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Three Key Regulations Among the Education Department’s New Trove

Greater accountability for schools, greater protections for students.

Disclaimer: The author previously worked at the U.S. Department of Education, including to develop some of these initial regulatory proposals.

Over the last week, the U.S. Department of Education published two sets of final higher education regulations, in the works for the last year-and-a-half, on a range of issues. Broadly, these rules determine eligibility for student loan discharges and accountability for the colleges students attend using their federal financial aid.

Of the hundreds of pages covering more than half a dozen topics, a few in particular stand out for their impact: fortifying and improving upon long-standing efforts to hold institutions accountable for misconduct and failure to meet federal rules, as well as protecting students, borrowers, and taxpayers.

Ensuring a Stronger Borrower Defense Rule

The Higher Education Act provides borrowers whose institutions commit certain types of misconduct (like making misleading claims about the education offered or the employment outcomes from the program) with the opportunity to have their loans discharged. Since 2015, the Department of Education has received more than half a million claims from borrowers alleging their colleges lied to them and seeking relief on their loans. About three out of four of those applicants attended a for-profit college; more than 80 percent had incomes low enough while in college that they qualified for a Pell Grant; and, about one in five are currently in default on their loans. However, the Department’s processes for borrower defense, which have been redone by both the Obama and Trump Administrations, haven’t been able to keep up with the demand. 

The Biden Administration’s new regulations include a broader list of misrepresentations, omissions, and aggressive recruitment tactics that institutions can be held responsible for, expanding the standard against which the Department will judge borrowers’ applications. They also ensure a robust group process for evaluating similar claims by multiple borrowers from an institution, which will help speed the processing of claims – good news, with more than 300,000 claims still pending as of August 2022. Independently, the Department will make a separate assessment of liabilities against the institution, holding schools financially accountable for the borrower defense claims; though by the Department’s own estimates, it’s likely the Department will recover the costs of just a small fraction of the claims that are approved. 

Closing the 9010 Loophole

For decades, for-profit colleges have been required to demonstrate they can obtain at least 10 percent of revenue from sources other than Department of Education (Title IV) funds. Schools that fail the so-called 9010 test two years in a row lose Title IV eligibility altogether. To skirt this requirement, some for-profit colleges have tried to plug any funding holes with Veterans Affairs or Department of Defense aid like the G.I. Bill. In many cases, those institutions aggressively recruited service members and veterans for low-value and high-cost programs. According to the Department, nearly three-dozen for-profit colleges would have failed the 9010 test in 2019 had DOD and VA benefits been included as federal aid. Instead, $1 from a student veteran opened the door to $9 more in Title IV aid.

The American Rescue Plan Act from March 2021 closed that loophole, requiring instead that the 10 percent side of the 9010 rule come from outside of any federal education assistance. The regulations negotiated by the Department – on which negotiators reached consensus – tightened up several other accounting tricks institutions might use to pass the test, like withholding funds to students until the calendar pages turned to a new fiscal year to avoid failing twice in a row. The final regulations published last week will codify those changes for the long-term, effective in colleges’ first fiscal year that starts on or after January 1, 2023. As the rules take effect, there will no doubt be some for-profit colleges that can’t (or won’t) shift their revenue to meet the new requirements – but for those that do, service members and veterans will be less of a target for the predatory recruiting that helped schools skirt the intent of the rule in the past.

Providing for Clearer, Stronger Change in Ownership Requirements

When institutions change owners, it can also mean big changes for students on campus and major implications for taxpayers, depending on who the new owners are and how they operate the school. The Department undertook changes to the regulations governing changes in ownership of college because the numbers – and complexity – of those transactions have been increasing in recent years, with more than 150 transactions processed between October 2018 and 2021, and dozens more still pending. To better monitor, review, and approve transactions, especially in a way that best protects students and taxpayers, the Department updated its regulations with more clarity on its processes and requirements.

Right now, schools can change ownership without adequate warning necessary for the Department to be able to evaluate the plan. But under the new rules, colleges will have to provide at least 90 days’ notice to the Department about a coming transaction and submit required application materials. The Department may opt to require a letter of credit based on the financial history of the new owner, as it often does now, and/​or based on the financial risk the transaction presents, which has rarely been accounted for even in high-risk changes in ownership. To be considered a nonprofit college, institutions’ former owners won’t be able to continue profiting off the school, and the schools will have to meet a stricter definition that prevents debt agreements and limits revenue-sharing agreements with a former owner. Additionally, the Department will require that colleges converting from for-profit status to a nonprofit status remain treated as a for-profit college – and subject to the requirements for those colleges, like the 9010 rule and Gainful Employment rules – unless and until the Department approves the conversion. These rules will help colleges understand what’s expected of them while ensuring a high bar for colleges that might otherwise seek to evade federal rules for for-profit colleges or shape-shift under the radar.

With these regulations now in place, the Department will move to implement the changes over the coming months so that they take effect at the start of the next federal financial aid award year (July 2023). That will be a challenging task. At the same time these rules are coming into play, the Department is finishing the remaining rules from the last round of negotiations (and a separate Public Service Loan Forgiveness rule on one issue that remains unresolved from these regulations), execute the debt cancellation plan and a student loan payment restart for tens of millions of borrowers, and more. So while there is much more work to do to protect students and taxpayers, these new rules are a significant milestone.