying with the underlying regulatory requirements.

Related entity

The RE – Q1 and RE – Q2 guidance updates make several notable changes to how ED defines “related” sources and how institutions should treat grants from unrelated entities.

In place of the International Standards on Auditing-based definition, the updated guidance now anchors the definition of “related party” to Accounting Standards Codification (ASC) 850, which is already incorporated by reference into ED regulations for compliance audits and financial statements under 34 CFR § 668.23(i)(1). The guidance provides an enumerated list of related parties drawn from ASC 850, including affiliates, principal owners and their immediate families, management and their immediate families, and other parties that can significantly influence the management or operating policies of the institution. The original guidance also included an illustrative example stating that if an institution or its owner donates funds to an entity that in turn provides grants or scholarships to the institution’s students, those funds should not be counted. That example has been removed, though the general principle that funds from related sources must be excluded remains intact. Additionally, the updated guidance notes that institutions can look to the related parties they are already required to identify in their annual audited financial statements as a resource for determining which funding sources must be excluded from their 90/10 calculations.

With respect to RE – A2, which addresses grants from unrelated entities where the institution is involved in selecting awardees, the original guidance stated definitively that if an institution or anyone related to it was involved in reviewing and selecting awardees of grants from an unrelated entity, those funds “are considered to be institutional scholarships.” The updated guidance takes a more restrained approach. Rather than categorically declaring such funds to be institutional scholarships, it simply directs institutions to “follow the applicable regulations governing institutional scholarships in 34 CFR § 668.28(a)(5)(iii)” and cross-references the updated RE – A1 for the definition of related parties.

Conclusion

ED’s March 2026 updates to the 90/10 guidance aim to simplify several compliance expectations and better align the guidance with the regulatory language, providing welcome relief from an increasingly difficult requirement for many schools serving low-income students. However, this relief should be tempered by the understanding that these changes are set forth in sub-regulatory guidance and could change without notice.

If you have any questions about this new guidance, please do not hesitate to reach out.

Colleges must submit their ACTS data by March 18, 2026.

ACTS comes from a federal push to make college admissions more transparent. The US Department of Education wants more detailed information to better monitor admissions and financial aid decisions, especially regarding fairness and compliance with its interpretation of federal civil rights laws.

Which schools does this apply to?

The new reporting requirements apply to all four-year colleges and universities, including those that offer only graduate programs. A reporting exception applies to non-degree and two-year institutions and otherwise required institutions that accept 100% of applicants and offer no non-need-based aid.  

An exemption may also apply to reporting for a specific year, within a dataset, if the open-entry and need-based aid qualifiers are met for that year.

Summary of the reporting qualifiers and exemptions:

What must be reported?

These institutions must submit six years of detailed student-level admissions data, covering 2019 – 2020 through 2025 – 2026.

Under ACTS, schools must report much more detailed admissions information than before. This includes data on students’ race, ethnicity and sex, as well as GPAs, test scores, family income, Pell Grant eligibility and whether the student is the first in their family to attend college. Schools must also report admissions decisions, waitlist activity, financial aid awards (federal and institutional) and even first?year cumulative GPAs for enrolled students. Graduate program reporting must also include GRE, MCAT and LSAT test scores.

What are next steps?

We encourage you to check with your institutional research office and IPEDS Keyholders to ensure they are aware of this requirement if you believe it applies to your institution.

Since the rollout of this requirement has not been widely publicized, there is growing concern that many institutions remain unaware of it, with less than 30 days until the reporting deadline. This is not an easy lift, because the required data goes back six years and likely will require institutions to pull data from different systems quickly.

If this applies to your institution, leaders need to quickly coordinate teams across admissions, institutional research, the registrar, IT and financial aid to gather and verify the reportable information.

Final thoughts

ACTS greatly increases what colleges must report about admissions and student outcomes in short order. It requires fast action, careful planning and strong data management to meet federal expectations and avoid compliance risks. Because ACTS data may be used in reviews of institutional fairness and compliance and may be subject to public scrutiny, we advise schools to be especially careful to ensure data is complete, accurate and clearly documented.

We do not anticipate a reporting extension since this is a highly desired dataset.

Please reach out to our team if we can be of assistance.

How did we get here?

The Higher Education Act of 1965 (HEA) specifies that certain programs are eligible for Title IV federal student aid only if they prepare students for “gainful employment in a recognized occupation” (20 USC 1088(b)). However, the statute does not define “gainful employment,” and, until 2010, no regulation or guidance attempted to define it. Under the Obama administration, ED took the position that the measure of gainful employment (GE) is whether graduates can pay their student loan debt based on their earnings.[1] It was a debt-based metric attempting to assess program effectiveness based on earnings and essentially applied only to for-profit institutions and nondegree programs at nonprofit and public institutions, leaving most other degree programs free from any graduate earnings assessment. The GE rule was heavily debated, subject to litigation, reissued, rescinded and reinstated in the years that followed, and as a result, had little impact on program eligibility for Title IV funds for the subset of higher education subject to the assessments.

The development of the EP metric, however, marked a significant departure from this debt-centered approach. Under the Biden administration, ED first formally proposed the EP, together with the debt-to-earnings (DTE) ratio, to assess program effectiveness and continued eligibility for federal grant and loan funding for all programs at private for-profit institutions and certificate programs across all institution types.[2] At its most basic level, the EP metric measures whether the typical graduate from a program who received federal aid is earning at least as much as a typical high school graduate between the ages of 25 and 34 in the labor force (i.e., either working or looking for work) in their state as reported by the voluntary participants in a Census Bureau survey.

Notably, the EP has nothing to do with student debt or program cost. Instead, the metric is intended to capture the extent to which postsecondary programs enhance a student’s potential earnings relative to not pursuing a college credential at all. Essentially, the theory assumes that if high school graduates without college make more than college graduates from a certain program, the program is not worthy of federal investment in the form of loans and grants. In practice (and in addition to the DTE ratio), if GE program graduates failed to earn more than the average high school graduate in their respective home state (or in some cases nationally), schools could still fail the GE test even if the program was offered for free and graduates did not incur debt. 

The end of GE for some and rise of GE for all – the new Earnings Premium framework

OB3 changed the game and codified the EP concept in statute (whereas before it only existed in regulation) and expanded it to apply to all programs at all institutions receiving Title IV funds, regardless of whether the institution is nonprofit, public or for-profit. Under the new framework, the EP, dubbed as the “Do Not Harm” test by ED, created a single metric applicable to all programs and eliminated the DTE ratio, leaving the modified EP as the single accountability measure for all Title IV programs.

The stakes are high. A program that fails to meet this new metric in two out of any three consecutive award years will be designated as a “low-earning outcome program” and will lose eligibility to participate in the Direct Loan Program. Significantly, ED has proposed tying the metric to broader institutional penalties under new Administrative Capability standards that could disqualify such programs from accessing all Title IV funds, including grants. Importantly, although this is a programmatic assessment, it is measured across the main campus and all branches and additional locations of the institution offering the same program.

How does the EP work?

The EP compares the median earnings of program completers who received Title IV funding to benchmark earnings thresholds.

• For undergraduate programs, the median earnings Title IV-funded program completers must exceed the median earnings of working high school graduates aged 25 – 34 in the state where the institution is located (or nationally depending on program size) who did not attend college during the year of the measured earnings.
• For graduate programs, including graduate certificates, the median earnings of Title IV-funded program completers must exceed the lowest of three benchmarks: the median earnings of working bachelor’s degree recipients aged 25 – 34 (not enrolled in postsecondary education during the measured earnings year) either statewide, in the same field of study within the state or in the same field nationwide.

Earnings of program graduates are assessed in the fourth tax year after program completion regardless of age or work engagement (full-time, part-time, occasional, etc.), using data from federal agencies such as the IRS and Social Security Administration. A cohort of at least 30 completers is required for a single-year calculation, and smaller cohorts may be assessed over an extended period.

What are the consequences for failing programs?

Loss of access to loans and potentially grants

Programs that fail the EP metric for the first time receive a notice of that determination, and must issue student warnings about potential loss of loan eligibility. A second failure within three consecutive award years results in designation as a “low-earning outcome program” and loss of Federal Direct Loan eligibility for two years. Given the rule’s expected July 1, 2026, effective date, the earliest a program could lose eligibility is July 1, 2028. Programs that fail the metric in a single year may elect to modify their Program Participation Agreement and commit to ceasing all new enrollments while teaching out the existing cohort, if ED determines it is in the best interest of the students.

Failure to meet administrative capability standards – loss of loan and grant eligibility

Institutions must also demonstrate that at least 50%of their Title IV recipients and funds are not from low-earning outcome programs. Failure to meet this threshold in two of three consecutive years triggers provisional certification status for the entire institution and loss of all Title IV aid –including Pell Grants – for low-earning outcome programs.

Appeals and reporting

Institutions can challenge ED’s determination but must base their appeal on data and calculation errors. Institutions must submit required data to ED by October 1 annually, with EP results published the following July. Reporting requirements will be further streamlined beginning in 2027.

How soon does this take effect?

Before implementing the new accountability framework, ED must complete several regulatory steps, most notably publishing in the Federal Register the proposed rules for public comment, followed by the publication of the final rule. Public and institutional participation in this comment period will be key, as several open issues remain, and the comment period will be the last chance to revisit arguments that may not have been addressed in negotiated rulemaking. Despite the historical “master calendar” requirements associated with most agency rulemakings allowing additional time to adjust course, this rule will take effect on July 1, 2026, as established in OB3.

What should I do to prepare?

In two words – start now.

Prior to the rulemaking process, ED estimated that more than 600,000 students were enrolled in programs that would fail the EP. While ED has since disclaimed this data, and the rulemaking revised the metric used to reach those estimates, institutions should work now to prepare for a significant ongoing compliance commitment and operational impact.

This is especially urgent for institutions offering programs in public service or traditionally lower-paying fields, and those located in lower-wage regional or rural labor markets. Programs offered in states with lower earnings benchmarks for high school graduates (undergraduate programs) or baccalaureate recipients (graduate programs) and serving a smaller local employment market are at a greater risk for failing the EP and losing access to federal funds, while identical programs offered in the same or neighboring states may yield different outcomes based on local employment markets.

Regardless of the institutional profile, waiting for the EP to take effect is not a winning strategy. All institutions should prioritize preparing for the EP, and should take immediate steps to identify at-risk programs by:

• Comparing earnings estimates from internal and external sources, including national earnings surveys from public and private entities, to identify programs that may be at risk under the metric.
• Identifying the appropriate CIP coding classification for programs to ensure dissimilar programs are not improperly grouped together. If the institution already reports this information to ED (usually existing GE programs), confirm those numbers are accurate. If it does not, begin the process of identifying the correct CIP codes.
• Collecting (or continuing collecting) data on prior program completers, and establishing a system to do so going forward. The appeals process allows challenges to EP calculations that depend on student status and income data, so institutions should strengthen post-completion communications and records to maintain contact with recent alumni – especially four years after completion – to align with information ED collects. The only basis to challenge an ED classification of a low-earnings outcome program is inaccurate (generated from information the institution cannot access), so cultivating and maintaining an internal and verifiable record of completer earnings is a best practice.

Identifying at-risk programs will inform potential solutions and strategies for compliance with the EP.

As noted above, ED has not published the proposed rules for public comment, but

institutions likely to be most affected by the EP and those that have concerns with the proposed language should start preparing comments to submit during the upcoming formal notice-and-comment process.

Cooley’s education team can support your efforts to understand and strategize for the EP. We are prepared to discuss any aspect of this proposal.

[1] https://www.federalregister.gov/d/2014-25594/p-10

[2] https://www.federalregister.gov/documents/2023/10/10/2023-20385/financial-value-transparency-and-gainful-employment

On July 7, 2025, ED published an interpretive rule significantly revising its position on how for-profit institutions calculate compliance under the Title IV regulations, specifically the “Non-Federal revenue (90/10)” regulations, commonly known as the “90/10 Rule.” Notably, ED will now permit revenue from distance education programs and unapproved locations to count toward the 10% nonfederal revenue requirement under the Higher Education Act (HEA), provided those programs meet statutory criteria. This stance signifies a meaningful shift from previous guidance and offers immediate regulatory relief for proprietary institutions, which may retroactively apply the new interpretation to their 90/10 calculations for prior fiscal years.

What is the 90/10 Rule?

The 90/10 Rule, codified in Section 487 of the HEA,[1] requires proprietary institutions to derive at least 10% of their revenue from nonfederal sources to remain eligible for Title IV federal student aid programs. The rule is designed to ensure institutional market viability by requiring schools to generate a portion of their revenue from tuition-paying students or other nonfederal sources, rather than relying entirely on federal government aid. Failure to meet this standard for two consecutive fiscal years results in the loss of Title IV eligibility for at least two subsequent fiscal years.

Historically, only federal funding from Title IV programs was counted on the “90” side of the equation, while other government funding, such as military and veteran benefits under the GI Bill, was counted as nonfederal revenue. However, a final rule published on October 28, 2022, implementing changes required by the American Rescue Plan Act, expanded the “90” side to include all federal education assistance, effective for fiscal years beginning on or after January 1, 2023.

While the final rule focused on broadening federal revenue sources, ED also stated in the preamble that institutions could not count proceeds from programs offered at unapproved locations or via distance learning toward their nonfederal revenue. This position, though not codified in the regulatory text, was described as necessary to ensure programs were offered from appropriately authorized locations and by institution-approved instructors.

ED’s July 2025 interpretive rule

In the new interpretive rule, ED clarifies that, “because the Department did not make the changes to the actual regulatory text,” the 2022 preamble language prohibiting the inclusion of revenue earned from online or unapproved locations “is non-binding and does not have the force of law.” Instead, ED points to the statutory language at 20 USC § 1094(d)(1)(B)(iii), which outlines the conditions under which revenue from Title IV-ineligible programs may be counted toward the nonfederal side of the 90/10 calculation. Under this provision, revenue from a non-Title IV program may be included if the program:

• Is approved or licensed by the appropriate state agency.
• Is accredited by a recognized accrediting agency.
• Provides an industry-recognized credential or certification.

ED concludes that because “none of the subclauses under subsection (iii) deal with the location of instruction, physical or otherwise … location is not relevant for the purposes of calculating revenue within this context under the 90/10 Rule.”

Implications for proprietary institutions

This revised interpretation brings significant benefits and clarity to for-profit institutions, particularly those with substantial online program offerings. In particular, proprietary institutions may now:

• Include revenue from distance education and unapproved locations in their 10% nonfederal revenue calculation, so long as the program satisfies at least one of the statutory criteria listed above.
• Avoid penalties or loss of Title IV eligibility tied to ED’s earlier, nonbinding interpretation in the 2022 preamble.
• Retroactively revise past 90/10 calculations to reflect the updated interpretation for affected fiscal years.

In sum, institutions are no longer bound by the preamble language in ED’s prior interpretation regarding instructional location.

Next steps

If you’re a proprietary institution looking to reassess your revenue streams or update past 90/10 calculations, now is the time to act. Cooley’s education practice is available to assist with navigating compliance strategies and structuring programs for federal aid eligibility.

[1] See also 34 CFR § 668.28.

Basics

The EP has nothing to do with student debt or program cost. Dubbed “gainful employment for all,” the metric will create a new program eligibility assessment beginning July 1, 2026, generally comparing graduate median earnings to working adults aged 25 – 34 who did not complete a comparable postsecondary program in the relevant state (or nationwide, depending on the number of qualifying graduates) and are not currently enrolled in a postsecondary institution. The metric is embracing the “do no harm” concept for student loan borrowers by preventing them from incurring federal loan debt for “low-earning programs” that do not produce median earnings that exceed those for people who generally did not attend comparable programs. As a result, the EP measures program alignment with median industry compensation regardless of the amount of debt a student carries or overall program cost. 

For undergraduate programs, the median earnings of those who completed the program and received Title IV funds generally must exceed the median earnings of those who have a high school diploma, or its recognized equivalent, and did not attend college in the state the institution is located for undergraduate programs, or nationwide if the university enrolls more than 50% of students who reside out of state. For graduate programs (including graduate certificates), the calculation is a bit more complicated, as median completer earnings for those who received Title IV funds must exceed the lowest of the median earnings for working adults who:

1. Completed only bachelor’s degree programs in the state the institution is located.
2. Work in the same field as determined by the education secretary.
3. Work in the same field nationwide.

The revised language refers to the earnings of program completers who are “working,” and indicates that small program cohorts will be aggregated.  

Although not fully implemented due to delays on GE regulations, similar eligibility metrics currently exist for all programs at for-profit schools, but only apply to certificate programs at nonprofit and public institutions. See a summary of the existing GE framework. Importantly, GE remains active, and the new EP metric supplements these requirements.

Consequences

Assessments of the EP will begin for the cohorts that completed four years prior to each assessment, but importantly the US Department of Education (ED) will not limit the review to fourth-year earnings. Instead, the law requires program completers to produce favorable results two out of three years preceding the assessment. As a result, ED will be looking at the prior years and comparable working adult outcomes, as well as the fourth year to determine the consequences for a low-earnings program. Failure to meet the minimum earnings standards for two out of three years within the assessment period will result in loss of program eligibility for students to receive federal loan funds. Failure of the metric in any single year will require notice to currently enrolled students that continued eligibility is in jeopardy.

Data sources

All colleges may be required to provide additional data to support the assessment, but some of the foundation information originates with ED and is already in place. The extensive data reporting required of all institutions for the existing GE/Financial Value Transparency (FVT) regulations likely will have some overlap for the new requirements, and includes a list of completers generated by ED that requires confirmation. That reporting has been repeatedly delayed after the July 1, 2024, effective date, due in part to challenges related to the Free Application for Federal Student Aid (FAFSA) last year. The institutional data (and completer confirmation) is now due on September 30, 2025, and ED provided a reminder of the reporting deadline for the delayed 2024 and 2025 reporting expectations in an electronic announcement on July 9.

The law does not identify the source(s) of median earnings for graduates (instead deferring to the Secretary of ED), but under GE, similar information was expected to originate with the IRS and Social Security Administration and is not publicly available. Program completers who are enrolled in an institution of higher education are excluded, and as previously noted, the law references the median earnings of those who are “working.”

Earnings data for the comparison group of working adults already exists and is gathered via the Census Bureau’s reporting as part of the American Community Survey. For the high school comparison applicable to undergraduate programs, the earnings median is based on self-reported median earnings for working adults aged 25 – 34 who either worked during the year or indicated they were unemployed and looking for work with only a high school diploma in the state. Notably, those who were not looking for work or were unresponsive were excluded from the median working adult calculation. For context, ED most recently published the earnings threshold as part of the rollout of the latest version of the GE regulations. The median earnings thresholds as reported in December 2024 ranged from $27,362 per year in Mississippi to $37,850 per year in New Hampshire. Because it is not part of the current FVT regulations, ED has not published comparable figures for state-by-state earnings for graduates for bachelor’s degree programs or those in any particular field, as required for the graduate program EP assessment.  

Timing of assessments

ED will be required to develop regulations to implement the details of the EP assessment, but the foundation already exists in the Code of Federal Regulations and is similar to the currently delayed FVT model included in the Biden-era GE rules. For nonprofit and public universities that are already required to confirm ED’s completer list pursuant to FVT requirements by September 30, 2025, the key difference with the EP metric is the potential loss of Title IV eligibility for underperforming programs.

ED will develop regulations to implement the EP metric, and that process likely will require completion of the “negotiated rulemaking” to develop the details of institutional reporting, calculation methodology, appeal process, open questions and timeline for implementation. The process likely also will include a request for data, confirmation of ED completer data and other information ED deems relevant. ED will then publish comparison information for undergraduate (see state-by-state earnings above) and graduate benchmarks in the Federal Register for reference and begin to notify institutions if programs fail the comparison metric. Pursuant to the law, institutions will have an opportunity to appeal agency determinations of a “low-earning program” and maintain Title IV eligibility throughout that process.

One key open question is when the new EP requirement will begin to impact private and public universities. As written, the EP focuses four years of earnings prior to the date of the assessment, indicating that absent some type of delay, the agency will be assessing earnings of graduates who completed well before Trump signed the bill, and based on earnings cycles and benchmarks that are already complete. However, ED first must create the data collection, comparison and appeal infrastructure while addressing ambiguous elements of the law (intentional or otherwise) before it can implement the earnings assessment. Due to the “master calendar” requirements for new regulations, ED must publish the final rule (after negotiated rulemaking and a notice and comment period) by November 1 to be effective July 1 of the following year. It is unlikely ED can complete the rulemaking process this year to align with the July 1, 2026, effective date in the law, but some of the completer and income data already exist, and therefore some action may be possible. ED also has the option to bypass certain public participation requirements if “… that notice and public procedure thereon are impracticable, unnecessary, or contrary to the public interest,” but has not indicated if it will pursue that option.

How to prepare

If not already complete, institutions should begin gathering information about prior program completers and a mechanism to collect such information going forward. Although not yet described in regulation, the appeal process may provide an opportunity to challenge student status (for potential exclusion from the calculation) and income data, so universities should reinforce post-completion communication plans and related records to maintain contact with alumni in the initial years following graduation. From a broader perspective, institutions should begin comparing earnings estimates from internal and external sources (such as national earnings surveys from private and governmental entities) to identify programs potentially at risk.

Please contact Jay Vaughan, Vanessa Agudelo or any Cooley higher education group team member regarding any questions about the EP or next steps to prepare.

Process for dissolution

Though Trump issued an EO calling for ED to dissolve, congressional action is required to disband any cabinet-level department. This would require 60 votes in the Senate. With the Republicans currently holding a small majority of 53 seats, the path forward is not clear. Sen. Bill Cassidy (R-LA), Health, Education, Labor and Pensions (HELP) chair, said that he will introduce legislation to close ED, but it has not reached the floor yet. On March 25, Rep. Andrew Ogles (R-TN), introduced a bill, HR 2386, that allegedly codified Trump’s executive order closing ED, but the text of the bill is focused on expanding state control over education and does not explicitly authorize the secretary to eliminate ED. The bill has been referred to the House Committee on Education and Workforce.

The EO suggests an awareness of these legal constraints, as it limits the secretary’s actions to facilitate the closure of ED to those that are “to the maximum extent appropriate and permitted by law.” In the last few months, ED has engaged in the reduction and reallocation of its functions in an effort to reduce its operations without facing the legal hurdles of a formal dissolution. The EO and its directive to McMahon signal that this period of extreme reduction and reallocation will likely continue.

Statutory limitations to reduction and reallocation actions

The Department of Education Organization Act (act) established ED in 1979 and transferred responsibilities for carrying out previously existing laws to ED, like the Higher Education Act of 1965 (HEA), previously managed by the Office of Education within the Department of Health, Education and Welfare, which no longer exists. Beyond defining ED’s purpose, the act also limits the reduction and reallocation actions that ED can take.

The act, and its codification in 20 US Code § 3401, grants the secretary limited authority to discontinue or reallocate functions within ED, but these powers are narrowly defined. The secretary has the discretion to “allocate or reallocate functions among the officers of the Department, and to establish, consolidate, alter, or discontinue such organizational entities within the Department as may be necessary or appropriate,” and the act authorizes the secretary to terminate some offices, such as English Language Acquisition, the Office of Environmental Education and the National Center for Education Statistics, under specific procedural guidelines (20 US Code § 3473). However, the act specifies that this authority does not extend to offices and programs created by or assigned to ED by statute, including the Office of Civil Rights (OCR) and the Federal Student Aid Office (FSA).

With this statutory limitation on transferring departments to other agencies, more legal challenges to this administration’s actions are expected.

Reduction and reallocation

ED’s efforts to reduce its size in recent months have mirrored reductions in other areas of the federal government. In February, ED offered staffers a $25,000 buyout to retire from their jobs at ED. According to McMahon, approximately 300 individuals out of 4,500 accepted this offer. Following the EO, ED laid off almost half of its staff, further reducing the number of employees within the department. Cutting staff this dramatically will inevitably limit the work ED can achieve.

If ED’s reductions significantly impact programs that are protected from elimination under the act, such that the programs can no longer function, its actions may amount to statutory violations of 20 US Code § 3473. This is the argument advanced by 21 attorneys general in their lawsuit against ED filed in March in the US District Court for the District of Massachusetts. In their complaint, they argue that ED’s “massive reduction in force is equivalent to incapacitating key, statutorily mandated functions of the Department, causing immense damage to Plaintiff States and their educational systems,” and that “[f]ar from being just a ‘first step,’ the layoffs are an effective dismantling of the Department.” Additional lawsuits brought by the American Federation of Teachers and the NAACP advance similar arguments against ED.

ED also has relied on the reallocation of its functions as a means of diminishing its operations. While the administration has attempted to focus the discussion surrounding the dismantling of ED as “restor[ing] the rightful role of state oversight in education and [] end[ing] the overreach from Washington,” as the secretary stated in her opening address, recent actions from the president and his administration suggest that many of the programs would not simply vanish, but would instead be reallocated to other agencies and departments.

As discussed, the secretary’s authority to reallocate ED’s functions does not extend to functions that are statutorily assigned to ED. However, the statutory limitations surrounding reallocation do not seem to be considered in the announcements, many of which involve the reallocation of functions that have been statutorily assigned to ED, like the FSA. In addition, the administration’s announcements on reallocating ED’s statutorily assigned functions – like the enforcement of the Individuals with Disabilities Education Act (IDEA) – also may exceed statutory limitations.

Announcements from the president regarding reallocation

Federal student loans

• In the days following the EO, Trump announced that federal student loans would now be directly under the control of the Small Business Administration (SBA). While this administrative change has been announced, there is no further information on how or when SBA will begin operations. Under the HEA, student loans are the education secretary’s responsibility, so this action will likely face legal challenges.

Individuals with special needs and Title I

• The president also announced plans for the Department of Health and Human Services (HHS) to take over special needs and nutrition programs, though similar to the stated plan to move student loans to SBA, there is limited information regarding how this process will operate. It is unclear what special needs programs would move, but HHS Secretary Robert F. Kennedy Jr. posted on his official government X (formerly Twitter) account that HHS “is fully prepared to take on the responsibility of supporting individuals with special needs.”
  
• Before signing the EO, Trump announced that Title I funding would be preserved and redistributed to another agency. The administration has not provided any additional information at this time.

Pell Grants

• In a speech delivered before signing the EO, Trump also mentioned that Pell Grants would be redistributed to another department, but he has not provided further details. Despite these announcements, the timing and manner of their implementation remains unclear. This has caused concern and consternation for impacted parties from both a legal and administrative standpoint. Further movement of programs from ED into other agencies should be expected and anticipated following these declarations.

Even if the legal challenges are overcome, the potential transfer of ED’s operations into other agencies raises significant concerns about whether the receiving agencies have sufficient trained and qualified staff to effectively operate the programs and take on the new responsibilities. These agencies likely do not have the resources nor institutional knowledge to handle the complex change in delegation. This concern has already been raised for SBA and HHS, as the agencies have not provided information on how to structure these additional programs.

Effects of reduction and reallocation

The education sector is already experiencing the effects of the administration’s reduction and reallocation efforts. In several states – including California, New York, Illinois, Kansas, Kentucky, Missouri and Utah – the federal government has delayed reimbursement or failed to reimburse school districts for expenses incurred under federal grant programs for homeless youth and students with disabilities that have been slashed by the administration. Teacher-preparation programs and programs dedicated to the improvement of school infrastructure also have experienced cuts. Similarly, sudden changes in reimbursement procedures related to pandemic relief programs have left schools unable to access funds that they were relying on.

Besides program cuts and abrupt procedural changes, the reductions in force (RIFs) have left school districts and education providers without designated points of contact for the various federal programs in which they participate, leading to widespread confusion across the sector. The full impact of the RIFs, particularly on smaller offices focused on large long-term projects, is likely to be felt in the future. For example, ED’s Office of Educational Technology (OET), which was focused on helping states and school districts navigate new technology through policy guidance, was eliminated as part of the administration’s plan to dismantle ED. As new technologies emerge, particularly within the realm of artificial intelligence, school districts and states will lack a central authority for guidance, potentially resulting in uninformed decision-making and redundant efforts. Other offices engaged in critical work, such as the OCR within ED, which is charged with protecting the civil rights of students and educators, also have experienced severe layoffs, with seven of the agency’s 12 regional enforcement offices being closed and the entire staff laid off. The effect of these closures on students’ civil rights is still unfolding, but it could potentially be significant.

While ED’s fate is currently murky, institutions and edtech organizations should continue to follow all reporting requirements and remain alert to any notices published. At this time, there have been no acts from Congress. Whatever the next steps are within the agencies, administration or the courts, Cooley will continue to monitor all movement as it relates to ED and its activities.

Regulatory context

On February 14, the ED Office for Civil Rights (OCR) issued a Dear Colleague Letter (DCL) outlining the obligations of educational institutions pursuant to Title VI and the 2023 US Supreme Court ruling in Students for Fair Admissions, Inc. v. President and Fellows of Harvard College (SFFA). The letter noted ED’s intent to begin assessing compliance by February 28, 2025, and warns that institutions found to be in violation could risk losing access to federal funds.

On February 25, a coalition of educators and sociologists filed a lawsuit against the OCR regarding the DCL. The suit challenges the DCL on First and Fifth amendment grounds, and argues that following its guidance “will do a disservice to students and ultimately the nation by weakening schools as portals to opportunity.” Soon thereafter, on March 5, another legal complaint relating to the DCL, this time with different plaintiffs, was filed against the department also under the First and Fifth amendments, but with multiple additional claims under the Administrative Procedure Act (APA).

Three days after the first suit was filed, OCR released a document, Frequently Asked Questions About Racial Preferences and Stereotypes Under Title VI of the Civil Rights Act (FAQ), which provides some further details regarding the types of activities ED now considers to be unlawful. However, other areas of the FAQ remain hazy, especially regarding enforcement processes. This post follows our review of the DCL and summarizes the suits filed challenging the guidance, provides key points of clarification from the FAQ that followed and discusses the possible enforcement mechanisms for noncompliance.

OCR’s Title VI FAQ

Following the filing of the first lawsuit, and on the day of the DCL’s compliance deadline, OCR issued a nine-page FAQ that clarifies the Title VI obligations for schools, colleges and other federally funded entities. The FAQ also sheds light on several prior areas of confusion and provides a clearer picture of OCR’s enforcement priorities.

• Admissions essays and policies: The FAQ acknowledges that Supreme Court precedent allows schools to consider “an applicant’s discussion of how race affected the applicant’s life,” but warns against “attempting to circumvent” the SFFA decision by asking essay questions related to race. Prohibited practices explicitly outlined in the FAQ include “crafting essay prompts in a way that require applicants to disclose their race” and “admissions policies that hold brief interviews in order to visually assess an applicant’s race.”
• Cultural and historical observances and programs: The FAQ explains that cultural and historical observances and programs focused on interests of cultures, heritages and areas of the world are permissible if they are open to all students. In particular, ED wrote, “educational, cultural, or historical observances – such as Black History Month, International Holocaust Remembrance Day, or similar events – that celebrate or recognize historical events and contributions” are lawful “so long as they do not engage in racial exclusion or discrimination.”
• Curriculum: The FAQ clarifies that ED can only punish schools in certain circumstances, citing the Department of Education Organization Act, which “prohibit[s] the Department from exercising control over the content of school curricula.”
• Diversity, equity and inclusion (DEI) programs: The FAQ seems to take a more measured approach to DEI programs than previous executive orders and the DCL that deemed DEI programs generally unlawful. The FAQ notes, “whether a policy or program violates Title VI does not depend on the use of specific terminology such as ‘diversity,’ ‘equity,’ or ‘inclusion.’” Instead, “OCR will examine the facts and circumstances of each case, including the nature of the educational institution, the age of the students and the relationships of the individuals involved” in its determinations. The FAQ emphasizes that DEI programs that involve discrimination “on the basis of race, color, or national origin” or that “treat students differently based on race, engage in racial stereotyping, or create hostile environments for students of particular races” are unlawful.
• “Extreme” practices: The FAQ explicitly condemns certain practices, including the segregation of students by race for events, the mandatory participation in protests or assigning students tasks differentiated by race. Specifically, the FAQ notes that “extreme practices at a university – such as requiring students to participate in privilege walks, […] pressuring them to participate in protests or take certain positions on racially charged issues,” and “mandating courses, orientation programs, or trainings that are designed to emphasize and focus on racial stereotypes […] – are all forms of school-on-student harassment that could create a hostile environment under Title VI.”
• Scholarships: Schools are prohibited from administering or advertising third-party scholarships or other opportunities based on race, even if the school itself does not sponsor such opportunities.
• Third-party contractors: The FAQ underscores that any race-based preferences in the procurement and selection of contractors will prompt OCR scrutiny. Likewise, schools cannot engage in racial preferences by outsourcing those processes to third parties.

Legal challenges to the DCL

American Federation of Teachers et al. v. Dept. of Education

In the February 25 suit noted above, American Federation of Teachers v. Dept. of Education, the plaintiffs claim that the DCL “radically upends and re-writes otherwise well-established jurisprudence” by attempting to ban efforts to advance DEI in education without “the lawmaking power of Congress nor the interpretative power of the courts.” In particular, the plaintiffs allege that the DCL misrepresents the state of the law under the Constitution and Title VI in the wake of the Supreme Court’s decision in SFFA, which prohibits colleges and universities from considering race, color or national origin in school admissions programs. The plaintiffs further argue that the DCL’s newly announced standard for evaluating discrimination claims under Title VI is unconstitutionally vague, and that its apparent prohibition on certain teaching methods and practices is unconstitutional.

Specifically, the plaintiffs have challenged the DCL on three grounds. First, the plaintiffs contend that the DCL infringes on First Amendment rights to free speech, expression and association by threatening investigations and enforcement actions against institutions that implement DEI programs. Second, the plaintiffs assert that the DCL violates the Fifth Amendment’s due process protections by establishing vague standards that “authorize[ ] or encourage[ ] seriously discriminatory enforcement.” Finally, under the APA, the plaintiffs argue that ED exceeded its statutory authority, and that the DCL is arbitrary and capricious.

Notably, the lawsuit was filed in the same court that had issued a nationwide preliminary injunction blocking several provisions of Executive Order 14173, which sought to curtail DEI practices in the private sector, including higher education. The Maryland federal district court’s initial ruling on February 21 granting a nationwide preliminary injunction temporarily prohibited the administration from enforcing certain aspects of the executive order, pending further legal proceedings; however, on March 14, a panel from the US Court of Appeals for the Fourth Circuit ruled without explanation that the Trump administration satisfied grounds for a stay of enforcement of the preliminary injunction pending appeal.

ACLU of New Hampshire et al. v. Dept. of Education

The second suit, filed on March 5, alleges that the DCL unconstitutionally restricts speech under the First Amendment by prohibiting teaching about race, diversity, equity and inclusion in schools receiving federal funding. In higher education, academic freedom prohibits the government from dictating what is taught, and in K-12 schools, Congress has prohibited ED from dictating curriculum.

The DCL also fails to define key terms and practices, creating uncertainty about what is prohibited in violation of the Fifth Amendment, leaving schools vulnerable to arbitrary enforcement. The plaintiffs claim these new policies are creating fear among educators about lessons or discussions of race or racism in history and literature, including the cancelling of Advanced Placement (AP) courses in African American Studies and impermissibly limiting free speech.

In addition to the constitutional challenges, the suit alleges that the DCL issues new federal agency guidance that imposes obligations without following the APA’s required process and without a reasoned justification. The American Civil Liberties Union (ACLU) alleges that, by doing so, ED is acting outside its authority, ignoring decades of legal precedent and its own prior guidance, without explanation.

Finally, the suit alleges that the DCL misstates and overstates the Supreme Court’s 2023 ruling in SFFA. The decision only addressed race as a formal admissions factor in college and university admissions decisions – it did not ban any other form of diversity initiatives.

Enforcement activities

Although ED claims that enforcement of Title VI and civil rights laws remains largely unchanged, with investigations and determinations still led by OCR at ED, recent threats of losing Title IV funding for noncompliance with this new interpretation of antidiscrimination laws adds complexity to the enforcement landscape. Notably, the initiative is advancing despite the fact that ED recently terminated nearly all of the employees in the agency’s OCR as part of the government-wide efforts to reduce employee headcount.

According to the FAQ, OCR findings of noncompliance with Title VI and civil rights laws may lead to voluntary resolution agreements or “consequences” – including administrative or judicial proceedings to enforce compliance. Although the DCL threatened noncomplying institutions with the potential loss of federal funds and Title IV eligibility, the FAQ only lays out the enforcement process for investigations led by the OCR, which have traditionally only resulted in monetary penalties for noncompliance. If ED intends to link Title VI noncompliance with loss of Title IV eligibility, it may have to deviate from traditional settlement practices. Historically, the loss of Title IV funding has been governed by processes outlined in the Title IV regulations and addressed in our review of the DCL. However, under 34 CFR 100.8(c), OCR also has the authority to terminate, refuse to grant or continue federal financial assistance as a result of noncompliance with Title VI of the Civil Rights Act of 1964.

It is worth noting that ED has already started enforcement of its interpretation of federal law and, delivering on a campaign promise, initiated actions against institutions it perceives as violating student rights. On March 7, the Department of Justice, the Department of Health and Human Services (HHS), the General Services Administration (GSA) and ED announced an immediate “cancellation” of approximately $400 million in federal grants and contracts to Columbia University, based on the administration’s position that Columbia has not acted to address “persistent harassment of Jewish students.” ED announced that this would be the first round of enforcement actions and more were expected to follow.

On March 13, Columbia received a letter from ED, HHS and GSA demanding material changes to university policies and structures. Note that some of these actions may be contractual in nature, and therefore not subject to the agency administrative processes, but also are unlikely to occur without corresponding agency inquiries, as evidenced by the fact that Columbia also was on the list of recipients of the March 10 enforcement letter discussed above.

Next steps

Whether or not your university is the recipient of an enforcement letter, you should know the rights, obligations and expectations associated with the agency outreach. If that experience is not in house, engage resources to provide the foundations regarding regulatory obligations, contractual requirements with government agencies and ED administrative processes. Cooley has represented clients in ED civil rights cases, advising universities on high-stakes sensitive matters and helping clients navigate the specific issues around antisemitism. Subject-matter knowledge is crucial, and Cooley has extensive civil rights, government investigations, litigation, and higher education institutional experience with university practitioners and former regulators to advise on key compliance matters.

The DCL comes on the heels of President Donald Trump’s January executive order, “Ending Illegal Discrimination and Restoring Merit-Based Opportunity”(EO). The EO directs federal agencies, including ED, to crack down on illegal “diversity, equity and inclusion” (DEI) programs that violate civil rights and identifies federally funded higher education institutions as a central focus of enforcement measures. The DCL, and a related memorandum issued by the US attorney general this month, build off of the EO and offer insight into the kinds of practices that could be considered “illegal discrimination.”    

Although the DCL does not create any new legal standards, and by its own terms only “provides notice of ED’s existing interpretation of federal law,” universities should regard it as a warning and take steps to avoid running afoul of the administration’s crackdown on DEI initiatives. Below we dig into what practices constitute “illegal discrimination,” outline the process for losing Title IV funds and address key steps that schools can take to prepare for the upcoming changes. 

‘Illegal discrimination’ – What is it?

The DCL, relying on Title VI of the Civil Rights Act of 1964, the equal protection clause under the 14th amendment, and SFFA, provides the following test for assessing whether an educational institution is engaging in “illegal discrimination:” “If an educational institution treats a person of one race differently than it treats another person because of that person’s race, the educational institution violates the law.” The DCL goes on to say that “… educational institutions may neither separate or segregate students based on race, nor distribute benefits or burdens based on race.”

Moreover, the DCL adopts a broader interpretation of SFFA, which was narrowly applied to prohibit considering race in admissions policies, to all decisions related to “… hiring, promotion, compensation, financial aid, scholarships, prizes, administrative support, discipline, housing, graduation ceremonies, and all other aspects of student, academic, and campus life.” Although SFFA left open an institution’s ability to pursue racial diversity through other race-neutral avenues, the DCL emphasizes that, under ED’s SFFA interpretation, racial diversity, equity and inclusion as a goal is impermissible.

A memo issued by the US attorney general this month sheds further light on the types of DEI programs that may be considered illegal under the Trump administration. In defining illegal DEI programs that will be subject to investigations and penalties, the memo includes “programs, initiatives, or policies that discriminate, exclude, or divide individuals based on race or sex.” However, “… educational, cultural, or historical observances – such as Black History Month, International Holocaust Remembrance Day, or similar events – that celebrate diversity, recognize historical contributions, and promote awareness without engaging in exclusion or discrimination” are permissible. Overall, the DCL and related guidance highlight the importance for institutions to carefully review existing programs that may lead to the exclusion of individuals or the denial of benefits based on race.

Loss of Title IV eligibility – What does it look like?

The DCL makes clear that ED will actively pursue sanctions against institutions of higher education that receive federal student aid dollars, and it encourages people to report “violations” to ED through an online complaint portal. If ED and the OCR intend to adhere to established education regulations, neither agency can simply revoke access to the federal student aid program without providing some form of due process. However, the type of process due to an institution depends on its level of certification and the alleged violation.

Under the federal regulations at 34 CFR Part 668 Subpart G, ED can initiate a “limitation, suspension or termination” action against an institution by issuing a notice and providing an opportunity to request a hearing or submit written materials explaining “why the limitation or termination should not take place.” ED could also take an immediate action to remove Title IV funding access, which an institution can only appeal after the action has been taken. But an action under Subpart G is not the only lever available to ED. Schools could be subject to other ED actions, such as Heightened Cash Monitoring or invasive investigations that may create intense pressure on the institution’s operations.

Given the DCL’s explicit reliance on Title VI of the Civil Rights Act – compliance with which is an explicit condition of the Program Participation Agreement that governs federal student aid programs – and the administration’s stance that the harmful nature of DEI programs violates Title VI, ED is issuing a dire warning that it will take action against institutions found to be out of compliance.

Next steps – What should institutions do now?

ED’s expansive interpretation of federal law has significant implications for universities, K-12 schools and other organizations receiving federal funding, such as contractors and subcontractors involved in federal projects. Although ED plans to provide additional legal guidance in the future, the DCL highlights multiple race-related institutional policies and programs that could trigger a federal investigation and put institutions at risk of losing federal funding. Here are key areas schools should review.

Reevaluate recruiting programs and admissions practices: Recruiting programs and admissions practices that set preferences based on identity or limit certain individuals from applying could be viewed as discriminatory. The DCL specifically targets college application essays that could be used as proxies for race, as well as the use of third-party contractors, clearinghouses or aggregators. Schools should review recruiting and admissions practices to ensure they do not limit applicants based on their race, either directly or indirectly.

Assess aspirational hiring policies and promotional goals: Aspirational hiring policies or promotional goals should be carefully crafted to avoid perceptions of preferential treatment for any particular group. Some institutions, like the University of Michigan, have already announced that they will no longer require diversity statements as part of faculty hiring, promotion and tenure decisions.

Review student scholarships and activities for inclusivity: Affinity groups and scholarship programs that restrict participation based on race could also be deemed discriminatory. Schools should thoroughly assess their existing DEI practices that offer advantages to specific groups based solely on protected characteristics and adjust accordingly.

Revisit publicly available information: The messaging on DEI initiatives on institutional websites should be mindful of the new federal directives when reflecting a DEI commitment. While many programmatic or institutional accreditors require diversity-related policies, there may be conflicts with the DCL. Institutions are encouraged to consult with their accrediting bodies to navigate these potential discrepancies given ED’s new interpretation of federal law.

Understand local and state laws: Institutions must ensure their DEI initiatives comply with both state and federal law. Some states have DEI policies that may differ from federal guidelines, while others may closely align with the new federal interpretation. A comprehensive review of local, state and federal regulations will help ensure DEI programs are defensible across various legal jurisdictions.

Consult legal counsel regarding potential risks: Seek legal advice to understand the potential risks to federal funding in light of the DCL. Cooley’s litigation and regulatory teams are assessing the enforcement risks associated with DEI and can help navigate any required adjustments to policies and practices.

Despite political shifts from the new administration, many educational institutions continue to recognize the value of fostering a diverse, inclusive and equitable environment. While the new DCL emphasizes the need to eliminate discriminatory practices, the ultimate goal of DEI programs should remain dedicated to ensuring all individuals have equal opportunities to succeed, regardless of their background. By focusing on fairness, transparency and equal access, educational institutions can implement DEI policies that both comply with federal law and uphold their commitment to an inclusive educational environment.

As the landscape of DEI continues to develop, we will continue to monitor both local initiatives and federal changes in this area and provide regular updates. And as always, if you have any questions related to federal or state-level compliance or need assistance reviewing your DEI programs, please feel free to contact us.

For insight on the attorney general’s memorandum titled, “Ending Illegal DEI and DEIA Discrimination and Preferences,” please visit Cooley’s Investigations and Enforcement Watch blog.

In addition, on December 26, 2024, ED announced it was terminating the negotiated rulemaking process for State Authorization, Cash Management, and Accreditation and Related Issues. These issues were part of the larger Program Integrity and Institutional Quality rulemaking that occurred throughout the spring and summer of 2024. It is unclear whether the new administration will take up the rulemaking or initiate a completely new regulatory agenda.

We’ve summarized the FVT/GE updates and the final Program Integrity rule below.

Financial Value Transparency and Gainful Employment

As we previously summarized in this September 2024 blog post, the FVT/GE rule went into effect on July 1, 2024. Pursuant to this rule, all institutions that participate in Title IV programs are required to report a significant amount of student and programmatic information to ED. Part of this reporting includes utilizing the earnings thresholds that will be used to calculate the earnings premium (EP), using the formula:EP = median annual earnings – earnings threshold.

On December 31, 2024, ED released the earnings thresholds for calculation year 2024 for all states and the District of Columbia. The earnings threshold is based on data from the US Census Bureau and is calculated as the self-reported median earnings for working adults aged 25 to 34 who either worked during the year or indicated they were unemployed and looking for work with only a high school diploma in the state in which the institution is located, or nationally, if fewer than 50% of the students in the program are from the state where the institution is located or the institution is a foreign institution. Notably, unlike the expected institutional data, this figure does not include earnings for those who claimed they were not actively seeking employment or for those who did not respond. ED will determine whether a program passes the EP test if the annual earnings exceed the earnings threshold.

The median earnings thresholds range from $27,362 per year in Mississippi to $37,850 per year in New Hampshire. While ED has provided this necessary component of the calculation, it has not announced the federal agency with earnings data that will be used for the institutional median annual earnings data. This is an important part of the formula needed to calculate the EP measure and is currently under review in ongoing litigation.

After months of delay in implementation, the institutional reporting deadline was set for January 15, 2025. However, as of that date, technical issues continued to cause challenges for institutions submitting data. Although there was no extension, ED recognized that there have been reporting issues and released guidance through an electronic announcement, which indicated it will reopen the reporting portals until February 18, 2025, to allow institutions to complete debt reporting and correct any issues that they may not have had time to address before January 15. Institutions should keep documentation of submissions, along with any issues that occur, to prepare in the event an explanation of delayed submission is required.

The fate of FVT/GE under the new administration is unclear. While the new administration is likely to have different priorities, neither President-elect Donald Trump nor ED Secretary nominee Linda McMahon have commented on this subject. During the first Trump administration, ED delayed implementation of certain aspects of the GE rule, established under former President Barack Obama, and then ultimately rescinded the rule in its entirety. It is possible the administration will pursue that path again, but the changes will need to go through negotiated rulemaking. For now, schools should be prepared to comply with the current reporting requirements.

Program Integrity

As announced on December 30, 2024, on January 3, 2025, ED published final rules on Program Integrity and Institutional Quality. According to ED, the regulations are meant to improve reporting on distance education and address how institutions calculate the return of federal financial aid following student withdrawals. The new rules will go into effect on July 1, 2026, but the reporting requirements do not apply until July 2027.

• Reporting distance education programs: Under the new rules, institutions are required to report information to the National Student Loan Data System about which students receiving federal financial aid are enrolled in distance education or correspondence courses. Based on the final rule, ED is no longer pursuing the proposed requirement that institutions would have to report all fully online programs at a virtual additional location. The final rule limits this requirement to only students receiving federal financial aid.

• R2T4 calculation: Separately, ED adopted its proposed amendments regarding the calculation and return of Title IV funds (R2T4). Under the change, when a student has received Title IV aid but does not begin attending the institution during the payment period or period of enrollment, the institution now has the option for a simplified procedure to return the funds to ED instead of the standard R2T4 calculation. The institution no longer must perform an R2T4 calculation for withdrawing a student if the institution regards the student as never having started, returns all Title IV funds, and refunds or writes off all charges related to the student. ED views this as codifying long-standing policies into regulation. This change also allows schools to have flexibility in their leave of absence policies for students who are incarcerated and have unforeseen interruptions in their eligible prison education programs. Additionally, for institutions required to take attendance, ED has adopted language that codifies the requirement that institutions determine a student has withdrawn within 14 days of the student’s last date of attendance.

• Proposed changes not included: A few proposed changes were not included in the final rules, specifically:
  
  
  1. The proposed addition of “virtual locations” to the definition of “additional location.”
  2. The proposed amendment to the definition of “clock hour” that would have limited asynchronous coursework offered under clock hour programs.
  3. Proposed changes requiring online programs to take attendance.
  4. The proposal to allow borrowers who did not attend to repay amounts owed as a loan instead of a lump sum.
  5. The proposed plan to expand eligibility for federal TRIO programs to all high school students regardless of immigration status.

While these rules do not go into effect until July 1, 2026, ED is giving institutions the option to early-implement the leave of absence modifications for students who are incarcerated, and the modified R2T4 calculation option begins on February 3, 2025. Trump has not commented on specific policies regarding current ED rulemaking. However, in his previous term, a Republican-led Congress took advantage of the Congressional Review Act, which allows Congress to review and overturn regulations passed after a certain date by the previous administration. It is possible that congressional Republicans will again attempt to use the power to rescind regulations, such as these rules, to create a clean slate for the Trump administration. We are continuing to track ED’s updates and expect significant changes with the new administration. Please contact us with any questions about compliance with these requirements.

On November 20, 2024, the US Department of Education (ED) Office of Civil Rights (OCR) released a new resource on Avoiding the Discriminatory Use of Artificial Intelligence.

The resource, which applies to all schools subject to federal civil rights laws, including K-12 and higher education institutions, provides information on the legal analysis OCR uses to determine whether a school is using artificial intelligence (AI) in a discriminatory manner. It provides examples of conduct that would be grounds for an investigation for various federal civil rights laws – including Title VI of the Civil Rights Act of 1964 (Title VI), which prohibits discrimination on the basis of race, color or national origin; Title IX of the Education Amendments of 1972 (Title IX), which prohibits discrimination on the basis of sex; and Title II of the Americans with Disabilities Act of 1990 (ADA) and Section 504 of the Rehabilitation Act of 1973 (Section 504), which prohibit discrimination on the basis of disability.

What does the resource say?

Unlike the toolkit that was released by ED’s Office of Educational Technology, which provides advice for mitigating risks, building strategies for AI integration and maximizing use of AI in schools, the OCR resource addresses how the agency will enforce anti-discrimination laws for schools’ AI use. The resource does not have the force of law but is key to understanding what may trigger an OCR investigation – which is important because, in addition to reputational harm, OCR investigations can result in significant fines and penalties for violations.

The resource includes 21 examples of incidents involving AI that could create the basis for on OCR investigation. Those examples include the following:

• Title VI: Using AI to check for plagiarism could trigger an OCR investigation if the tool results in allegations of plagiarism for students who are non-native English speakers. OCR describes an instance where an instructor uses AI to check for plagiarism, but the tool has a higher error rate for non-native English speakers, resulting in more of those students’ essays being flagged, and those students facing disciplinary action or receiving a lower grade. OCR would have grounds to investigate the school for a violation of Title VI because the AI tool impacted English learners’ ability to participate in the class.

• Title IX: Failing to respond to a student’s use of AI to create fake explicit images of other students that are viewed and discussed at the school could trigger an OCR investigation. Schools have an obligation to respond to and prohibit sex-based harassment, and the resource provides that it may be a Title IX violation if a school fails to adequately respond to and prohibit harassment of the subjects of such images.

• Section 504: Using a generative AI tool to write Section 504 plans for students with disabilities could trigger an OCR investigation. The resource provides that a school’s use of a generative AI tool to write Section 504 plans could violate the school’s obligation to provide students with disabilities a free appropriate public education if the school does not review or modify the generated Section 504 plans to meet the specific needs of each individual student.

How should schools and edtech companies prepare?

Schools

Schools need to adequately evaluate AI tools before using them to determine whether there is a risk of discrimination. Additionally, schools should educate faculty and staff about potential risks before permitting use of such tools in the classroom. Having a human element – like teachers – checking the impact of tools in real time may bolster an argument that the school responded reasonably to the extent that it cannot detect discriminatory impact before use in the classroom. Further, schools need to properly investigate complaints about potential discrimination in schools resulting from the use of tools both inside and outside the classroom.

Edtech companies

Edtech companies should be aware of these potential issues when developing their technology and take steps to address them early, before they create an issue. Ensuring products are not discriminatory will be important for the long-term success and reputation of the company. When contracting with schools, edtech companies should be prepared for schools to ask about the impact of their technology, so they should be prepared to explain how AI technology will be used, along with being accurate and clear about the impact. Additionally, edtech companies should create robust acceptable use policies that allow them to suspend a user’s account for any inappropriate or prohibited behavior. The company can then consult with the school regarding a student’s conduct to determine whether to permit access again, after a student engages in prohibited conduct, such as inappropriate images that would constitute sex discrimination.

Election impact

AI is not going away, and neither is the bipartisan focus on safety for students and children using AI tools. Technology is rapidly evolving, and the law continues to try to keep up, which may result in ED and other agencies issuing more guidance like this while laws and regulations are developing.

While AI will remain top of mind, early indications are that the new administration’s enforcement strategy for violations of civil rights laws will likely differ from the current administration’s. Because the OCR resource is a guidance document and not a formal regulation, the new administration has the prerogative to modify it, rescind it or simply not enforce it. Precedent exists from the previous Trump administration, during which ED rescinded a 2014 Obama-era Dear Colleague Letter addressing racial disparities in student discipline.

Moreover, if, the Trump administration is not as focused on proactive enforcement by OCR, fewer investigations will be initiated even if this resource remains unchanged. Likewise, if the incoming administration prioritizes efforts to dismantle diversity, equity and inclusion (DEI) programs in schools and discourage classroom discussions on topics such as race and gender, the content schools and edtech companies permit on AI tools will be impacted. Finally, anticipated changes to Title IX will impact what is deemed sex discrimination and how schools should treat it when it occurs in AI tools.

Regardless of the new administration’s approach, schools and edtech companies will need to work together to ensure tools are nondiscriminatory, and should look to this resource for guidance as long as it remains in effect.

If you have any questions about the guidance on discriminatory use of AI or the future of AI in schools, please contact us.

Over the last year, ED has provided periodic guidance on the FVT/GE Rule that went into effect on July 1, 2024. As a reminder, pursuant to this rule, all institutions that participate in Title IV programs are required to report a significant amount of student and programmatic information to ED. Originally, this information was due on July 1, 2024, but pursuant to a March 29 Dear Colleague Letter (DCL), the deadline was extended to October 1, 2024.

From the beginning, this timeline has been a source of significant concerns from the regulated community (evident by the continued delays), as many institutions now find themselves subject to extensive reporting requirements during a busy fall semester while still recovering from the delayed FAFSA rollout. Most of these updates have been technical in nature – including an extensive Frequently Asked Questions webpage with rolling updates and a handbook outlining the procedure for reporting required information. However, an August 2024 update revealed an acknowledgement by ED of agency challenges with its own data that could impact the process and timing of certain subsets of student data used to assess program performance under the FVT/GE Rule.

On August 30, 2024, ED published a warning regarding certain lists that it generated (commonly referred to as “Completers Lists”) and tools created by the agency to help identify the cohorts of students subject to FVT/GE Rule reporting requirements. ED suggested that “institutions pause reviews of the Completers Lists and use of the FVT/GE Reports as [ED] work[s] to resolve these issues.” In theory, the Completers Lists reflect ED’s records regarding the cohorts of students whose earnings will be included in the FVT/GE metrics. Upon receiving the lists, institutions are required to review them and make any necessary corrections within 60 days. Institutions must return the lists to ED, which will use them to seek earnings information, publish the FVT/GE metrics and, for certain programs, notify institutions of failing results. Without the timely production and review of the Completers Lists and other reports prepared by ED to assist institutions with the reporting obligations, the overall reporting timeline became compressed.

In response to these issues, on September 10, 2024, a bipartisan group of senators sent a letter to ED asking to further delay the FVT/GE reporting requirements until July 2025. The senators stated that “the rollout has continued to experience significant challenges that have greatly impacted students and postsecondary institutions” since its initial extension to October 1. Following this letter, and with no further updates addressing the system’s technical issues, ED announced on September 13 that the deadline for all required FVT/GE reporting is now January 15, 2025. This change, ED notes, will “allow [institutions] to prioritize their work on the FAFSA.” This includes finalizing work for the 2024 – 2025 FAFSA, as well as preparing for the release of the 2025 – 2026 FAFSA. ED’s stated goal is to produce “the first complete set of results under FVT/GE in time to help inform students’ college decisions next award year.” While ED will accept schools opting in to report certain information early, the announcement indicates that the issues with the Completers Lists have yet to be resolved.

For those unfamiliar with GE, the Higher Education Act (HEA) specifies that certain programs are eligible for Title IV federal student aid program funds only if they prepare students for “gainful employment in a recognized occupation.” This basis for Title IV participation must be met by all programs at proprietary institutions, as well as nondegree programs offered by nonprofit and public institutions. But the HEA does not define or further explain the concept of “gainful employment.” Thus, ED has – over the course of now three versions of regulations – attempted to create a definition of what it means to be gainfully employed. While many would assume that having any paying job would qualify as being “gainfully employed,” ED has previously taken the position that the measure of gainful employment is whether graduates can pay their student loan debt based on their earnings. ED’s new GE rule continues to push this definition but adds a number of new twists. Although not entirely clear, it appears that GE programs could begin to lose eligibility in 2026.

What is familiar?

ED has implemented two prior versions of a GE rule at various points over the last 15 years. The latest proposal borrows largely from the 2014 version, which was rescinded by the prior administration in 2019. The new GE rule once again attempts to define whether a program is effective in using external characteristics and data sources – yet to be identified – related to post-graduation performance.

Under the latest proposal, a GE program is defined by the institution’s Office of Postsecondary Education Identifier (OPEID) and the program’s six-digit Classification of Instructional Programs (CIP) code and degree level. This is a welcome change from the proposal discussed in negotiated rulemaking, where there was talk of moving to a four-digit code, thereby adversely impacting categories of programs rather than specific curricula and credential levels. As of July 1, 2024, if an institution has multiple locations under the same OPEID that offer the same program at the same degree level, those programs will be combined and measured as one program pursuant to the six-digit CIP code standard.

The debt-to-earnings (DE) ratio remains largely unchanged. It requires that a GE program’s graduates have median – not mean – annual wages that ensure the median loan debt is not more than 8% of those earnings – or, in the alternative, that the median loan debt is not more than 20% of discretionary earnings as calculated by ED. These pass/fail thresholds are consistent with the 2014 version of the rule, and two failures in three consecutive years will result in a Title IV loss for the failing program.

Also similar to the prior rule, once a program has lost eligibility, or an institution voluntarily discontinues a failing program, the institution cannot add that program, or a “substantially similar” program (meaning one that shares a four-digit CIP code root with the failing program), to the Eligibility and Certification Approval Report (ECAR) for a three-year period of ineligibility. After the three-year period is over, institutions may seek to reestablish eligibility for the program.

What’s new?

‘Financial value transparency’ construct

In a move to expand the reach of ED’s stated goal to determine and share the effectiveness of education programs that are eligible to receive Title IV funds, ED also has added a new “financial value transparency” framework that will measure the earnings outcomes, borrowing, costs and debt of all postsecondary programs, not just the GE programs. All programs at all institutions (yes, including nonprofits and public colleges and universities) must report this information, which will be publicly available on an ED website. While all eligible institutions will have to report additional information to ED and disclose program information to students, non-GE programs will not be subject to Title IV eligibility loss based on their scores, but will be identified publicly (see below) as underperforming in terms of earnings outcomes.

Removal of due process protections and appeal options

Under the 2014 iteration of the GE rule, institutions were given multiple opportunities to review and test data before ED made a final determination, as well as an opportunity to challenge the earnings figures used by ED in its calculation through a recent graduate earnings survey. The 2014 rule also included a “zone” metric, where programs with an annual DE between 8 – 12%, or a discretionary DE of 20 – 30%, would be provided an additional year to improve and pass the GE ratios. With the exception of a limited review period to ensure the correct students are included in the evaluation, and despite the fact that ED expressed concerns about the accuracy of the sample data it produced during discussion of the proposals, all of these processes to protect institutions from the impacts of data errors are absent from the new rule. In fact, ED has yet to clearly identify the source(s) of the data that will serve as the driver for the GE rule – nor has ED explained how it will avoid the prior data shortcomings plaguing the information the agency provided during negotiated rulemaking. Further, an institution now may only appeal after loss of eligibility and solely on the basis of a miscalculated DE rate or earnings premium. The appeal will be conducted under Subpart G of the regulations.[1]

Earnings threshold

In addition to the DE measurement, median program earnings will now be measured against the average earnings of a high school graduate. Thus, even a program that yields no debt, or a program that is offered at no charge, could fail the GE test if the graduates do not earn at least as much as the average high school graduate aged 25 – 34 in their state actively seeking or engaged in the employment marketplace (or nationally, if the program is primarily offered online across many states). Notably, unlike institutional outcomes, students who are surveyed and self-identify as not actively seeking employment are excluded from the calculation of average high school earnings. A GE program must pass both the DE ratio and the high school earnings threshold to “pass” the GE measure. If a program fails the same metric for two of three consecutive years, it will lose eligibility for Title IV funding. This means that a GE program will become ineligible for Title IV if it fails the DE ratio or the high school earnings measure for two out of three consecutive years. A program does not lose eligibility if it fails different metrics for two of three consecutive years.

New ED website

The 2014 GE rule included disclosure requirements that mandated institutions have GE information included in numerous locations on their website. Under the new rule, ED will develop its own website, where it will post the information on each program at each school, and the institutions must post prominent links to the ED site on all webpages where program, cost and aid information is published.

New calculation of debt measure

One positive change from the 2014 GE rule is ED’s new median debt determination. To establish the median debt for a program, ED will use the lesser of the total loan debt or the “total amount for tuition and fees and books, equipment, and supplies for each student, less the amount of institutional grant or scholarship funds provided to that student” (emphasis added). This bolded clause is a positive development for institutions. In the prior iteration of the rule, the costs were capped, but ED did not consider reductions to tuition, such as grants and scholarships, provided to students in that measure. Now, for institutions that provide grants, loans and tuition discounts, those reductions will be deducted from the student’s overall costs, which may reduce the median student debt.

On a less positive front, the prior version of the rule required ED to measure both the mean and the median debt – and to use the lesser of the two. In the new version, ED will only use the median debt. This may negatively impact institutions where the average debt is lower than the median of the cohort.

Student warnings

Under the new rule, all eligible institutions (yes, again, nonprofits and publics included) will be required to notify enrolled and prospective students when a program is not passing the DE rates. For non-GE programs, this will include an acknowledgement that prospective and enrolled students must submit through ED’s new website. (Note that graduate programs will be required to confirm students receive disclosures for underperforming graduate programs, but ED backed off on requiring non-GE undergraduate programs to do the same.)

For a failing GE program, institutions must notify enrolled and prospective students that the program is at risk of losing Title IV eligibility after just one year of failing either metric. For a GE program failure, notice must be sent within 30 days from the date ED issues a notice of determination that a GE program has failed one of the metrics, as one failure could result in loss of Title IV in the following year. For non-GE programs, the notice and acknowledgement requirement becomes effective on July 1, 2026. What is not entirely clear from the regulations is how the 30-day notice requirement for failing GE programs will align with the language of 34 CFR § 668.605, which indicates warnings will be required for failing programs “[b]eginning on July 1, 2026.”

‘Qualified graduate programs’

Under the 2014 version of the GE rule, medical and dental programs were provided a longer window between the graduate cohort and the year in which earnings were measured to account for the residency and internship requirements that delay substantive earnings growth. In the new iteration, ED has created a new category of programs that will receive this extended measurement period, which it now calls “qualified graduate programs.” Under this new definition, ED will provide this extended period “for the first three award years that the Secretary calculates debt-to-earnings rates and the earnings premium measure” for programs “[w]hose students must complete required postgraduation training programs to obtain licensure in one of the following fields: medicine, osteopathy, dentistry, clinical psychology, marriage and family counseling, clinical social work, and clinical counseling.” ED indicates that after the initial three-year period, it will reassess the programs included in the definition and reevaluate regularly after that.

Transitional reporting period

While there was a transition period calculation in the 2014 version of the GE rule, the new rule takes a different approach. Rather than automatically running a transitional rate based on what schools report, ED has changed what is actually reported. For the first six years for which rates are calculated, institutions may opt to report the required information in one of two ways. The first option is standard reporting, which will initially report, for programs other than qualifying graduate programs, for the second through seventh award years prior to July 1, 2024, and for qualifying graduate programs, for the second through eighth award years prior to July 1, 2024. The second option is to use the “transitional reporting period,” which only includes information on the two most recently completed award years. If an institution opts to go with transitional reporting, ED will calculate transitional rates using the median debt for the period reported and the earnings for six years.

What are the key dates and deadlines?

• July 1, 2024: The rule takes effect, but schools should begin preparing now.
• July 31, 2024: The first institutional reporting is due. ED indicated that it will provide additional guidance and training on the new reporting requirements prior to this date.
• October 1, 2024 (and every October 1 thereafter): Subsequent and ongoing annual reporting.
• Early to mid-2025: We anticipate ED will be able to issue the first GE and financial value transparency scores, but it is not entirely clear, because the deadline for ED’s website and institutional disclosure requirements is not until July 1, 2026.
• July 1, 2026:
  • ED will establish its program information website.
  • Institutions with programs subject to the financial value transparency framework must issue student acknowledgments for programs with failing DE rates.
  • Institutions subject to the GE framework will be required to issue student warnings for any program that has failed one of the GE metrics and could become ineligible in the subsequent year.  

ED published a fact sheet, and there is additional information available on ED’s website. We encourage institutions to carefully review all available information, and Cooley is happy to answer any questions.

[1] 34 CFR 668.81 et. seq.

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The US Department of Education (ED) announced last week that it will implement updates to its Electronic Application (E-App) system – the website on which institutions apply for and certify their eligibility for federal student aid funds – beginning in September 2023. This is part of ED’s broader Federal Student Aid Partner Connect initiative to modernize a number of systems used by institutions and students.

The E-App upgrade implementation will likely significantly impact ED’s processing of institutional applications for the near future. Although the changes will not be effective until September, ED will shut down and cease use of the current E-App system on August 25 to allow a transition to the new application system. It is not clear when the new application system will be online and available to schools.

Institutions with a recertification application due to ED after August 25 – particularly those with applications due September 30 – should plan to submit that application in the current E-App system in advance of the August 25 shutdown to ensure timely receipt and processing. Institutions that undergo any changes during the shutdown will be required to report them to ED via email and should plan for additional time to work through this process.

We also strongly encourage institutions to log in to ED’s E-App system via eligcert.ed.gov before August 25 and save copies of their current program participation agreement (PPA), eligibility and certification approval report (ECAR) and E-App, as well as any related updates or correspondence with ED. This is a very important step for institutions with any pending changes reported in the current E-App system.

With this update, ED also is issuing a new version of the E-App, but a draft version is not yet available. It is not clear whether the update will include additional substantive data requests or questions that go beyond the current version.

We would be glad to discuss this transition and its impact on your institution.

This NPRM comes on the heels of a litany of new rules, including, among others, rules that broaden borrower defense to repayment (BDR) regulations, tighten the 90/10 calculation, and update change in control regulations, all set to take effect July 1, 2023. Also in the background are substantial recent policy and regulatory announcements, including guidance broadening the scope and interpretation of the third-party servicer rules, a push to require individual board members and executives to assume liability for institutional funds, and another large negotiated rulemaking set to roll out in 2023. Individually, each of these new initiatives requires close review and attention but collectively, this recent flurry of activity is unwieldy at best, and the breadth of the NPRM requires an all-hands approach to understand and prepare for the potential impact.

It’s important to note that, while the spotlight is on the new GE rule, several of the other proposals in this NPRM will have a significant impact on institutional operations and eligibility for public, nonprofit and proprietary institutions.

ED is accepting public comments on these proposals via its submission portal through June 20, 2023. We’re aware that various stakeholders have asked ED to extend the comment period but, at this point, there is no extension.

We’ve briefly described the key proposals below.

1. Gainful Employment (GE)

The Higher Education Act (HEA) specifies that certain programs are eligible for Title IV program funds if they prepare students for “gainful employment in a recognized occupation.” But the HEA does not define or further explain that concept, so ED’s latest NPRM aims to do so through a pair of debt and earnings metrics. ED has implemented versions of this rule at various points over the last decade and the latest proposal borrows largely from the 2014 version of ED’s GE rule, which was rescinded by the prior Administration in 2019.

The proposal will use metrics calculated annually to assess whether certain programs lead to “gainful employment,” as well as to evaluate whether all programs are “high debt” or “low earnings”:

1. Debt-to-earnings (DTE) metrics, which compare the debt burden of program graduates to their annual and discretionary income.
2. An earnings premium (EP) metric, which analyzes the earnings of programs graduates relative to the earnings of individuals who have only a high school diploma.

The DTE metrics, with some tweaks, were part of the 2014 GE rule, while the EP metric is new in this NPRM.

These metrics will have different consequences for different programs and institutions. All Title IV-eligible programs, whether degree or nondegree, and whether offered at nonprofit, public, or proprietary institutions, will disclose their EP and DTE rates. Programs with rates that do not meet the thresholds established by ED will be categorized as either “high debt burden” or “low earnings,” and institutions will need to need to obtain student acknowledgement of those labels before they can disburse Title IV funds to students.

Only certain programs – specifically, all programs offered by proprietary schools and nondegree programs offered by public and nonprofit schools (collectively known as “GE Programs”)— will face Title IV-eligibility consequences, depending on the outcome of the metrics. GE Programs that do not meet certain thresholds established by ED in two of three consecutive years will lose Title IV eligibility.

The implementation of this will require significant annual data reporting from institutions related to their Title IV-eligible programs, including data around each individual student, program cost, and institutional and private loans. In addition, there are also several unknowns about how this framework will operate in practice. ED contemplates that the disclosure and student acknowledgement side of the framework will use an ED-operated website, which hasn’t been developed yet. In addition, to calculate its metrics, ED will need to obtain anonymized earnings data from another federal agency – such as the IRS or the SSA) – through an interagency agreement, which is not yet in place, nor has a specific agency been identified as the source (although ED says it prefers to work with the IRS).

Also with the publication of the NPRM, ED released program-level data purporting to estimate institutional performance under this rule, drawing on several sources of data currently available to ED. Notably, it’s not likely that any of the data used here will be the actual data used to calculate metrics when the rule takes effect, because ED has not yet decided from where it will obtain earnings data, institutions have not yet provided any of the needed student-level data, and the years from which ED is drawing may not align with the cohort years at the time any rates are officially calculated.

Finally, other topics in this NPRM pick up on the GE rule as well. The administrative capability proposal would consider an institution not administratively capable if at least half its total Title IV funds come from failing GE programs, or if at least half its full-time Title IV students are enrolled in failing GE programs. The certification proposal would limit the number of hours in a GE program to the greater of the required minimum number of clock or credit hours, as established by the state in which the institution is located, or any federal agency or the institution’s accrediting agency.

2. Financial responsibility

The NPRM proposes a number of changes to ED’s financial responsibility regulations, including reverting to a more expansive version of events – similar to the version that was in effect in 2016 – that must be reported to ED and may result in a reassessment of the institution’s financial condition. The NPRM also adjusts requirements with respect to the timing and form of institutional financial statements, and modifies the financial review requirements for institutions that undergo a change in control.

Financial audits timing and form

In an effort to receive information about financial situations as soon as possible, ED proposes that proprietary institutions must submit annual financials either six months after the last day of the fiscal year or 30 days after the auditor issues its report, whichever is earlier. The NPRM would also make mandatory a more detailed related party disclosure and require foreign-owned institutions to provide organizational documents for controlling owners. In addition, ED is proposing that financial statements include a footnote to disclose spending on recruiting, advertising, and pre-enrollment expenditures in the previous fiscal year, which ED believes are possible indicators of financial instability. Finally, as under current rules, the auditor’s opinion cannot be adverse, qualified, or disclaimed, or otherwise disclose a going concern. The proposed regulations will add that the auditor’s opinion cannot include a disclosure about the institution or an ownership entity’s diminished liquidity or ability to continue operations.

Financial responsibility after a change in control

ED is proposing to relocate and amend the financial tests it applies to institutions undergoing a change in control. These changes would retain the existing same-day balance sheet tests, and also specify that a new owner’s historic financials must satisfy certain metrics, including the composite score. In examples where there may be no new owner with control, or where a new owner does not have historic financials, an automatic letter of credit may be required. Finally, the NPRM allows ED to determine that an institution is not financially responsible following a change in control because the repayment of acquisition debt is inconsistent with an institution’s available cash.

New financial responsibility obligations

ED has added “obligations” that all institutions must meet in order to be considered financially responsible. In addition to making timely refunds and meeting the required financial ratios, which have long existed, ED is also proposing that institutions must pay credit balances on time and according to the regulations, make payments on financial obligations in less than 90 days, make payroll on schedule, and not borrow from retirement funds or other restricted sources without authorization.

Updates to triggering events

ED has updated the mandatory and discretionary “triggering” events that must be reported to ED, typically within 10 days of occurrence. Depending on the circumstances, some mandatory triggers are “automatic,” meaning the occurrence of the event indicates a financial responsibility failure, without recalculating the composite score.

This set of automatic triggers includes:

• If provisionally certified due to a change in control, the school is sued by a federal or state entity, or through a qui tam/False Claims Act suit.
• Receiving more than 50% of its Title IV funds for programs failing the GE metrics.
• Any oversight body requires the school to submit a teach-out plan.
• A state authorizing agency notice of a violation that would result in a revocation if the violation is not fixed.
• If publicly traded (now defined as directly or indirectly owned at least 50% by a public entity), either the school (or the owner’s publicly traded ownership entity) is subject to a suspension or revocation of exchange registration, or Securities and Exchange Commission actions filed in court, an exchange notifies the entity that it is not in compliance with the listing requirements, failure to file a required SEC report, or an equivalent action in a foreign exchange.
• One year of failing the 90/10 ratio.
• Two years of cohort default rates over 30%.
• A loss of eligibility in another federal educational assistance program.
• An ED action results in a default or adverse condition in a credit agreement.
• The school declares a state of financial exigency to any governmental agency or accreditor.
• The school, an owner or controlling/managing entity files for receivership.

ED has also created another set of mandatory triggers that, when reported, will result in a recalculation of the school’s most recently files composite score. These triggers include:

• If the school’s composite score is less than 1.5, and a debt or liability from a “settlement, arbitration proceeding, or a final judgment in a judicial proceeding” reduces the score to below 1.0.
• ED has initiated an action to recover loan discharges, and the adjudicated claims would bring the composite score below 1.0.
• If a for-profit school has a composite score below 1.5 or, in the first year following a change in control, withdraws owner’s equity by any means, unless it is a transfer within the same school group or a required payment, and that withdrawal results in a composite score below 1.0.
• A contribution in the last quarter of the fiscal year, followed by a distribution in the first two quarters of the following fiscal year that reduces the composite score below 1.0.

In addition, ED has proposed new discretionary triggering events. In these circumstances, the issue must be reported to ED, and ED which will determine whether the reported incident is likely to have a materially adverse effect on the school’s financial health (at ED’s discretion). These discretionary triggers include:

• Accrediting or governmental agency action placing the school on probation or show cause, or a comparable status.
• The school or its owners violate a credit agreement that results in change in terms, or the creditor takes action to withdraw or suspend the agreement.
• “Fluctuations” in Title IV volume.
• “High” annual dropout rates.
• For schools on reporting following a change in control, or due to a financial responsibility issue, the reports indicate a failure of ratios, negative cash flows or other indicators of a material change to finances.
• Pending group BDR claims that, if approved, could be subject to recoupment.
• Discontinued programs that impact more than 25% of enrolled students.
• Closure of more than 50% of the school’s locations, or a location where more than 25% of students are enrolled.
• Citation by a state agency for failing to meet requirements.
• Loss of eligibility in other federal assistance programs.
• Investigations by a stock exchange.

Finally, regardless of the type of trigger, if ED believes it meets the thresholds as defined, it will require an at least 10% letter of credit based on the prior year’s Title IV receipts, and each trigger requires its own letter of credit, so any institution that experiences multiple triggers will be required to post at least 10% per triggering event.

3. Administrative capability

The NPRM proposes additions to ED’s “administrative capability” rules, which implement the HEA’s requirement that institutions must demonstrate they are administratively capable to administer Title IV program funds. These additions include new components to the financial aid counseling requirements around cost of attendance and sources of financial aid and specifying that certain negative actions by other regulatory agencies will result in an institution being not administratively capable. The NPRM also incorporates other existing rules into the administrative capability requirements, including certain aspects of the past performance rules and the misrepresentation rules, as well as prohibiting delayed disbursements of Title IV funds.

Other key proposals on this topic are listed below.

High school credential verification

The NPRM adds parameters to how institutions must evaluate the high school credentials of prospective students, which has long been an area of ambiguity. Under the current rules, institutions must develop and follow procedures to evaluate the validity of a student’s high school diploma, if the institution or ED has reason to believe the diploma or school is not valid. But there was no further guidance to institutions on when or how to conduct that evaluation. The NPRM proposes that adequate procedures may include obtaining certain documentation from the high school or a state regulatory agency attesting to the rigor of the high school or confirming that the high school does not appear on any invalid list published by ED (although ED has, notably, declined to publish such a list for many years). Certain high school credentials also would be presumptively invalid: those that do not meet applicable requirements in the state where the school is located; those that are determined invalid by ED, a state or a court; those that require little to no secondary coursework to obtain the diploma; and those issued by an unaccredited entity that maintains a business relationship or is otherwise affiliated with the institution at which the student is enrolled.

Adequate career services

ED is proposing that institutions must provide adequate career services to eligible students who receive Title IV aid. In making this determination, ED will consider (1) the share of students enrolled in GE programs; (2) the number and distribution of career services staff; (3) the services institutions promise to students; and (4) the presence of institutional partnerships with recruiters and employers who regularly hire graduates.

Accessible clinical and externship opportunities

ED proposes that all institutions must provide students with “geographically accessible” clinical or externship opportunities related to and required for completion of a credential or licensure. These opportunities must be provided within 45 days of successful completion of other coursework.

4. Certification

ED proposes a number of changes to its procedures for certifying institutions to participate in the Title IV programs. ED has always had broad discretion to approve or not approve, or otherwise condition, an institution’s participation, and this NPRM signals a continuation of that approach. ED’s proposal specifies a number of circumstances in which ED may place or continue an institution on provisional status, including if ED decides the institution is “at risk of closure.” The proposal gives ED the flexibility to impose agreement terms from one to three years, depending on how soon it wants to review the institution again, which is largely consistent with current ED practice.

Several other changes in this section will have a significant impact, as listed below.

Supplementary performance measures

The proposal will establish certain metrics for ED to consider in deciding whether to certify an institution’s participation in the Title IV programs. These include a withdrawal rate, an institution’s GE metrics, the amount the institution spends on instruction and related activities, academic support, support services and recruiting, as well as the licensure pass rates in licensure programs. The NPRM does not set forth specific benchmarks or penalties – it only states that ED will consider these factors in assessing the institution’s certification.

Liability and Program Participation Agreement (PPA) co-signatures for controlling owners

In March 2022, ED published an electronic announcement that updated PPA signature requirements for entities exercising substantial control over nonprofit and proprietary institutions, authorizing ED to require those entities to sign the PPA in certain situations, thereby assuming joint and several liability for an institution’s federal student aid obligations. The NPRM proposes to significantly expand that policy by requiring, as a default, authorized representatives of entities that directly or indirectly control an institution to sign the PPA, even if there is no reason to believe the institution poses a risk to taxpayer dollars. The NPRM includes broad examples of circumstances that signal an entity can control the institution and indicates ED will aggregate the ownership interests and other rights of affiliated or related entities, as well as require authorized representatives of all such entities to sign the PPA.

Notably, the NPRM does not address whether and when individual board members and executives may be asked to assume personal liability for institutional obligations by signing the PPA. Currently, those expectations are set forth in a more recent ED electronic announcement from March 2023 and have not yet been incorporated into a rulemaking.

New PPA certifications

Under current rules, institutions must certify that they comply with the authorization requirements of each state in which students are located. Many institutions satisfy this requirement through participation in the State Authorization Reciprocity Agreement (SARA), which also requires member institutions to agree to uniform consumer protection policies. The NPRM would require institutions to certify compliance with consumer protection laws related to closure, recruitment, and misrepresentation for the state in which the institution is located, as well as each state in which enrolled students are located. This would apply even if the institution were authorized to provide education to students in the state through its SARA membership and increases the obligations of all institutions to ensure compliance with laws that vary greatly by state.

In addition, the NPRM heightens compliance obligations related to professional licensure programs, adding to disclosure requirements put in place through a 2019 negotiated rulemaking. Under the current rules, institutions must identify and make available lists of states (1) in which each licensure program meets the requirements for licensure, (2) in which each licensure program does not meet the requirements for licensure, and (3) for which the institution has not made a determination. Under the NPRM, simply disclosing this information would be insufficient. Rather, institutions would also be required to certify to ED in its PPA that each licensure program satisfies all educational prerequisites for each state in which students enrolled in the program are located. This includes certifying that each licensure program is programmatically accredited, if required for licensure in a state.

Conditions on approval

Although ED already wields considerable discretion to impose any conditions on an institution’s participation in the federal student aid programs, the NPRM would codify some specific conditions ED may impose for provisionally certified institutions. Conditions may include limits on the acquisition of another institution or entering into written arrangements with other institutions, as well as hiring a monitor to review marketing and recruiting materials. The NPRM also codifies other conditions that are already commonly imposed on provisionally certified institutions (especially after a change in control), including limits on growth and cash and student complaint reporting, as well as conditions specific to institutions converting to nonprofit status.

5. Ability to benefit (ATB)

ED reached consensus on changes to the ATB rules during negotiated rulemaking. Under existing law and regulation, students without a high school diploma or GED may access federal student aid by passing an exam approved by ED, meeting a state process to establish eligibility, or successful completion of six credits, or the equivalent, toward a degree or certificate at the institution. Regardless of which of the ATB alternatives applies, a student must be enrolled in an eligible career pathways program in order to be eligible under the ATB option.

The academic credit and passing test score options are essentially unchanged in the proposed rule, which instead focuses primarily on the state process alternative. ED is attempting to codify the process by which states can establish their program and maintain eligibility, based on the success rate of the students who attend college under this ATB alternative.

The bottom line

The NPRM is complex and covers a significant number of regulations and subjects that require careful review and analysis. Please contact us to discuss any aspect of ED’s proposal.

Unaccredited out-of-state institutions

After six years of uncertainty around how the BPPE’s “out-of-state registration” process applied to unaccredited institutions offering distance education programs to California residents, the recent update makes clear that an application for registration is required, regardless of accreditation status. The revised California Education Code (CEC) §94801.5 added two words that closed a long-standing “loophole” in the registration process, which for the past six years technically required unaccredited schools to register, but also specified that only accredited schools were eligible to register. Now, the law only requires evidence of accreditation “as applicable,” meaning that any out-of-state institution, accredited or not, that is not otherwise exempt, must submit an application with all the required documents and disclosures, “as applicable,” to the institution. The BPPE will evaluate the application to determine whether registration will be granted.

If you operate an unaccredited institution and were relying on that gray area to avoid registration in California, the area is gray no more. You should complete and submit the registration application to the BPPE as soon as possible. Note: By registering with the BPPE, you also will be obligated to update your catalog and enrollment agreements used for California residents to include new language regarding the Student Tuition Recovery Fund (STRF), and you will be required to collect and remit, on a quarterly basis, the STRF fees to the BPPE.

Void enrollment and loan agreements for unapproved operations

As many institutions in California have learned, there was a long-standing provision in the CEC stating that any enrollment agreement or instrument of indebtedness (including, for example, an income share agreement) executed between a student and an institution that is not authorized to operate in California (if such authorization is required) is unenforceable. This existing provision has been amended to state that the contract is not only unenforceable – it is void. And the application of this provision has been expanded to institutions that are required to be registered as out-of-state institutions.

Additional prohibited activities

In addition to the already long list of prohibited business activities in CEC §94897, the following have been added:

• Committing fraud against, or making a material untrue or misleading statement to, a student or prospective student under the institution’s authority or the pretense or appearance of the institution’s authority.
• Charging or collecting institutional charges not authorized by an executed enrollment agreement.
• Refusing to provide a transcript for a current or former student because the student owes a debt, conditioning the provision of a transcript on the payment of a debt, charging a higher fee for obtaining a transcript, providing less favorable treatment of a transcript request because a student owes a debt, or using transcript issuance as a tool for debt collection.
• Requiring a student or employee to sign a nondisclosure agreement, except to protect intellectual property or trade secrets.
• Failing to maintain policies related to compliance with the Private Postsecondary Education Act or adhere to the institution’s stated policies.

While all of these are important to note, we are aware of a number of institutions that have included NDAs in their enrollment agreements, typically to protect the institution’s intellectual property, but it is important to ensure those clauses (or any NDAs) are narrowly drafted as to not violate this provision.

‘Physical presence’ and ‘limited physical presence’

The BPPE’s statutory authority is different depending on the location of the institution. The definition of a private postsecondary education institution always included a limitation to those with a “physical presence” in California, but that term was not clearly defined. With the recent amendments, CEC §94801.7(b) now specifies that “an institution is considered to have a physical presence in the state if it offers instruction or core academic support services from a physical location owned, operated, or rented by or on behalf of the institution in California.”

This more detailed explanation has been the BPPE’s practice for many years, but this amendment codifies it in law. In addition, CEC §94801.7 now authorizes the BPPE to establish, through regulation, types of California-based activity that could constitute “limited physical presence,” which would subject institutions to registration requirements rather than approval requirements. The process to promulgate regulations in California is a long one, so we anticipate it will be late 2023 or early 2024 before those regulations are published.

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This post does not address every amendment to the Private Postsecondary Education Act, and we encourage clients to closely review the underlying governing statute and the BPPE’s memo (both linked above) to ensure compliance. For more information, please reach out to Cooley’s education team.

This latest update comes in the form of a blog post by ED Under Secretary James Kvaal and may be the first time ED has issued substantive guidance via blog. The “sub-sub-regulatory” post further revises and delays ED’s hastily issued Dear Colleague Letter (DCL) from February 15, 2023, which itself was corrected and delayed once already. Cooley previously summarized the first TPS announcement in a blog post, as well as its update. 

We’ve summarized the key updates from the ED blog post below.

Effective date delayed

ED’s February DCL drastically expanded the department’s regulatory oversight over third-party entities that partner with institutions participating in federal student aid programs – with ED initially announcing that those changes would be immediately effective. Following prompt backlash and confusion over the scope of the changes, ED delayed the effective date to September 1, 2023, so it could review public comments and questions.

ED’s April 11 blog notes the department has received more than 1,000 comments on the proposal and needs additional time to review and consider whether any revisions to the guidance are necessary. It therefore eliminates the September 1 deadline for implementation and instead announces that any new guidance will become effective six months after it is published in the future.

Clarifications on covered services

ED indicates that certain activities generated hundreds of comments, but it does not believe these services are covered by the TPS rules. The department also notes that it will update this list as it reviews comments.

Services not covered by the TPS rules include the following:

• Study abroad programs.
• Recruitment of foreign students not eligible for Title IV aid.
• Clinical or externship opportunities that meet requirements under existing regulations because they are closely monitored by qualified personnel at an institution.
• Course-sharing consortia and arrangements between Title IV-eligible institutions to share employees to teach courses or process financial aid.
• Dual or concurrent enrollment programs provided through agreements with high schools and local education agencies, which are exempt because they do not involve students receiving Title IV aid.
• Local police departments helping to compile and analyze crime statistics, unless they write or file a report on behalf of an institution for compliance purposes.? 

Eliminating foreign ownership restriction (for now)

ED’s February DCL, like many previous iterations of TPS guidance, prohibited institutions from contracting with TPS providers with foreign ownership. ED states in the blog post that, based on comments it received – and the fact that a significant number of providers have foreign ownership – it will eliminate this restriction for now, although it will potentially revisit it as a negotiated rulemaking topic.

Next steps

While next steps are unclear and could include a new DCL, ED has indicated that it will include TPS-related issues as part of its upcoming negotiated rulemaking, which will unfold over the next few months. Notably, when ED held public hearings in mid-April to solicit comments on potential topics for the rulemaking, a majority of the comments addressed TPS issues and the need for them to be included in rulemaking.

We will continue to track the TPS saga and will provide updates as they become available.

As noted in our overview last week, ED’s guidance indicated it was immediately effective but, unlike most ED guidance, also included a 30-day comment period. Citing the need for clarity and time to come into compliance with the updated guidance, ED announced on February 28 that the new guidance – including the obligation to report any service providers newly covered by the regulations – will not take effect until September 1, 2023. ED has also reset the 30-day timeline for comments on the Dear Colleague Letter, to begin on February 28.

The update also encourages the public to submit comments on the guidance, noting that ED is particularly interested in comments on the impact of the prohibition on contracting with foreign or foreign-owned third-party servicers, and how to address the Department of Education’s concerns about the ability to hold such servicers liable. The update does not provide insight into the ED’s concerns on this issue, which is expected to impact a significant number of providers that will be newly covered by the expansive guidance. 

We will continue to monitor developments and will provide updates as they become available. If you have questions about the TPS guidance, please reach out to us.

On February 15, ED announced two separate initiatives (one final and one proposed) that impact service providers to institutions of higher education that participate in federal financial aid programs. Both initiatives are aimed at expanding ED’s oversight over third-party providers that collaborate with institutions to recruit students, develop instructional content and provide retention and other support services.

These initiatives will require institutions and their partners to carefully evaluate their existing arrangements, including assessing whether any services provided by a third party are newly subject to ED’s expanded third-party servicer guidance and monitoring whether the payment structure between the institution and provider needs modification. Both announcements include opportunities for the public to share feedback and ED is actively encouraging parties to provide comments.

Expanded Third-Party Servicer Functions

ED revised its Dear Colleague Letter (DCL) guidance related to its “third-party servicer” (TPS) regulations, which expands the types of service providers covered by the rules and gives the agency increased oversight over third parties that contract with institutions. Although ED indicates that this DCL is effective immediately, ED is accepting public comments through March 17.

New “Servicer” Functions

Under longstanding ED rules, a TPS is an entity that enters into a contract with an institution to administer “any aspect” of the institution’s participation in the federal student aid programs. A TPS is jointly and severally liable with the institution for violations of the federal student aid rules by the TPS, must be reported by the partner institution on its Eligibility and Certification and Approval Report, and must include certain provisions in its institutional partner contracts. Although ED regulations have long identified a list of certain functions that do or do not create a TPS relationship, ED has taken a very expansive view of these rules in recent years through several iterations of guidance. 

Although much of the new DCL is consistent with ED’s previous guidance on TPS issues, it notably adds, among other updates: (1) student recruiting services, (2) student retention services, (3) involvement in the development of instructional course content, and (4) the dissemination of marketing materials, in some cases, to the list of functions that constitute TPS functions. This is expected to greatly expand the number of third-party providers covered by ED’s TPS rules.

The key additions to the list of functions that constitute TPS activities are:

2. Retention Activities:

• Monitoring academic engagement and/or daily attendance.
• Conducting outreach to students regarding attendance or academic engagement.
• Responding to inquiries from students and/or their families regarding assistance or resources designed to help students maintain enrollment in the institution/program or maintain eligibility for Title IV aid.

3. Instructional Content:

• Providing any percentage of a Title IV-eligible program at an institution;
• Establishing completion requirements of a course;
• Evaluating whether students met the completion requirements of a course;
• Delivering instruction or mandatory tutoring;
• Assessing student learning; or
• Developing curricula or course materials.

4. Marketing Materials:

• Preparing or disseminating promotional materials to market educational programs, only if the provider is also involved in the design or delivery of the program or provides technology, curriculum, or faculty.

These additions are likely to encompass a significant number of companies that work with institutions to develop content and market to and recruit students, most of which were not previously covered by the TPS rules.

Other functions outlined in the new DCL – such as awarding, processing, or disbursing federal student aid, performing student eligibility activities, preparing certain consumer disclosures, performing default prevention services, providing computer or software services when the provider uses or controls systems used for financial aid, or monitoring attendance or academic engagement for Title IV purposes – were generally already covered by ED’s previous guidance, even though there’s been considerable ambiguity around how to interpret several of them for years. ED has generally not provided additional clarity on these here, but they continue to constitute TPS functions.

Servicer Qualifications

Institutions can only contract with a TPS that meets certain requirements. This means each institution must appropriately diligence any TPS with which it contracts to ensure it is qualified, and any TPS must be able to satisfy these requirements to do business in the space.  

An institution is prohibited from contracting with a TPS that (1) was limited, suspended, or terminated by ED in the last 5 years; (2) has been convicted or, or pled nolo contendere or guilty to, a crime involving the acquisition or use of government funds; (3) has been administratively or judicially determined to have committed fraud or other material violation of law involving government funds; (4) has had to repay more than 5% of the Title IV funds it administered in either of its two most recent audits; (5) has been cited for failing to timely submit compliance audit reports in the previous five years; or (6) was either debarred or suspended or whose principals were either debarred or suspended.

The DCL also expressly states that companies that are considered a TPS, as well as their subcontractors, cannot be (1) located outside of the United States or (2) owned or operated by an individual who is not a U.S. citizen or national or a lawful U.S. permanent resident. This is not a new statement from ED but, because the definition of TPS was largely limited to active processing of Title IV funds in the past, it aligned with certain other government-wide limitations on the processing of taxpayer funds and information by overseas entities. However, ED’s significant expansion into activities that are unrelated to handling funds raises concerns about the rationale for such a restriction and how it will work in practice, and ED does not explain either in its DCL. In addition, the institutions that service providers support do not have this limitation. This sudden change will create additional urgency for ED to define what it means to be “owned or operated” by a non-US owner and explain why such organizations should be excluded from supporting institutions, particularly when they are now subject to increased ED oversight.

Obligations of Servicers

An entity that is considered a TPS is jointly and severally liable with the institution for violations of the federal student aid rules by the TPS. A TPS must also undergo an annual compliance audit performed by an independent auditor and in accordance with ED’s Audit Guide, which must be submitted to ED. Such an obligation will be particularly challenging considering ED has very few regulations that will apply to the greatly expanded scope of covered services. A TPS must also submit an annual data form to ED describing its ownership, the institutions with which it works, and the services it provides.

Contracts with TPS providers must also include certain provisions, including obligating the TPS provider to comply with all Title IV regulations and certain data security requirements, including FERPA and FTC obligations. A provider that is newly covered by the TPS rules following this announcement may need to modify or amend its institutional contracts to include these required provisions.

Reporting and Deadlines

Institutions must report to ED any TPS contracts within 10 days of entering into or substantially modifying the contract. Following this new DCL announcement, however, institutions have until May 1, 2023, to report any TPS arrangements that were not previously reported. New providers in the TPS category also have until May 1 to file their annual data form.

Incentive Compensation Listening Sessions

ED will hold two “listening sessions” to receive public comments and recommendations to improve guidance on ED’s incentive compensation prohibition. These are largely targeted at the “Bundled Services Exception” and the role of often misnamed online program managers (OPMs) in providing services to institutions.

The ban on incentive compensation prohibits institutions of higher education from providing any commission, bonus, or other incentive payment based, directly or indirectly, on success in securing enrollments or financial aid to any persons engaged in student recruiting, admissions activities, or making decisions about the award of student financial aid.

There are several longstanding exceptions to this ban, which ED stated in a 2011 Dear Colleague Letter (the “2011 DCL”). Among them, ED indicated that – although sharing a percentage of tuition revenue with a third party for student recruitment would typically be prohibited as an improper incentive payment – such an arrangement would not violate the incentive compensation ban if the tuition share is paid for a variety of bundled services (even if student recruitment is one of the services in the bundle), and the third party is unaffiliated with the institution. This is known as the “Bundled Services Exception,” and has provided the basis on which many institutions modeled payment for third parties over the last decade. In practice, this means that many institutions pay their third-party providers a percentage of program or institutional revenue for a bundle of services, rather than paying a fee-for-service for the specific services provided.

The announcement indicates that ED is considering eliminating the Bundled Services Exception, and potentially further modifying the way ED oversees third-party providers that partner with institutions. ED is specifically seeking comment on the benefits and disadvantages of the Bundled Services Exception and how changing from a revenue-sharing model to fee-for-service model would impact performance and payments under third-party contracts. It is also seeking general comments on how institutions work with OPMs and the outcomes of those relationships. This is unlikely to prevent partnerships between institutions and third parties, but may change how institutions compensate third parties that are involved in student recruiting, admissions, or financial aid.

Procedurally, it is unclear what steps ED will take to rescind the Bundled Services Exception if it decides to eliminate the option. The original parameters exist in the form of agency guidance only, through the 2011 DCL, but they reflect longstanding guidance that ED has enforced and on which institutions and third-party providers have relied for over a decade. ED appears to be foregoing a formal negotiated rulemaking – which is typically required for any ED regulations related to the federal student aid programs and was widely anticipated to occur later this year – to make this change and is instead relying on “listening sessions” to receive public comment. It is unclear what ED will do, or is required to do, with any comments it receives.

The sessions will be held virtually on March 8 and March 9, both from 1 to 4 PM ET. In addition, the Department of Education will accept written comments on the topics until March 16. ED provides a list of specific questions on which it is seeking comments in the February 15 Federal Register announcement. Individuals who wish to speak at the sessions can register via email to margo.schroeder@ed.gov.

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We are continuing to monitor these developments and would be glad to discuss how they impact your company or institution.

Applicable to all Title IV-participating institutions, the first substantive version of the regulations became effective in 1995 after the authorizing statute became law in 1993. The original BDTR allowed student borrowers to assert a defense against repayment of a Federal Direct Loan based on an act or omission of the school giving rise to a state law claim that would support a challenge to repayment. The focus at that time was not loan discharge or institutional recoupment, but rather, providing a borrower a defense in a wage garnishment or other collection proceedings and was rarely used for the first 20 years. That view changed in 2015.

From 1995 to 2015, there were between five and 60 BDTR requests in total depending on ED’s description in public documents. With the closure of Corinthian Colleges and ED’s increased public promotion of the BDTR process, hundreds of thousands of claims began pouring in. As a result, in 2016, ED initiated its first rulemaking on BDTR in more than 20 years. This rulemaking resulted in a new BDTR, which became effective in July 2017. Even before that version became effective, the Department of Education under then-Education Secretary Betsy DeVos began discussing concerns about the rule, and initiated another round of rulemaking in 2019 that resulted in a third version of the BDTR, which became effective in July 2020 and continues to control the process today. Starting with the 2017 BDTR, each new iteration of the rule has established a new “federal definition” of wrongful acts sufficient to support a BDTR claim as a replacement for the “state law claim” standard that existed under the 1995 rule (although that option remains available for loans disbursed prior to July 1, 2017). We have discussed changes to the earlier versions of the BDTR regulations in previous CooleyED blog posts.

The 2023 version of the BDTR is part of a larger effort by the Biden administration to address ballooning student debt. These efforts also can be seen in the recent student loan forgiveness policy for all borrowers below certain income thresholds (though at the time of this writing, it has been halted and is working its way through the court system), the extended pause on repayment during the COVID pandemic, and the recently announced settlement in the Sweet v. Cardona (formerly Sweet v. DeVos) case.

Impactful changes in 2023 BDTR regulations

The 2023 BDTR resurrects some of the provisions in the 2017 rule, while also expanding the “acts or omissions” of the institution that could form the basis for a BDTR claim. Below we have highlighted a few, but certainly not all, of the impactful changes in the 2023 BDTR regulations.

Separation between discharge and recoupment

The new BDTR resurrects the separation between the loan discharge process (between the borrower and ED) and the recoupment process (between an institution and ED) from the 2017 rule, which is intended to increase ED’s ability to discharge student debt for as many students as possible, as quickly as possible. This bifurcated process will allow ED to act on discharge requests from borrowers more expeditiously, and then separately initiate action to recoup from the institution if the agency chooses to do so. It also allows ED to discharge loans that it cannot seek recoupment for due to the expiration of agency and state recovery limitations periods. Although this efficiency has been the stated goal of the BDTR process since the 2017 rule was implemented, the discharge process has been extremely slow – and fraught with legal challenges and controversy. Additionally, ED has not successfully recovered BDTR discharges from an open school, so it is not clear if this process will facilitate both discharge and recovery. However, it is clear that the agency is prioritizing discharging loans without regard to recoverable amounts or defenses permitted by state laws.

Applicable time frame

Generally, the standards of the 2023 rule applicable to a borrower’s BDTR claim will apply to claims pending on, or received on or after, July 1, 2023.

In an attempt to clarify that the department would not “retroactively” apply the 2023 rules, ED indicates in the new BDTR that schools will not be subject to recoupment if the conduct giving rise to the borrower defense claim occurred prior to July 1, 2023. However, if an act occurring before July 1, 2023, would have met the thresholds for discharge under the 1995, 2017 or 2020 version of the rule (as applicable, based on loan disbursement date), ED may still seek recoupment. By way of example, this would mean that if ED concluded that an institution employed an aggressive recruitment tactic (as defined under the 2023 rule) in 2015, ED can discharge the student’s loan based on the 2023 rule, but it cannot recoup from the institution unless such tactics also gave rise to a cause of action under state law as required to assert a BDTR defenses under the 1995 rule (applicable to a loan disbursed in 2015) would not have prohibited that conduct.

Uniform federal standard

A borrower claim may be approved based on a uniform federal standard that includes:

1. Substantial misrepresentation (expanded).
2. Substantial omission of fact.
3. Breach of contract (revived from 2017).
4. Aggressive and deceptive recruitment (new).
5. Judgments against the institution (revised).
6. Final actions by ED (also new).

Group claims

Not only has the group discharge option been reinstated, but groups also can be formed by ED, or upon the request of a third party, which now includes legal assistance groups and an expanded definition of state entities. Individual borrowers are no longer required to file applications in such circumstances. There is now presumption of injury in group claims for all borrowers, even if borrowers did not request relief from repayment obligations and ED presumes that every claim (individual or group) supported by a preponderance of the evidence warrants a 100% loan discharge.

Defense to repayment

Borrowers may assert a defense to repayment “at any time,” as long as the borrower has a balance due, regardless of the time elapsed since the date of the school’s action that supports the claim. Without a statute of limitations, schools would be expected to maintain borrower records indefinitely if they wanted to preserve the ability to defend themselves. In addition, maintaining data and records forever is not only practically impossible, but it also directly contradicts ED’s guidance and best practices around record retention and destruction.

Recoupment process

The process of recoupment has moved from 34 CFR Subpart G (which is used in fine, limitation and suspension matters) to Subpart H (which applies in appeals relating to audit findings and program review determinations). Since there is no track record of the BDTR process under Subpart G to date, it is not clear how much this shift will impact institutions in a recoupment action. However, as written this is a significant shift in favor of ED in terms of required burdens and agency deference. Subpart H historically relates to appeals with more developed administrative records and opportunities for institutions to respond before an appeal. As a result, the institution bears more of a burden to demonstrate all expenditures are proper once the dispute reaches the appeal stage. Consistent with such agency deference, the new BDTR clarifies that ED “…has the burden to prove that the loans it is seeking to recoup on were discharged for the purposes of borrower defense and that the institution has the burden to prove that the decision to discharge the loans was incorrect or inconsistent with law and thus that the institution should not be liable.”

ED recovery

For loans disbursed after July 1, 2023, there is generally a six-year limitations period for ED to recover funds from the school after the borrower’s last date of attendance at the institution, but that period does not apply if the school has received notice of the claim, or a class action suit based on the same facts, during the six-year period. In addition, there is no limited timeframe for recoupment for discharged loan based on 1) a favorable judgment based on state or federal law in a court or administrative tribunal of competent jurisdiction based on the institution’s act or omission relating to the making of covered loan or the provision of educational services for which the loan was provided; or, 2) ED sanctioned or otherwise took adverse action against the institution at which the borrower enrolled under 34 CFR part 668, subpart G, by denying the institution’s application for recertification, or revoking the institution’s Provisional Program Participation Agreement based on the institution’s acts or omissions that could give rise to a borrower defense claim.

In the case of a closed school, ED may pursue recovery for loans disbursed on or after July 1, 2023, from “a person affiliated with the school.” An affiliated person is generally someone with ownership or control over the institution, which includes directors and executive officers. Despite regulatory citations related to that definition, it remains unclear who or what this would cover.

Prohibition and disclosure

The new BDTR brings back the prohibition on pre-dispute arbitration agreements and class action waivers as they apply to borrower defense claims. Institutions also are required to disclose publicly and notify the secretary of education about judicial and arbitration filings and awards pertaining to a BDTR claim.

In the past six years, there have been numerous revisions and changes to the BDTR. Each reworks the understanding and power of ED to forgive and recoup on student borrower loans. Even now, ED is faced with hundreds of thousands of BDTR claims that must be analyzed under three existing rules – and adding another version into the process will only complicate matters and create more risk, both in terms of actual recoupment and interim actions and/or conditions of continued participation based on pending BDTR applications or discharges. For institutions, this complexity creates additional challenges. As more information and guidance becomes available, we will continue to provide updates.

On July 28, 2022, the US Department of Education (ED) published a Notice of Proposed Rulemaking (NPRM) to amend its 90/10 and change of ownership and control regulations.

ED is accepting comments on the rule package until August 26, 2022, before it issues a final rule. We expect ED will publish the rule package in final form no later than November 1, which allows the rules to take effect next July 1, 2023, under ED’s master calendar requirements. If ED misses the November 1 deadline, the final rule would likely take effect July 1, 2024.

Negotiated Rulemaking (Neg Reg) History

The change in control and 90/10 proposals are part of ED’s 2022 negotiated rulemaking process, which wrapped up a series of hearings earlier this year. ED’s Neg Reg committee ? which consisted of stakeholders and experts in the covered issues ? discussed rule proposals across seven broad federal student aid topics. Although ED was expected to issue NPRMs on each of the topics this summer, ED indicated in June it would delay most of the proposals until 2023. The change in ownership/control and 90/10 changes issued in this NPRM are now the only remaining proposals from the federal student aid topics expected this year. Although this proposal has gotten less attention that those related to borrower defense to repayment issues earlier this year, some of these changes are equally as important and will materially modify existing regulatory standards.

Neg Reg committees usually consist of stakeholders with wide-ranging perspectives, including representatives from regulatory agencies, students, consumer advocacy groups and ED itself. Given the range of views, consensus is rare. In the 2022 sessions, the committee only reached consensus on two of the seven topics: 90/10 and ability-to-benefit proposals. The 90/10 proposal in this NPRM, therefore, reflects the committee’s consensus language and therefore is the least likely to change regardless of comment. However, because of the potentially significant implications. We encourage impacted institutions to provide feedback. The committee did not reach consensus on the change in ownership and control proposal, so the NPRM language is ED’s own proposal, although it is similar to proposals that were discussed in the public hearing.

90/10

The 90/10 proposal updates the treatment of federal funds in the calculation and makes other modifications to the sources of funding that can be included as revenue. Under the existing 90/10 rule, proprietary institutions must derive at least 10% of their revenue from sources other than federal funding in order to maintain eligibility for the federal student aid programs. Currently, the federal funding includes only Title IV funding on the “90 side” of the calculation, while all other federal funding (such as veterans funding) is counted on the “10 side” of the equation (Ten Money).

However, in March 2021, the President signed the American Rescue Plan Act of 2021 (ARPA), which specified that all federal funding will count on the 90 side beginning with fiscal years starting on or after January 1, 2023.

ED’s NPRM implements the ARPA by expanding the scope of funds that count toward the 90 side to include all federal funds that are disbursed or delivered to or on behalf of a student to attend an institution, including both veteran and active service military benefits. In practice, this means that sources of federal funding that tend to be significant sources of Ten Money (such as funding from the Post 9/11 GI Bill) are no longer Ten Money and are instead on the 90 side.

The NPRM also proposes several other changes to the 90/10 regulations that will significantly impact the calculation and alternative sources of “Ten Money.” Like the statutory change, the regulation changes would apply to fiscal years beginning on or after January 1, 2023.

The following are the key proposals:

• Federal funds on the 90 side:  The NPRM updates the regulatory language to state that all federal funding paid either to the institution or the student to cover tuition, fees, or other institutional charges counts on the 90 side of the calculation. This proposal is based on a specific statutory change in ARPA, and ED’s revision is just to implement that change. The NPRM adds a related proposal to clarify the impact of this change: ED will publish in the Federal Register a list of federal sources that must be counted on the 90 side and make periodic updates to the list as needed. The main goal of the list is to identify sources of federal funding that may get paid directly to students without the institution’s knowledge, but are still intended to cover tuition, fees, or institutional charges and are therefore must be included in the calculation. Unfortunately, the timing of this publication is unclear and could define revenue categories during the fiscal year in question, making rate management challenging. 

• Clarify treatment of revenue from services performed by students: To count revenue generated by activities conducted by the institution for training and education, the revenue must be directly related to services performed by students. For example, a cosmetology program could count funds generated from hair-styling services provided by a student but not the sale of beauty products to customers receiving services. ED explained that this change is intended ensure that institutions are not including revenue from tangential activities that are indirectly related to services provided by students.

• Restrictions on revenue from ineligible programs: The rule also creates restrictions on counting revenue generated from programs that are ineligible for Title IV and significantly revising amounts previously eligible for inclusion in the 90/10 rate since 2008. Institutions can count revenue from ineligible programs as non-federal revenue only if (1) the funds paid on behalf of a student are not from a source related to the institution or its owners or affiliates; (2) the program does not include courses offered in the institution’s eligible programs; (3) the courses are taught by one of the institution’s instructors; and (4) the program is located at the institution’s main campus, approved additional location, another location approved by the state or accrediting agency, or an employer facility. Items 2-4 are significant changes and will impact currently acceptable 90/10 solutions. These proposed amendments to the rule add thresholds to the existing, requirement that these type of courses and programs meet one of the following: (a) be approved or licensed by the appropriate State agency; (b) be accredited by an accrediting agency recognized by ED; (c) provide an industry-recognized credential or certification; (d) provide training needed for students to maintain State licensing requirements; or (e) provide training needed for students to meet additional licensing requirements for specialized training for practitioners that already meet the general licensing requirements in that field. The proposal is intended to create an additional guardrail for ineligible programs that do not necessarily have the same consumer protection mechanisms as Title IV-eligible programs and to decrease the incentive to create ineligible programs that would contribute to the 10 side.

• Disallowing proceeds from the sale of accounts receivable and loans as “revenue”: The proposed rule expressly prohibits counting any amount of the proceeds from the sale of accounts receivable or institutional loans as revenue.

• Prohibiting delayed disbursements: The NPRM would expressly prohibit delaying Title IV disbursements to the next fiscal year. Although this practice was generally criticized in the past, the NPRM would make the prohibition explicit by requiring the institution to request and disburse Title IV funds to students by the end of the institution’s fiscal year.

• Public disclosure of 90/10 failure: In the event an institution fails to satisfy 90/10 in any single fiscal year, the proposed rules require the institution to disclose this to students at the end of the current fiscal year with an explanation that the school could lose Title IV eligibility if it fails a second year.

• Clarity on revenue generated from income share agreements: The NPRM specifies how institutions must treat income share agreements when the agreement is with the institution or a related party. Those requirements include having only cash payments representing principal payments that were used to satisfy tuition, fees and other non-federal revenue charges. The proposed provision would also prohibit the sale of income share agreements from being included as non-federal revenue. The goal for ED is to remove the incentive for proprietary institutions to encourage students to take out unclear credit products for schooling.

Change of Ownership/Control

The NPRM modifies the process for implementing a change in ownership or a change in control, and amends the thresholds for what constitutes (i) a reportable change and (ii) a change in control that must be approved by ED. In addition, this rule package makes certain definitional changes, including ? notably ? implementing a more stringent approach to what constitutes a “nonprofit.”

In both the Neg Reg hearings and the preamble to NPRM, ED indicated its changes generally reflect the increasing complexity of institutional ownership structures, an increasing number of applications for changes in control and an increasingly detailed ED review. A number of the changes reflect processes and procedures that ED is already implementing in practice.

The key proposed changes include the following:

• New Definition of “Nonprofit Institution”: The NPRM makes important updates to the definition of “nonprofit institution,” and enhances the requirements an institution must meet to be viewed as nonprofit by ED, regardless of its 501(c)(3) status. Although this change was likely driven by concerns around proprietary institutions converting to nonprofit status, it applies to all nonprofit institutions, including traditional universities.

The proposed changes are intended to ensure that no part of a nonprofit institution’s net earnings benefit any private entity or natural person. In making this determination, ED proposes it will have broad authority to consider “the entirety of the relationship between the institution, the entities in its ownership structure and other parties.” ED identifies a number of example arrangements that would generally prevent an institution from operating as a nonprofit, although ED retains discretion to evaluate the individual relationships.

Examples of presumptively prohibited arrangements for a nonprofit institution include when the institution:

• Owing a debt to a former owner or an affiliate of the former owner
• Entering a revenue-sharing agreement (either directly or indirectly) with a former owner, current or former employee of the institution, or member of its board, or an affiliate of any of those entities.
• Entering any agreement, including lease agreements, with a former owner, current or former employee of the institution, or a member of its board, or any affiliate of those entities.
• Engaging in an excess benefit transaction with any natural person or entity

The institution may be able to demonstrate to ED that any of the listed arrangements are “reasonable,” based on the market price and terms for such services or materials, and the price bears a reasonable relationship to the cost of the services or materials provided.

Importantly, ED may evaluate these contracts during recertification of any nonprofit institution’s eligibility to participate in Title IV or any other time the information becomes available to ED, such as if there is an IRS or state action. These types of arrangements are currently  reviewed by ED if an institution applies to convert from for-profit to nonprofit status, but historically were not reviewed following the conversion, raising the possibility that a previously converted for-profit could be treated as a for-profit for ED purposes at some point in the future.

• Require 90 days’ notice to ED and notice to students prior to a change in ownership: The proposed rule would require institutions submit a pre-acquisition review notice, including an Electronic Application, state and accreditor approvals, and financial statements, at least 90 days before a change in control. Although most parties currently submit a pre-acquisition application under ED’s existing rules, such a pre-transaction review by ED is optional.  Under the proposal, the parties would not be required to wait for ED’s approval to complete a transaction, but they would be required to wait at least 90 days from submission of the pre-acquisition application to close a deal. The proposed regulation also emphasizes that ED can decide not to approve a transaction. Importantly, the proposal also requires an institution to notify its enrolled and prospective students at least 90 days prior to a proposed change in control.

• Changes in reporting thresholds for a “change in ownership” and a “change in control”: ED is proposing a number of definitional changes that impact what events constitute a change in ownership and what events constitute a change in control. These changes will modify which types of changes require approval from ED, and which changes must simply be reported to ED (with no approval required).
  • Reportable Changes
    • Within ten days of the change, institutions must report any change by which a person or entity acquires at least a 5% ownership interest.
    • When a person or entity, alone or with other affiliated persons or entities, acquires at least 25% ownership of an institution; a natural person becomes a general partner, managing member, trustee or co-trustee, or officer of an entity that has at least 25% ownership interest; or an entity becomes a general partner or managing member of an entity with at least a 25% ownership interest, it is considered a reportable change of control.
  • Changes in Control Requiring Approval
    • The NPRM proposes to move the threshold for changes in control that require ED approval from the current standard of 25% of voting interest and control to 50% of voting interest and control. However, the proposal also expands and specifically lists a number of scenarios that would fall into the change of control category, including, among others: 
      • Acquiring 50% of voting interest or otherwise acquiring 50% control
      • Ceasing to hold 50% of voting interest or otherwise ceasing to hold 50% control
      • A partner in a general partnership (GP) acquiring or ceasing to own at least 50% of the voting interest in the GP
      • Any change in the general partner of a limited partnership, if the GP has an equity interest in the school
      • Any change in the managing member of an LLC, if the managing member has an equity interest in the school
      • A person becoming the sole member or shareholder of an LLC or other entity that has an indirect interest in the school
      • The addition or removal of any entity that provides/will provide audited financial statements to ED
    • In determining “control,” the NPRM indicates ED will consolidate interests among commonly owned, managed, or controlled entities, or those that vote together through an agreement or proxy arrangement.

• Codify current practice for new owners without acceptable financial history: As has long been department practice, the NPRM formalizes ED’s expectation that if a new owner is unable to provide two fiscal years of audited financial statements in connection with a change in control application, ED will require the institution to post a letter of credit of at least 25% of the institution’s prior year Title IV volume. If only one year of acceptable audited financial statements is available, ED will require a letter of credit in the amount of 10% of prior year Title IV volume. Importantly, if an entity in the ownership structure holds a 50% or greater voting or equity interest in another institution, ED is proposing that it may combine the Title IV volume of all institutions under such common ownership when calculating the letter of credit amount.

What’s Next

ED is accepting public comments on these proposals until August 26, 2022. We encourage all interested parties to consider submitting comments addressing their concerns with the proposed language. Comments can be submitted here.

Following the close of the comment period, ED will review the public feedback before it issues its final rules.  ED is likely to issue its final rules no later than November 1, 2022, in order to meet its master calendar requirements, which require publication of a final rule by November 1, 2022 for the rule to take effect July 1, 2023. Rules that do not meet the November 1 publication deadline will take effect the following July 1, which therefore pushes the implementation of the rule another year. ED delayed publication of the remaining topics from the 2022 Neg Reg, which include Ability to Benefit, Administrative Capability, Gainful Employment, Financial Responsibility, and Certification Procedures. We anticipate ED may revisit those proposals in 2023.

We will continue to track developments and will provide additional updates as they become available.