U.S. Department of Education’s Composite Score Ratio Question & Answers

By Michael T. Wherry, CPA | May 15, 2020

The U.S. Department of Education (ED) decided April 9th was a good time to issue guidance on multiple items. ED released an electronic announcement responding to questions submitted in regard to the composite score ratio which becomes effective July 1, 2020 as part of the Borrower Defense to Repayment regulations (BDTR). The questions and answers relate mostly to the treatment of leases under ASU 2016-02 and qualified long-term debt. Listed below are our highlights from this announcement. For institutions which are refinancing debt during the Covid-19 crisis, we believe it is critical to understand ED’s guidance related to pre- and post-implementation debt, and the impact on the composite score ratio.

The entire announcement is available on ED’s website – click here to access.


  • This announcement didn’t address any delays of the July 1, 2020 effective date of the composite score ratio changes within the BDTR regulations. This announcement only addressed questions submitted to ED subsequent to the release of the final BDTR regulations.
  • ED is in process of updating the eZ-Audit templates which is scheduled for completion in the spring of 2020.
  • M&A will be developing a standard supplement schedule which will be required to be included in the audited financial statements for reports issued after June 30, 2020. As a reminder, these supplemental schedules will enable ED to properly compute the composite score ratio mainly as a result of the pre- and post-implementation treatment of long-term debt and leases.

Treatment of Long-Term Debt

  • In regard to the refinancing of existing pre-implementation debt, to the extent the debt hasn’t increased it can continue to be treated as pre-implementation debt up to the value of pre-implementation Property, Plant and Equipment (PPE) in the Primary Reserve Ratio. (Some limitations exist in regard to a credit facility or related party debt).
  • ED reminded institutions that pre-implementation debt can never increase.
  • If qualified existing debt is refinanced and the new proceeds exceed the previous qualified debt, then the new debt would be considered post-implementation debt and must be associated with post-implementation PPE to be included in the Primary Reserve Ratio.
  • The extension of terms for pre-implementation debt would retain its characteristics of pre-implementation debt.
  • The use of a credit facility requires a close review of the underlying transactions and ED provided examples in the guidance.

Treatment of Leases

  • ED clarified that the impact of the new lease standard on the composite score ratio begins when the lease standard becomes effective for an institution. For nonpublic entities, this is standard is effective for years beginning after December 15, 2020. ED reminded schools that December 15, 2018 is the date solely used to determine pre- and post-implementation leases.
  • Unrelated to ED’s guidance, the Financial Accounting Standard Board (FASB) is proposing another one-year delay due to the Covid-19 crisis. The FASB proposal will go through a 15-day comment period once the proposal is officially issued. The FASB expects to hold a meeting in early May to discuss feedback on the proposal. Thus, if this delay passes a December 31st year end nonpublic institution won’t need to adopt the lease standard until the year ended December 31, 2022.
  • Any institution may opt-out of the pre- and post-implementation lease report and treat all leases as post-implementation. However, once an institution opts-out, this election can’t be reversed.
  • A change of ownership which occurs on or after July 1, 2020 will change the treatment of all leases to post-implementation leases. ED views a change of ownership as a new business decision which trumps previous business decisions made by an institution prior to the lease standard being released or contemplated.

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