On March 2, 2023, the U.S. Department of Education announced it will hold individuals representing corporations or other legal entities, including a member of the board of directors or a chief executive officer, personally liable for the institution of higher education in certain circumstances. Federal Student Aid (FSA) will require such individuals to sign an institution’s program participation agreement (PPA) to assume joint and several liability for the institution’s performance of its obligations in the PPA.
A Marked Departure From Past Guidance
The Department’s announcement follows a March 23, 2022, electronic announcement (EA) notifying institutions of higher education that FSA will require additional signatures on an institution’s PPA from individuals representing corporations or other legal entities that have, or could have, direct or indirect effects on the institution’s administrative capability or financial responsibility. Notably, the March 23, 2022, EA states: “By co-signing the PPA, the entities (but not the individuals who sign as authorized representatives of the entities) agree to assume liability for financial losses to the federal government related to the institution’s administration of Title IV programs.” McGuireWoods addressed the March 23, 2022, EA in an April 18, 2022, alert, and today’s guidance signals a departure from FSA’s stance because individuals now will be held personally liable for the institution’s financial losses and performance.
The Department justifies such a marked departure from past guidance by saying it will “strengthen accountability and better ensure that taxpayers are protected in the event of school closures, approved borrower defense claims, or outstanding liabilities owed to the Department.” The Department appears to adopt the strategy outlined in the National Student Legal Defense Network’s publication, Holding Executives Personally Liable under the Higher Education Act.
The Department’s Authority to Impose Personal Liability
Title IV of the Higher Education Act of 1965 (Title IV or HEA), as amended, gives the Department the authority to require “the assumption of personal liability, by one or more individuals who exercise substantial control over such institution … for financial losses to the Federal Government, student assistance recipients, and other program participants for funds under this subchapter, and civil and criminal monetary penalties.” 20 U.S.C. § 1099c(e)(1)(B). The Department may determine that an individual exercises substantial control over an institution if the Department finds:
- the individual directly or indirectly controls a substantial ownership interest in the institution;
- the individual, either alone or together with other individuals, represents — under a voting trust, power of attorney, proxy or similar agreement — one or more persons who have, individually or in combination with the other persons represented or the individual representing them, a substantial ownership interest in the institution; or
- the individual is a member of the board of directors, the chief executive officer or other executive officer of the institution or of an entity that holds a substantial ownership interest in the institution.
20 U.S.C. § 1099c(e)(2).
Title IV defines an “ownership interest” as including but not limited to:
- a sole proprietorship;
- an interest as a tenant in common, joint tenant or tenant by the entireties;
- a partnership; or
- an interest in a trust.
20 U.S.C. § 1099c(e)(3). Title IV’s implementing regulations define “ownership” or “ownership interest” as follows:
- Ownership or ownership interest means a legal or beneficial interest in an institution or its corporate parent, or a right to share in the profits derived from the operation of an institution or its corporate parent.
- Ownership or ownership interest does not include an ownership interest held by a mutual fund that is regularly and publicly traded;a U.S. institutional investor, as defined in 17 CFR 240.15a-6(b)(7);a profit-sharing plan of the institution or its corporate parent, provided that all full-time permanent employees of the institution or its corporate parent are included in the plan; oran employee stock ownership plan (ESOP).
- a mutual fund that is regularly and publicly traded;
- a U.S. institutional investor, as defined in 17 CFR 240.15a-6(b)(7);
- a profit-sharing plan of the institution or its corporate parent, provided that all full-time permanent employees of the institution or its corporate parent are included in the plan; or
- an employee stock ownership plan (ESOP).
34 C.F.R. § 600.31(b).
Title IV, however, prohibits the Department from requiring an individual to assume personal liability when the institution:
- has not been subjected to a limitation, suspension or termination action by the Secretary or a guaranty agency within the preceding five years;
- has not had, during its two most recent audits of the institution’s conduct of programs under this subchapter, an audit finding that resulted in the institution being required to repay an amount greater than 5% of the funds the institution received from programs under this subchapter for any year;
- meets and has met, for the preceding five years, the financial responsibility standards under 20 U.S. Code § 1099c(c); and
- has not been cited during the preceding five years for failure to submit audits required under this subchapter in a timely fashion.
20 U.S.C. § 1099c(e)(4). The Department noted that individuals will not be required to assume personal liability in every instance where one of the four conditions above is not satisfied. For example, the Department will not always require an individual to assume personal liability for the institution when the institution has failed to submit requisite audits in a timely fashion in the past five years. If more than one of these conditions is satisfied, the Department is more likely to require an individual to assume personal liability.
When Will the Department Require an Individual to Assume Personal Liability?
The Department “anticipates it is most likely to request signatures from individuals at institutions or groups of affiliated institutions that pose the largest financial risk to the United States.” Specifically, the Department intends to hold individuals personally liable for (1) an institution that “annually receives tens or even hundreds of millions of dollars of Title IV funds” or (2) “institutions with serious and significant sets of concerns related to their compliance with federal financial aid rules.” The Department provides the following non-exhaustive list of factors it will consider in determining whether to require an individual to assume personal liability for the institution:
- 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 (borrower defense) 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 requirements of the HEA;
- whether the institution has substantial problems with financial responsibility, which may be indicated by factors such as repeated financial responsibility composite scores below 1.0 or a going concern disclosure issued by its auditor;
- whether a for-profit institution has failed to meet the legal requirements for the 90/10 threshold;
- 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 rate;
- 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 indicated that it anticipates that there may be instances where an institution or individual is subject to personal liability under 20 U.S.C. § 1099c(e)(4), but is not required to assume personal liability. According to the Department, the more factors that apply, the “greater likelihood” the Department will deem it necessary to hold an individual personally liable for losses related to federal student aid programs.
Sign the PPA or Find an Alternative
The Department will typically require an individual to assume personal liability through a signature on the PPA, but alternatives may exist. More than one individual may be required to sign a PPA and assume personal liability. According to the Department, “[i]f more than one individual exercising substantial control over an institution is required to sign the PPA and assume personal liability, an institution’s initial or continuing participation is contingent on each such individual cosigning the PPA.” The Department noted, however, that alternative financial protections to a signature on the PPA exist and may be considered on a case-by-case basis. Although the Department did not specify what such alternatives may be, FSA typically has permitted institutions to provide a letter of credit in lieu of an entity or individual signing a PPA.
What This Means
Individuals should consult with counsel to determine whether the Department lawfully may impose a personal liability requirement. A federal district court recently interpreted Title IV as permitting the Department to hold corporate entities liable but forbidding the Department to hold individuals liable unless the conditions in 20 U.S.C. § 1099c(e)(4), listed above, are satisfied. For details, see Florida Coastal School of Law, Inc. v. Cardona, No. 3:21-cv-721, Order, 44-45 (M.D. Fla. Aug. 9, 2021). In other words, the Department cannot require an individual to be personally liable for the institution unless the institution has been subject to a limitation, suspension or termination action by the Department or a guaranty agency within the past five years; has an audit finding in its two most recent audits that resulted in the institution repaying an amount greater than 5% of its Title IV funds; has failed its financial responsibility standards in the past five years; or has been cited in the past five years for failure to submit audits required under Title IV in a timely fashion. If the institution satisfies one or more of these factors, then it is more likely that the Department will require the individual to sign a PPA to assume personal liability. See 20 U.S.C. § 1099c(e)(4).
Unlike the March 23, 2022, EA, the Department’s most recent guidance does not address when the Department will require an individual to assume personal liability. The March 23, 2022, EA states that the Department will determine whether an entity must assume joint and several liability by signing a PPA when the school is up for its next recertification. As a PPA has an expiration date, it is questionable whether the Department will require an individual to assume personal liability for the institution prior to the PPA’s expiration or recertification date. The Department, however, may have authority to require an assumption of personal liability under Title IV, 20 U.S.C. § 1099c(e)(1)(B) to protect the financial interest of the United States. Accordingly, the Department presumably may require an individual to assume personal liability prior to the expiration or recertification of a PPA as a condition of continued participation in Title IV programs.
An individual may be able to challenge a requirement to be personally liable for an institution, but it is an uphill challenge. The Department has authority and discretion under Title IV to protect the “financial interest of the United States,” and courts may defer to the Department’s discretion. If the Department’s financial decision is that an individual must assume personal liability for the institution as a condition of continued Title IV funding, the individual may argue that such a requirement is arbitrary and capricious under the Administrative Procedure Act and demonstrate that the institution can cover the Title IV liabilities. An individual also may challenge the Department’s guidance which was promulgated without negotiated rulemaking or notice-and-comment rulemaking. The Department, however, likely will argue that Title IV itself provides the authority to require an individual to assume personal liability such that negotiated rulemaking or notice-and-comment rulemaking is not necessary.
The Department intends to use its discretion to hold individuals personally liable for financial losses and other Title IV liabilities. An individual who is required to assume personal liability for the institution by signing a PPA should seek legal counsel.
McGuireWoods offers an interdisciplinary team of attorneys who focus on education law, private equity and business and securities law. McGuireWoods’ attorneys serve as trusted advisers to proprietary and nonprofit colleges and universities. For any questions concerning this alert, please contact any of its authors.