Among the many topics included in Secretary Linda McMahon’s regulatory agenda for the U.S. Department of Education was a relatively unnoticed provision regarding “Title IV Eligibility Issues.”
While other proposals have gotten a lot of media attention, the proposed regulatory changes to rules on mergers and acquisitions could have the most profound impact on the industry long-term. In addition to identifying the “why” of these potential changes, this article will propose 5 areas where policy changes could make a significant impact.
To anyone who has gone through it before, mergers and acquisitions at the department are, and have been, a challenge. Even after the parties agree to a transaction, getting federal approval can take two to three years and, throughout that period, the department can challenge, delay or reject any potential deal.
Additionally, the federal agency’s demands for compliance can be exhaustive. Frequently, a proposed transaction becomes an opportunity for federal officials to dive deep into an institution’s (and their owner’s) administrative and financial health, which is too often unrelated to the proposed transaction.
Beyond published regulations, the department has, at times, struggled to operationalize the process. Despite valiant efforts, the agency has been unable to make the approval process faster, more efficient or reliable. Rather, institutions are left with procedures that can sometimes seem arbitrary and difficult to predict.
The result has been a retreat from transactions, especially among private equity firms. Sadly, when a transaction is pursued, owners and school leaders treat it as an option of last resort, sometimes when it is too late to save a school and its programs.
Indeed, the number of college closures is increasing. According to the Federal Reserve Bank of Philadelphia, up to 80 colleges could close in the next year due to financial distress related to precipitous declines in enrollment.
Into this environment, McMahon has proposed to revise the rules on transactions. This is an excellent sign. And so is the presence of Undersecretary Nicholas Kent, who is intimately familiar with the challenges of institutional transactions.
Notably, specific proposals will not be made for a few months. Until we see what the department is planning, below is a list of five regulatory areas ripe for change to unleash the power of transactions to protect and expand opportunities for students and pull schools back from the brink of closure.
1. Revise rules on PPA signatures
First, in a simple fix, the department should rescind the March 1, 2023 electronic Announcement extending personal liability requirements to owners and ownership entities. This requirement has halted more than one transaction and remains a significant barrier to private investment in higher education.
Moving forward, the Department should not require personal liability from owners; such a demand is antithetical to commonly understood principles of American corporate law. Further, the July 2024 regulations expanding signature requirements should also be rescinded or revised to limit signatories to a program participation agreement to the day-to-day owners of an institution.
2. Codify transaction approval procedures in regulation
Too often, the agency approval process for transactions has been a black box of evolving procedure. Two simultaneous transactions can have very different pathways to approval, despite similar circumstances and financial positions.
The department—whether through a full negotiation committee or a smaller working group —should codify an internal review process that affords institutions predictability, the timelines for approval and the invaluable awareness of the requirements for a successful transaction.
3. Revise administrative capability and financial responsibility thresholds
The Biden Administration tightened regulations regarding administrative capability and financial responsibility. For schools on the brink of closure, this has rendered ongoing participation in the federal loan program exceedingly more difficult.
In some cases, the rules make school closures more likely to occur. That is not good for institutions or students. McMahon has the opportunity to wisely and intentionally keep standards high, while also appropriately modifying the previous administration’s more high-stakes approach.
4. Reducing the department’s transactional footprint
The department should reduce their own footprint as much as possible in the transactional space. That means: rescind regulations that result in making transactions more difficult to complete, such as imposing significant financial protection requirements on transacting institutions.
For a while, the agency has lacked a sufficient number of personnel experienced and equipped to reliably and consistently review increasingly complex financial transactions. Now, with even fewer employees in the building, the department would do well to reduce its own workload or continue to risk delaying necessary transactions even further.
5. Mimic the administration’s approach to accreditation
Since taking office, the administration has talked about the need to expand accreditation options for colleges and universities. The department should bring that same disruptive and innovative mindset to institutional mergers and acquisitions.
Even now, schools are experimenting with new and alternative arrangements that allow them to continue pursuing their unique missions. Indeed, some of these arrangements—such as public-private partnerships and workforce development companies—dovetail well with the Trump Administration’s policy priorities.
The department should create an environment—either through regulatory changes or an experimental sites initiative—that fosters this type of innovation and prioritizes institutions and programs that want to pursue unique career and education pathways.
