The U.S. Department of Education’s (ED) recent Dear Colleague Letter (GEN-24-11) offers critical guidance on the treatment of long-term debt and property, plant, and equipment (PP&E) in calculating an institution’s composite score for financial responsibility under Title IV. This update replaces the 2020 Electronic Announcement (except LTD Q&A 10) and builds on the 2019 regulations.
Below are the key takeaways from the announcement, along with actionable insights.
Key Points on Long-Term Debt and PP&E
Pre-Implementation Debt and PP&E
- Pre-implementation debt can only offset pre-implementation PP&E up to the lower of either the PP&E’s book value or the debt’s outstanding balance at the time of refinancing.
- If refinanced pre-implementation debt generates any proceeds beyond the balance of the original debt:
- The entire amount of the pre-implementation debt no longer qualifies to off-set pre-implementation PP&E
- If the excess proceeds are used for acquiring post-implementation PP&E, the excess proceeds qualify as post-implementation debt.
Post-Implementation Debt
- Post-implementation debt must directly align with the acquisition of new PP&E and cannot exceed the book value of the associated asset.
Refinancing Guidelines
- Refinancing does not need to be refinanced with the original lender or have the same repayment terms.
- It must occur at arm’s length and cannot involve credit facilities or related-party debt.
Construction in Progress (CIP)
- CIP is excluded from expendable net assets but can be converted into PP&E when placed into service. Short-term loans for CIP are permissible, and ED provides examples of CIP transitions to long-term debt.
Specific Scenarios for Bond Refinancing
ED provides four scenarios for bond refinancing and their implications for qualified post-implementation debt:
Option A
This is similar to “Pre-Implementation Debt and PP&E” above. If refinanced pre-implementation bonds generate any proceeds beyond the balance of the original bonds:
- The entire amount of the pre-implementation bond no longer qualifies to off-set pre-implementation PP&E
- If the excess proceeds are used for acquiring post-implementation PP&E, the excess proceeds qualify as post-implementation debt.
Option B
Various documentation must be provided to ED via eZ-Audit, adequate disclosures are to be made in the audited financial statements, and an allocation methodology is required to assign qualified post-implementation debt to specific PP&E items.
Option C
Bonds where 100% of proceeds are used for PP&E are considered qualified post-implementation debt.
Option D
If bond proceeds are split between PP&E and operational needs, none of the debt qualifies as post-implementation.
Compliance and Risk Management
Institutions must ensure proper categorization of debt and PP&E to maintain accurate composite scores and protect Title IV eligibility. Mistakes in handling refinanced debt, CIP transitions, or bond proceeds can have significant financial consequences.
McClintock’s Solution Mindset
The GEN-24-11 guidance introduces nuanced requirements for handling long-term debt and PP&E, emphasizing the need for proactive financial management. By anticipating challenges and seeking expert advice, institutions can safeguard their compliance and financial health.
To navigate these complexities, institutions should:
- Conduct regular financial audits.
- Maintain meticulous records, especially for refinanced debt and CIP transitions.
- Review ED guidance closely before making financial changes.
