Letter of credit

The Department notifies the institution of the requirement and the amount. The institution obtains the letter of credit from a bank acceptable to the Department and submits it. The letter remains in place for the required period. If the institution closes or incurs a liability it cannot pay, the Department can draw on the letter. Once the underlying condition is resolved, the requirement may be lifted and the letter released.

Example: an online institution in the financial-responsibility zone posts a letter of credit for 10 percent of its prior-year Title IV funding. Two years later its composite score exceeds 1.5. The Department releases the letter-of-credit requirement, and the bank cancels the instrument.

A surety bond serves a similar protective purpose but is structured differently. Provisional certification is a status that may accompany a letter-of-credit requirement. Financial-responsibility composite score is the metric that often triggers the need for a letter of credit.

Assuming a letter of credit is optional once a low composite score is received. Underestimating the collateral or fee cost imposed by the issuing bank. Allowing a letter of credit to expire without renewal while the underlying requirement remains in effect.