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FAME Regulatory Bulletin

CHANGE: “Who is in Control?”

Change can create a loss of control.  But, conversely, change brings new control.  Otherwise, change would result only in chaos.  Our discussion last week included important considerations when there was a change in personnel in a key role at a school, i.e., the director of financial aid.  This week’s focus is on another frequent occurrence of change in some segments of higher education.  That situation is when there is a change of control of an institution.  Some involved in such a change may, depending upon their era growing up, believe they are like Frank Sinatra and want to “have it my way.”  Or, for those in more recent years, they may see such change as expressed by Janet Jackson when she sang, “I wanna be the one in control.”  Yes, changes in institutional control or ownership may have some of that thought process behind the reasons for the change, but we will leave that for another conversation.  Change in control or ownership is likely thought by most to be only an item of interest to the for-profit sector of postsecondary education.  But, that is not necessarily true.  In recent years, there have been a number of non-profit schools that have had changes in control and ownership.  And, while it may not be as common at a public institution, there is the possibility of change of control in that arena as well.  Therefore, let us highlight some of the points to consider regarding changes in institutional control and ownership from the perspective of those who are to be in ownership or control after the change.   What are things to look at prior to a change in ownership or control?  Then, what is required upon the change having occurred?  And, back to our ongoing theme each week as we discuss change:  how do you enhance your institution’s environment of excellence when this type of change occurs?  Let’s explore these topics.

Precursor to Change – Due Diligence

Embarking on a change in control of an institution is significant.  Before finalizing such a crucial move, it is important to have thorough analysis performed on a breadth of factors.  As a primer for your checklist in the process, we will list a number of elements to address.

  • Naturally, the financial aspects of the organization to undergo the change are critical to the decision making in the matter.  The individual or entity considering the purchase or assumption of control of the school should obtain and review copies of financial statements and audits for at least the two most recently completed fiscal years.  Additionally, as part of the transfer of control, the new owners may want to require an audit be done as part of the close-out so that all data is current and accurate at the point of transfer.  Any findings reported in an audit must be able to have been addressed in the audit’s Corrective Action Plan (CAP) and it must be able to be demonstrated that what was said to have taken place as part of the CAP actually occurred to address the audit concerns.
  • In the review of the financial side of things for a proprietary institution, the appropriate calculation of the 90/10 ratio in the revenue test should be ascertained to ensure adequate revenue from non-Title IV sources.
  • Obtain a copy of the school’s current Eligibility and Certification Approval Report (ECAR), institutional refund policy, Return to Title IV (R2T4) Funds policy, and any required default management plans.  [These items will be needed when you, as the new owner, submit a new electronic Application for Approval to Participate in the Federal Student Aid Programs (E-App).]
  • If the school has participated in the Federal Direct Loan (FDL) or Federal Perkins Loan programs, research the school’s applicable Cohort Default Rates (CDRs).
  • If the institution that is being bought has had a Title IV Federal Program Review, the status of that review and its resolution must be accurately assessed.  Even if a Final Program Review Determination (FPRD) letter has been received from the U.S. Department of Education (ED) for the program review, there should be clear evidence that all matters related to the program review are documented to have been satisfactorily resolved.  If a FPRD letter has not yet been received, thoroughly understand the reason why, and the potential ramifications.  At times, ED may delay action and the school may not receive a FPRD letter for an extended period of time.  (See the illustration discussed in FAME’s second quarter 2014 edition of the Inside Report in the feature article entitled “When Hell Does Not Freeze Over.”)
  • The status of the institution’s accreditation should be reviewed.  If the accreditation is under review by the accrediting body, or if the accreditation is at the point of needing to be renewed or reaffirmed, be aware of any recent activity, correspondence, and dialog between the school and the accrediting agency.  Ensure that all programs the school is actually offering are appropriately included under the current accreditation.  And, of paramount importance is obtaining proof that the school’s current accreditation will be continued under the new ownership or control.
  • Likewise, as accreditation status is looked at, the school’s standing with the applicable state approving agency should be reviewed.  Request a review of all communication between the state and the school.  Similarly, request of the Sate approving agency what the school’s current status is with them and whether there have been any recent concerns or complaints.
  • Have your legal counsel check for any legal claims, law suits, or other legal proceedings or complaints filed against the school.
  • Ensure that all students who are eligible for Title IV Federal Student Aid payments have been paid current as of the time the change in ownership or control occurs.  This is critical for the ability to retain students while the transition in ownership occurs.
  • It is noteworthy to realize that ED does offer an optional “preacquisition review.”  This review is for the purpose of determining whether a school has accurately completed the questions on the E-App.  If this optional review is desired, the application must be submitted 45 days prior to the anticipated change in ownership.
  • The former owner(s) must notify its accrediting agency of the change in ownership.  At the same time they must notify ED of the change.  Notification must be given to ED within 10 days of the change occurring.

Processing Change – Taking the Reins

Once due diligence has been performed, the work is not finished.  It is now the point at which the actual change begins.  Just as the steps taken prior to the change in ownership were necessary for a beneficial transition, there are also essential points to consider for the realization of a successful change in ownership.  These are listed below.

  • If the former owner did not notify ED of the change in ownership, as required, the new owner must do so.
  • The new owner must also notify the state approving agency of the change in ownership.
  • As a new owner, you must ensure that the chief administrator [i.e., President or  Chief Executive Officer (CEO), or other high-level school official designated by the chief administrator, etc.] and the chief finanacial aid administrator attend ED’s Fundamentals of Title IV Training.  If, however, the new owner’s chief administrator and chief financial aid administrator are the same as under the prior owners, the new owners may request a waiver of the training requirement.  ED may grant the request for the waiver or deny it.  ED may also instead indicate that other individuals at the school attend the training or alternative training.
  • The E-App the new owner submits—to be considered complete at the end of the process—will include the school’s two most recently completed fiscal years’ audits (as obtained in the first bullet point under the prior section above), an audited balance sheet showing the financial condition of the school at the time of ownership change, and a default management plan (if the school will participate in student loan programs).  Additionally, if the new owner is an ongoing corporation or partnership, the new owners must submit complete audited financial statements for the most recently completed two fiscal years for the entity.  If the new owner is an individual, ED will require alternate documentation such as personal financial statements or an irrevocable letter of credit.
  • Within 10 days of the change in control or ownership taking place, a new “materially complete” E-App must be submitted with all appropriate documentation.  See the discussion later regarding the Temporary Provisional Participation Agreement (Temporary PPA).
  • As the new owner, you must submit proof that the school’s accreditation continued with the change in ownership and that it remains in effect.
  • A copy of the school’s legal authorization to operate under the new ownership as a business and as an institution that offers postsecondary education must be submitted.
  • The new owner assumes all liabilities that may have accrued from the prior owner’s administration of the Federal Student Aid programs.  This includes accepting liability for any funds distributed to the school under the prior ownership that were improperly spent before the change in ownership.
  • The new owner must use the school’s institutional refund policy and R2T4 policy that were in effect prior to the change in ownership for current students (those enrolled prior to the change in ownership).  Likewise, the new owner must honor all contracts (e.g., enrollment, financial, etc.) with current students.
  • Ensure that neither the school nor its employees have been debarred or suspended by a federal agency.  All employees working with Title IV aid programs—whether awarding aid or disbursing aid—must be free from debarment and suspension histories.  Schools must also have a policy for the method and frequency for making such determinations about its employees.  That is, a school must decide if it does it every six months, annually, or every two years, etc.  Also, it has to decide if it will make the determination based upon a written statement or by use of the government’s The Excluded Parties List System (EPLS) Web site maintained by the General Services Administration (GSA) at its System for Award Management (SAM) Web site at  A school has to retain a copy of the results of its research that employees have not been debarred or suspended by a federal agency.  A school should check with its attorney as to which method and frequency is most appropriate for the school.
  • As a new owner, you will be well served to ensure that all Classification of Instructional Programs (CIP) codes are accurate and up-to-date.  Many schools omitted updating theirs when the new list came out in 2010.  The CIP codes are discussed in detail in the June 30, 2014, Regulatory Bulletin’s article, “Working with Code:  CIP Codes.”
  • Make certain that all systems access for school authorized users to various federal and state agency logins are obtained for the director of financial aid.  (See last week’s Regulatory Bulletin’s article, “CHANGE: ‘You’re Gonna Change, or….’” for more important considerations when there are changes in the individual filling the role of the director of financial aid.)  Likewise, access to outside agencies’ and servicers’ systems should be obtained.  (Schools that have been a FAME client under the school’s former ownership should contact FAME’s Customer Service for assistance regarding updating contracts for servicing under the new ownership.)

Positive Change – Considering Best Practices

  • As indicated in the prior section, ED offers the opportunity to request a “preacquisition review.”  Generally, this prior review will help in the transition between ownerships.  The preacquisition review will potentially eliminate or reduce the amount of time between when funding under the prior owners ends and when it begins under the new owners.
  • When buying a school, timing is critical.  The purchase should be planned to be finalized as close to the beginning of the month as possible so you have the rest of that month and all of the following month to get the change of ownership approvals from your accrediting agency and the state approving agency.  If this happens, the application for a Temporary PPA, which allows for approval from month to month, may be considered.  (See the next bullet point.)  If the deadlines are not met, approval to participate is ended and funding stops until ED approves a new PPA based upon the change in ownership.  This could take 90 to 120 days, at least.  Experience indicates that accrediting agencies usually work well with a school.  But, a state approving agency may require prior notice of up to 30 to 60 days before their next board meeting to even consider the change.
  • If a preacquisition review has been requested, much of the process for submitting an application for a Temporary PPA has been accomplished.  Some updating of information may still be required.  A school undergoing a change in ownership may desire to apply for approval to participate in Title IV programs through use of a Temporary PPA.  This is not a requirement, but an option.  It may benefit the school in being able to continue with almost uninterrupted Title IV participation for the school.  To do so requires submitting similar information as the regular E-App.  This includes a copy of the school’s state license and accrediting agency’s approval (both of which are the ones that were in effect on the day before the change in ownership occurred).  The accreditation approval must include approval for all of the school’s non-degree programs as well as any degree programs offered.  The audited financial statements collected from the prior school’s owners in the due diligence phase (for the two most recently completed fiscal years) must be included, as well as your (the new owner’s) audited financial statements for the two most recently completed fiscal years.  When submitting the application, it is important to ensure that a properly signed signature page (Section L of the E-APP) is included.  If a Temporary PPA is approved, the school may continue its participation under the same terms and conditions that were in effect prior to the change of ownership.  This Temporary PPA, if approved, may be continued month to month until a permanent PPA is approved and signed, as long as the school complies with submitting the necessary documents prior to the expiration date of the temporary approval (i.e., generally the last day of the month following the month in which the change of ownership occurred).  The information that must be submitted, as stated in the Federal Student Aid Handbook,*  includes:
    • a same day balance sheet showing the school’s financial position on the day the ownership changed, prepared in accordance with Generally Accepted Accounting Principles (GAAP) and audited in accordance with Generally Accepted Governmental Auditing Standards (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 ED’s plan or is exempt from providing a plan.
  • It is a given that when the change in ownership occurs, the prior approval to participate in Title IV programs is generally ended until the new owner’s E-App is approved and signed.  (Even if a new owner chooses to pursue a Temporary PPA, there is likely to be some period of time between the expiration of the old school’s PPA and receipt of an approved new PPA, temporary or otherwise).  Students already processed for financial aid may have subsequent disbursements made for the payment period for grants and Campus-Based aid, or for the period of enrollment for Direct Loans.  However, no payments may be made for loans not having had the first disbursement made for the loan period before the change in ownership occurred.  Therefore, it is critical to have all financial aid processing accurately done and up-to-date at the time of change of ownership.
  • A school must notify all new students that no Title IV Federal Student Aid funds may be disbursed until the school receives its new approved PPA based upon the new ownership.  As indicated above, the amount of time depends upon the route the school chooses to pursue for approval to participate in the Title IV programs.
  • The new owners would be wise to ensure that any non-degree credit hour programs, or credit hour programs that do not fully transfer into a degree program at the school, have had an accurate clock-to-credit hour conversion performed.  This means that the conversion done must generate the correct conversion for financial aid purposes, not just the conversion done for academic purposes for its accrediting agency.
  • It is important to keep in mind that once the new owners have received a PPA, it will likely be a provisional one.  As such, a school is limited in its opportunity for growth during the time it has a provisional PPA due to having to receive ED approval prior to adding new programs or locations.  Thus, management should be aware and plan accordingly.
  • When realizing that there will be a significant change occurring, determine the impact it will have on current staff and students (those associated with the school under the prior ownership).  Consider ways to mitigate any negative impact in enrollment as well as in staff capabilites and morale.  Help the individuals being impacted by this significant change see and grasp how you, as the new owner, will bring about positives for the school.
  • Make appropriate changes in communication efforts.  Ensure that appropriate and effective communication occurs in a timely manner regarding the change in ownership or control.  Being informed and feeling as though they are a part of change, rather than having change happen “to them” will make the transition easier for students and staff that continue on with the new school.
  • A new owner may find it wise to have a review of files, policies and procedures, and consumer information, etc., to determine any potential for compliance concerns.  An outside review will help ascertain any possible issues and provide suggestions to alleviate concerns.  This also helps provide a baseline for further comparison and monitoring down the road.  (Schools that may be interested in such an outside review may contact FAME’s Consulting Services department for more information.)

Changing Control

Whatever the genesis of the change of ownership and control, it will take effort.  There is potential for confusion, misunderstanding, and apprehension.  After all, change is not comfortable.  But, change brings new opportunities.  Depending upon how well each step of the change process occurs will determine the effect of the change.  If the appropriate precursors to change (due diligence) are followed, and the appropriate process of taking the reins is employed, along with utilizing best practices to ensure the change is positive, that is what will occur—positive change.  And, that should be the outcome for all involved when change is done correctly.  As we said last week, use the change for a push toward enhanced excellence!

In next week’s issue of our Regulatory Bulletin, we will look at one more incidence of change at a school that impacts the world of financial aid.  That circumstance is when when there is a change in location, either from a move or an additional location being opened.  In the meantime, look out for change…in a positive way!

* 2013-2014 Federal Student Aid Handbook, page 2-91

This article is presented for informational and educational purposes only and should not be considered to be giving legal advice.  Individuals should consult their own legal counsel.

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