To begin and continue to participate in any Title IV, the Higher Education Act (HEA), program, an institution must demonstrate to the Secretary that the institution is financially responsible under the established requirements.
The Secretary considers an institution to be financially responsible if determined that:
- The institution’s Equity, Primary Reserve, and Net Income ratios yield a composite score of at least 1.5
- The institution has sufficient cash reserves to make required returns of unearned Title IV, HEA, program funds
- The institution is able to meet all of its financial obligations and provide the administrative resources necessary to comply with Title IV, HEA, program requirements
For a variety of reasons and given the current environment, it might be difficult to meet these requirements—with that comes the financial responsibility letter from the Department of Education.
Example of the Financial Responsibility Letter
This financial responsibility letter typically looks like:
“In assessing the financial strength of School ABC, our financial analyst reviewed the financial statements using the indicators that are set forth in regulations at 34 C.F.R. 668.171. These statements yield a composite score of X.X out of a possible 3.0. A minimum score of 1.5 is necessary to meet the requirement of financial standards.”
Note: X.X will be under 1.5, or this letter would not have been issued.
Next Steps for Institutions
Institutions are typically given two options at this point:
- Letter of Credit Alternative – this will typically require the institution to post a letter of credit with the Department of Education that equals 50 percent of funds received by the institution during the most recently completed fiscal year.
- Provisional Certification – this will typically require the institution to post a letter of credit with the Department of Education that equals 10 percent of funds received by the institution during the most recently completed fiscal year; however, the institution must comply with all of the requirements specified for the Provisional Certification Alternative in 34 C.F.R. 668.175(f), including Zone Alternative requirements and Heightened Cash Monitoring 1 method of payment.
If you have the financial means to chose Option 1, this means you get to continue to operate as normal and no provisional Program Participation Agreement (PPA) would be issued. Option 2 is the more common choice we see, which will, at bare minimum, require adherence of Zone Alternative and Heightened Cash Monitoring 1 requirements. We typically see a 10 percent letter of credit required for this option as well.
Process Changes Under the Provisional Certification
A few of the processes that will require adjustments under this provisional certification are as follows:
- Method of Payment – this typically involves a change from the advanced payment method to the Heightened Cash Monitoring 1 requirements. This payment method means you have to credit funds to student accounts and pay credit balances to the students PRIOR to requesting funds from the Department of Education. As credit balances are required to be paid prior to requesting funds, you are no longer allowed to use a credit balance waiver. This is a fundamental shift for most institution, who are used to requesting funds and subsequently post to student accounts. This is done to shift more responsibility onto the institution, as institutions are required to pay credit balances as they arise.
- Notification Requirements – the institution is required to provide information to appropriate School Participation Division no later than 10 days after any of the oversight or financial events located at 34 C.F.R. 175.
- Auditor’s Attestation Requirements – the institution must require its compliance auditor to express an opinion on its compliance with the Zone Alternative and payment method requirements.
Key Takeaways
A lot of times, as auditors, we run into issues with method of payment or notification requirements not being met, as an institution is just not fully aware of what requirements accompany these changes. Schools owners that are used to withdrawing money from the company at any point will have to start notifying the Department of Education before doing so. Further, institutions that are accustomed to holding credit balances and drawing funds prior to crediting ledger cards will have to rethink their systems.
In the end, it comes down to thoroughly reading what you are signing and understanding the fine print. Also important is to share this information with the appropriate parties you work with to make sure all legs move in the same direction. For example, if you use an outside accountant, make sure they also understand how this will impact current practices; and if you use a third-party servicer to assist with your Title IV process, make sure they know what change has occurred and when it has occurred. Most servicers will be your “best friend” in this process, as they have experience with these requirements and are the ones that typically assist with funding processes. Most importantly, make sure your staff understands these changes, as it will impact their daily operations. And ensure, lastly, that your auditor is provided the proper documentation and understands when these changes took place—they will need to comment on these requirements on your next compliance report.
Don’t be afraid to seek advice from your third-party servicer, your auditor, or even the Department of Education. Forming a proper plan at the beginning of changes that will impact how you run your company is the best way to get to a happy ending.
Please reach out to our team if you have any questions or concerns.
