consecutive years, it will lose its Title IV eligibility to participate in the Direct Loan and U.S. Federal Pell Grant programs effective 30 days after notification from the ED and will remain ineligible for at least two fiscal years. If a school’s cohort default rate equals or exceeds 30% in two of the three most recent fiscal years for which rates have been issued by the ED, it may be placed on provisional certification by the ED and, under new regulations that were scheduled to take effect on July 1, 2017, but were subsequently delayed, may be required to submit a letter of credit to the ED.
The three-year cohort default rates for KU for the U.S. Federal fiscal years ending September 30, 2014, 2013 and 2012, were 14.6%, 12.4% and 12.9%, respectively.
Because KU receives a significantly lower level of taxpayer-funded grants and subsidies than community colleges, state schools and not-for-profit schools, KU is more dependent on tuition, and its students are more dependent on loans. However, no assurances can be given that these resources or programs will enable Kaplan’s schools to maintain cohort default rates below the thresholds for sanctions.
Recent Federal Rulemaking
Borrower Defense to Repayment Regulations. On November 1, 2016, the ED issued final rules that would have become effective on July 1, 2017, but were subsequently delayed, that expand the bases on which borrowers may obtain a discharge of their federal financial aid loans and that establish a process for the ED to commence a separate proceeding against the institution to recover the discharged amounts. Prior to the effective date, on June 14, 2017, the ED delayed implementation of a large portion of the rule. Multiple state attorneys general have sued the ED to force reinstatement of the rules.
The final rules amend existing procedures and standards for borrowers seeking the discharge of certain Title IV loans first disbursed prior to July 1, 2017, based on certain acts or omissions of the institution. The final rules also expand the bases for borrowers to obtain discharges of certain Title IV loans first disbursed on or after July 1, 2017, including any substantial misrepresentations by the school or any of its representatives or individuals or entities with whom the institution has an agreement, certain breaches of contract and certain judgments against the school. The final rules include procedures for borrowers to assert discharge claims as a group rather than individually and create extended and, in some cases, unlimited statutes of limitation for the submission of discharge claims. The final rules also establish procedures for the evaluation of claims, for minimal school participation in the process and for the ED to consolidate and present borrower claims during the process. If the borrower discharge claims are approved, the ED may discharge some or all of the loans and initiate a separate proceeding to recover any discharged loans from the institution.
The rules also amend the ED’s financial responsibility regulations by imposing, among other things, two sets of triggers for determining whether the ED may require the institution to furnish the ED with a letter of credit or other form of acceptable financial protection and to accept other requirements that the ED might impose. The first set of triggers include certain lawsuits, judgments and settlements; an accrediting agency requirement to submit a teach-out plan in connection with closure of a location; one or more programs that could lose eligibility based on gainful employment rates in the next award year; and certain withdrawals of owners’ equity. If one of the triggers occurs, the ED would recalculate the institution’s composite score by estimating the amount of actual and potential losses resulting from the triggering event and determining whether the recalculated composite score results in the institution failing the financial responsibility standards. The rules for estimating potential losses are broad. For example, the rules generally presume that potential losses from pending lawsuits equal the amount sought in the complaint or in any final demand letter.
Additionally a second set of triggers that could result in the ED imposing a letter of credit requirement and other conditions or requirements include failure to comply with 90/10 requirements for the most recently completed fiscal year; an SEC warning that it may suspend trading on the institution’s stock; failure to file certain reports with the SEC; receipt of notice of non-compliance with exchange requirements; notice that the institution’s stock is delisted; cohort default rates exceeding 30% for the two most recent years; certain significant fluctuations in Title IV funding; failure to comply with certain state or accreditor requirements; high annual drop-out rates; probation, show cause or similar action by an institution’s accrediting agency; certain violations of loan agreements; expected or pending claims for borrower relief discharges; and other material adverse effects on financial condition.
If the ED deems that the institution failed the financial responsibility standards based on one or more of the aforementioned events listed in the regulations or based on the institution’s failure to comply with other requirements in the financial responsibility regulations, the ED may permit the institution to continue participating in the Title IV programs under a provisional certification and would require the institution to submit a letter of credit or other form of financial protection, comply with certain student debt-to-income ratios under the ED’s gainful employment rules discussed below and potentially accept other conditions or restrictions.