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Government Regulation and Financial Aid
12 Months Ended
Sep. 30, 2018
Risks and Uncertainties [Abstract]  
Government Regulation and Financial Aid
Government Regulation and Financial Aid

Our institutions are subject to extensive regulation by federal and state governmental agencies and accrediting bodies. In particular, HEA, and the regulations promulgated thereunder by ED, subject the institutions to significant regulatory scrutiny on the basis of numerous standards that schools must satisfy in order to participate in the various federal student financial assistance programs under Title IV of the HEA.
    
To participate in the Title IV Programs, an institution must be authorized to offer its programs of instruction by relevant state education agencies, be accredited by an accrediting commission recognized by ED and be certified as an eligible institution by ED. ED will certify an institution to participate in the Title IV Programs only after the institution has demonstrated compliance with the HEA and ED’s extensive regulations regarding institutional eligibility. An institution must also demonstrate its compliance to ED on an ongoing basis. The Program Participation Agreement (PPA) document serves as ED’s formal authorization of an institution and its associated additional locations to participate in Title IV Programs for a specified period of time. Universal Technical Institute of Texas was recertified in April 2018 and entered into a new PPA with ED which will expire April 2022.
 
In December 2016, we were advised by ED that our applications for Title IV program participation recertification with respect to our Universal Technical Institute of Arizona and Universal Technical Institute of Phoenix institutions had been processed. In December 2017, we submitted recertification applications for all of our institutions. We received a fully recertified PPA for Universal Technical Institute of Texas in March 2018. In November 2018, we received a fully recertified PPA for Universal Technical Institute of Arizona and a fully recertified PPA for Universal Technical Institute of Phoenix. Both of the PPA's will expire on March 31, 2022. On July 31, 2018, ED issued the Final Program Review Determination letter for Universal Technical Institute of Arizona, indicating that the program review was satisfactorily closed.

State Authorization

Each of our institutions must be authorized by the applicable state education agency where the institution is located to operate and offer a postsecondary education program to its students. Our institutions are subject to extensive, ongoing regulation by each of these states. Additionally, our institutions are required to be authorized by the applicable state education agencies of certain other states in which our institutions recruit students. If any one of our campuses were to lose its authorization from the education agency of the state in which the campus is located, that campus would be unable to offer its programs and we could be forced to close that campus. If one of our campuses were to lose its authorization from a state other than the state in which the campus is located, that campus would not be able to recruit students in that state.

Accreditation
    
Accreditation is a non-governmental process through which an institution voluntarily submits to ongoing qualitative reviews by an organization of peer institutions. Accrediting commissions primarily examine the academic quality of the institution’s instructional programs. A grant of accreditation is generally viewed as confirmation that the institution’s programs meet generally accepted academic standards. Accrediting commissions also review the administrative and financial operations of the institutions they accredit to ensure that each institution has the resources necessary to perform its educational mission, implement continuous improvement processes and support student success.

Accreditation by an ED-recognized commission is required for an institution to be certified to participate in Title IV Programs. In order to be recognized by ED, accrediting commissions must adopt specific standards for their review of educational institutions. All of our institutions are accredited by the Accrediting Commission of Career Schools and Colleges, an accrediting commission recognized by ED.

An accrediting commission may place an institution on reporting status to monitor one or more specified areas of performance in relation to the accreditation standards. An institution placed on reporting status is required to report periodically to the accrediting commission on that institution’s performance in the area or areas specified by the commission.

Regulation of Federal Student Financial Aid Programs

Congress has historically focused on for-profit education institutions, specifically regarding participation in Title IV Programs and U.S. DOD oversight of tuition assistance for military service members attending for-profit colleges. Continued Congressional activity could result in the enactment of more stringent legislation by Congress, further rulemakings affecting participation in Title IV Programs and other governmental actions, increasing regulation of the for-profit sector. Action by Congress may also increase our administrative costs and require us to modify our practices in order for our institutions to comply with Title IV Program requirements. In addition, concerns generated by this Congressional activity may adversely affect enrollment in for-profit educational institutions such as ours.

Political and budgetary concerns significantly affect Title IV Programs. Congress most recently reauthorized the HEA in 2008, is actively working on another HEA reauthorization and is expected to revise and reauthorize the HEA, but it is unlikely that reauthorization will occur in 2018 and uncertain when the process will be completed. Significant factors relating to Title IV Programs that could adversely affect us include the following:

Gainful Employment

On June 16, 2017, ED announced its intent to convene a negotiated rulemaking committee to develop proposed regulations to revise the gainful employment regulations. ED convened meetings from December 2017 through March 2018, but negotiators failed to reach consensus on all key elements of the proposal. ED published a proposed rule on August 14, 2018, on which it accepted public comment through September 13, 2018. The proposed rule would eliminate the existing Gainful Employment regulations. ED stated in the notice of proposed rulemaking that it plans instead, among other things, to publish program-level outcomes data using the existing government website called the College Scorecard, or on a new federal website. ED has indicated the proposed regulations will not be published in final form by November 1, 2018, as would typically be required for them to take effect on July 1, 2019. Regulations published after November 1, 2018 and prior to November 1, 2019 typically would take effect on July 1, 2020.

On June 30, 2017, ED announced the extension of the compliance date for certain gainful employment disclosure requirements from July 1, 2017 to July 1, 2018. ED stated that institutions are still required to comply with other gainful employment disclosure requirements by July 1, 2017. ED has not issued completer lists to schools, which is the first step toward generating the data for calculating a second set of gainful employment rates. Further, ED’s agreement with the Social Security Administration to produce mean or median earnings data has expired and has not been renewed. The earnings data are used to calculate the debt-to-earnings rates. Consequently, we cannot predict when ED will begin the process of calculating and issuing new draft or final gainful employment rates in the future. While we have implemented a mitigation strategy for those programs identified as in the zone, because we cannot calculate the exact impact of such action on a program's debt to earnings rates, we may overestimate the required tuition reduction, which would have a negative impact on our tuition revenues. Conversely, we may underestimate the required tuition reduction and fail to improve the program's debt to earnings rates.

Borrower Defense to Repayment Regulations

In November 2016, ED published final regulations establishing rules regarding, among other things, the ability of borrowers to obtain discharges of their obligations to repay certain Title IV loans and for ED to initiate a proceeding to collect from the institution the discharged and returned amounts and the extensive list of circumstances that may require institutions to provide letters of credit or other financial protection to ED. These regulations are discussed at “Business - Regulation of Federal Student Financial Aid Programs - Defense to Repayment Regulations” included elsewhere in this Report on Form 10-K. The regulations had a general effective date of July 1, 2017, which was delayed until July 1, 2019 by ED action that was subsequently invalidated by federal court orders as of October 16, 2018. ED published a notice of proposed rulemaking in the Federal Register on July 31, 2018 to amend these regulations, but announced that final regulations would not be published until after November 1, 2018. Accordingly, any final regulations that ED may publish after November 1, 2018 and prior to November 1, 2019 typically would not take effect until July 1, 2020 unless ED is able to establish an earlier date for implementation of the regulations. The proposed regulations would, among other things, modify the current procedures and standards for borrowers to assert through an ED-administered process a defense to the borrowers’ obligation to repay certain Title IV loans based on certain acts or omissions by the institution or a covered party; maintain, but shorten, the list of events that could result in ED deeming the institution to fail ED’s financial responsibility standards and requiring a letter of credit or other form of acceptable financial protection and the acceptance of other conditions or requirements; require the institution to notify ED of an extensive list of financial events including, but not limited to, liabilities incurred from a final judgment in a judicial or administrative determination; address the treatment of operational leases and long-term debt in the calculation of an institution’s composite score under ED’s financial responsibility standards; amend certain regulations related to the discharge of student loans based on the school’s closure or a false claim of high school completion under certain circumstances; generally permit the use of arbitration clauses and class action waivers while requiring certain disclosures to students. We cannot provide any assurances as to the timing, content or ultimate effective date of any such regulations.

90/10 Rule

A for-profit institution loses its eligibility to participate in Title IV Programs if it derives more than 90% of its revenue from Title IV Programs for two consecutive fiscal years as calculated under a cash basis formula mandated by ED. The loss of such eligibility would begin on the first day following the conclusion of the second consecutive year in which the institution exceeded the 90% limit and, as such, any Title IV Program funds already received by the institution and its students during a period of ineligibility would have to be returned to ED or a lender, if applicable. Additionally, if an institution exceeds the 90% level for a single year, ED will place the institution on provisional certification for a period of at least two years, and could impose other restrictions or conditions on the institution's Title IV eligibility. For the year ended September 30, 2018, approximately 71% of our revenues, on a cash basis, were derived from funds distributed under Title IV Programs, as calculated under the 90/10 rule.

Federal Student Loan Defaults

To remain eligible to participate in Title IV Programs, institutions must maintain federal student loan cohort default rates below specified levels. An institution whose cohort default rate is 30% or more for three consecutive federal fiscal years (FFYs) or 40% or more for any given FFY loses eligibility to participate in some or all Title IV Programs. This sanction is effective for the remainder of the FFY in which the institution lost its eligibility and for the two subsequent FFYs. None of our institutions had a three-year FFEL/DL cohort default rate of 30% or greater for 2015, 2014 or 2013, the three most recent FFYs with published rates.

Financial Responsibility Standards

An institution’s financial responsibility is measured by its composite score, which is calculated by ED based on three ratios. ED assigns a strength factor to the results of each of these ratios on a scale from negative 1.0 to positive 3.0, with negative 1.0 reflecting financial weakness and positive 3.0 reflecting financial strength. ED then assigns a weighting percentage to each ratio and adds the weighted scores for the three ratios together to produce a composite score for the institution. The composite score must be at least 1.5 for the institution to be deemed financially responsible without the need for further oversight. In addition to having an acceptable composite score, an institution must, among other things, meet all of its financial obligations including required refunds to students and any Title IV Program liabilities and debts, be current in its debt payments, comply with certain past performance requirements and not receive an adverse, qualified, or disclaimed opinion by its accountants in its audited financial statements. If ED determines that an institution does not satisfy its financial responsibility standards, depending on the resulting composite score and other factors, that institution may establish its financial responsibility on an alternative basis.

If an institution's composite score is below 1.5, but is at least 1.0, the institution is in a category classified by ED as the zone. Under ED regulations, institutions in the zone solely because their composite score is less than 1.5 are still considered to be financially responsible, but require additional oversight by ED in the form of cash monitoring and other participation requirements. Institutions in the zone typically are permitted by ED to continue to participate in the title IV programs under one of two alternatives:  1) the “Zone Alternative” under which an institution is required to make disbursements to students under a payment method other than ED’s standard repayment, typically the Heightened Cash Monitoring 1 (HCM1) payment method; to notify ED within 10 days after the occurrence of certain oversight and financial events and to comply with other operating conditions imposed by ED or 2) submit a letter of credit to ED equal to at least 50 percent of the Title IV funds received by the institutions during the most recent fiscal year.  ED permits an institution to participate under the “Zone Alternative” for a period of up to three consecutive fiscal years.  Under the “Zone Alternative” notification requirement, the institution must provide timely information to ED regarding any of the following oversight and financial events:
any adverse action, including a probation or similar action, taken against the institution by its accrediting agency, state authority or other federal agency;

any event that causes the institution to realize any liability that was noted as a contingent liability in the institution's most recent audited financial statements;

any violation by the institution of any loan agreement;

any failure of the institution to make a payment in accordance with its debt obligations that results in a creditor filing suit to recover funds under those obligations;

any withdrawal of owner's equity/net assets from the institution by any means, including by declaring a dividend;

any extraordinary losses as defined in accordance with generally accepted accounting principles; or

any filing of a petition by the institution for relief in bankruptcy court.

Under the regulations that were scheduled to take effect on July 1, 2017, but then were further delayed until July 1, 2019 by ED action that was subsequently invalidated by federal court orders as of October 16, 2018, the list of information that an institution must provide timely to ED is as follows: any event that causes the institution, or a related entity, to realize any liability that was noted as a contingent liability in the institution’s or related entity’s most recent audited financial statements or any losses that are unusual in nature and infrequently occur or both as defined in accordance with certain specified accounting standards. The institution also would be required to notify ED of certain other events described in the new Defense to Repayment regulations. ED could impose a letter of credit or other conditions or requirements upon us in response to the reporting of any oversight or financial events.

Under the HCM1 payment method, the institution is required to make Title IV disbursements to eligible students and parents before it requests or receives funds for the amount of those disbursements from ED.  As long as the student accounts are credited before the funding requests are initiated, an institution is permitted to draw down funds through ED’s electronic system for grants management and payments for the amount of disbursements made to eligible students.  Unlike the Heightened Cash Monitoring 2 (HCM2) or reimbursement payment methods, the HCM1 payment method typically does not require institutions to submit documentation to ED and wait for ED approval before drawing down Title IV funds. ED may place an institution that is in the zone on the HCM2 or reimbursement methods of payment. An institution on the HCM1, HCM2 or reimbursement payment methods must pay any credit balances due to a student or parent before drawing down funds from ED for the amount of disbursements made to the student or parent.
If an institution's composite score is below 1.0, the institution is considered by ED to lack financial responsibility. If ED determines that an institution does not satisfy ED's financial responsibility standards, depending on its composite score and other factors, that institution may establish its financial responsibility on an alternative basis by, among other things:

posting a letter of credit in an amount equal to at least 50% of the total Title IV Program funds received by the institution during its most recently completed fiscal year; or
posting a letter of credit in an amount equal to at least 10% of such prior year's Title IV Program funds, accepting provisional certification for a period of no more than three years, complying with additional ED notification and operating requirements and conditions and agreeing to receive Title IV Program funds under an arrangement other than ED's standard advance funding arrangement. Under new regulations that take effect on July 1, 2017, ED may increase this amount to account for ED’s determination of the additional amount of financial protection needed to fully cover any estimated losses.
If an institution is unable to establish financial responsibility on an alternative basis, the institution may be subject to financial penalties, restrictions on our operations and loss of external financial aid funding.
ED published final regulations that were scheduled to take effect on July 1, 2017, but then were further delayed until July 1, 2019 by ED action that was subsequently invalidated by federal court orders as of October 16, 2018, that amend the financial responsibility regulations to expand the list of actions or events that require an institution to provide ED with a letter of credit or other form of acceptable financial protection. The regulations also, among other things, may increase the amount of the letter of credit or other form of financial protection that an institution must provide to ED if the institution has a composite score below 1.0, no longer qualifies for the Zone Alternative, or does not comply with other applicable requirements of the financial responsibility regulations. The regulations also would permit ED to recalculate an institution’s composite score to account for its estimate of actual or potential losses resulting from certain events identified in the new Defense to Repayment Regulations. See “Regulation of Federal Student Financial Aid Programs - Defense To Repayment Regulations.”

ED has historically evaluated the financial condition of our institutions on a consolidated basis based on the financial statements of Universal Technical Institute, Inc. as the parent company. ED’s regulations permit ED to examine the financial statements of Universal Technical Institute, Inc., the financial statements of each institution and the financial statements of any related party. For our 2018 fiscal year, we calculated our composite score to be 1.6. However, the composite score calculations and resulting requirements imposed on our institutions are subject to determination by ED once it receives and reviews our audited financial statements.

Return of Title IV Funds

An institution participating in Title IV Programs must calculate the amount of unearned Title IV Program funds that have been disbursed to students who withdraw from their educational programs before completing them. The institution must return those unearned funds to ED or the appropriate lending institution in a timely manner, which is generally within 45 days from the date the institution determines that the student has withdrawn. If an institution is cited in an audit or program review for returning Title IV Program funds late for 5% or more of the students in the audit or program review sample, the institution must post a letter of credit in favor of ED in an amount equal to 25% of the total Title IV Program funds that should have been returned in the previous fiscal year.
    
Because we operate in a highly regulated industry, we, like other industry participants, may be subject from time to time to investigations, claims of non-compliance, or lawsuits by governmental agencies or third parties, which allege statutory violations, regulatory infractions, or common law causes of action.

Compliance with Regulatory Standards and Effect of Regulatory Violations

Our institutions are subject to audits and program compliance reviews by various external agencies, including ED, ED’s Office of Inspector General, state education agencies, student loan guaranty agencies, the VA and ACCSC, as well as other federal and state agencies. Each of our institutions’ administration of Title IV Program funds must also be audited annually by independent accountants and the resulting audit report submitted to ED for review. If ED or another regulatory agency determined that one of our institutions improperly disbursed Title IV Program funds or violated a provision of the HEA or ED’s regulations, that institution could be required to repay such funds and could be assessed an administrative fine. ED could also transfer the institution from the advance method of receiving Title IV Program funds to a cash monitoring or reimbursement system, which could negatively impact cash flow at an institution. Significant violations of Title IV Program requirements by us or any of our institutions could be the basis for a proceeding by ED to fine the affected institution or to limit, suspend or terminate the participation of the affected institution in Title IV Programs. Generally, such a termination extends for 18 months before the institution may apply for reinstatement of its participation.
In April 2015, ED completed an ordinary course program review of our administration of the Title IV programs in which we participate for our Avondale, Arizona institution main campus and additional locations of that institution. The site visit covered the 2013-2014 and 2014-2015 award years. An initial program review report dated September 22, 2017 was issued by ED in July 2018. The report contained nine findings that are not material because they are limited to errors identified in individual student records and to requests to update and strengthen certain financial aid-related disclosures and procedures. None of the findings require us to perform any retroactive file reviews of all of our students for any issues for any time period. We provided our response to ED within the stated deadline of 30 days from the date we received the report.  ED reviewed our response to the report and issued its final program review determination letter on July 31, 2018. All findings were considered resolved by ED.

Veterans' Benefits Programs

Since October 1, 2011, the Post-9/11 GI Bill has been effective for both degree and non-degree granting institutions of higher learning, allowing eligible veterans to use their Post-9/11 GI Bill benefits. Additionally, veterans use benefits such as the Montgomery GI Bill, the REAP and VA Vocational Rehabilitation at our campuses. We derived approximately 17% of our revenues, on a cash basis, from veterans' benefits programs in 2018. To participate in veterans' benefits programs, including the Post-9/11 GI Bill, the Montgomery GI Bill, the REAP, and VA Vocational Rehabilitation, an institution must comply with certain requirements established by the VA. These criteria require, among other things, that the institution:

report on the enrollment status of eligible students;

maintain student records and make such records available for inspection;

follow current VA rules; and

comply with applicable limits on the percentage of students receiving certain veterans benefits on a program or campus basis.

The VA shares responsibility for VA benefit approval and oversight with designated State Approving Agencies (SAAs).  SAAs play a critical role in evaluating institutions and their programs to determine if they meet VA benefit eligibility requirements. Processes and approval criteria as well as interpretation of applicable requirements can vary from state to state. Therefore, approval in one state does not necessarily result in approval in all states. 

During 2012, President Obama signed an Executive Order directing the Departments of Defense, Veterans Affairs and Education to establish “Principles of Excellence” (Principles), based on certain guidelines set forth in the Executive Order, to apply to educational institutions receiving federal funding for service members, veterans and family members. We are required to comply with the Principles to continue recruitment activities on military installations. Additionally, there is a requirement to possess a memorandum of understanding (MOU) with the U.S. DOD as well as with certain individual installations.