On March 1, 2023, the U.S. Department of Education (the Department) announced that, in particular circumstances, it would consider holding individual leaders personally accountable for financial losses that the federal government may incur, including Title IV funds distributed to institutions.
It is important to note that the number of institutions affected by this announcement is likely to be quite small given the Department’s intent at this time. Institutions must fail a four-pronged test for the Department to consider requiring individuals to assume personal liability, and even then, the Department has broad discretion over implementation. Although the current administration has shared its plans for implementing this guidance, a future administration may take a more expansive approach.
The announcement describes the process the Department will use when considering whether to require an individual to sign a Program Participation Agreement (PPA), which institutions sign to be eligible for Title IV funding.
Under the Higher Education Act of 1965 (HEA), the Department has “the authority to require the assumption of personal liability (or financial guarantees) from individuals who own or exercise substantial control over institutions.” The Department stipulates that governing board members and presidents of private nonprofit institutions fall into this category.
The Department cannot impose this requirement if the institution:
- has not been subjected to a limitation, suspension, or termination action by the secretary of education or a guaranty agency within the preceding five years;
- has not been required to repay an amount greater than 5 percent of the funds the institution received from programs under Title IV for any year;
- meets and has met the Department’s financial responsibility requirements over the preceding five years; and
- has not been cited during the preceding five years for failure to submit audits required under Title IV in a timely fashion.
If an institution fails any of the prongs of this four-pronged test, the Department potentially can require an individual to assume personal liability for recouping Title IV funds.
The Department can decide at its discretion whether to require an individual to assume personal liability. It has stated that the factors it will consider currently include, but are not limited to:
- whether the institution (when considered individually or in combination with other institutions under common ownership or control) receives a significant amount of Title IV funding;
- whether the Department has approved a significant number of borrower defense to repayment or false certification claims for the institution or for another institution where the individual has or had substantial control;
- whether the institution or the individual has a record of civil or criminal lawsuits or settlements or disciplinary or legal actions by the Department or other state or federal agency involving federal student aid or involving claims of dishonesty, fraud, misrepresentation, consumer harm, or financial malfeasance;
- whether the institution or the individual has a history of noncompliance with the HEA’s requirements;
- whether the institution has substantial problems with financial responsibility, which may be indicated by things such as repeated financial responsibility composite scores below 1.0 or a going concern disclosure issued by its auditor;
- whether the Title IV funding received by the institution (when considered individually or in combination with other institutions under common ownership or control) has substantially increased or decreased recently;
- whether the institution has high withdrawal or low retention rates;
- whether the individual is subject to executive compensation or a bonus structure that could significantly affect the financial health of the institution;
- whether the Department has identified significant findings of a lack of administrative capability at the institution;
- whether the Department has recently notified the institution that it has identified systemic or significant audit or program review findings or whether the institution has unpaid fines or liabilities resulting from an audit or program review;
- whether there have been recent state or accrediting agency actions against the institution, including show cause or suspension actions, or recent state or accrediting agency actions against other institutions related to the individual’s involvement at that institution; or
- any other factors specific to the institution or the individual that are relevant for the Department to determine whether an individual assuming personal liability is necessary to protect the financial interest of the United States.
The Department does not need to engage in any kind of public comment or negotiated rulemaking with this policy. It is not a “change” in statute; it is guidance based on already established law in the HEA. The novelty rests in the Department’s recent explanation of its approach. Until now, it has not actively required individuals to sign a PPA and assume personal liability.
The number of institutions affected by this new announcement is small. However, it is important for board members to understand their responsibilities and liabilities as fiduciaries of the institutions they oversee. Without signing a PPA, an institution is ineligible to receive Title IV funds.
The language in the announcement indicates that the Department is currently focused on board members, chief executives, and other individuals of for-profit institutions. However, neither the Department nor the statute provides any protection for private nonprofit institutional leaders. Although the current administration has shared its plans for implementing this guidance, a future administration may take a more hardline approach. Boards should discuss the ramifications of this guidance and take action as appropriate.
- Given our institution’s financial position and the requirements laid out above, could the chief executive or a member of our board be subject to signing our institution’s PPA agreement and assume personal liability?
- Are we current on the volume of Title IV funding our institution receives?
- Have state or accrediting agencies recently taken actions against our institution?
- What policies and procedures should the board enact in response to this Department announcement?