This chapter describes the regular recertification of schools, as well as changes that can affect a school’s participation and how and when to report these changes to the Department on the Application for Approval to Participate in the Federal Student Financial Aid Programs (E-App).
The new Document Center, now available on the Common Origination and Disbursement (COD) website, is a centralized electronic repository of documents that allows school users and affiliated third-party servicers to electronically upload program compliance documents. The new feature is designed to aid users in supporting compliance related services such as:
Eligibility and Certification Program Reviews Financial Analysis Compliance Audits Method of PaymentThe Benefits of using the Document Center include:
Reducing paperwork Improving the efficiency of the Department’s compliance document management process Providing immediate notifications when documents are requested or uploadedFSA, School (both domestic and foreign), and the third-party servicers can access the Document Center
The Document Center allows users to electronically
Upload Documents Submit and Respond to Document Requests Search and View Previously Uploaded Documents and Receive Notification Alerts when Documents are UploadedSchools are required to use the Document Center when submitting compliance related documents to the Department. Please review the 8/14/2020 Electronic Announcement for more information.
A school may be certified to participate for up to six years. Recertification is the process through which a school that is presently certified to participate in the FSA programs applies to have its participation extended beyond the expiration date of its current Program Participation Agreement (PPA). The Department will notify a school six months prior to the expiration of its PPA. The school must submit a materially complete application before the expiration date in its PPA.
Recertification Recertification references Sec 498(g) and (h) of the HEA 34 CFR 600.20(b) and (f)If a school that is currently certified submits its materially complete application to the Department no later than 90 calendar days before its PPA expires, its PPA remains valid, and its eligibility to participate in the FSA programs continues until its application is either approved or not approved. This is true even if the Department does not complete its evaluation of the application before the PPA’s expiration date. (For example, if a school’s PPA expires on June 30 and it submits its application by March 31, the school remains certified during the Department’s review period—even if the review period extends beyond June 30.) If the 90th day before the PPA’s expiration falls on a weekend or a federal holiday and the school submits its application (E-App) no later than the next business day, the Department considers the application to be submitted 90 days before the PPA expires.
If the school’s application is not received at least 90 days before the PPA expires or is not materially complete by that date, the school’s PPA will expire on the scheduled expiration date and the FSA program funding will cease. If a school’s eligibility lapses, the school may not continue to disburse FSA funds until it receives the Department’s notification that the school is again eligible to participate in the programs.
The School Participation Division (SPD) will contact the school if it has questions about the application, generally within 90 days of the Department receiving it. If a school’s application is approved, the Department will send an electronic notice to the president and financial aid officer notifying them that the PPA is available to print, review, sign, and return. If the application is not approved, ED will notify the school and explain why.
Nonparticipating eligible schools are only required to renew their eligibility when the Department requests it. Their eligibility status continues indefinitely as long as they continue to meet the institutional eligibility requirements. If a school wants to be certified to participate in the FSA programs, it must submit an application and supporting documentation (see Chapter 1).
Eligible nonparticipating school Eligible nonparticipating school reference 34 CFR 600.20(b)(1)Changes to previous applications, including changes in ownership, reporting, expanding eligibility, and certification, must be submitted to the Department through the E-App.
Supporting documents can be emailed to the following address:
Changes In OwnershipChange in ownership–publicly traded corporation
A change of ownership that results in a change in control occurs when a person who has or gets an ownership interest in the entity (or the parent of that entity) that owns the school gets or loses the ability to control the school. A person can be a legal entity or a natural person. The parent or parent entity is one that controls the specified entity directly or indirectly through one or more intermediaries.
Control and ownership interestControl and ownership interest references Definition of control 34 CFR 600.31(b) Ownership interest 34 CFR 668.15(f)
The most common example of this change in controlling interest is when the school is sold to a new owner. Other kinds of “covered transactions” include
the transfer of the controlling interest of stock (or a membership interest) of the entity that owns the school, or any of its parent entities;
A merger under state law of the ownership entities of two or more eligible schools; the division of one school into two or more schools; the transfer of the liabilities of a school to its parent corporation;a transfer of assets that comprise a substantial portion of the educational business of the school, except if it is exclusively in the granting of a security interest in those assets; or
a change in status as a for-profit, nonprofit, or public institution.A transfer of ownership and control of all or part of an owner’s equity or partnership interest in a school, its parent corporation, or another legal entity that has signed the school’s PPA is not considered a change in ownership and control if the transfer is from an owner to a family member or—upon the retirement or death of the owner—to a person not a family member who for at least two years preceding the transfer has established and retained an ownership interest in the school and has been involved in its management. A family member of an owner includes: a spouse; a spouse’s parent, stepparent, sibling, step-sibling, child, stepchild, grandchild, or step-grandchild; a child’s spouse; and a sibling’s spouse.
Excluded transactions Excluded transactions reference 34 CFR 600.31(e)The Department does not consider that a public institution has undergone a change in ownership that results in a change of control if there is a change in governance, and the school after the change remains a public institution, provided
the new governing authority is in the same state as included in the institution’s program participation agreement; and
the new governing authority has acknowledged the public institution’s continued responsibilities under its PPA.
Within 10 days of undergoing a change in governance, however, a public institution must report that change to the Department. The school must also explicitly acknowledge its continued responsibilities under its PPA. If the documentation transferring control of a public institution to another in-state entity does not specifically acknowledge those responsibilities, the school must acknowledge them in a separate letter.
A closely held corporation (including the term close corporation) is
a corporation that qualifies under the law of the state of its incorporation or organization as a closely held corporation; or
if the state of incorporation or organization has no definition of closely held corporation, a corporation whose stock is held by no more than 30 persons and has not been and is not planned to be publicly offered.
For a closely held corporation, a change in ownership and control occurs when
a person acquires more than 50% of the total outstanding voting stock of the corporation;a person who holds an ownership interest in the corporation acquires control of more than 50% of the outstanding voting stock of the corporation; or
a person who holds or controls 50% or more of the total outstanding stock of the corporation ceases to hold or control that proportion of the stock of the corporation.
For publicly traded corporations, a change in ownership and control occurs when
a person acquires ownership and control of the corporation such that the corporation is required to file a Form 8K with the Securities and Exchange Commission (SEC) notifying that agency of the change in control, or
a person who is a controlling shareholder of the corporation ceases to be a controlling shareholder.A controlling shareholder is a shareholder who holds or controls through agreement both 25% or more of the total outstanding voting stock of the corporation and more shares of voting stock than any other shareholder. A controlling shareholder for this purpose does not include a shareholder whose sole stock ownership is held as a U.S. institutional investor, held in mutual funds, held through a profit-sharing plan, or held in an employee stock ownership plan (ESOP).
For a publicly traded corporation, when a change of ownership occurs, instead of a same-day balance sheet, the school may submit its most recent quarterly financial statement as filed with the SEC. Together with its quarterly financial statement, the school must submit copies of all other SEC filings made after the close of the fiscal year for which a compliance audit has been submitted to ED.
Consider a publicly traded school that is provisionally certified because of one change in ownership and experiences another. If any controlling shareholder on the newer change of ownership application was listed on the ownership application for which the provisional approval was granted, the expiration date for the original provisional certification remains unchanged if the newer application is approved.
“Other entities” include limited liability companies, limited liability partnerships, limited partnerships, and similar types of legal entities. A change in ownership and control of an entity that is neither closely held nor required to be registered with the SEC occurs when
a person who has or acquires an ownership interest gets control of both the corporation and at least 25 percent of the total of outstanding voting stock of the corporation; or
a person who holds control of the corporation and ownership or control of at least 25 percent of the total outstanding voting stock of the corporation ceases to control the corporation or to own or control that percentage of its stock.
For a general partnership or sole proprietorship, a change in ownership and control occurs when a person who has or acquires an ownership interest acquires or loses control as described earlier.
In a wholly owned subsidiary, substantially all of the outstanding voting securities are owned by its parent together with the parent’s other wholly owned subsidiaries. It changes ownership and control when its parent entity changes ownership and control as described earlier.
A nonprofit institution changes ownership and control when a change takes place that is described under “Covered transactions.”
If a school undergoes a change in ownership or control, the school’s owner/CEO (or a high-level school official designated by that person) and its chief financial aid administrator must attend the Fundamentals of Federal Student Aid Administration training. If the owner/CEO and/or the financial aid administrator have not changed, the school may request a waiver of the training requirement from its SPD. ED may grant or deny the waiver for the required individual, require another official to take the training, or require alternative training.
A school that changes ownership or changes its status as a parent or subordinate institution must adopt the Sample Default Prevention Plan or develop its own default management plan that is approved by the Department. The school must implement the plan for at least two years.
A school is exempt from submitting a default management plan if
the parent school and the subordinate school both have a cohort default rate of 10% or less, andthe new owner of the parent or subordinate school does not own, and has not owned, any other school with a cohort default rate over 10%.
Ownership or ownership interest means a legal or beneficial interest in a school or its corporate parent or a right to share in the profits derived from the operation of a school or its corporate parent. The school must report any change in ownership interests whenever
an owner acquires a total interest of 25% or greater, an owner who held a 25% or greater interest reduces his or her interest to less than 25%, oran owner of a 25% or greater interest increases or reduces her interest but remains the holder of at least a 25% ownership interest.
25% Threshold 25% Threshold reference 34 CFR 600.31(c)(2)(ii)(A)Ownership or ownership interest does not include an ownership interest held in an ESOP, a mutual fund that is regularly and publicly traded, a U.S. institutional investor as defined by the SEC, or a profit-sharing plan of the school or its corporate parent (provided that all full-time permanent employees of the school or corporate parent are included in the plan).
Because of these reporting requirements, even though transferring ownership interest through death or retirement may be excluded from being considered a change in ownership resulting in a change of control, the resulting change in percentages of ownership interests must be reported to the Department.
A school must report any changes that result in an individual or owner (including a corporation or unincorporated business entity) acquiring the ability to substantially affect the actions of the school. Such a change must be reported within 10 days of the change. A school owned by a publicly traded corporation must report the change within 10 days after the corporation learns of the change. Adherence to these requirements is enforced during the institutional participation approval process, program reviews, and audit process. All schools are bound by these reporting requirements, and substantial penalties may be imposed on schools that fail to comply with them.
An individual or corporation has the ability to substantially affect the school’s actions when they
personally hold, or hold in partnership with one or more family members, at least a 25% ownership interest in the school (directly or indirectly);
personally represent (with voting trust, power of attorney, or proxy authority), or represents in partnership with one or more family members, any individual or group holding at least a 25% ownership interest in the school (directly or indirectly);
are the school’s general partner, chief executive officer (or other executive officer), chief financial officer, individual designated as the lead program administrator for the FSA programs at the school, or a member of the school’s board of directors; or
are the chief executive officer (or other officer) for any entity that holds at least a 25% ownership interest in the school or is a member of the board of directors for such an entity.
To ensure that its FSA program participation isn’t jeopardized, a school must report to the Department an ownership change (including the names of persons involved). On receiving the notification, the Department will investigate and notify the school whether a change in ownership resulting in a change of control has occurred that will require the school to submit a materially complete application.
If a school is changing control, the school must submit a materially complete application through the E-App within 10 business days of the change in ownership, and submit the documents required by 34 CFR 600.20(g)(2)(i)-(iv).
To assist with the Change in Ownership process, the prospective owner should ask the former owner for copies of the school’s Eligibility and Certification Approval Report (ECAR), refund policy, Return of Title IV Funds policy, any required default management plan, program reviews, audited financial statements (for at least the two most recently completed fiscal years), and compliance audits. The prospective owner will need this information to receive approval to participate.
Accompanying the application must be audited financial statements for the school’s two most recently completed fiscal years (if the school has not yet submitted statements for those years), an audited balance sheet showing the financial condition of the school at the time of the change, and a default management plan (if required). Each participating school must demonstrate financial responsibility independently. If the entity that has acquired the school is an ongoing entity (partnership or corporation), the school must also submit completed audited financial statements of the acquiring entity for the last two consecutive fiscal years. For information on financial responsibility and submitting audited financial statements see Chapter 4.
The school also must submit proof that its accreditation is continued under the new ownership or control, along with a photocopy of its state legal authorization under the new ownership. The application for provisional extension of certification as outlined under 34 CFR 600.20(g) is discussed later in this section. It also outlines the specific information that must be included within 10 business days after the change in ownership occurs.
The school may not award FSA program funds until it receives a new Temporary Provisional PPA signed on behalf of the Secretary.
Although a separate financial aid compliance audit is not required when there is a change in ownership, structure, or governance, the prospective owner may choose to have the accounts audited before they are closed out. Questions about FSA accounts or closeout procedures should be addressed to the appropriate SPD.
If new owners acquire a school or if a school is the result of the merger of two or more schools that formerly were operating separately, the new owner is liable for any debts that accrued from the former owner’s FSA program administration. A new owner accepts liability for any federal funds that were given to the school but that were improperly spent before the date the change in ownership, structure, or governance became effective. A new owner must also abide by the school’s refund policy and the Return of Title IV funds (R2T4) policy for students enrolled before the date the change became effective, and must honor all student enrollment contracts signed before the date of the change.
Before the change in ownership, structure, or governance takes place, the former owner should make sure that all students receive any FSA payments already due them for the current payment period and that all records are current and comply with federal regulations. If the school needs additional funds for its students for the current payment period, it should request them and disburse them to all eligible students before the change takes place.
The school loses its approval to participate in the FSA programs when the change takes place. Generally, a school may
use Pell or TEACH Grant or Campus-Based funds that it has received or request additional Pell Grant or Campus-Based funds from the Department to satisfy any unpaid commitment made to eligible students from the date the school’s participation ended until the scheduled completion date of the payment period; and
credit a student’s account with the proceeds of a second or subsequent disbursement of a Direct Loan to satisfy any unpaid commitment made to the eligible student under the Direct Loan Program from the date participation ends until the scheduled completion of that period of enrollment. (The proceeds of the first disbursement of the loan must have been delivered to the student or credited to the student’s account prior to the end of the participation.)
The school must notify all new students that no federal aid funds can be disbursed until the school’s eligibility is established and a new PPA signed by the Department is received.
Beginning on the date that the change becomes effective, the school may no longer award FSA funds. If the school’s prospective owners wish the school to participate in one or more of the FSA programs, the school must submit a materially complete application to the Department.
The school can apply for preacquisition review and temporary provisional approval after the change in ownership (described in the next section).
The Department, at its discretion, may permit a school undergoing a change in ownership that results in a change in control to continue to participate in the FSA programs on a provisional basis if the school meets the following specific requirement.
At least 90 days prior to the change in ownership, the institution must provide the Department with notice of the proposed change, including the appropriate State authorization and accrediting documents, and copies of the appropriate financial statements. After a school has submitted this information to the Department, any changes to the proposed ownership structure must be reported promptly to the Department, and at least 90 days prior to the change. The institution must additionally provide enrolled and prospective students with notice of the proposed change in ownership, and submit evidence that disclosure has been made no later than 90 days prior to the change. (see Electronic Announcement GEN-23-77)
The school must submit a materially complete application that must be received by the Department no later than 10 business days after the change becomes effective. A materially complete application for the purpose of applying for a temporary approval must include
a completed application form;a copy of the school’s state license or equivalent that was in effect on the day before the change in ownership took place;
a copy of the accrediting agency’s approval (in effect on the day before the change in ownership) that granted the school accreditation status including an approval of the nondegree programs it offers;
financial statements of the school’s two most recently completed fiscal years that are prepared and audited in accordance with the requirements of the generally accepted accounting principles (GAAP), published by the Financial Accounting Standards Board, and the generally accepted governmental auditing standards (GAGAS) published by the U.S. General Accounting Office (submitted via the eZ-Audit website);
a completed signature page, Section L.audited financial statements for the school’s new owner’s two most recently completed fiscal years that are prepared and audited in accordance with GAAP and GAGAS, or acceptable equivalent information for that owner (submitted via the eZ-Audit website); and
If such financial statements are not available, financial protection in the amount of—
At least 25 percent of the institution's prior year volume of title IV aid if the institution's new owner does not have two years of acceptable audited financial statements; or
At least 10 percent of the institution's prior year volume of title IV aid if the institution's new owner has only one year of acceptable audited financial statements; and
If deemed necessary by the Secretary, financial protection in the amount of an additional 10 percent of the institution's prior year volume of title IV aid, or a larger amount as determined by the Secretary. If any entity in the new ownership structure holds a 50 percent or greater direct or indirect voting or equity interest in another institution or institutions, the financial protection may also include the prior year volume of title IV aid, or a larger amount as determined by the Secretary, for all institutions under such common ownership.
If the application is approved, the SPD will send the school a Temporary Provisional Program Participation Agreement (Temporary PPA). The Temporary PPA extends the terms and conditions of the PPA that were in effect for the school before its change of ownership.
The Temporary PPA expires on the earliest of the
date that the Department signs a new program participation agreement; date that the Department notifies the school that its application is denied; orlast day of the month following the month in which the change of ownership occurred unless the school provides the necessary documents described as follows.
The Department can automatically extend the Temporary PPA on a month-to-month extension if, prior to the expiration date, the school submits
a same day balance sheet showing the school’s financial position on the day the ownership changed, prepared in accordance with GAAP and audited in accordance with GAGAS;
approval of the change of ownership from the school’s state agency that legally authorizes postsecondary education in that state (if not already provided);
approval of the change of ownership from the school’s accrediting agency (if not already provided); and
a default management plan that follows examples provided by the Department or notification that it is using the Department’s plan or is exempt from providing a plan.
Temporary approvalSchools may submit an E-App marked “pre-acquisition review” before a change in ownership (CIO) takes place. Although the Department will issue a response letter following its pre-acquisition review, that letter does not tell the school the Department’s decision on whether the CIO application will be approved. Also, any guidance or indications of the Department’s position in the response are preliminary and subject to final determination when the Department conducts its review following the closing of the CIO transaction.
The Department provides schools with one option for pre-acquisition review of CIO transactions: an abbreviated pre-acquisition review (APAR). That option is discussed below.
When a CIO occurs, the Department may continue the school’s participation on a provisional basis if the school submits a materially complete application that the Department receives no later than 10 business days after the change occurred. See 34 CFR 600.20(g). The APAR option may be useful to a school that wants the Department’s limited guidance on whether its new owner’s financial statements satisfy 34 CFR 600.20(g)(2)(iv), which is one of the requirements for a materially complete application. In addition, the Department will provide guidance to ensure that the financial statements will be submitted by the correct new owner entity.
If the new owner is unable to provide two years of financial statements that are prepared and audited according to 34 CFR 668.23(d) [as required by 34 CFR 600.20(g)(2)(iv)], the new owner must post an irrevocable letter of credit (LOC) to meet the requirements of a materially complete application. If a school already knows that it will have to post an LOC because it does not have two years of financial statements, the APAR may nevertheless be useful if the school wishes to obtain guidance on the amount of the LOC since it must be posted within 10 business days following the closing of the CIO transaction.
The Department’s response to an APAR will not include any guidance to the school or the potential new owner about other conditions that may be imposed or whether the Department sees any impediments to approving the CIO. The APAR only focuses on whether the Department will require an LOC to be posted for a materially complete application and the amount of that LOC. Although the timing cannot be guaranteed, the Department’s goal is to issue a response letter within 60 days after submission of all documents and information requested by the Department for the APAR.
Please note: A pre-acquisition review is not required, and a school may close its transaction without requesting such a review. So long as the school complies with its program participation agreement and all regulatory requirements are being met, including compliance with 34 CFR 600.20(g) and (h), the school may continue to participate in the Title IV programs pending the Department’s review and final determination on the CIO. However, if the new owner’s financial statements do not meet the requirements of 34 CFR 600.20(g)(3)(iv), or if financial statements from the incorrect entity are submitted, the school will have failed to submit a materially complete application.
If an LOC is required for a materially complete application, it must be posted within 10 business days following the closing of the CIO transaction. The form of the LOC will be provided by the SPD as an attachment to the pre-acquisition response.
In addition, following the post-closing review of the same-day balance sheet and other indicators of financial responsibility, the Department may require a separate LOC (or require an existing financial responsibility LOC to be increased) even if an LOC was not required for a materially complete application.
All LOCs submitted to the Department must be issued by a financial institution insured by the Federal Deposit Insurance Corporation.
A school is required to report changes to certain information on its approved application, as listed in the following sections. A school may also wish to expand its FSA eligibility and certification. Some of these changes require the Department’s written approval before the school may disburse the FSA program funds; others do not. If a school does not obtain ED approval for a new location, branch, program, or increase in program offering, the school is liable for all FSA funds it disburses to students enrolled at that location or branch or in that program.