On Jan. 16, 2026, Federal Student Aid (FSA) announced that it will no longer enforce a rule requiring ownership entities, including corporations and limited liability companies, to sign a Program Participation Agreement (PPA) and assume joint and several liability for the acts or omissions of the school. This rule, 34 C.F.R. § 668.14(a)(3)(ii), commonly called the “Parent Liability Rule,” had been criticized by some for chilling capital investments in education, particularly investment in private nonprofit institutions and trade schools. Whether and when FSA will require an owner-entity to sign a PPA remains an open question for a future negotiated rulemaking.
Any institution of higher education that receives federal financial student aid under Title IV of the Higher Education Act of 1965, as amended (Title IV), must enter into a PPA with the U.S. Department of Education. A PPA conditions eligibility to receive federal financial student aid on compliance with certain statutory and regulatory requirements. The Parent Liability Rule requires that, for all proprietary or private nonprofit institutions, “an authorized representative of an entity with direct or indirect ownership of an institution must sign the institution’s PPA.”
FSA’s decision not to enforce the Parent Liability Rule arises from a settlement agreement with a private nonprofit institution that sued the U.S. Department of Education, challenging application of the Parent Liability Rule. That institution’s lawsuit argued, among other things, that FSA lacked authority under Title IV to promulgate the Parent Liability Rule and that the rule’s adoption violated the Administrative Procedure Act. The Department has published the school’s complaint and the parties’ settlement agreement along with the electronic announcement that FSA would not enforce the Parent Liability Rule.
FSA, however, reserves the right to “require an authorized representative of an entity that directly or indirectly holds a substantial ownership interest in the institution [to] sign that institution’s PPA on a case-by-case basis, in a manner consistent with 20 U.S.C. § 1099c(e)” to protect the United States’ financial interest. Whether and when the Secretary of Education will require signatures of an ownership-entity or a specific individual remains an open question and likely will be addressed during a future negotiated rulemaking. Questions and answers about this development follow:
When will FSA require an owner-entity to sign a PPA?
- FSA specifically stated that it will generally not require owner-entities to sign a PPA “if the owner-entity of an institution has no or de minimis assets, unless there are circumstances that suggest that a parent owner withdraws equity from an owner-entity in a pretextual manner in order to intentionally evade liability.”
- FSA “will not require a financial guarantee from an institution, or the assumption of personal liability by one or more individuals exercising substantial control over the institution, where the institution has met the conditions specified in 20 U.S.C. § 1099c(e)(4)(A)–(D).” These four statutory conditions are when the institution:
- has been subjected to a limitation, suspension or termination action by the Secretary of Education or a guaranty agency within the preceding five years;
- has 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;
- does not meet or has not met, for the preceding five years, the financial responsibility standards under 20 U.S.C. § 1099c(c); or
- has been cited during the preceding five years for failure to submit audits required under this subchapter in a timely fashion.
What alternatives exist to signing a PPA?
- FSA will determine on an individualized basis whether alternative protections to minimize financial losses such as a letter of credit will suffice in lieu of a signature on a PPA. FSA remains open to considering other acceptable financial protections.
What is the effective date of FSA’s guidance in the announcement?
- FSA will apply the owner-entity signature policy to a PPA issued on or after Jan. 16, 2026, the date of the announcement. FSA will not retroactively apply the guidance.
Will the signatory requirement apply to ownership entities or individuals?
- FSA does not directly address in its announcement whether ownership-entities as opposed to individuals will be required to sign a PPA. Title IV directly authorizes the Secretary of Education to require “financial guarantees from an institution” or “the assumption of personal liability, by one or more individuals who exercise substantial control over such institution,” under 20 U.S.C. 1099c(e)(1)(A)–(B) in specific circumstances as outlined above. At least one federal district court interprets this provision of Title IV as permitting FSA to hold corporate entities liable but forbidding FSA to hold individuals liable unless certain circumstances have been satisfied. For details, see Florida Coastal Sch. Of Law., Inc. v. Cardona, No. 3:21-cv-721, Order, 50–55 (M.D. Fla. Aug. 9, 2021). This court’s opinion, however, was issued before the Supreme Court of the United States’ opinions in Loper Bright Enterprises v. Raimondo and West Virginia v. EPA. These more recent opinions confine a federal agency’s discretion to interpret the statutes they administer.
For now, FSA is signaling a willingness to negotiate alternatives to a signature on a PPA for private non-profit and proprietary institutions. FSA likely will clarify whether and when an ownership-entity may be required to sign a PPA in future negotiated rulemaking.
McGuireWoods offers an interdisciplinary team of attorneys who focus on education law and private equity and features a Higher Education Enforcement and Regulatory Counseling Practice Group. McGuireWoods’ attorneys serve as trusted advisers to proprietary and nonprofit colleges and universities. For any questions concerning this alert, please contact the authors.
A past article on these issues may be found at:
Education Department to Hold Owners, Individuals, Board Members Liable for Higher Education Institutions (March 2, 2023).