As the COVID-19 pandemic disrupted businesses around the country and Congress stepped in to provide financial aid through the Paycheck Protection Program (PPP), many private schools qualified for help. The attractiveness of the PPP – 100% loan forgiveness – puts the burden on recipients to meet the criteria for forgiveness, and applications must be done in the next three to six months. First, private school leaders need to ask their PPP lenders what is required to fulfill all requirements for loan forgiveness. Generally, criteria fall into three buckets: providing proper documentation, proving economic uncertainty and ensuring all the terms of the loan are met. A brief overview follows:
1. Providing proper documentation
- Schools must document how the loan was used for payroll costs (at least 75% of the loan amount must be used for this) and proof of the number of full-time equivalent staff on payroll. Documents can include payroll reports from a provider, payroll tax or insurance filings or paperwork showing retirement or health insurance payments were made.
- Documentation, such as receipts, account statements or cancelled checks, must also be provided to demonstrate that no more than 25% of the PPP loan was used to pay rent, utilities or mortgage interest, if applicable.
(Please click here for general information on how long certain documents should be retained.)
2. Proving economic uncertainty
In order to qualify for a loan and subsequent forgiveness of the loan, schools will have to prove that they are suffering or will suffer economic uncertainty as a result of the pandemic. They must be able to show that the loan is necessary to support ongoing operations or continue operations in the next school year and that there is a lack of other sources of liquidity. Among the many factors impinging on a school’s finances and causing economic uncertainty are:
- unexpected costs that may arise from switching to remote teaching, including setting up an IT infrastructure if one was lacking before;
- hiring special consultants in the switch to a new learning environment;
- a loss in funding because of the effect of the pandemic on stock markets;
- an inability to use endowments to pay salaries or cover expenses because of limits or legal restrictions placed on the endowments;
- an inability to earn from revenue sources such as summer camps, boarding and facility rental, cutting off access to alternative sources of liquidity;
- reduced enrollment or forced reduction in tuition rates because of economic hardship caused by the pandemic, affecting either the funding of scholarships or students’ ability to pay tuition costs;
- costs involved in implementing changes in classrooms and school-wide to ensure students are safe if social distancing guidelines must be maintained indefinitely;
- restrictive debt covenants requiring periods of non-use of lines of credit.
3. Providing certifications of good faith to ensure terms of loan are met
- Loan recipients must be able to prove to the Small Business Administration (SBA) that they applied for the loans in good faith, believing they needed the money to continue operations, and met all criteria. Examples of proof include:
- revenue and budget projections demonstrating how the pandemic has reduced or will reduce revenue and increase costs.
- documentation of cancelled contracts, programs and other activities that would have brought in alternative funding.
- a comprehensive list of financial resources the school may have access to and, if using these resources would have a detrimental impact on the school, a description of that impact.
- Those that intentionally presented false facts will not have the loans forgiven.
- Banks are expected to approve forgiveness of a loan within 60 to 90 days of an application being made, but the SBA may take more time to review and provide their approval.
- The SBA could take several months to perform their due diligence. During this time, schools will be expected to maintain all the terms of the loan.
If a school does not meet the criteria for forgiveness outlined by its lender and the SBA, its PPP loan may not be fully forgiven. In that case, the school will be charged 1% interest each year on the remaining amount of the loan, which will have to be paid back within two years. Interest and principal payments will be deferred for six months from the date of the loan. However, interest will accrue during that six-month deferment period.
On May 13, 2020 the SBA and Department of the Treasury released FAQ #46, providing clarification on PPP loans regardless of the loan size. Schools and businesses taking a PPP loan with an original principal amount of less than $2 million will automatically be granted safe harbor relief with regard to the “good faith certification” it is required to provide.
However, schools and businesses taking loans greater than $2 million will be subject to a compliance review by the SBA. FAQ #46 states that should a borrower not provide sufficient information for the certification of the loan request, the “the SBA will seek repayment of the outstanding PPP loan balance and will inform the lender that the borrower is not eligible for loan forgiveness.”
Title IX and Section 504
One of the complications of the PPP loan is that it contained some criteria that private schools ordinarily are not required to comply with as part of their operations. Among them are Title IX of the Education Amendments of 1972, which prohibits sex discrimination in any education program or activity receiving federal financial assistance, and Section 504 of the Rehabilitation Act of 1973,which prohibits discrimination against qualified individuals with a handicap.
Since PPP loans are funded by the government, private schools should be aware that accepting the loan means they are now bound to meet the requirements of Title IX and Section 504. Schools receiving federal financial assistance are also expected to designate at least one employee to coordinate the school’s efforts to comply with and carry out their responsibilities under Title IX and Section 504. Religious schools are not exempt from Section 504 but may apply for a Title IX waiver.
The SBA guidance states that “once the loan is paid or forgiven, the nondiscrimination obligations will no longer apply.” Therefore, schools that pay off the loan quickly will not have to comply with these laws going forward. However, if a school made changes required by these laws in order to accommodate a student while the loan was in force, then it may have to continue to meet these requirements while that student remains with the school.
Schools that received a PPP loan should check with their lenders to be confident they are meeting all the criteria for loan forgiveness. If you have any questions or concerns regarding PPP loan forgiveness, or want more information on how to be sure your school is fully complying with the PPP rules and regulations affecting private schools, please fill out the form below.