Financial Responsibility Triggering Events for Higher Education Institutions

Nearly a year ago in October of 2023, the U.S. Department of Education implemented significant changes to financial responsibility triggering events for higher education institutions. These changes became effective on July 1, 2024. While some time has passed since the effective date, many for-profit institutions’ financial leaders are still struggling with understanding the major changes and properly applying them to their schools. Knowing that once a triggering event occurs, it must be reported to the Department within 21 days leaves little room for error. Institutions that do not report a triggering event in a timely manner can unfortunately be deemed not financially responsible by the Department.

Note that there are two types of triggering events. The first is a “mandatory trigger,” which is described under 34 CFR 668.171(c) as automatically requiring financial protection or a recalculation of the composite score to determine if financial protection is needed. The second is a “discretionary trigger,” described in 34 CFR 668.171(d) as allowing the Department to determine whether financial protection is warranted.

So, how can you best prepare to report your school’s triggering event? First, it’s important to have an understanding of key changes to the triggering events.

Capital Contributions Funds

If a capital contribution is made in the final three months of your higher education entity’s fiscal year, these funds must remain in the institution for a minimum of six months in the subsequent fiscal year. Any distributions taken in the subsequent fiscal year will be netted against the prior year contributions – this effectively categorizes the contribution as a related party loan, not a capital contribution.

After your composite score is recomputed, if it falls below a 1.0, your institution would no longer be considered financially responsible.

Withdrawal of Owner’s Equity

Any proprietary institutions with a composite score under 1.5 in a fiscal year that has a subsequent withdrawal of equity dropping the composite score below 1.0 will not be deemed financially responsible. This rule also applies to an institution for its annual financial statement or change in ownership submission through the end of the first fiscal year after a change in ownership with a subsequent withdrawal of owner’s equity.

Non-Federal Educational Assistance Funds

For its most recently completed fiscal year, a for-profit institution that did not receive at least 10% of its revenue from sources other than federal educational assistance, as provided under § 668.28(c), will keep its financial protection. This will remain in place until the institution passes the 90/10 revenue requirements for two consecutive years. The triggering event deadline for this instance is 45 days after the fiscal year end.

Financial Protection

The Department is now able to hold financial protection (e.g., a letter of credit) for two full fiscal years, even if your institution has alleviated the triggering event. In addition, if an institution has multiple financial triggers that are unrelated to each other, the Department is now able to “stack” multiple layers of financial protection. This implication can cause your for-profit university or secondary education institution to be classified as not financially responsible.

Audit Opinion

The Department can deem your institution not financially responsible if a qualified, adverse or disclaimed audit opinion is issued. In addition, if the financial statements include a disclosure regarding diminished liquidity or ability to continue as a going concern, unless alleviated, the Department can also deem your institutional not financial responsible. This is even the case if the institution is in compliance with all other financial metrics.

Beyond these crucial updates, there are other changes to mandatory and discretionary triggering events that can also affect a school’s financial responsibility (full regulations here; please refer to 668.171(c) and 668.171(d)). The Department can deem your institution not financially responsible when these guidelines are not followed. See the recent Electronic Announcement from the Department for further guidance on the related documentation requirements. To understand the impact of triggering events and how to report on them properly, please talk to our team of Title IV professionals.