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| 1 minute read

US Department of Education-Centric Defaults Should be Removed from University Debt Documents

Amendments to the United States Department of Education federal student aid regulations regarding financial responsibility, 34 CFR § 668.23 et. seq., will become effective on July 1, 2024. These amended regulations, which are applicable to private nonprofit, for-profit and public universities, describe, among other things, “mandatory triggering events” that constitute automatic failures of a university’s financial responsibility obligations and must be reported by the university to the Department within 21 days of occurrence. Upon reporting of a mandatory triggering event, the university will be required to promptly post a letter of credit or escrow funds with the Department in an amount that is not less than 10% of the total federal student aid that the university received in its prior fiscal year.

One mandatory triggering event is a lender or bond trustee declaring an event of default as a result of an action taken by the Department in respect of the university. While the type of action taken by the Department is not stated in the amended regulation, the adopting release includes several examples of the Department conditioning or restricting the university’s continuing participation in federal student aid programs. To avoid the possibility of failing financial responsibility obligations, being required to report a mandatory triggering event and having to post a letter of credit or escrow funds with the Department for an extended period, universities are advised to review their bond indentures and loan agreements to see if these documents contain this type of event of default. If so, universities should work with their lenders and bond trustees to delete, or significantly revise, this event of default as soon as possible.

Universities should also resist inclusion of this type of event of default in future bond indentures and loan documents. In light of the requirement that universities post a letter of credit or escrow cash with the Department for an extended period upon occurrence of this event of default, there is an alignment of interests of universities and their lenders in not including this type of event of default in debt documents.


nonprofits & tax-exempt organizations, higher education, universities, us department of education