A Summary of the Department of Education’s Updates for Changes in Ownership
On July 28, 2022, the Department of Education published its proposed revisions to changes in ownership rules. These remained open for comment until late August, with regulations finalized in October 2022. These changes will be effective on July 1, 2023 and are intended to minimize risks to students and taxpayers any time an institution undergoes a change in ownership, according to the Department of Education. Let’s dive in:
An overview of the key clarifications to the definitions, according to the Department, are listed below:
- Main campus – this is defined as the primary physical location where the institution offers programs that is within the same ownership structure and certified as the main campus by the accrediting agency and the Department.
- Additional location – this is defined as a physical facility that is separate from the main campus and within the same ownership structure of the institution that participates in Title IV solely through the certification of the main campus.
- Branch campus – this is defined as additional locations that are geographically separate from the main campus and independent by virtue of being permanent. It offers degrees, certificates, or recognized credentials; has its own faculty; and maintains its own budgetary and hiring authority. The updated definition also specifies that branch campuses are physical facilities in the same ownership structure of the institution and are approved by the Department as branch campuses.
- Distance Education – this is defined as instruction that occurs between students and instructors that are separated and provides regular, substantive interaction between them. The new changes clarify that an institution that offers both on-campus and distance education programs (associated with the main campus) would list its location as the administrative office address as approved by the accrediting agency. This would also apply to institutions with only distance education programs.
- Not-for-profit/Nonprofit Institution – the definition of this institution is one that is owned and operated by a not-for-profit organization or association; has no part of its net earning benefitting a private party; is authorized to operate as a not-for-profit organization by each state where it is located; and is determined by the IRS to be a 501(c)(3) entity. The change clarifies that the institution’s net earnings do not benefit any private entity or person.
The Department also noted that an institution would not qualify as a not-for-profit if it:
- Has debt or payments owed to a former owner of the institution, or
- Holds a revenue-sharing agreement with a former owner, current or former employee, board member, or an affiliated person or entity related to the former owner (unless it is determined that the payments are reasonable based on the market price for the services).
These rules are in place to prevent proprietary institutions from converting to a not-for-profit to avoid current regulatory requirements.
Previously, institutions undergoing a change in ownership were granted provisional certification to participate in Title IV programs if it submitted the following information within 10 business days of the transaction, according to guidance provided by the Department:
- A materially complete application that is supplemented by a copy of the institution’s state license authorizing it to provide postsecondary education, and
- Its accreditation documents, audited financial statements of its two most recently completed fiscal years, and audited financial statements of the new owner’s two most recently completed fiscal years.
The Department’s new rules change the following:
- Institutions must report within a minimum of 90 days prior to any change. Required information may include: a completed form, state authorization and accreditation documents, copies of audited financial statements for the institution and the new entity, as well as detail of the new ownership structure, and
- The institution is required to notify students (existing and prospective) of the change.
Failure to meet these requirements could interrupt Title IV participation.
Financial Protection – Letters of Credit
It previously stood that when a new owner of an institution did not have a history of audited financial statements, the Department required financial protection often in the form of a letter of credit. Under the new regulations, financial protection would be 25% of the institution’s financial aid in the prior year when a new owner does not have two years of audited financial statements.
In situations when a new owner has only one year of audited financial statements, the financial protection amount is 10% of the institution’s financial aid in the prior year. This change aligns the letter of credit requirements with the amounts currently used for institutions with a failing composite score.
The Department also has the discretion to require an additional 10% if deemed necessary. If the new owner has a controlling interest in another institution that participates in Title IV, the Department may also include the Title IV amount of that institution in the calculation of the financial protection amount.
Change in Control
The Department also adjusted circumstances in which there is a change in control for certain entities. The threshold for a change in ownership would be an owner acquiring or losing 50% voting interest in the entity. There are a few other situations that the Department includes specific to partnerships and limited liability companies that would constitute a change in control. It also stated that these entities may consider family members or even a group of persons that individually own less than 50% of the entity as having combined ownership that could meet the new threshold.
There are a number of adjustments under this rule that can make changes in ownership more challenging. Make sure your institution is aware of the implications and talk through your specific situation with a Title IV audit expert: