[Federal Register Volume 59, Number 228 (Tuesday, November 29, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-29048]
[[Page Unknown]]
[Federal Register: November 29, 1994]
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Part VI
Department of Education
_______________________________________________________________________
34 CFR Part 600, et al.;
Institutional Eligibility; Student Assistance General Provisions;
Federal Family Education Loan Programs; Final Rule
DEPARTMENT OF EDUCATION
34 CFR Parts 600, 668, and 682
RIN 1840-AB87, 1840-AB85 and 1840-AB80
Institutional Eligibility; Student Assistance General Provisions;
Federal Family Education Loan Programs
AGENCY: Department of Education.
ACTION: Final regulations.
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SUMMARY: The Secretary amends the Institutional Eligibility
regulations, the Student Assistance General Provisions regulations, and
the Federal Family Education Loan (FFEL) Program regulations to further
implement changes in the Higher Education Act of 1965, as amended
(HEA), and to improve the monitoring and accountability of institutions
and third-party servicers participating in the student financial
assistance programs authorized by Title IV of the HEA (Title IV, HEA
programs). These regulations seek to improve the efficiency of Federal
student aid programs and, by so doing, to improve their capacity to
enhance opportunities for postsecondary education.
EFFECTIVE DATE: These regulations take effect on July 1, 1995, with the
exception of Sec. 668.9(b), which is effective as of July 1, 1994.
However, affected parties do not have to comply with the information
collection requirements in Secs. 668.3, 668.8, 668.15, 668.16, 668.22,
and 668.23 until the Department of Education publishes in the Federal
Register the control numbers assigned by the Office of Management and
Budget (OMB) to these information collection requirements. Publication
of the control numbers notifies the public that OMB has approved these
information collection requirements under the Paperwork Reduction Act
of 1980.
FOR FURTHER INFORMATION CONTACT: Wendy Macias or Greg Allen, U.S.
Department of Education, 600 Independence Avenue, S.W. (Regional Office
Building 3, Room 4318), Washington, D.C. 20202-5343. Telephone (202)
708-7888. Individuals who use a telecommunications device for the deaf
(TDD) may call the Federal Information Relay Service (FIRS) at 1-800-
877-8339 between 8 a.m. and 8 p.m., Eastern time, Monday through
Friday.
SUPPLEMENTARY INFORMATION: On April 29, 1994 the Secretary published
interim final regulations (denominated final regulations) amending the
Student Assistance General Provisions regulations and the regulations
for the Federal Family Education Loan Programs and the Federal Pell
Grant Program (59 FR 22348). These regulations became effective on July
1, 1994. At the time these final regulations were published, the
Secretary requested additional public comment on whether further
changes in the regulations were warranted. A notice correcting the
regulations and extending the comment period until July 28, 1994 was
published on July 7, 1994 (59 FR 34964).
Based on the comments received, the Secretary is making further
changes in the regulations. These changes will take effect July 1,
1995. The Secretary also received comments on other provisions of the
regulations and may make further changes in the regulations based on
these comments. However, if the Secretary determines that additional
changes are necessary, these future changes would not become effective
before July 1, 1996.
The Higher Education Amendments of 1992, Pub. L. 102-325, (the
Amendments of 1992) and the Higher Education Technical Amendments of
1993, Pub. L. 103-208 (the Technical Amendments of 1993) amended the
HEA in several areas relating to the participation of institutions in
the Title IV, HEA programs. Further, the Amendments of 1992 amended the
HEA to expand the Secretary's authority to regulate the activities of
those individuals and organizations now called third-party servicers.
The Student Assistance General Provisions regulations contain
requirements that are common to educational institutions that
participate in the Title IV, HEA programs.
The April 29, 1994 final regulations included a discussion of the
major issues which will not be repeated here. The following list
summarizes those issues and identifies the pages of the preamble to the
April 29, 1994 final regulations on which a discussion of those issues
can be found:
The Secretary clarified the terms used in the statutory definition
of academic year (pages 22351 and 22361-22363);
The Secretary added a definition of third-party servicer as
applicable to those individuals or organizations that contract with an
institution to administer any aspect of the institution's participation
in the Title IV, HEA programs (pages 22364-22365);
The Secretary amended the definition of an eligible program to
implement statutory requirements, including requirements for ``short-
term'' programs (at least 300 but less than 600 clock hours) that would
be eligible for the FFEL programs only. The Secretary included
methodologies for the measurement of completion and placement rates for
short-term programs, as required by the statute. Also in accordance
with the statute, the Secretary added further provisions to evaluate
the quality of short-term programs. The Secretary also amended the
provisions for English as a second language programs (pages 22351-22352
and 22365-22368);
The Secretary added two new sections to codify procedures with
regard to applications to participate initially or to continue to
participate in a Title IV, HEA program and procedures by which the
Secretary certifies that an institution meets the standards in subpart
B of these regulations and accordingly may participate in a Title IV,
HEA program. The Secretary added procedures to codify new statutory
provisions governing provisional certification procedures for
participation in a Title IV, HEA program (pages 22352-22353 and 22368-
22374);
The Secretary amended the regulations governing program
participation agreements to include numerous new provisions added by
the Amendments of 1992 and provisions previously prescribed by the HEA
but not specifically spelled out in the regulations. The Secretary also
added provisions to amend the regulations governing program
participation agreements (pages 22353 and 22374-22377);
The Secretary made significant changes to the section governing the
evaluation of an institution's financial responsibility. The Secretary
strengthened the factors used to evaluate an institution's financial
responsibility to reflect statutory changes (pages 22353-22354 and
22378-22383);
The Secretary strengthened and expanded the standards of
administrative capability for participating institutions, addressing
areas previously not regulated or for which there were only guidelines
(pages 22354 and 22383-22391);
The Secretary amended the provisions governing default reduction
measures to reflect statutory changes made by the Amendments of 1992
and current departmental practices (pages 22355 and 22391-22394);
The Secretary clarified the terms used in the statutory definition
of a fair and equitable refund policy (pages 22355-22359 and 22394-
22401);
The Secretary implemented the statutory requirement that
institutions have annual compliance audits (pages 22359 and 22401-
22403);
The Secretary expanded the factors of financial responsibility of
an institution to take into consideration substantial control over both
institutions and third-party servicers (page 22381);
The Secretary implemented annual audit requirements for third-party
servicers as necessary to implement statutory provisions under the
Amendments of 1992 (pages 22401-22403);
The Secretary amended the regulations to require a third-party
servicer to notify any institution under whose contract the third-party
servicer is assessed a liability and any institution that receives the
same services for which a liability was assessed, of the assessment of
the liability against the servicer (page 22408);
The Secretary created a new section to codify contract requirements
between institutions and third-party servicers. As one of the
conditions in the contract, a third-party servicer is required to
assume joint and several liability with an institution that the
servicer contracts with for any violation by the servicer of any Title
IV, HEA program requirement (pages 22405-22407);
The Secretary amended the regulations to apply against a third-
party servicer the sanctions under subpart G of the Student Assistance
General Provisions for any violation of a Title IV, HEA program
requirement (page 22408);
The Secretary amended the regulations to apply fiduciary standards
to third-party servicers so that a third-party servicer is required to
act at all times with the competency necessary to qualify as a
fiduciary (pages 22408-22409);
The Secretary amended the regulations to require a third-party
servicer that contracts with a lender or guaranty agency to assume
joint and several liability for any violation of any FFEL program
requirement or applicable statutory requirement. Collection of
liabilities from the violation would be collected first from the lender
or guaranty agency (page 22415);
The Secretary added a new section to codify Federal requirements
for third-party servicers that contract with lenders or guaranty
agencies. A third-party servicer is required to meet certain standards
of financial responsibility and administrative capability to be
considered eligible to contract with a lender or guaranty agency. In
addition, this section implements statutory authority to require that a
third-party servicer must have performed an annual audit of the
servicer's administration of a lender's or guaranty agency's
participation in the FFEL programs (pages 22415-22416); and
The Secretary amended the Federal Pell Grant Program regulations to
implement section 487(c)(7) of the HEA that provides that an
institution may offset the amount of Title IV, HEA program
disbursements against liabilities or may receive reimbursement from the
Department for those amounts if, in the course of any audit conducted
after December 31, 1988, the Department discovers or is informed of any
Title IV, HEA program assistance (specifically, Federal Pell Grant
Program funds) that an institution has provided to its students in
accordance with program requirements, but the institution has not
previously received credit or reimbursement for these disbursements
(pages 22416-22417).
Substantive Changes to the Final Regulations
PART 668--STUDENT ASSISTANCE GENERAL PROVISIONS
Subpart A--General
Section 668.2 General Definitions
Academic Year
In the April 29, 1994 final regulations, the Secretary addressed an
abuse of the definition of an academic year whereby an institution that
has programs that are measured in credit hours without terms could
claim that it meets the requirements for the minimum amount of work to
be performed by a full-time student over an academic year by giving a
full-time student a minimal amount of instruction over a 30-week (or
more) period, which the institution claims to be equivalent to 24
semester or 36 quarter hours. A modification was made to require that,
for educational programs using credit hours, but not using a semester,
trimester, or quarter system, a week of instructional time is any week
in which at least five days of regularly scheduled instruction,
examinations, or preparation for examinations occurs, as opposed to one
day of regularly scheduled instruction, examinations, or preparation
for examinations for all other programs. In response to public comment,
the Secretary has amended the definition of an academic year to require
that, for educational programs using credit hours, but not using a
semester, trimester, or quarter system, a week of instructional time is
any week in which at least 12 hours of regularly scheduled instruction,
examinations, or preparation for examinations occurs. A corresponding
change has been made to the definition of an eligible program in
Sec. 668.8(b)(3)(ii). Third-party Servicer.
In response to public comment, the definition of third-party
servicer has been amended to specifically exclude the function of
providing computer services or software. This change merely codifies
the Secretary's determination in the preamble to the April 29, 1994
final regulations, that the function of providing computer services or
software is simply a technological means to assist in carrying out
certain administrative functions that are already included in the
definition third-party servicer under this part.
In response to public comment, the definition of third-party
servicer has been modified to expressly exclude employees of an
institution. For purposes of determining which individuals are
employees of an institution, with respect to administering any aspect
of an institution's participation in the Title IV, HEA programs, the
regulations now specify that an employee is an individual that works on
a full-time, part-time, or temporary basis at the institution; performs
all required duties that are relevant to the administration of the
institution's participation in the Title IV, HEA programs on site at
the institution under the supervision of the institution; is paid as an
individual directly by the institution; is not employed by or
associated with a third-party servicer; and is not a third-party
servicer for any other institution.
Section 668.3 Reductions in the Length of an Academic Year.
In the April 29, 1994 final regulations, the Secretary promulgated
regulations to implement the technical amendment that provided that the
Secretary may reduce, for good cause on a case-by-case basis, the
required minimum of 30 weeks of instructional time to not less than 26
weeks of instructional time in the case of an institution of higher
education that provides a 2-year or 4-year program of instruction for
which it awards an associate or baccalaureate degree. In response to
public comment the Secretary has amended Sec. 668.3(c) to clarify that
an institution may apply for a longterm reduction in the length of an
academic year if it wishes to continue operating with a reduced
academic year on a longterm basis. An institution's other option would
be to ask for a temporary reduction in the length of an academic year
while the institution changes to at least a 30 week academic year. The
Secretary notes that Sec. 668.3(c)(2) requires an institution that is
granted a longterm reduction in the length of an academic year to
reapply to the Secretary in order to continue the reduction whenever
the institution is required to apply to continue to participate in a
Title IV, HEA program.
The April 29, 1994 final regulations require that an institution
applying for a transitional or longterm reduction in the length of an
academic year must demonstrate that the institution has awarded,
disbursed, and delivered Title IV, HEA program funds in accordance with
the academic year requirements in section 481(d) of the HEA since July
23, 1992, as the requirements became applicable to the various Title
IV, HEA programs. In response to public comment, the Secretary has
added Sec. 668.3(d) to specify that an institution may demonstrate
compliance with this requirement by making arrangements that are
satisfactory to the Secretary to repay any overawards that resulted
from the improper awarding, disbursing, or delivering of Title IV, HEA
program funds.
Section 668.8 Eligible Program
English as a Second Language (ESL)
In response to public comment, the Secretary has removed
Sec. 668.8(j)(2) that required an institution to assess each student at
the end of an ESL program to substantiate that the student has attained
adequate proficiency in written and spoken English to use already
existing knowledge, training, or skills.
Undergraduate Educational Program in Credit Hours.
In response to public comment, the clock-hour/credit-hour
conversion regulations have been amended to reinstate the exemption
from the clock-hour/credit-hour conversion formula for programs of at
least two academic years in length that lead to an equivalent degree,
as determined by the Secretary. A similar change has been made for
programs offered by an institution that are fully creditable toward
that institution's equivalent degree, as determined by the Secretary.
Section 668.9 Relationship Between Clock Hours and Semester,
Trimester, or Quarter Hours in Calculating Title IV, HEA Program
Assistance
On October 20, 1994, Pub. L. 103-382 was signed by the President of
the United States. Pub. L. 103-382 amends the HEA to specify that
public or private nonprofit hospital-based diploma schools of nursing
are exempt from any regulations promulgated by the Department
concerning the relationship between clock hours and semester,
trimester, or quarter hours in calculating student grant, loan, or work
assistance under Title IV of the HEA. Accordingly, this section is
amended to provide for that exemption. This provision took effect on
July 1, 1994.
Subpart B--Standards for Participation in the Title IV, HEA
Programs
Section 668.12 Application Procedures
In response to public comment, the Secretary has revised
Sec. 668.12(b) to no longer automatically require an institution to
apply to the Secretary for a certification that the institution
continues to meet the standards for participation in the Title IV, HEA
programs if the institution adds an additional location that offers 100
percent of a program. The regulations have been revised to require that
if an institution adds an additional location that offers 100 percent
of a program, the institution is required to notify the Secretary in
accordance with 34 CFR 600.30. If the Secretary determines that the
addition of the location may impair an institution's administrative
capacity or financial strength, the Secretary may require the
institution to apply to the Secretary for a certification that the
institution continues to meet the standards for participation in the
Title IV, HEA programs.
Section 668.15 Factors of Financial Responsibility
In response to public comment, the Secretary has revised the cash
reserve requirement to provide that an institution will be deemed to
have sufficient cash reserves to make refunds if the institution
demonstrates that it meets the factors of financial responsibility in
Sec. 668.15 and demonstrates that it has paid refunds in a timely
manner over a two-year period. If the institution does not demonstrate
financial responsibility, the institution will have to post a letter of
credit in accordance with existing regulations. If the institution did
not demonstrate timely payment of refunds, the institution will have to
post a letter of credit equal to 25 percent of the Title IV refunds it
was required to make over the past year.
Based upon the change in requirements for the cash reserve related
to refund payments set out in 668.15, the Secretary has amended
Secs. 668.15(b)(7)(i)(A) and (8)(i)(B) to remove the reference to the
cash reserve fund in the delineation of items that would be included in
the list of institutional assets for the acid test analysis.
The Secretary has also amended the language in 668.15(b)(7)(i)(B)
to clarify that the determination of an institution's financial
responsibility depends, in part, upon an analysis of the relative size
of an institution's net operating losses over the prior two year
period. This clarification is being made to reflect the discussion on
59 FR 22382 of the April 29 final regulations, where the Secretary
explained that an analysis of an institution's operating losses was
made to determine if the losses in either or both of the institution's
two most recently completed fiscal years in sum total more than ten
percent of the institution's total net worth at the beginning of the
first year in the two year period.
The Secretary has amended Sec. 668.16(d) to delineate items that
the Secretary will consider in determining whether a State tuition
recovery fund is an acceptable substitute for the federal cash reserve
requirement.
Section 668.16 Standards of Administrative Capability
In response to public comment, the Secretary has modified the
provisions governing satisfactory academic progress in Sec. 668.16(e)
to provide clarification.
In response to public comment, the Secretary has revised
Sec. 668.16(l) that required that, to be administratively capable, an
institution was required to meet the 33 percent withdrawal rate
specified in the regulations. This provision is now applicable only to
institutions that seek to participate in a Title IV, HEA program for
the first time (``new'' schools). The Secretary has also changed the
withdrawal date provision to require institutions to report their
withdrawal rates for an award year time period, rather than an academic
year time period.
Section 668.22 Institutional Refunds and Repayments
Section 668.22(a)(1) has been amended to clarify that the
requirement that an institution have a fair and equitable refund policy
under which the institution makes a refund of certain charges to a
student who received Title IV, HEA program assistance, includes any
student whose parent received a Federal Direct PLUS loan on behalf of
the student. In addition, Sec. 668.22(i) has been amended to clarify
that ``financial aid'' includes Federal Direct PLUS loans received on
the student's behalf.
In response to public comment, changes have been made to remove
language that would have required an institution to treat a student on
a leave of absence as a withdrawal for purposes of this section.
Language has been removed from Secs. 668.22(a)(1)(ii), (e)(1)(i), and
(g)(2)(iv) of the April 29, 1994 final regulations to reflect this
change. Section 668.22(j)(1)(ii) has been amended to define the
withdrawal date for a student who does not return to the institution at
the expiration of an approved leave of absence or takes a leave of
absence that is not approved, as the student's last recorded date of
class attendance as documented by the institution. Section 668.22(j)(2)
has been added to specify that a leave of absence is approved for
purposes of this section if no other leave of absence has been granted
within a twelve-month period, the leave of absence does not exceed 60
days, the student makes a written request to be granted the leave of
absence, and the leave of absence does not involve additional charges
by the institution to the student. Section 668.22(j)(4)(iii)(A) has
been amended to require that an institution pay a refund that is due to
a student who does not return to the institution at the expiration of
an approved leave of absence, within 30 days of the date of expiration
of the leave of absence. Section 668.22(j)(4)(iii)(B) has been added to
require that an institution pay a refund that is due to a student who
is taking an unapproved leave of absence, within 30 days after the
student's last recorded date of class attendance as documented by the
institution.
In response to public comment, Sec. 668.22(b)(1)(iv)(A) has been
amended to reflect that the Secretary has removed Appendix A to this
part, Standards for Acceptable Refund Policies by Participating
Institutions, and replaced it with the Federal refund calculation
described in new Sec. 668.22(d).
Sections 668.22(c)(2)(ii) and 668.22(g)(2)(ii)(B) permit an
institution to exclude allowable late disbursements of loans made under
the Federal Direct Student Loan Program from a student's scheduled cash
payment. These sections have been amended to clarify that late
disbursements of loans made under the Federal Direct Student Loan
Program must be made in accordance with 34 CFR 685.303(d) of the
Federal Direct Student Loan Program regulations.
In response to public comment, Sec. 668.22(e)(i) has been amended
to define the minimum ``period of enrollment for which the student has
been charged'' as the semester, trimester, quarter, or other academic
term in the case of an educational program that is measured in credit
hours or clock hours and uses semesters, trimesters, quarters, or other
academic terms. Section 668.22(e)(ii) has been amended to define the
minimum ``period of enrollment for which the student has been charged''
in the case of an educational program that is measured in credit hours
or clock hours and does not use terms and is longer than or equal to
the academic year in length, as the greater of the payment period or
one-half of the academic year. Section 668.22(e)(ii) is also amended to
define the minimum ``period of enrollment for which the student has
been charged'' in the case of an educational program that is measured
in credit hours or clock hours and does not use terms and is shorter
than the academic year in length, as the length of the educational
program.
Section 668.22(f)(1)(ii), (f)(2)(i), (g)(3)(ii), (h)(1), (h)(2)(ii)
and (h)(2)(v) have been amended to clarify that, for purposes of this
section an institution is not required to determine whether a student
has received an overpayment and, therefore, is not required to return
any amount of a repayment, for noninstitutional costs for Federal
Direct Stafford, or Federal Direct PLUS program funds. This is
consistent with requirements for Federal Work Study (FWS), Federal
Stafford loan, Federal PLUS, and Federal SLS program funds.
In response to public comment, Sec. 668.22(g)(3)(iii)(B) has been
added to provide that an institution does not have to pay a refund if
the institution demonstrates that the amount of a refund would be $25
or less, provided that the institution has obtained written
authorization from the student in the enrollment agreement to retain
any amount of the refund that would be allocated to the Title IV, HEA
loan programs.
Consistent with the allocation order for the return of unsubsidized
and subsidized Federal Stafford loans, Sec. 668.22(h)(1)(v) has been
added and Sec. 668.22(h)(1)(vi) has been amended to clarify that an
institution must allocate a refund to eliminate outstanding balances on
unsubsidized Federal Direct Stafford loans received by the student
before allocating any portion of the refund to eliminate outstanding
balances on subsidized Federal Direct Stafford loans received by the
student.
Section 668.22(j)(3) has been amended to clarify that this
paragraph specifies the timely determination of withdrawal for students
who drop out of an institution. It is unnecessary to specify the timely
determination of a student's withdrawal in the case of students who
officially withdraw, are expelled, or take an unapproved leave of
absence, because the institution has either been informed of the
withdrawal, or has taken action to withdraw the student. Further, the
Secretary would expect an institution to be aware that a student has
failed to return from an approved leave of absence on the day that the
student is scheduled to return to the institution.
In order to provide further guidance on the refund process, the
Secretary has included flow charts that demonstrate the basic
procedures for determining which refund policy to use and general
guidance on how to calculate refunds. These flow charts are located in
a new Appendix A to this part (Flow Charts for Procedures for
Calculating Refunds Under Sec. 668.22).
Section 668.23 Audits, Records, and Examinations
References to a foreign institution have been removed from this
section to clarify that an institution, as that term is used throughout
the regulations, includes a foreign institution, as defined in 34 CFR
600.52, unless otherwise specified.
In response to public comment, Sec. 668.23(c)(1)(i) and (iii) have
been amended to specify that a third-party servicer's annual compliance
audit must meet the compliance audit standards for institutions. This
change reflects the Secretary's determination that a third-party
servicer, as an agent of an institution, must be examined with the same
standards that are applied to institutions.
The Secretary is making a technical change to Sec. 668.23(c)(1)(iv)
and (d) to specify that the U.S. General Accounting Office's
publication concerning general standards and standards for compliance
audits is now published under the title: Government Auditing Standards.
In response to public comment, a foreign institution's first audit
report is only required to cover the two most recently concluded award
years in which the foreign institution participated in the Title IV,
HEA programs, unless otherwise specified by the Secretary. If a foreign
institution has been participating in the Title IV, HEA programs for
less than two award years, the foreign institution's first audit report
must cover the entire period of time since the foreign institution
began to participate in the Title IV, HEA programs. This change to the
final regulations that were published on April 29, 1994, reduces the
burden that is placed upon a foreign institution that has been
participating in the Title IV, HEA programs for a long time. A new
Sec. 668.23(c)(2)(i)(B) incorporates this change.
In response to public comment, Sec. 668.23(c)(3) has been revised
to require that an institution's or third-party servicer's annual
compliance audit must be based upon the award year and submitted to the
Department of Education within six months after the end of the
institution's or third-party servicer's fiscal year that ends on or
after the most recently concluded award year for which the audit is
performed. A corresponding change has also been made to new
Sec. 668.23(c)(2)(i)(B) and to Sec. 668.23(c)(2)(ii).
In response to public comment, Sec. 668.23(h)(1)(v), which required
an institution to document a Title IV, HEA program recipient's
placement in a job, if the institution had a placement service and the
student used that service, has been removed. In addition,
Sec. 668.23(h)(2) (i) and (ii), which require an institution to
establish and maintain records regarding the admission requirements and
educational qualifications of each regular student the institution
admits into an eligible program, have been combined under
Sec. 668.23(h)(2) to simplify the regulations.
Subpart G--Fine, Limitation, Suspension and Termination Proceedings
Section 668.81 Scope and Special Definitions
Under the State Postsecondary Review Program (SPRP) authorized
under Part H-1 of Title IV of the HEA, a State Postsecondary Review
Entity (SPRE) reviews institutions referred to a State to determine if
the referred institutions meet applicable State standards. If a SPRE
determines, after affording an institution the opportunity to contest
that determination, that an institution should no longer participate in
the Title IV, HEA programs because it violates state standards, it
notifies the Secretary of that determination. Under 34 CFR 667.26(b)(2)
of SPRP regulations, the institution is not allowed to appeal that
termination determination to the Secretary.
Upon receipt of that notice, the Secretary immediately terminates
the institution's participation in the Title IV, HEA programs.
Accordingly, Sec. 668.81 is amended to clarify that Subpart G of Part
668 does not apply to terminations under the SPRP.
Subpart H--Appeal Procedures for Audit Determinations and Program
Review Determinations
Section 668.116 Hearing
The Secretary has also made a typographical correction to
668.116(e)(1)(vi) to reflect that institutions and third party
servicers have up to 30 days following the filing of a request for
review of an audit determination or a program review determination to
file certain other records and materials to be considered in
conjunction with their request. The April 29, 1994 final regulations
contained a typographical error that defined this period as ``3'' days
rather than the ``30'' days established for such documentary
submissions.
PART 682--FEDERAL FAMILY EDUCATION LOAN PROGRAMS
Subpart D--Guaranty Agency Programs
Section 682.413 Remedial Actions
The April 29, 1994 regulations applied the remedial actions of this
section to a third-party servicer that contracts with a lender or
guaranty agency to administer any aspect of the lender's or agency's
FFEL programs. However, the final regulations did not specify that a
third-party servicer was entitled to an opportunity to be heard prior
to the assessment of any remedial actions that the Secretary deems are
appropriate to the alleged violation. Accordingly, Sec. 682.413(e)(1)
is amended to provide third-party servicers that contract with lenders
or guaranty agencies with an opportunity to present evidence or other
information as to why the remedial action should not be levied against
the servicer. This change provides due process protection for third-
party servicers that contract with lenders or guaranty agencies.
Analysis of Comments and Changes
In response to the Secretary's invitation in the April 29, 1994
final regulations, 706 parties submitted comments. An analysis of the
comments that have resulted in changes to the final regulations
follows.
Major issues are grouped according to subject, with appropriate
sections of the regulations referenced in parenthesis. Other
substantive issues are discussed under the section of the regulations
to which they pertain. Technical and other minor changes and suggested
changes the Secretary is not legally authorized to make under the
applicable statutory authority are not addressed (unless the Secretary
believes it is necessary to do so.)
PART 668--STUDENT ASSISTANCE GENERAL PROVISIONS
Subpart A--General
Section 668.2 General definitions
Academic Year
Comments: Eighty-seven commenters commented on the Secretary's
definition of a week of instructional time for purposes of the
definition of an academic year and a week of instruction for purposes
of the definition of an eligible program in Sec. 668.8. A few
commenters asked for clarification on the implementation of the five-
day rule. One commenter suggested that the Secretary clarify the
definition of a week of instruction, because a strict reading of the
language implies that an institution would not be able to count as a
week of instruction any week in which there was not a full five days of
instruction due to a holiday, teacher workshop day, etc. Some
commenters were concerned that this provision would require their
students to make-up time for Federal holidays. One commenter observed
that given that there are approximately 12 Federal holidays per year,
even a nine-month program which meets five days per week would not be
deemed to have 30 weeks of instruction under the current definition of
an academic year. One commenter expressed concern that its institution
would have to eliminate a monthly inservice, during which meetings,
tutoring sessions, and professional lectures are conducted. Another
commenter stated that the State of Maryland would not permit them to
reduce the number of hours per day in order to add a fifth day of
class. The institution was concerned that under this provision, its
students who attend their weekend program would be ineligible for Title
IV, HEA program assistance. Another commenter requested that the
Secretary define a day of instruction, examination, or preparation.
Many commenters were concerned that requiring students to attend
classes at least five days per week if the students are attending
educational programs measured in credit hours without semesters,
trimesters, or quarters, would create time and economic hardships. The
commenters said the schedules of these programs are tailored to meet
the needs of non-traditional students who have family and work
obligations which require flexible school schedules. Many commenters
believed that under this provision, students would encounter decreased
wages and increased child care costs if they were required to spend
extra days in class. Some commenters stated that this rule would only
contribute to student absenteeism. Other commenters argued that this
provision would work as a disincentive for some students to attend
these programs and would serve as an agent in cutting off equal access
to students who cannot attend classes five days a week. Some commenters
feared that this rule would have a substantially negative impact on
enrollment at their institutions. One commenter stated that he
specifically chose his program of study because it allowed flexibility
in attending classes and retaining his job, and this provision would
prohibit him and many other students from pursuing their education and
employment opportunities. Some commenters maintained that students who
travel to institutions for intensified weekend programs would be
severely impacted by this provision, as they would incur greater
transportation and lodging costs. Some commenters viewed the provision
as discriminatory, as it would limit educational access for some
students. One of the commenters observed that traditional education is
not effective in low-income, single-parent households. A few commenters
believed that the Secretary did not take into account the rationale for
the use of non-standard terms. These institutions offer more starts
with less students so that staff can better assist students with
placement upon completion of the program.
Some commenters remarked that while the current definition
addresses the required minimum of days per week, it disregards the
number of hours per day. Many commenters felt that the Secretary should
focus on the amount of daily instructional time rather than the number
of days per week spent in the classroom. The commenters questioned the
relationship between the number of days a student attends classes and
the quality of a program, especially if the regulation does not
recognize the length of time a student spends in class per day. One
commenter suggested that the Secretary define its 30-week academic year
as any period of at least 30 chronological weeks, i.e., 210 days, in
which at least 720 clock hours of instruction is scheduled to occur.
This methodology translates to requiring scheduled attendance of at
least 24 hours of attendance per week for a full-time student and is
consistent with the Department's long-standing definition of full-time
status. The commenter noted that given that non-fixed term institutions
frequently have weekly or bi-weekly starts which could make it
difficult for auditors to determine exactly where vacations and/or
other activities not related to class preparation might fall, this
proposal is more easily audited since the program reviewer or auditor
would simply need to look at the program curriculum to determine the
total number of classroom hours of instruction within the period. The
commenter maintained that this proposed change is consistent with the
Department's historical definition of full-time status, is easier to
audit, satisfies current clock-hour/credit-hour conversion
requirements, and is less administratively burdensome than the
definition in the final rule. One commenter believed the effective date
and the timeframe allowed for institutions to comply with this
regulation was too stringent. The commenter felt that institutions and
students should be given sufficient time to rearrange their schedules
based on the changes necessitated by this requirement.
Discussion: The Secretary would like to clarify the Department's
interpretation of the five-day rule under the regulations in effect for
the 1994-95 award year as it applies to programs which measure progress
in credit hours but do not use standard terms (semesters, trimesters,
or quarters). A proprietary institution of higher education or a
postsecondary vocational institution must, to be eligible, provide an
eligible program, as defined by Sec. 668.8(d) of the Student Assistance
General Provisions regulations. Section 668.8(d) provides for three
types of eligible programs for these institutions which require a
program to have a specified number of weeks of instruction (see
Sec. 668.8(d) (1), (2), and (3)). In addition, each participating
institution is subject to a definition of an academic year in which a
full-time student (with respect to an undergraduate course of study),
during a minimum of 30 weeks of instructional time, must complete a
specified amount of work.
For purposes of these definitions of an eligible program and an
academic year, for all educational programs measured in credit hours
without standard terms (semesters, trimesters, or quarters), a ``week
of instruction'' and a ``week of instructional time'' must include at
least five days of instruction, examinations, or preparation for
examinations within a consecutive seven-day period, as opposed to the
required one day of instruction, examinations, or preparation for
examinations per seven day period for all other programs.
The five-day rule in effect requires an institution to demonstrate
that certain programs and academic years for those programs have not
only a minimum number of weeks, but also a minimum number of days. For
example, in order for a program to meet the eligible program definition
that requires at least 600 clock hours, 16 semester or trimester hours
or 24 quarter hours of instruction, examinations, or preparation for
examinations offered during a minimum of 15 weeks, the program must
meet for a minimum of 15 weeks over which a minimum of 75 days of
instruction, examinations, or preparation for examinations occur (five
days of instruction, examinations, or preparation for examinations for
15 weeks).
An institution that wants to set its program to be only 15 weeks
long would therefore have to meet an average of five days per week for
the 15 week period in order for the program to be eligible. An
institution with a program that meets less frequently than five days a
week would have to meet enough weeks to provide 75 days of instruction,
examinations, or preparation for examinations. For example, a program
meeting three times a week would have to be 25 weeks long in order to
be eligible under this provision.
This same approach is used to determine an institution's academic
year. An institution that wants to set its academic year to be only 30
weeks long would have to meet an average of five days per week for the
30 week period. An institution with a program that meets less
frequently than five days a week would have to meet enough weeks to
provide 150 days of instruction, examinations, or preparation for
examinations (30 weeks x five days per week) in order to have a program
offered over a full academic year. For example, a program that meets
four times a week would have a full academic year of approximately 38
weeks (37 weeks x four days per week (plus an additional 2 days) = 150
days of instruction, examinations, or preparation for examinations). An
institution has the option of pro rating Title IV, HEA program aid
disbursements if it chooses to offer an eligible program over a period
of time less than an full academic year.
The Secretary believes that this interpretation addresses many of
the concerns of the commenters, as it does not require an institution
to restructure a program to schedule five days of classes per week or a
student to be in attendance five days per week. This interpretation
allows an institution to establish a class schedule that meets the
needs of its student population, while ensuring that the student is
provided with a sufficient amount of education. The Secretary does not
specify what constitutes a day of instruction, examination, or
preparation for examination. However, the Secretary would expect an
institution to be able to demonstrate that the amount of instruction,
examinations, or preparation for examinations offered or required is
reasonable and necessary for completion of the program.
The Secretary agrees with the commenters who noted that it would be
more appropriate for the current definitions of a week of instructional
time and a week of instruction to take into account the hours of
education offered to students each week, rather than the days of
education offered each week. In particular, the Secretary agrees with
the commenter who suggested that the Secretary define an academic year
in a manner that relates to the amount of work that a full-time student
is expected to perform over this period. To this end, the Secretary has
decided to modify the definition of an academic year and an eligible
program beginning with the 1995-96 award year to require that, for
educational programs using credit hours, but not using a semester,
trimester, or quarter system, a week of instructional time (and a week
of instruction) is any week in which at least 12 hours of regularly
scheduled instruction, examinations, or preparation for examinations
occurs. The Secretary believes that a minimum number of hours, as
opposed to a minimum number of days per week, will permit even greater
flexibility to institutions that seek to provide education to
nontraditional students. The Secretary believes that 12 hours per week
is a reasonable measure, since full-time students are expected to carry
a minimum of 12 semester or quarter hours per academic term in an
educational program using a semester, trimester, or quarter system.
Thus, full-time students enrolled in such programs are generally
assumed to be in class attendance at least 12 hours per week, and this
hourly requirement has been adopted to replace the five day rule to
measure program eligibility. This provision is to be implemented in the
same manner as the five-day rule provision. For example, in order for a
program to meet the eligible program definition that requires at least
600 clock hours, 16 semester or trimester hours or 24 quarter hours of
instruction, examinations, or preparation for examinations offered
during a minimum of 15 weeks, the program must meet for a minimum of 15
weeks over which a minimum of 180 hours of instruction, examinations,
or preparation for examinations occur (12 hours of instruction,
examinations, or preparation for examinations per week for 15 weeks).
An institution that wants to set its program to be only 15 weeks long
would therefore have to meet an average of 12 hours per week for the 15
week period in order for the program to be eligible. An institution
with a program that meets less frequently than 12 hours per week would
have to meet enough weeks to provide 180 hours of instruction,
examinations, or preparation for examinations. For example, a program
meeting 6 hours per week would have to be 30 weeks long in order to be
eligible under this provision.
Because neither the current five-day rule nor the 12-hour per week
provision requires an institution to offer instruction, examinations,
or preparation for examinations on specific days, an institution may
not include a holiday for these calculations unless regularly scheduled
instruction, examinations, or preparation for examinations occurs on
that day.
Because the interpretation detailed above does not require an
institution to restructure a program to meet 5 days per week, the
Secretary does not agree that it was necessary to delay implementation
of this requirement.
Changes: The definition of an academic year has been amended to
require that, for educational programs using credit hours, but not
using a semester, trimester, or quarter system, a week of instructional
time is any week in which at least 12 hours of regularly scheduled
instruction, examinations, or preparation for examinations occurs. A
corresponding change has been made to the definition of an eligible
program in Sec. 668.8(b)(3)(ii).
Comments: One commenter observed that many external degree and
adult learning programs are trying to reduce the number of days spent
in the classroom. One commenter requested that the Secretary utilize
the diversity and plurality of the education system by recognizing the
amount of time the student spends in different educational settings.
One commenter remarked that although instruction does not include
periods of orientation or counseling, that is the time when some
schools perform their required entrance loan counseling.
Discussion: The Secretary agrees that internships, cooperative
education programs, independent study, and other forms of regularly
scheduled instruction can be considered as part of an institution's
academic year. Orientation programs and counseling do not provide
educational instruction related to class preparation or examination and
must not be included in determining the length of an academic year.
Changes: None.
Comments: Some commenters were confused as to the specific abuses
that the Secretary is attempting to curb with the five-day rule. A few
commenters disagreed with the Secretary's rationale that credit hour
non-term programs are more susceptible to abuse than a traditional
academic program. Many of the commenters believed that the 30-week
academic year and the clock-hour/credit-hour conversion provisions have
adequately dealt with this situation. One commenter requests that the
Secretary demonstrate how it is possible to abuse the current
definition and still meet the requirements for clock-to-credit-hour
conversions. Several commenters believed that this provision is
unnecessary, as the abuses that the Secretary is trying to curb with
this rule are already addressed by other existing provisions (for
example: certification gatekeeping functions contained in the HEA;
State requirements which specify hours of instruction or academic
calendars which consider class attendance on a daily or weekly basis;
accrediting agencies which are required to look at the relationship
between tuition and program length as it relates specifically to
vocational training; and the SPRE standards). The commenters feel that
the public would be better served by relying on existing regulations
relating to program length, rather than requiring five days of
instruction per week. A few commenters did not understand why its
program met the program contact hours requirements of its accrediting
agency, yet did not comply with the Department's regulations. One
commenter requested clarification of the Secretary's policy of
requiring accreditation of an institution for oversight, but not
accepting verification by these accrediting agencies that an
institution's programs are educationally sound.
Some of the commenters noted that this provision was not addressed
in the February 28, 1994 notice of proposed rulemaking or during
negotiated rulemaking and there was no opportunity to comment on this
provision until publication of the final rule. Some commenters argued
that the Department is exceeding its statutory authority, as Congress
did not define this provision during reauthorization. One of these
commenters believed there was no indication in the proposed rule that
non-standard term programs would be singled out for discriminatory
treatment in the definition of an academic year. The commenter
understood that although the Secretary indicated he was concerned about
assuring no opportunities for abuse by these programs, he made that
statement in the context of the possible need to establish a standard
workload for a full-time student; not in the context of making changes
to the definition of an academic year and an eligible program. Many of
the commenters believed that this provision is prejudicial against
credit hour institutions without terms, and suggested that the
Secretary apply the same definition of a week of instruction to all
institutions. One commenter was concerned that the regulation treats
programs that have a term, but a term that is not a semester, trimester
or quarter, the same as ``nonterm'' programs. Another commenter felt
that the interests of the four-year institutions were better
represented than the nonterm institutions which would be more impacted
by this provision. One commenter noted that the Secretary has made an
exception for programs that lead to associate, bachelor, or
professional degrees, but not for nondegree programs.
Discussion: As stated in the February 28, 1994 NPRM and the April
29, 1994 final regulations, the Secretary is correcting an abuse of the
definition of an academic year whereby an institution that has programs
that are measured in credit hours without standard terms could claim
that it meets the requirements for the minimum amount of work to be
performed by a full-time student over an academic year by giving a
full-time student a minimal amount of instruction over a 30-week (or
more) period, which the institution claims to be equivalent to 24
semester or 36 quarter hours. The Secretary believes that provisions
that address this area of abuse are appropriate in the regulations to
prevent institutions from establishing elongated instructional
schedules that do not require an appropriate workload throughout that
period for a full-time student. Institutions offering credit hour
programs without standard terms have more flexibility in shifting the
workload requirements for their programs over an indefinite period than
do clock hour programs or credit hour standard term programs. The
Secretary believes that it is appropriate to establish minimum
instructional periods that must be used for students attending these
institutions. No corresponding changes need to be made where students
are already required to receive a minimum amount of clock hours of
training per week to be full-time students, or where the institution
has fixed standard terms.
It is the Secretary's responsibility, and not an institution's
accrediting agency, to utilize the definitions of an academic year and
an eligible program in the HEA to ensure that appropriate amounts of
Title IV, HEA program funds are disbursed to students. The Secretary
does not believe that other provisions of the HEA or of the regulations
address the specific area of abuse that this provision addresses.
Although the clock-hour/credit-hour provision provides some protection
against course structuring where an insufficient quantity of
instruction is offered to support the academic credits assigned to the
program, it does not prevent an institution from stretching the length
of an educational program to conform to the minimum number of weeks
required without offering an appropriate quantity of instruction during
each of those weeks. Further, the Secretary notes that there are
programs that must meet the statutory minimum number of weeks under the
academic year and eligible program definitions that are not subject to
the clock-hour/credit-hour regulations. For example, a training program
in which each course is fully acceptable toward the institution's
associate degree would be exempt from the clock-hour/credit-hour
provision.
The Secretary notes that the February 28, 1994 NPRM requested
comment on whether a minimum full-time workload for students enrolled
in these educational programs should be established to address this
abuse. Several commenters agreed that this abuse should be addressed.
Rather than changing the proposed definition of full-time student to
require measurement of student workloads, the Secretary believes it is
more beneficial to stem abuse in this area by modifying the definitions
of an academic year and an eligible program to require a minimum amount
of instruction per week for institutions that offer credit hour
programs without terms.
The Secretary notes that the statute defines an academic year in
terms of weeks of instructional time and certain eligible programs in
terms of weeks. The statute does not apply these terms to the
definitions of eligible programs that qualify an institution as an
institution of higher education for purposes of the Title IV, HEA
programs. For the reasons stated above, the Secretary believes it is
necessary to define these terms in a manner that will protect Title IV,
HEA program funds.
Changes: None.
Third-Party Servicer
Comments: Five commenters suggested, for the purposes of 34 CFR
part 668, that the definition of third-party servicer in this section
should only identify those functions relating to third-party servicers
that contract with institutions (as opposed to those third-party
servicers that contract with lenders and guaranty agencies) to provide
third-party servicers and institutions a clear understanding of which
provisions are applicable. The five commenters also suggested that the
definition of third-party servicer should be limited to those
activities that an institution is required to perform under its
participation agreement with the Secretary. These commenters believed
that such a limitation would result in services such as consulting,
training, computer services, ability to benefit test publishers, and
legal advice not being covered by these regulations. The five
commenters recommended clarifying that administration of participation
is limited to what is specified in the institution's participation
agreement with the Secretary.
Discussion: The Secretary does not believe that additional
clarification of the definition of third-party servicer is necessary in
the form recommended by the commenters. Section 481(f) of the HEA
specifies that a third-party servicer is an individual, State, or
private, profit or nonprofit organization that enters into a contract
with an eligible institution to administer, through either manual or
automated processing, any aspect of the institution's participation in
any Title IV, HEA program. A third-party servicer that contracts with
an eligible institution to administer any aspect of the institution's
participation in the Title IV, HEA programs is required to follow the
provisions in 34 CFR part 668 that are applicable to third-party
servicers. Under the program participation agreement that an
institution signs to participate in the Title IV, HEA programs, the
institution specifically agrees to abide by all rules and regulations
pertaining to Title IV of the HEA. Therefore, the suggestion to limit
the scope of the definition of third-party servicer to what is required
under a program participation agreement would not narrow the scope of
the definition of third-party servicer, and could result in confusion
over the definition of third-party servicer.
Changes: None.
Comments: Five commenters contended that the function of processing
student financial aid applications was ambiguous and needed further
clarification or else should be removed. The commenters argued that the
Free Application for Federal Student Aid (FAFSA) is sent to the central
processor or Multiple Data Entry Processor (MDE) and the function
therefore should not be covered by the regulations. In addition, the
commenters recommended that if the Secretary kept the language, that
processing student financial aid applications should be clarified to
exclude non-Federal financial aid applications.
Five commenters recommended that the function of determining
student eligibility and related activities should not include ``related
activities.'' The commenters argued that related activities was too
ambiguous a term and was highly subjective.
Five commenters recommended clarifying the function of certifying
loan applications to not include guaranty agency or lender electronic
processing of loan applications because, the commenters contended,
these entities merely use data provided by an institution.
Five commenters were concerned that escrow agents, as that term is
used pursuant to 34 CFR 682.408, would be considered to be third-party
servicers under the definition of third-party servicer in 34 CFR part
668. The commenters recommended that the Secretary specifically exclude
the function that escrow agents perform from the list of functions that
the Secretary does not consider administration of the Title IV, HEA
programs because, the commenters contended, an escrow agent disburses
funds for a lender under the FFEL programs and not for an institution.
In addition, the commenters argued that the function of receiving,
disbursing, or delivering Title IV, HEA program funds should include
clarification that disbursements of funds are those received by the
institution from the Secretary or lender.
One commenter argued that the definition of a third-party servicer
should include an attorney that is carrying out litigation activities
on Title IV, HEA program loans. Two commenters recommended that a
dollar threshold be established so as not to preclude services by local
attorneys on a small number of accounts. Three commenters argued that
attorneys should be excluded from the definition of a third-party
servicer. The commenters pointed out that if attorneys are covered by
these regulations that conflicts may arise between these regulations
and other Federal and State rules and regulations governing the conduct
of attorneys.
Five commenters recommended excluding data exchange functions from
the list of functions that the Secretary does not consider
administration of the Title IV, HEA programs. The commenters believed,
for example, that the Student Loan Clearinghouse, which the commenters
stated received and consolidated student enrollment data, should not be
considered a third-party servicer because the company merely
consolidates data for institutions, lenders, and guaranty agencies.
Eight commenters supported the Secretary's decision to not include
computer services and software providers from the list of functions
that the Secretary considers to constitute administration of the Title
IV, HEA programs. Six of the commenters requested that the Secretary
specifically exclude these services in the regulations. One commenter
believed that the function of providing industry-specific software or
service packages should be included in the list of functions that the
Secretary considers to constitute administration of participation in
the Title IV, HEA programs because flaws in these programs could result
in huge liabilities for institutions using the software. However, the
commenter also believed that computer software packages that are
modifiable by the user should not be covered by the regulations.
One commenter recommended that alternate Electronic Data Exchange
(EDE) destination points that serve only as an electronic conduit from
the Central Processing System to an institution should be excluded from
the definition of third-party servicer because this type of activity is
not a function of administering an institution's participation in the
Title IV, HEA programs.
Discussion: The Secretary does not agree with those commenters who
recommended removing the function of processing financial aid
applications. The Secretary believes that processing financial aid
applications is of fundamental importance to the proper delivery of
program funds authorized under Title IV of the HEA, and third-party
servicers contracting to perform this type of administration of the
Title IV, HEA programs must be held accountable for any violations
caused by the servicer. The Secretary also believes that the definition
of third-party servicer is sufficiently clear as applying only to the
function of processing financial aid applications required by the
Federal government for determinations by an institution of student
eligibility under the Title IV, HEA programs.
The Secretary does not agree with those commenters that recommended
modifying the function of determining student eligibility and related
activities to exclude ``related activities.'' The statute defines the
functions of a third-party servicer as administration of any aspect of
an institution's participation in any Title IV, HEA program. Since
there was no contention among commenters that determining student
eligibility was not a third-party servicer function and because the
statutory definition of third-party servicer is sufficiently broad, the
Secretary believes that the inclusion of ``related activities,'' such
as reviewing documents submitted as a result of student verification,
assists public understanding that a related function of determining
student eligibility is a third-party servicer activity and avoids the
possibility of third-party servicers attempting to avoid the
requirements of these regulations.
The Secretary agrees with commenters that the function of
certifying loan applications by an institution or its third-party
servicer should not include guaranty agency or lender electronic
processing of loan applications. However, the Secretary does not
believe that a change to the regulatory language is warranted because
guaranty agency and lender involvement in the certification of loan
applications under the FFEL programs is a routine practice of these
entities and is monitored under the FFEL programs. The Secretary does
not consider a guaranty agency or lender that electronically processes
loan applications for the FFEL programs and performs its assigned role
in the programs that the guaranty agency or lender participates in to
be considered a third-party servicer of an institution under these
regulations.
The Secretary does not agree with commenters that the function of
an escrow agent, as that term is used pursuant to 34 CFR 682.408,
should be added to the list of functions that the Secretary does not
consider to be an administration of an institution's participation in
the Title IV, HEA programs. Nor does the Secretary believe that the
function of receiving, disbursing, or delivering Title IV, HEA program
funds should be clarified to only include disbursements of funds that
are received by the institution from the Secretary or lender. The
Secretary believes that commenters have inadvertently misread the
definition of third-party servicer under 34 CFR part 668 as including
the functions of an escrow agent under 34 CFR 682.408. Under the
definition of third-party servicer in 34 CFR part 668, a third-party
servicer is an individual or a State or private, profit or nonprofit
organization that enters into a contract with an eligible institution
to administer, through either manual or automated processing, any
aspect of the institution's participation in any Title IV, HEA program.
Because an escrow agent under 34 CFR 682.408 contracts with an eligible
lender or guaranty agency to administer aspects of the lender's or
guaranty agency's FFEL programs and does not contract with an eligible
institution, an escrow agent is a third-party servicer of a lender or
guaranty agency and not of an institution and is considered to be a
third-party servicer under the definition of third-party servicer in 34
CFR part 682.
The Secretary generally agrees with those commenters who believed
that attorneys should not be covered by the definition of a third-party
servicer under these regulations. However, as noted in the discussion
of comments in the final regulations published in the Federal Register
on April 29, 1994, the Secretary, in promulgating the definition of
third-party servicer, applied the definition to a list of functions
relating to the administration of the Title IV, HEA programs, and
therefore is not regulating or excluding distinct entities by their
identity but rather the activities that individuals or organizations
perform in contracting with institutions. Provision of legal advice or
litigation activities are not included in these functions. However, it
is possible that an attorney would be considered to be a third-party
servicer under these regulations if the activity of the attorney,
performed on behalf of an institution, constitutes administration of
the Title IV, HEA programs. It is not appropriate to state that
attorneys are never considered third-party servicers as that would
permit services to escape oversight simply by being provided under
attorney signatures or by non-attorneys working for attorneys or their
law firms.
With respect to those commenters who recommended establishing a
dollar threshold to exclude local attorneys providing services on a
small number of accounts, the Secretary does not believe that such a
limitation is justifiable in the face of the statutory definition of
third-party servicer. The statute does not permit the Secretary to
promulgate a monetary threshold for administration of Title IV, HEA
program funds to determine whether or not an individual or organization
is a third-party servicer administering those funds.
The Secretary disagrees with those commenters who recommended
specifically excluding data exchange functions under the list of
activities that the Secretary does not consider administration of the
Title IV, HEA programs. The Secretary believes that data exchange is an
overly broad term that encompasses a wide variety of services such as
processing raw student eligibility data, determining completion rates,
or transmission of prepared data. With such an encompassing reach, the
Secretary cannot support excluding all data exchange from the oversight
of third-party servicers by the Secretary that is afforded by these
regulations.
The Secretary agrees with those commenters who supported the
Secretary's decision to exclude computer software or service providers
from the list of activities that the Secretary considers to constitute
administration of an institution's participation in the Title IV, HEA
programs. As explained in the discussion of comments in the final
regulations that were published in the Federal Register on April 29,
1994, the Secretary believes that the function of providing computer
software or services is simply a technological means to assist in
carrying out certain administrative functions that are already included
in the definition of third-party servicer in 34 CFR part 668. The
Secretary also agrees with the commenters who believed that the
function of providing computer software or services should be
specifically excluded from the definition of third-party servicer in
the list of functions that the Secretary does not consider to
constitute administration of an institution's participation in the
Title IV, HEA programs. Because the Secretary has already provided
explanation in the discussion of comments in the final regulations
published on April 29, 1994, in the Federal Register, the Secretary
believes that it is appropriate to provide that exclusion in the
regulations.
With respect to the commenter who recommended that alternate EDE
destination points be excluded from the definition of third-party
servicer in these regulations, the Secretary does not agree with the
comment. It is the experience of the Secretary that alternate EDE
destination points use the data that institutions provide to assist in
the administration of the institution's participation in the Title IV,
HEA programs. Alternate EDE destination points provide institutions
with assurances that the data relayed from the institution to the
alternate EDE destination point will be provided to the Central
Processor without error. Therefore, it is the position of the Secretary
that such a service should be under the oversight of these regulations
since relaying electronic information to the Central Processor is an
important function in the processing of Federal student financial
assistance claims.
Changes: A change has been made. The definition of third-party
servicer is amended to specifically exclude the function of providing
computer software or services from what the Secretary considers to
constitute the administration of an institution's participation in the
Title IV, HEA programs.
Comments: Two commenters believed that temporary employees employed
on-site at a campus under the complete supervision of an institution's
financial aid administrator (FAA) to assist in the administration of an
institution's participation in the Title IV, HEA program should not be
considered to be a third-party servicer. Two commenters believed that
``moonlighting'' FAAs who contract with other institutions to assist in
administering those institutions' participation in the Title IV, HEA
program should not be considered to fall within the scope of the
definition of third-party servicer. Another commenter recommended that
individuals taking on small consulting activities should not be subject
to the same stringent requirements as corporate consulting firms that
manage financial aid offices for several institutions. Three commenters
were concerned that employment contracts would fall within the scope of
the definition of a third-party servicer thereby making employees that
administer an institution's participation in the Title IV, HEA programs
third-party servicers.
Discussion: The Secretary agrees with those commenters that
believed that individuals employed on a temporary basis should not be
considered to be third-party servicers. The Secretary recognizes that
individuals who work full-time as financial aid administrators at one
institution often moonlight and provide valuable assistance at other
institutions during busy periods of the award year. The Secretary
believes that these individuals can appropriately be considered as
employees even if they are not paid as a regular salaried or hourly
employee of the institution.
With respect to employees hired pursuant to specific employment
contracts, the Secretary does not believe that such contracts trigger
the third-party servicer requirements. The Secretary never intended
that individuals employed by an institution in a capacity that involves
the administration of any aspect of an institution's participation in
the Title IV, HEA programs would be considered to be a third-party
servicer. The Secretary, is concerned however, that a third-party
servicer not be designated as an employee simply to avoid the
requirements of these regulations. The Secretary, therefore, considers
an individual engaged on a temporary basis to be an employee if the
person performs all required duties that are relevant to the
administration of the institution's participation in the Title IV, HEA
programs on site at the institution under the institution's
supervision, is paid directly by the institution, and is not employed
by or associated with a third-party servicer and is not engaged as a
third-party servicer at another institution. This language is not
intended to enable individuals who perform services for multiple
institutions during an award year to avoid being considered a third-
party servicer. The Secretary will in the future consider whether
further regulation is required if the employee designation is abused.
Changes: Changes have been made. The definition of third-party
servicer has been amended to clarify that employees of an institution
are not considered to be third-party servicers. An individual is
considered an employee of the institution if the individual works on a
full-time, part-time, or temporary basis at the institution; performs
all duties on site at the institution under the supervision of the
institution; is paid as an individual directly by the institution; is
not employed by or otherwise associated with a third-party servicer;
and is not a third-party servicer for any other institution.
Section 668.3 Reductions in the Length of an Academic Year.
Comments: Four commenters asked the Secretary to clarify that on-
going reductions, as opposed to transitional reductions, in the minimum
length of an academic year are permitted. One commenter questioned when
the two-year period began for transitional reductions in the minimum
length of an academic year. One commenter did not understand how an
institution could demonstrate that it has provided Title IV, HEA
program funds to its students based on the academic year requirements
in section 481(d) of the HEA since July 23, 1992, and also meet the
requirement that an institution must have an academic year that is less
than 30 weeks on the effective date of the regulations in order to
obtain a transitional reduction. One commenter urged the Department to
remove the requirement that an institution demonstrate that it has
provided Title IV, HEA program funds to its students based on the
academic year requirements in section 481(d) of the HEA since July 23,
1992. Another commenter did not believe that Congress or the Department
intended to force institutions to prove retroactively that they had a
30-week academic year prior to publication of the regulations. The
commenter noted that there was no way for an institution to ``make
amends'' if the institution was not previously in compliance.
One commenter was pleased that the Secretary had clarified
preliminary requirements for institutions requesting a reduction in the
minimum length of an academic year. The commenter further commended the
Secretary for providing that currently participating institutions may
be granted a temporary reduction for a period not to exceed two years,
if the institution demonstrates a commitment to change to a 30 week
academic year. The commenter felt that it would be beneficial for the
Secretary to provide examples of what ``unique conditions'' the
Secretary would look for when evaluating an institution's request for a
longterm reduction. One commenter felt that the Secretary should
provide guidance regarding the basis for a denial of a reduction
request. Specifically, the commenter questioned whether the Secretary
will abide by the decision of the accrediting agency that the academic
quality of the institution is satisfactory, or if and when he will
contravene such a determination.
Discussion: The Secretary would like to clarify that there are two
types of minimum academic year reductions for which an institution may
apply. The first type is a transitional waiver. An institution may ask
for a temporary reduction in the length of an academic year while the
institution changes to a 30 week academic year. This transitional
reduction may not exceed two years from the effective date of the April
29, 1994 final regulations (July 1, 1994). The second type is a
longterm waiver. An institution may apply for a longterm reduction in
the length of an academic year if it wishes to continue operating with
a reduced academic year on a longterm basis. The Secretary notes,
however, that Sec. 668.3(c)(2) states that an institution that is
granted a longterm waiver must reapply to the Secretary for a reduction
each time the institution is required to apply to continue to
participate in a Title IV, HEA program.
The Secretary notes that it is not inconsistent to require an
institution to demonstrate that it has provided Title IV, HEA program
funds to its students based on the academic year requirements in
section 481(d) of the HEA since July 23, 1992, and also meet the
requirement that an institution must have an academic year that is less
than 30 weeks on the effective date of the regulations. An institution
is permitted to have an academic year of less than 30 weeks, but may
not make full payment of Title IV, HEA program funds. However, unless
and until the institution is granted a reduction in accordance with
these regulations, the institution must pro rate the amount of Title
IV, HEA program assistance awarded to students in attendance based on
the definition of an academic year found in section 481(d) of the HEA.
The Secretary believes that it is appropriate to require that an
institution applying for a reduction in the length of an academic year
demonstrate that the institution has awarded, disbursed, and delivered
Title IV, HEA program funds in accordance with the academic year
requirements in section 481(d) of the HEA since July 23, 1992, as the
requirements became applicable to the various Title IV, HEA programs.
As the statute clearly states that an institution may not be granted a
reduction in the minimum length of academic year unless the institution
applies to the Secretary for a reduction, and the Secretary grants a
reduction, the Secretary expects that institutions with academic years
of less than 30 weeks that have not been granted a reduction have been
properly pro rating Title IV, HEA program assistance. The Secretary
believes institutions must have made a good faith effort to comply with
the requirements of the statute. The Secretary would like to clarify
that an institution that is ineligible for a reduction because the
institution did not properly award, disburse, or deliver Title IV, HEA
program funds in the past may be eligible for a reduction if the
institution makes arrangements that are satisfactory to the Secretary
to repay any overawards that resulted from the improper awarding,
disbursing, or delivering of Title IV, HEA program funds. The
Secretary's experience to date has been that this liability amount has
been insignificant.
In determining what constitutes ``unique circumstances'' that would
justify the Secretary granting a longterm reduction, the Secretary may
look at information such as whether an educational program has
historically provided instruction in a non-traditional manner for less
than 30 weeks in previous academic years and cost reduction to
students. Upon further consideration, the Secretary has decided that
program placement rates, completion rates or other educational outcomes
may also be evaluated as part of the Secretary's determination. Other
factors may qualify as unique circumstances that justify granting the
institution's request, depending upon the context in which these
factors are presented in a particular case.
The statute provides that a reduction may be granted by the
Secretary for good cause on a case-by-case basis. Therefore, the
Secretary, and not an institution's accrediting agency, is charged with
ensuring that reductions in the academic year are granted in a manner
that protects Title IV, HEA program funds. Although the Secretary
agrees that approval by an institution's nationally recognized
accrediting agency or State body that authorizes the institution to
provide postsecondary programs should be considered as a factor in
determining good cause for granting a reduction, the Secretary does not
believe that such approval on its own is sufficient reason for granting
an institution's request, as such an approval will most likely not
include all areas that the Secretary will look at to determine that a
reduction is warranted. Other factors that should be taken into account
include the number of hours of attendance and other coursework that a
full-time student is required to complete in the academic year, and any
unique circumstances that justify granting the institution's request.
Changes: Section 668.3(c) has been amended to clarify that an
institution may apply for a longterm reduction in the length of an
academic year if it wishes to continue operating with a reduced
academic year on a longterm basis. Section 668.3(d) has been added to
specify that an institution may demonstrate compliance with this
requirement by making arrangements that are satisfactory to the
Secretary to repay any overawards that resulted from the improper
awarding, disbursing, or delivering of Title IV, HEA program funds.
Section 668.8 Eligible Program
English as a Second Language
Comments: Many commenters requested the elimination of the
requirement that institutions test students at the conclusion of
English-as-a-Second-Language (ESL) programs to substantiate their
proficiency in English, and that schools only admit students who
``need'' such training. Commenters suggested that the Department lacks
the authority to require that institutions test program completers in
order to evaluate what they have learned or to dictate institutional
admissions policies. Furthermore, a number of commenters asserted that
they did not believe that the Department had grounds for limiting
student aid eligibility for individuals in ESL programs to Federal Pell
Grants only, as stipulated in the regulations.
Discussion: Upon further consideration, the Secretary agrees that
the assessment of whether an ESL program is providing adequate
instruction in English to allow a student to use already existing
knowledge, training, or skills should be left to an institution's
accrediting agency. Although findings from the Department of
Education's Inspector General have revealed more abuses in these
programs historically, the Secretary will defer regulating in this area
for now to provide the accrediting agencies an opportunity to address
this problem. The Secretary notes that an institution is still required
to document its determination that ESL instruction is necessary to
enable each student enrolled in its ESL program to use already existing
knowledge, training, or skills. The Secretary notes that section
401(c)(2) of the HEA limits the eligibility of these ESL programs to
the Federal Pell Grant Program. A student may receive other Title IV,
HEA program assistance for ESL coursework that is part of a larger
eligible program.
Changes: Section 668.8(j)(2) has been removed from the regulations.
Undergraduate Educational Program in Credit Hours
Comments: Five commenters requested that the Secretary put back
into the clock-hour/credit-hour conversion regulations the provision
that allows the Secretary to determine if a degree is an equivalent
degree and therefore exempt from the requirements of the clock-hour/
credit-hour conversion formula. Two of the commenters believed that
programs offered at institutions accredited by the Association of
Advanced Rabbinical and Talmudic Schools, which in some States lead to
the First Talmudic degree rather than a baccalaureate degree, is a
clear example of an equivalent degree and therefore should be exempted
from the clock-hour/credit-hour conversion requirements. Four
commenters suggested that the Secretary consider factors such as the
length of the program or acceptance as equivalent to the baccalaureate
degree for purposes of licensure by a State agency when determining if
a degree is in fact an equivalent degree.
Two commenters were concerned about the impact of the clock-hour/
credit-hour conversion regulations on hospital-based diploma nursing
programs that do not lead to a degree. The commenters believed that it
was unfair to reduce Federal financial assistance to students who were
enrolled at a hospital-based diploma school of nursing but were taking
a substantial number of credits at a local university or community
college. The two commenters requested that the Secretary allow programs
that offer equivalent credentials to be exempted from the clock-hour/
credit-hour conversion requirements.
One commenter requested that the Secretary allow an undergraduate
program offered over at least two years to be exempted from the clock-
hour/credit-hour conversion regulations if the program was equivalent
to an associate degree, as defined under paragraph (b) of this section.
Discussion: The Secretary agrees with those commenters who
requested that the Secretary reinsert the provision (previously removed
from the clock-hour/credit-hour conversion regulations in the April 29,
1994 final regulations) that an institution offering an undergraduate
educational program measured in credit hours and at least two academic
years in duration is exempt from applying the formula contained in
paragraph (l) to that program if the program provides an equivalent
degree as determined by the Secretary, or if each course within the
program is fully acceptable for credit toward that institution's
equivalent degree. Since publication of the final regulations on April
29, 1994, the Secretary has encountered at least one instance of a
degree that the Secretary considers to be an equivalent degree to a
baccalaureate degree. Given this additional information, the Secretary
believes that it is necessary to reinsert the ``equivalent degree as
determined by the Secretary'' language back into the clock-hour/credit-
hour conversion regulations so as not to penalize those institutions
that offer the equivalent degree.
With respect to those commenters who were concerned about the
impact of the clock-hour/credit-hour conversion regulations on
hospital-based diploma schools of nursing and who suggested inserting
``equivalent credential'' into the regulations to exclude these types
of programs, the Secretary believes that the issue has been resolved.
Pub. L. 103-382, which was signed by the President on October 20, 1994,
amends the HEA to specify that public or private nonprofit hospital-
based diploma schools of nursing programs are exempt from the clock-
hour/credit-hour conversion regulations as of July 1, 1994. The
Secretary has incorporated this statutory exemption into new
Sec. 668.9(b) (see discussion in the preamble for Sec. 668.9 under
significant changes to the final regulations). Because there is now a
statutory exemption for hospital-based diploma schools of nursing, the
Secretary sees no reason to provide a broad-based exclusion for non-
degree programs and therefore does not believe it to be appropriate to
exclude programs that lead to an equivalent credential.
The Secretary disagrees with the commenter who specifically
recommended excluding programs that are the ``equivalent of an
associate degree'' as defined under Sec. 668.8(b), from the
requirements of the clock-hour/credit-hour conversion regulations. The
Secretary believes that under the definition of the ``equivalent of an
associate degree,'' associate degree programs are already exempt from
the requirements of the clock-hour/credit-hour conversion regulations,
provided that the associate degree program is at least two academic
years of study. Furthermore, a two academic year program that is
acceptable for full credit towards a bachelor's degree is also exempted
from the clock-hour/credit-hour conversion requirements, provided that
the bachelor's degree program is offered at the same institution that
provides the two academic year program.
Changes: Changes have been made. The Secretary is amending
Sec. 668.8(k) (1) and (2) to exempt a program from the clock-hour/
credit-hour conversion requirements if the program is an equivalent
degree as determined by the Secretary or if each course within the
program is fully acceptable for credit toward the institution's
equivalent degree.
Comments: One commenter asked if there were any clock-hour/credit-
hour conversion requirements for programs offered in number of courses,
rather than in credit hours.
Discussion: Institutions that participate in the Title IV, HEA
programs must measure their programs in clock hours or in credit hours.
Changes: None.
Subpart B--Standards for Participation in the Title IV, HEA Programs
Section 668.12 Application procedures
Comments: There were a number of comments on this section. Many
commenters suggested that the requirement that an entire institution
must be recertified if the institution proposes to establish a branch
campus or an additional location that will offer 100 percent of an
educational program off site be deleted. Institutions expressed their
concern that this provision would act as a disincentive for
institutions to agree to offer programs at employer sites and would
therefore be at odds with the Administration's efforts to increase
education and training collaboration between institutions and
employers. Some commenters suggested that this provision be revised to
exclude programs offered by degree-granting institutions.
Discussion: The Secretary agrees that not all institutions that add
an additional location that offers 100 percent of a program need to be
required to be recertified. However, the Secretary has determined
through experience that the addition of a branch campus or other
location that offers a complete educational program can have a major
impact on the financial status of the whole institution and the ability
of the whole institution to administer the Title IV, HEA programs. For
many years, the Secretary has required institutions that seek to add a
location at which a complete educational program is offered to undergo
a certification review so that the Secretary could ascertain whether
the institution has the financial resources and sufficient
administrative capability to support another location.
Therefore, the Secretary has removed the requirement that an
institution must apply to the Secretary for a certification that the
institution continues to meet the standards for participation in the
Title IV, HEA programs if the institution adds an additional location
that offers 100 percent of a program. However, the Secretary requires
the institution to notify the Secretary of the addition of such a
location (as institutions that add an additional location that offers
at least 50 percent of an educational program are currently required to
do) if the institution wishes to have the location included in the
institution's participation in a Title IV, HEA program. The Secretary
puts institutions on notice that they may be required to file a
complete recertification application if the Secretary determines that
the addition of the location might impair an institution's
administrative capacity or financial strength.
Commenters that discussed employer-sponsored training programs
seemed not to understand that if institutions contract with employers
to provide training programs at the work-site or some other off-campus
location, that the employer is paying for the cost of training, and
that no Title IV, HEA program funds are involved, there is no need for
the institution to notify the Secretary.
Changes: Section 668.12 has been revised to no longer require an
institution to apply to the Secretary for a certification that the
institution continues to meet the standards for participation in the
Title IV, HEA programs if the institution adds an additional location
that offers 100 percent of a program. Section 668.12 has been further
revised to require that, if an institution adds an additional location
that offers 100 percent of a program, the institution is required to
notify the Secretary in accordance with 34 CFR 600.30. The current
regulations already provide that the institution may be required to
file a complete recertification application if the Secretary deems it
necessary.
Section 668.15 Factors of Financial Responsibility
General Standards of Financial Responsibility Cash Reserve
Comments: Many commenters believed that requiring an institution to
maintain a cash reserve fund equal to at least 25 percent of the total
dollar amount of refunds paid by the institution in the previous fiscal
year would not protect students or the Federal government if the
institution failed or went bankrupt. The commenters opined that in a
bankruptcy proceeding the disposition of any balance in the cash
reserve fund would fall under the jurisdiction of a Federal bankruptcy
court and therefore would not be available immediately to students or
to the government. Furthermore, some commenters indicated that because
an institution would have unrestricted access to cash reserve funds the
cash assets held in such funds are potentially at risk due to the
possibility of preferential transfer or fraudulent conveyance by an
owner in advance of a bankruptcy proceeding.
Many other commenters believed that the cash reserve fund
requirement was unnecessary in view of all the other requirements that
an institution must now satisfy to demonstrate that it is financially
responsible. The commenters contended that this requirement would place
an ``undue burden'' on an institution and could prevent the institution
from otherwise meeting other financial responsibility standards or even
cause the institution to become financially unstable. Moreover, based
on the new criteria for calculating a refund under the ``fair and
equitable'' refund provisions, the commenters were concerned that the
amount of the cash reserve could grow significantly in a short period
of time and would thus place an increasing and on-going financial
burden on the institution. Some of these commenters, and other
commenters, urged the Secretary to reduce the amount of the required
reserve from 25 percent to either 10 percent or an amount that would be
necessary for the institution to be able to make refunds for a 30-day
period. Another commenter suggested that the Secretary impose the cash
reserve requirement only on an institution that does not satisfy all
other financial responsibility standards; or, require that the
institution maintain, temporarily, a cash reserve fund until the
institution is able to provide, to the Secretary, an irrevocable letter
of credit.
Other commenters believed that the cash reserve requirement would
adversely affect an institution's ability to maintain its educational
standards because capital that would traditionally be available to the
institution for reinvestment in the institution or otherwise used to
support the institution's educational services and facilities would now
have to be wastefully set aside in a reserve fund. The commenters
suggested that the Secretary restructure the requirement to allow an
institution to mitigate or eliminate its cash reserve if the
institution could demonstrate set levels of reinvestment in its
business through capital acquisition. At a minimum, the commenters
urged the Secretary to allow an institution to provide a bond or letter
of credit in lieu of the cash reserve fund requirement.
One commenter believed that the separate fund provision of this
requirement would be particularly troublesome because it would impose
accounting, reporting, and management burdens that would not be
warranted for all institutions. The commenter recommended that the
Secretary provide an alternative method under which an institution
could prove that it met all the requirements of this section.
Specifically, the commenter suggested that the Secretary allow an
institution that issues debt in the public debt markets and achieves an
``investment grade'' credit rating on that debt issue with a nationally
recognized debt rating service to establish that it is financially
responsible in this manner.
Still other commenters believed that the Secretary was imposing an
unreasonable financial burden on an institution that participates in a
State tuition recovery program. The commenters noted that since the
Secretary has not approved any State tuition recovery funds, an
institution that would otherwise be exempt from the cash reserve
requirement would have to continue to contribute to the State's fund
and would, for identical reasons, be required to maintain for Federal
purposes a cash reserve fund. These commenters urged the Secretary to
grant relief to institutions by acting expeditiously to approve State
tuition recovery programs.
One commenter noted that the term ``refunds'', as used in this
section, could mean tuition refunds, institutional refunds, or any
disbursements made to students. The commenter suggested that the
Secretary clarify the meaning of the term so that an institution may
calculate correctly the amount of its required cash reserve.
A number of commenters contended that the requirement to maintain
the cash reserve fund in a bank account or in the form of short-term
securities was unnecessary and restrictive. One of these commenters
believed that the Secretary should exempt from the separate cash-
reserve fund requirement an institution that had sufficient
unrestricted funds to pay required refunds. Other commenters urged the
Secretary to allow an institution to maintain its cash reserve in a
money market fund or in other Federal government securities with
maturities of one year or less.
A few commenters believed that the establishment of a cash reserve
fund could be a problem for public institutions located in a State that
controls directly the receipt and disbursement of funds. The commenters
noted that those institutions may not have the authority under State
law to establish a cash reserve fund. Another commenter noted that many
public university systems operate under a pooled treasury concept.
Under that scheme, the three-month U.S. Treasury notes that could be
used to satisfy the cash reserve fund requirement would not be
earmarked to one campus. Consequently, the commenter recommended that
instead of requiring each campus to calculate the amount of a reserve
fund and maintain that fund, the Secretary should revise the
regulations to allow a public university system to (1) calculate the
amount of the reserve fund based on the total refunds of all system
campuses and, (2) maintain one consolidated reserve fund for all the
system's campuses.
Discussion: Under section 498(c)(6) of the HEA, the Secretary is
charged with establishing requirements to ensure that an institution
maintains sufficient cash reserves to pay required refunds. The
Secretary believes that an institution's ability to make required
refunds is enhanced by requiring the institution to reserve a portion
of the cash it receives from students in advance of providing
educational services. In this regard, the Secretary established the
cash-reserve-fund requirement on the premise that if an institution, at
the beginning of its fiscal year, reserved a reasonable amount of cash
of an amount based on a percentage of the institution's historical
refund experience, the institution would have sufficient cash reserves
to make refunds to students. However, the Secretary is convinced that
many points made by the commenters are valid, and that a performance-
based approach will better accomplish the statutory requirements and
the Secretary's objectives.
Under this performance-based approach, the Secretary would consider
an institution to have satisfied the statutory requirement, that the
institution maintained sufficient cash reserves to make required
refunds, if for two consecutive years (1) the institution demonstrates,
to the satisfaction of the Secretary, that it has made all required
refunds to students in a timely manner, and (2) that it has met or
exceeded all of the financial responsibility standards in
Sec. 668.15(b) in both of its last two consecutive fiscal years. An
institution that demonstrates that it satisfies these criteria provides
reasonable assurance to the Secretary that the institution will
continue to make required refunds in a timely manner. Moreover, the
Secretary believes that such an institution is not likely to close
precipitously because the institution will have demonstrated over a
period of time that it is financially responsible. Along the same
lines, the Secretary acknowledges that there is little, if any, risk
associated with an institution that has its liabilities backed by the
full faith and credit of a State, or by an equivalent governmental
entity, and therefore considers such an institution to have sufficient
cash reserves to make required refunds.
Conversely, the Secretary believes that the risk of precipitous
closure increases significantly for an institution that is unable, or
unwilling, to make required refunds in a timely manner, or that fails
to meet the financial responsibility standards. Therefore, upon a
finding by the Secretary, or an independent auditor engaged in the
performance of a financial or compliance audit, or a SPRE, or a State
licensing authority, that the institution failed to make required
refunds in a timely manner, or failed to satisfy the standards of
financial responsibility under Sec. 668.15(b) in either of the
institution's last two complete fiscal years, the Secretary shall
require the institution to submit to the Secretary an irrevocable
letter of credit equal to at least 25 percent of the total amount of
refunds the institution made, or should have made, during the
institution's last complete fiscal year. This irrevocable letter of
credit requirement may be satisfied in conjunction with any letter of
credit that may be required under Sec. 668.13(d)(1) or
Sec. 668.15(d)(2). The Secretary may, in his sole discretion, require
that two or more letters of credit be established separately with
common expiration dates or combined into a single letter of credit.
In establishing this performance-based requirement, the Secretary
considered carefully the points made by the commenters who noted that
the reserve-fund requirement would provide little, if any, protection
to students in the event that an institution went bankrupt, and the
commenters who argued that it was unnecessary or counter-productive to
require an institution that otherwise satisfies its financial and
fiduciary responsibilities to maintain a reserve fund. The Secretary
believes that by applying the letter of credit provision only to non-
performing institutions, this requirement provides the necessary
incentive for institutions to make, and to continue to make, refunds in
a timely manner, provides reasonable assurance that the Secretary will
be able to make refunds to students in the event that an institution
closes precipitously, and at the same time relieves the burden on
performing institutions.
The Secretary notes that since this requirement will not take
effect until July 1, 1995, an institution must continue to comply with
the current 25 percent cash-reserve requirement until that date.
Therefore, in response to public comment and further review, the
Secretary wishes to clarify the following issues. First, with respect
to calculating the amount of the cash reserve, the term ``refunds''
includes only refunds of title IV, HEA program funds. Second, an
institution may borrow cash from its reserve fund but only when this is
necessary for the institution to comply with the requirement that it
make timely refunds. If an institution uses the reserve fund for this
reason, the Secretary will consider the institution to be in compliance
with the requirement in Sec. 668.15(b)(5)(i) if the institution
demonstrates that it maintained an average monthly fund balance in its
cash reserve fund that was at least equal to the amount of the required
cash reserve. Lastly, because an institution must demonstrate its
compliance with the reserve-fund requirement by providing the required
information in a note to its audited financial statement, the
institution may, in lieu of establishing a separate cash-reserve fund
for each of its locations, establish a single cash-reserve fund that
represents the institution's combined refund exposure for all
locations. To enable the Secretary to make a determination regarding an
institution's compliance with this provision, the refund experience and
cash reserve requirement for each eligible and participating
institution shall be disclosed separately in the required footnote.
Changes: Section 668.15(b)(5) is amended to require that,
institutions not coming within the performance-based exception set out
in Sec. 668.15(d)(1), must submit to the Secretary an irrevocable
letter of credit, that is acceptable and payable to the Secretary, for
an amount equal to at least 25 percent of the total amount of title IV,
HEA program refunds the institution made, or should have made, during
the institution's last complete fiscal year.
In addition, the Secretary makes the following conforming changes
to Sec. 668.15(d), Exceptions to the general standards of financial
responsibility. First, the Secretary amends Sec. 668.15(d)(1) to exempt
from the requirement to submit an irrevocable letter of credit, an
institution that (1) has its liabilities backed by the full faith and
credit of a State, or equivalent governmental entity, or (2) any
institution that has, for both of its two latest consecutive fiscal
years demonstrated, to the satisfaction of the Secretary, with the
support of an audited financial statement submitted in accordance with
Sec. 668.15(e) and Sec. 668.23(c), that it has made all of its required
title IV, HEA program refunds in accordance with the ``timely payment''
provisions in Sec. 668.22(j)(4), and has for both of those years met or
exceeded the standards of financial responsibility under
Sec. 668.15(b). Second, in Sec. 668.15(d) the Secretary determines an
institution's compliance with the two-consecutive-year performance
requirement by evaluating (1) the institution's compliance audit
reports and audited financial statements covering that 2-year period,
and (2) any untimely refund findings during that two-year period from a
program review, a SPRE, other State agency or an independent auditor.
This section also requires the institution to have met the standards of
financial responsibility under Sec. 668.15(b) for the 2-year period. If
an institution is cited by an auditor for a condition that would no
longer permit it to use the exemption in 668.15(d)(1), the institution
must notify the Secretary of that fact within 30 days of receiving such
notice from its auditor, and must take immediate steps to secure the
required letter of credit.
The Secretary has made a conforming change to Secs. 668.15(b)
(7)(i)(A) and (8)(i)(B) by removing the reference to the cash reserve
fund in the delineation of items that would be included in the list of
institutional assets for the acid test analysis.
Acid Test Ratio
Comments: A number of commenters agreed with the Secretary's
decision to exclude from the calculation of the acid test ratio
uncollateralized receivables from owners and related parties.
Several commenters argued that the use of an acid test ratio, as
more of a test of liquidity than of assets, was contrary to
Congressional intent.
Other commenters believed that the acid test ratio was defined too
narrowly in the regulations to include as current assets only cash,
cash equivalents, and current accounts receivables. The commenters
noted that generally the acid test ratio is defined as current assets
less inventory divided by current liabilities. Such a definition would
allow other current assets not included in the regulatory definition to
be used in calculating the acid test ratio. However, the commenters
opined that an acid test ratio, regardless of how it is calculated, is
inappropriate and therefore not applicable to the education training
industry. The commenters argued that the short-term liquidity
requirements imposed by the acid test ratio would force an institution
to delay making capital investments to the detriment of its students.
To make a better assessment of the financial performance and stability
of an institution, some of the commenters suggested that the Secretary
should evaluate the significance of the ratio in view of other
financial indicators such as operating losses, negative equity, or
commercial loan defaults. Other commenters suggested that in view of
the new institutional oversight provisions under Part H of the HEA the
Secretary should adopt for these regulations the previous 1:1 current
ratio requirement. A few other commenters urged the Secretary to remove
the acid test ratio requirement because they believed that the new
audit requirements would provide safeguards sufficient to ensure that
an institution could meet its liabilities and remain operational. Still
other commenters suggested that if an institution failed to meet the
acid test ratio requirement, the Secretary should merely refer the
institution to the State for review under the provisions of the State
Postsecondary Review Program. Yet another commenter urged the Secretary
to adopt as a satisfactory measure of liquidity the acid test ratio of
between 0.5 to 0.75:1 suggested by the American Institute of Certified
Public Accountants (AICPA).
One commenter believed strongly that the Secretary should not allow
an institution to include accounts receivable on the asset side of the
acid test ratio because the receivables could not be readily
liquidated.
A few commenters believed that for purposes of calculating the acid
test ratio an institution should not be able to consider as a cash
equivalent the cash reserve under Sec. 668.15(b)(5). The commenters
noted that the cash reserve would be a restricted fund (i.e., used only
for the payment of refunds) and therefore would not be available to pay
the general debts of the institution. Thus, the commenters contended
that if the Secretary allowed institutions to include the cash reserve
as a current asset an otherwise insolvent institution might be able to
satisfy the acid test requirement. Another commenter agreed with the
provision that cash reserves should be included in the acid test ratio
but believed that the provision should be expanded to read as follows:
``Reserve funds created in accordance with Sec. 668.15(b)(5) may be
included as cash equivalents in calculating the institution's acid test
ratio.'' Still other commenters suggested that fixed assets, prepaid
expenses, and inventory be included in calculating the ratio.
One commenter noted that an institution could be financially stable
despite its failure to meet the 1:1 acid test ratio requirement. The
commenter opined that an auditor would be in the best position to
determine whether an institution was financially stable and suggested
that the Secretary require the auditor to make that determination based
on guidance issued by the AICPA regarding an auditor's responsibility
for determining an institution's ability to continue as a going
concern. The commenter suggested that in lieu of the acid test ratio
the Secretary should require an auditor to make a ``going concern''
determination and hold the auditor responsible for applying the AICPA
guidelines in making that determination.
Discussion: Section 498(c)(2) of the HEA directs the Secretary to
prescribe criteria with respect to operating losses, net worth and
assets-to-liabilities ratios to determine that an institution is
financially responsible. The Secretary maintains that the acid test
ratio is an appropriate measure of financial responsibility for an
educational institution because it provides a reliable measure of an
institution's ability to meet current obligations as they come due.
Because, in general, financial obligations must be satisfied in cash,
the Secretary has chosen an acid test ratio, because it relies only on
those assets that have the highest probability of conversion into cash.
The Secretary has chosen to exclude less liquid items such as
inventory, related party receivables, and prepaid or deferred items for
the following reasons: (1) As a provider of services, an educational
institution does not, in general, acquire and maintain significant
inventories of saleable products. Accordingly, for most educational
institutions, the exclusion of inventory from any calculation yields a
value that is not significantly different from one that would be
obtained if such inventories were included. Furthermore, because of
difficulties associated with the valuation of inventories, and the
existence of differing methodologies of accounting for inventories and,
because a distressed liquidation of inventory items by an institution
in financial difficulty may result in the realization of only a portion
of their actual value, comparability of inventory values among
institutions is extremely difficult. The Secretary, in seeking a fair
basis of comparison that is applicable to all institutions, chose to
exclude inventories from any calculation of liquidity;
(2) Related party receivables that are uncollateralized represent
unsecured claims on the assets of other businesses or individuals the
repayment of which is substantially at the discretion of the
controlling individual or business entity. While in many cases these
assets are accounted for as demand notes and hence they are
appropriately classified as current, they are in fact repayable at the
discretion of the controlling individual, and the Secretary has seen
institutions close for financial reasons without having demanded such
repayments from related parties. Because the Secretary cannot
reasonably determine the probability that such claims will be paid, the
Secretary believes that he is justified in excluding these items from
any calculation of liquidity; and
(3) In general, prepaid items and deferrals represent past outflows
of cash that may provide future economic benefits to an institution.
Because the realization of these assets depends in large part on the
continued existence of the educational institution, the Secretary
believes it is appropriate to exclude these items when evaluating an
institution at a fixed point in time.
The Secretary believes that a minimum ratio of at least cash and
current accounts receivable to all current liabilities is an
appropriate measure of an institution's ability to meet all of its
financial obligations. While many have argued that unearned tuition
liabilities do not represent financial claims on the assets of an
institution, and therefore should be excluded, the Secretary would
argue that unearned tuition liabilities are more accurately
characterized as cash collected from students in advance of providing
educational services. As these funds are not yet earned by the
institution, the Secretary believes that it is appropriate to require
that an institution have adequate liquid resources on hand to provide
refunds to students that withdraw or to fund a teachout should the
institution close at other than the end of an academic period.
Furthermore, while the Secretary concedes that such claims are not
direct financial claims comparable to a fixed debt they represent
obligations to perform a service. The performance of that service will
incur liabilities or the liquidation of assets over the next operating
period. Since a substantial portion of the unearned tuition income that
flows into an institution's revenue accounts is immediately expended to
provide for such things as instructor's salaries, rent, utilities and
other operational expenses, only a portion of unearned tuition
liabilities are ultimately realized as profit by the institution. It is
the Secretary's belief that a financially responsible institution
should be able to finance continuing operations out of earnings
retained as a result of past profits and not from the cash prepayments
of students who have yet to receive any educational benefit.
The Secretary believes that, for the most part, institutions that
make significant capital expenditures that are expected to benefit the
institution in future periods will finance those expenditures with
long-term financing arrangements. Accordingly, the Secretary believes
that capital acquisitions to the extent that they are externally
financed or funded from long-term sources of funds would not
significantly impact the acid test ratio. The Secretary recognizes that
a number of institutions incur significant expenses associated with
marketing and advertising and that many institutions refer to these
operating expenses as capitalized costs, often including these past
expenses as a current asset on the institution's balance sheet. The
Secretary believes that these costs are more appropriately
characterized as operating expenses and does not recognize such
capitalized assets in the acid test calculation.
Contrary to the opinion expressed in the comment, the AICPA does
not establish standards with respect to performance indicators such as
the acid test ratio.
While the Secretary does not agree that fixed assets should be
included in the calculation of the acid test ratio because such assets
are considerably less liquid than those that are included in the ratio
calculation, the Secretary does consider the institution's total
financial circumstances in determining an institution's compliance with
Federal financial responsibility standards. The Secretary includes in
his calculation of tangible net worth all the assets of an institution
to the extent that the value of these assets exceeds the institution's
liabilities after adjusting for intangible assets.
Changes: See conforming changes made as a result of comments on the
cash reserve requirement.
Exceptions to the General Standards of Financial Responsibility
Comments: One commenter was concerned that an institution that
participated in an inadequate State tuition recovery fund would be able
to avoid the more rigorous requirement in Sec. 668.15(b) under which
the institution would need to maintain in a separate fund a cash
reserve equal to at least 25% of the total dollar amount of refunds
paid by the institution in the previous fiscal year. The commenter
suggested specific criteria that the Secretary should consider in
determining the adequacy of a State's tuition recovery fund.
Specifically, the commenter suggested that in assessing a State's fund
the Secretary should consider (1) the maximum fund level, (2) the
current fund balance, (3) the amount of annual assessments collected by
the fund, (4) the amount of claims paid out by the fund, (5) the
authority of the fund administrator to levy against institutions
participating in the fund additional assessments and the
administrator's history of levying and collecting additional
assessments, (6) the fund's history of paying claims, including the
percentage of claims paid, (7) the compliance by an institution (or
institutions) with the fund's assessment and payment requirements and,
(8) whether students at an institution have received their refund
payments from the fund instead of from the institution. Furthermore,
the commenter urged the Secretary to exempt an institution from the 25%
cash reserve requirement only if the Secretary concluded from the
criteria identified above that a State would be able to pay all claims
made against the fund.
A few commenters questioned the authority of the Secretary to
determine the acceptability of a State's tuition recovery fund. These
commenters argued that since the statute mandated the use of State
tuition recovery funds the Secretary should merely require a State to
certify that its fund would be able to pay required refunds to students
for institutions that closed precipitously. In addition, regardless of
the Secretary's authority in this matter, the commenters believed
strongly that if the Secretary approves State tuition recovery funds on
a State-by-State basis, in determining whether to approve a State's
fund the Secretary should consider the State's entire plan for dealing
with closed institutions, including provisions for teach-outs.
Many other commenters urged the Secretary to approve existing State
tuition recovery funds, or give presumptive approval to those funds,
because of the reasons identified in the discussion regarding the 25%
cash reserve requirement.
Discussion: Section 498(c)(6) of the HEA provides that an
institution may be granted an exemption from the cash reserve
requirement if it participates in a state tuition recovery fund that is
acceptable to the Secretary. At this time the Secretary is evaluating
possible standards that can be used for determining the acceptability
of a State's tuition recovery fund. While no definitive criteria have
yet been established, the Secretary has determined that three specific
criteria will be examined in the design and operation of a State's
tuition recovery to determine whether it is acceptable in lieu of the
other cash reserve requirements.
The Secretary does not intend to grant presumptive approval to any
state tuition recovery fund, but instead will examine applications from
states on a case-by-case basis. In evaluating an application from a
State for a blanket approval of its tuition recovery fund to exempt its
participating schools from the federal cash reserve requirements, the
Secretary will consider the extent to which the state tuition recovery
fund: 1) provides refunds to both in-state and out of state students,
2) makes all refunds in accordance with the refund payment procedures
in Sec. 668.22(h), 3) provides a reliable mechanism for the State to
replenish a fund should any claims arise that deplete the funds assets.
Changes: Section 668.15(d)(1)(ii) has been amended to delineate the
items that the Secretary will consider in determining whether a State
tuition recovery fund is an acceptable substitute for the federal cash
reserve requirement. The Secretary may also consider other factors
presented in an individual state application on a case by case basis.
See also conforming changes made as a result of comments on the cash
reserve requirement.
Section 668.16 Standards of Administrative Capability
Comments: One commenter suggested that as a factor in the
determination of a designated individual's ability to administer the
Title IV, HEA programs at an institution, the Department should mandate
that a capable individual must not have defaulted on a Federal or State
loan.
Discussion: The Secretary has no evidence that any notable
percentage of these individuals has defaulted on a Federal or State
loan. Furthermore, the Secretary believes that it would be extremely
burdensome for an institution to adequately screen applicable employees
to ensure that none of them had defaulted on a Federal or State loan or
grant.
Changes: None.
Comments: Six commenters supported the Secretary's use of third-
party servicers in determining whether or not an institution has an
adequate number of qualified personnel on hand in determining whether
or not an institution is administratively capable.
Discussion: The Secretary is pleased to have been able to make this
change in the final regulation as a result of public comment on the
February 28, 1994 NPRM.
Changes: None.
Comments: Several commenters suggested that the prohibition on
having different family members perform the two functions of
authorizing payments and disbursing or delivering funds is onerous,
particularly in a small, family-run institution. These commenters
requested that smaller institutions be exempted from this provision.
Discussion: This standard was strengthened to provide additional
deterrence to collusion, which is a major problem at institutions that
engage in fraud and at many institutions that fail to make refunds. The
strengthened language also gives the Secretary added, needed authority
to terminate institutions that engage in collusion.
The Secretary understands the concern of small family-run
institutions that arranging for someone outside the family to perform
one of these tasks may be burdensome. However, at very small
institutions not meeting this standard, the compliance audit would
probably report that there are insufficient internal controls unless
the procedures to use additional staff were followed.
Changes: None.
Comments: A number of commenters suggested that the requirement
that an institution does not meet the administrative capability
standards if it does not have satisfactory academic progress standards
of 150 percent of the time it takes to complete a program bears no
logical relationship to the standards of administrative capability and
therefore, should be deleted.
Discussion: Because students are required by Title IV of the HEA to
maintain satisfactory progress to receive Title IV, HEA program
assistance, it is logical that an institution's ability to administer
Title IV, HEA programs must be judged, in part, on the existence and
implementation of an adequate satisfactory progress policy.
Furthermore, the general requirements that a school have a satisfactory
academic progress policy have been a part of the administrative
capability standards in the general provisions regulations for many
years.
In order to maintain the integrity of the Title IV, HEA programs,
the Secretary does not believe that Title IV, HEA program assistance
should be provided beyond the point at which a student can reasonably
be expected to complete his or her education. The Secretary believes
that this regulation achieves this objective.
Change: None.
Comments: A number of commenters felt that the Department is wrong
in justifying this policy of satisfactory academic progress on the
grounds that a similar period will be used to calculate completion
rates under the Student-Right-to-Know Act, since the latter is a
consumer information statute that does not address student aid
eligibility. Furthermore, the Student-Right-to-Know Act applies only to
first-time, full-time degree seeking students while the satisfactory
academic progress standards would apply to all Title IV students.
Discussion: The Secretary was not trying to justify the
satisfactory academic progress policy based on the Student-Right-to-
Know Act. The Secretary was merely pointing out that the Student-Right-
to-Know Act also uses the concept of a full-time undergraduate student
completing a program in no more than 150 percent of the published
length of the educational program.
Changes: None.
Comments: A number of commenters opposed the minimal satisfactory
academic progress standards set by the Department on the basis that
they would discriminate against minority and disabled students. Many
commenters suggested that the imposition of the 150 percent timeframe
does not provide traditional students between the ages of 18 and 24
much leeway to change programmatic decisions. Furthermore, several
commenters suggested that the regulation should provide for a phase-in
of the standard, because if it is not phased-in over time, many
students will have entered postsecondary education under one assumption
about timeframes for completion only to have these assumptions changed
sometime during their educational career. The commenters felt that for
many students, it will not be possible or practical to change these
timeframes and it would be unfair to hold them to any new standard.
A few commenters believed that the satisfactory academic progress
provisions were confusing and overly burdensome.
Discussion: Section 668.16(e)(3) modifies earlier regulations which
provided that an institution must establish a maximum timeframe in
which the student must complete his or her educational objective, by
providing that the maximum timeframe can be no longer than 150 percent
of the published length of the educational program. The 150 percent can
be calculated using credit hours, clock hours, terms, academic years,
or any other reasonable measure. For example, a school with an
undergraduate program consisting of 120 credit hours may have a policy
that includes a provision requiring a student to complete the program
within 180 credit hours. Such a policy would not only provide a
traditional student attending full-time 6 years to complete a 4-year
program, but also easily accommodate most non-traditional students
because the use of credit hours as the measure allows for less than
full-time attendance as well as non-consecutive enrollments.
The Secretary recognizes that these requirements may create a
hardship for some students who were maintaining progress under the
institution's old policy but do not meet the requirements of the new
policy. However, Sec. 668.16(e)(3)(vii) requires each institution to
have procedures for students to appeal determinations that they are not
making satisfactory progress, and an institution may consider as part
of a student's appeal whether mitigating circumstances are present that
would justify payment to an otherwise-ineligible student. With such a
determination that mitigating circumstances are present, a student who
otherwise would fail one or more tests of the institution's
satisfactory progress standards could still be eligible for payment for
the increment of education used to measure satisfactory academic
progress under Sec. 668.16(e)(3)(ii).
For student appeals under the institution's satisfactory academic
progress standards for aid disbursed during the 1994-95 award year, a
student who met the institution's standards prior to July 1, 1994, but
does not meet the new satisfactory progress standards might be awarded
an additional disbursement for the increment of education used to
measure satisfactory academic progress under Sec. 668.16(e)(3)(ii) if
such a disbursement would permit the student to complete the program
during that period.
An institution must determine and document each student's
eligibility for an extension of eligibility due to a mitigating
circumstance on an individual basis. An institution cannot routinely
grant every applicable student an extension of eligibility as a means
to circumvent the 150 percent provision.
The Secretary has recognized the need to clarify and simplify the
provisions related to satisfactory academic progress. While this
section has been rewritten in an effort to meet these goals, the
underlying policies as provided for in the April 29, 1994 final
regulations have not been altered.
Changes: Section 668.16(e) has been amended to clarify that the
satisfactory academic progress standards of this section are for
purposes of determining student eligibility for Title IV, HEA program
assistance and does not apply to non-Title IV students. The Secretary
has removed the requirement that an institution's standards are
considered to be reasonable if the standards conform with the standards
of satisfactory progress of the institution's nationally recognized
accrediting agency if the agency has those standards. Section
668.16(e)(2) has been amended to clarify which required elements of an
institution's standards are qualitative and which are quantitative.
Section 668.16(e)(2)(ii)(A) has been amended to clarify that the
maximum timeframe in which a student must complete his or her
educational program must be, for an undergraduate program, no longer
than 150 percent of the published length of the educational program
measured in academic years, terms, credit hours, or clock hours.
Section 668.16(e)(4) has been amended to clarify that the Secretary
considers an institution's satisfactory academic progress standards to
be reasonable if the standards provide for a determination at the end
of each increment by the institution as to whether the student has met
the qualitative and quantitative components of the standards instead of
a determination that the student has successfully completed the
appropriate percentage or amount of work according to the established
schedule. Section 668.16(e)(6) has been amended to clarify that the
Secretary considers an institution's satisfactory academic progress
standards to be reasonable if the standards provide specific procedures
for a student to re-establish that he or she is maintaining
satisfactory progress rather than for a reinstatement of a student's
aid.
Comments: A large number of commenters stated that an institution's
default rates are not indicative of an institution's administrative
capability. Many commenters argued that the proposal to use Federal
Stafford Loan and Federal SLS program default rates as a criterion of
administrative capability went beyond the statute and Congressional
intent.
Other commenters asserted that the use of default rates is unfair
to institutions with small numbers of students. These commenters
suggested that institutions with small number of students either be
exempt from using default rates as an indicator of administrative
capability or that these institutions be given the opportunity of
withdrawing from certain programs rather than being penalized for
participation in high-risk programs.
Discussion: The Secretary points out that the use of default rates
as a determining factor in the evaluation of an institution's
administrative capability is not new. The Secretary does not agree with
those commenters who assert that default rates are not indicative of
administrative capability.
Changes: None.
Comments: Many commenters suggested that the requirement that an
institution with an annual withdrawal rate of more than 33 percent does
not demonstrate administrative capability be eliminated. Some of these
commenters asserted that use of a 33 percent withdrawal rate as an
absolute standard would result in discrimination against high-risk
minority students, reducing opportunities available to them. Commenters
also asserted that this standard would adversely affect community
colleges that enroll a significantly large number of adult,
nontraditional students, many of whom exit and return to the
institution several times during their academic careers, or transfer to
other institutions. Another commenter noted that institutions located
near military bases, where transfers of personnel are routine, could
experience high withdrawals of students. Most of these commenters
recommended that this provision be eliminated.
Several commenters suggested that this provision duplicates efforts
by the SPREs and should, therefore, be eliminated.
Discussion: Because SPREs must establish withdrawal rates that are
applicable to institutions that are referred to the SPRE, the Secretary
agrees with the commenters that this provision duplicates efforts by
the SPREs. However, the Secretary believes that the use of a withdrawal
rate standard to evaluate whether an institution should be permitted to
begin participation in a Title IV, HEA program is essential to
effective gatekeeping for the Title IV, HEA programs. Therefore, the
Secretary has revised the withdrawal rate requirement to make it
applicable only to institutions that seek initial participation in a
Title IV, HEA program.
The Secretary does not accept the argument of some commenters that
withdrawal rates are not an appropriate measure of administrative
capability. On the contrary, the Secretary finds that withdrawal rates
are a clear measure of administrative capability as they are a function
of overall institutional performance and the information and support
services that an institution provides to its students and prospective
students.
The Secretary expects that an institution that has good admissions
procedures and administers the ability-to-benefit provisions properly
will have a lower withdrawal rate than one which admits students who
cannot benefit from the program either because they lack the academic
ability or because they do not receive adequate support services. An
institution that provides proper disclosures, such as the institutional
and financial assistance information required to be provided to
students and prospective students under subpart D of these regulations,
and in the case of an institution that advertises job placement rates
as a means of attracting students, data concerning graduation and
employment, and applicable State licensing requirements, as required in
the program participation agreement in Sec. 668.14(b)(10), will be
providing information necessary for prospective students to make
informed decisions. The Secretary believes that if prospective students
receive adequate and accurate information, they will drop out of an
institution in lesser numbers. Further, if an institution provides the
financial aid counseling required in Sec. 668.16(h), the Secretary
expects that students are not likely to withdraw because of a lack of
understanding about the financial resources available to them.
The Secretary notes further that students who withdraw may be
eligible for a refund, especially now that more stringent refund
policies have been set forth in these regulations at Sec. 668.22. Were
an institution to have a high withdrawal rate, it follows that an
institution might experience difficulty complying with the refund
requirement. The Secretary also believes withdrawal rates are related
to default rates in the FFEL and Federal Perkins Loan programs in that
students who withdraw are more likely to default.
The Secretary also believes it is more appropriate to measure an
institution's withdrawal rate on an award year time period, rather than
an academic year time period. The Secretary notes that other enrollment
information that an institution is required to report to the
Department, such as the number of correspondence students, incarcerated
students, and ability-to-benefit students, is all reported for an award
year. This change will allow an institution that seeks initial
participation in a Title IV, HEA program to report withdrawal rate
information in a manner consistent with this other enrollment
information.
The regulations currently provide that an institution does not
count as a withdrawal any student who was entitled to and received in a
timely manner in accordance with Sec. 668.22, a refund of 100 percent
of tuition and fees under the institution's refund policy. Because the
withdrawal rate provision will now only apply to institutions that seek
initial participation in a Title IV, HEA program and, therefore, have
not been required to make refunds in accordance with Sec. 668.22, the
Secretary has removed the requirement that the refund must be made in a
timely manner in accordance with Sec. 668.22.
Changes: Section 668.16(l) has been revised to require that an
institution that seeks initial participation in a Title IV, HEA program
must have a withdrawal rate less than or equal to 33 percent in order
to be administratively capable. Section 668.16(l) has been further
revised to require that an institution calculate its withdrawal rate
for an award year. Section 668.16(l) has been further revised to remove
the requirement that a refund must be made in a timely manner in
accordance with Sec. 668.22.
Comments: One commenter objected to the elimination of
Sec. 668.16(l) as proposed in the February 28, 1994 NPRM in which the
Department proposed to require that institutions provide certain types
of information to students.
Discussion: The Secretary continues to believe that providing
adequate and accurate information to students and prospective students,
so they can make informed decisions, is a function of proper
administration of the Title IV, HEA programs. However, this requirement
is covered in the section on the Program Participation Agreement,
Sec. 668.14, and therefore is being removed from the administrative
capability standards section.
Changes: None.
Comments: One commenter objected to the elimination of
Sec. 668.16(m) as proposed in the February 28, 1994 NPRM in which the
Department would have required that institutions have advertising,
promotion, and recruitment practices that reflected the content and
objectives of the programs offered by the institution.
Discussion: While the Secretary continues to believe that
advertising, promotion and recruitment practices that reflect the
content and objectives of educational programs accurately is a critical
aspect of the proper administration of the Title IV, HEA programs, the
Secretary also recognizes that accrediting agencies and SPREs will
address these practices and agrees with those commenters who
recommended that these proposed requirements not be included in the
final regulations.
Changes: None.
Section 668.22 Institutional Refunds and Repayments
General
Comments: Close to 200 commenters requested that the Secretary
simplify the refund requirements of this section. Many of the
commenters suggested that the Secretary merely repeat the language of
the statute. These commenters believed that using only the language of
the statute will provide institutions with the necessary flexibility to
administer the statute in the most reasonable and efficient manner.
Fifty-nine commenters pointed out that the area of refunds has
traditionally been left to institutions for self-regulation and it
should remain that way. One hundred commenters felt that the complexity
of the refund provisions will promote noncompliance. Five commenters
contended that these refund requirements will cause institutions to
lose income. The commenters felt that, as a result, an institution will
be forced to reduce operating expenses by reducing employees, supplies,
equipment, training, etc., and/or significantly increase tuition. Five
commenters noted that this provision does not take into account that
contracts with instructors based on full-class attendance have already
been made. Sixteen commenters felt that the provisions of this section
will place too great a financial and administrative burden on
institutions. Six commenters felt that as a result of the financial
burden, institutions will not be able to meet the standards set out in
Sec. 668.15, Factors of financial responsibility. Eight commenters felt
that the effective date of these provisions should be delayed because
of the complexity and severe impact of these provisions.
Discussion: The Secretary understands the commenters' frustrations
with the intricacies of the refund provisions of this section. The
Secretary has sought to simplify the refund procedures to reduce
administrative burdens and make changes that will reduce financial
burdens on institutions. However, the Secretary notes that the
Department is committed to reducing the widespread fraud and abuse
associated with the making of refunds. Any suggested changes that would
reduce administrative and financial burdens on institutions while
continuing to provide the level of protection to which the Department
is committed, were given serious consideration. The Secretary continues
to welcome suggested amendments to these regulations that will achieve
these goals. To this end, the Secretary does not believe that merely
repeating the language of section 484B of the HEA in regulations would
provide sufficient safeguards to Title IV, HEA program funds.
Further, because of this commitment to the reduction of fraud and
abuse, the Secretary does not believe it is in the best interest of the
student or the Title IV, HEA programs to delay implementation of the
refund provisions of the April 29, 1994 final regulations. The
Secretary understands that institutions may inadvertently make mistakes
in their implementation of the provisions of this section and whenever
possible the Secretary will take into consideration whether an
institution that has calculated refunds improperly has, nonetheless,
made a good faith effort to comply. In determining whether
administrative sanctions will be pursued against an institution that
has failed to pay refunds in accordance with the regulations, the
Secretary will examine whether such an institution can demonstrate a
good faith effort to comply with the provisions of this section, or
whether the institution sought to avoid its responsibilities for
properly making refunds by ignoring the calculations required by
regulation. An institution must demonstrate that it has made a
reasonable attempt to implement the refund provisions based on all
information available at the time.
Changes: See changes to specific refund sections below.
Comments: Four commenters stated that it is sufficient that the
SPREs are charged with setting standards for student refunds that are
in compliance with the HEA. Four commenters contended that the
provisions of this section are often in conflict with established State
policies which have been based on a thorough and realistic analysis of
the needs and interests of the State. One commenter felt that the
regulation of refunds should not be used to curb abuse at institutions.
The commenter felt that other gatekeeping functions will address fraud
and abuse.
Discussion: The HEA has specifically charged the Secretary with
oversight in the area of refunds, and the Secretary therefore has the
primary responsibility for determining whether refunds are paid timely
and in accordance with Federal requirements. Although an institution's
SPRE or other State agency may have certain concerns about an
institution's refund practices, the Secretary has the primary
responsibility for establishing refund requirements that will ensure
the protection of the Title IV, HEA programs.
Changes: None.
Comments: Three commenters noted problems with the law on refunds
and urged the Secretary to support changes to the law that will lead to
a coherent and consistent Federal policy on refunds. Two commenters
suggested that all institutions be required to use one refund policy.
Two commenters suggested the use of the pro rata refund policy for all
Title IV, HEA program assistance recipients. One commenter suggested
that an institution should owe a 100 percent refund to a student who
withdraws within the first two weeks, with the percentage of the refund
decreasing by 10 percent each week thereafter until the sixth week. No
refund would be due after this time. The commenter felt that this would
give a student a sufficient amount of time to assess the institution
without penalizing the institution. One commenter recommended that all
institutions use terms to award aid. An institution would retain zero
percent of institutional charges for a student who withdraws in the
first week of the program. The amount the institution could retain
would then increase by 10 percent increments each week for the next
seven weeks. No refund would be required after that point. The
commenter suggested that a student who attends at least one day in a
seven-day period would be counted as having attended a full week. The
institution would determine the percentage contribution of all sources
of funds to institutional charges at the time the student is awarded
aid. The commenter suggested that the institution use these percentages
to determine the amount that the institution will retain from each
source of funds. One commenter suggested that only institutions with
high withdrawal rates or with excessively high tuition be required to
calculate refunds under the pro rata refund provisions.
Discussion: The Secretary notes that the specific changes suggested
by these commenters would require changes in the law. The Secretary
agrees that certain changes in the law on refunds may be desirable and
is willing to work with members of the community to achieve legislation
that is coherent, consistent, and effective.
Changes: None.
Comments: One commenter suggested that the Secretary not require
institutions to pay refunds to students who withdraw for reasons
outside of the control of the institution, for example, those who
withdraw for purely personal reasons. Likewise, one commenter felt that
the pro rata refund provisions should be limited only to those students
who officially notify the institution of their withdrawal, since most
students are old enough to be held legally accountable for the
contractual agreements made during admission to the institution. One
commenter recommended that the term ``drops out'' be replaced with the
term ``officially withdraws'' since it is unduly burdensome to require
an institution to determine the date on which a student has
unofficially dropped out.
Discussion: The Secretary believes that the HEA makes clear that
students who withdraw from an institution for whatever reason are
entitled to any refund owed in accordance with the law and applicable
regulations.
Changes: None.
Comments: Nine commenters felt that it would be impossible to
explain these refund policies to students. One commenter supported the
requirement that an institution provide a clear and conspicuous written
statement of its refund policy to students and prospective students.
Discussion: The Secretary believes that information on how a
student's refund would be calculated should he or she withdraw from the
institution is vital to a student's assessment of whether to enroll or
continue enrollment at an institution. Therefore, an institution must
provide the information necessary for a student to make an informed and
valid assessment. The Secretary does not believe it is unreasonable to
expect an institution to provide reasonable examples of common refund
situations applicable to the average student population, and answer any
questions on this material, should a student request such information.
The Secretary believes that the simplifications made to the refund
section in response to public comment will make it easier for an
institution to explain the refund policies to a student.
Changes: See specific changes to the refund sections.
Fair and Equitable Refund Policy
Comments: Thirteen commenters felt it is very burdensome to require
an institution to calculate a student's refund under three refund
policies. Eight commenters suggested that an institution be allowed to
determine the refund that is generally the most generous (for example,
with the use of charts that show the refund due based on the number of
weeks remaining) and use it for all students who withdraw. One
commenter supported the requirement that an institution calculate every
student's refund under each applicable policy for comparison purposes.
Discussion: The Secretary continues to assert that the individual
calculation of all possible refunds for each withdrawing student is the
only possible means by which an institution can determine which refund
calculation provides the largest amount, as required by law. Further,
the Secretary notes that it would be difficult for an institution to
determine that one particular policy always provided the most generous
refund as refund amounts vary based on the unpaid amount of an
individual student's scheduled cash payment.
The Secretary understands that institutions would prefer a simple
predetermined chart or other reference aid that would enable them to
complete a refund calculation without doing a student-by-student
analysis. However, several variable items must always be examined. For
example, the institution generally is required to determine the amount
of funds it has earned under its enrollment contract with the student,
and then return the unearned funds using the allocation priorities set
out in Sec. 668.22(h). In some cases, the institution may only have
earned the funds under the contract that were allocated to be paid by
the student (i.e., the funds remaining under the contract after the
unearned portion has been returned). In this situation, whether the
institution gets to keep any of the funds for this student already in
its possession will depend solely upon whether the student has already
paid his or her share of the contract price. For these calculations,
even though the institution might be able to develop a chart showing
what has been earned under the enrollment contract during the refund
period, a student-by-student calculation must also be made to determine
whether the student has already paid his or her share of the contract
that the institution has earned. Different variables are present in the
pro rata refund calculation that require student-by-student
determinations, because the amount of the refund is reduced by the
amount of any unpaid charges on the enrollment contract at the time of
withdrawal. For this reason, some degree of student-by-student analysis
would be required for every refund calculated under these regulations.
The Secretary would like to clarify the process of determining
which refund policies to use when calculating a refund for a student.
For a first-time student who withdraws on or before the 60 percent
point in time in the period of enrollment for which the student has
been charged, an institution must: (1) Calculate a refund under the pro
rata refund calculation; (2) Compare this refund amount with refunds
calculated under applicable State law and in accordance with the
institution's accrediting agency's policy, if any. If either the State
policy or the accrediting agency policy does not exist, the institution
would compare the pro rata refund amount with the refund amount
calculated under the remaining policy. For example, if no accrediting
agency refund policy exists, the institution would compare the pro rata
refund amount with the refund calculated in accordance with the State
refund policy; (3) If there is no State refund policy and no
accrediting agency policy (i.e., nothing with which to compare the pro
rata refund amount), use the pro rata refund amount as the student's
refund. (An institution is never required to use the refund calculation
under Appendix A, Standards for Acceptable Refund Policies by
Participating Institutions, for a first-time student who withdraws on
or before the 60 percent point in time in the period of enrollment for
which the student has been charged. [As discussed later, the Federal
refund calculation will replace Appendix A, Standards for Acceptable
Refund Policies by Participating Institutions, for the 1995-96 award
year and beyond.])
For a continuing student (the pro rata refund policy does not
apply), an institution must: (1) Compare refunds calculated under
applicable State law and in accordance with the institution's
accrediting agency's policy, if any. If one of these policies does not
exist, the institution would use the remaining policy to arrive at the
refund amount. No other refund calculation is necessary. (2) If there
is no State refund policy and no accrediting agency refund policy, then
(and only then) must the institution compare refunds calculated in
accordance with Appendix A, Standards for Acceptable Refund Policies by
Participating Institutions, [the Federal refund calculation for the
1995-96 award year and beyond] and the institution's refund policy.
Changes: None.
Comments: Two commenters contended that it was inaccurate to refer
to accrediting agency standards that are approved by the Secretary as
the Secretary will not be approving the refund standards of accrediting
agencies.
Discussion: The Secretary would like to clarify that an accrediting
agency must have its refund policy approved by the Secretary before an
institution may use an accrediting agency's refund policy to calculate
a student's refund under the requirements of this section. In approving
an accrediting agency's policy, the Secretary will look at factors such
as whether the accrediting agency's specific refund standards: require
an institution to make a refund of unearned tuition, fees, room and
board, and other charges to a student who received Title IV, HEA
program assistance, or whose parent received a Federal PLUS loan or
Federal Direct PLUS loan on behalf of the student, if the student
withdraws from the institution; include standards that specify the
percentage of funds that will be refunded to a student (or retained by
the institution) specific to the point in time that the student
withdraws from the institution; and address the treatment of all
charges specified in the law.
Changes: None.
Comments: One commenter requested that an institution be permitted
to exclude administrative fees from refunds calculated under policies
other than the pro rata refund policy.
Discussion: The Secretary notes that current regulations do not
prohibit a State, accrediting agency, or institution (if the
institution is comparing its own policy with a refund under Appendix A,
Standards for Acceptable Refund Policies by Participating Institutions,
[the Federal refund calculation for the 1995-96 award year and beyond])
from developing refund policies that permit institutions to exclude
administrative fees. The Secretary does not plan to regulate in this
area unless necessary to stem abuse. The Secretary notes that the
Federal refund calculation also permits an institution to exclude an
administrative fee from the calculation of the refund. The Federal
refund policy is discussed in the section of Analysis of Comments and
Changes that addresses comments received on Appendix A, Standards for
Acceptable Refund Policies by Participating Institutions.
Changes: None.
Pro Rata Refund
Comments: Two commenters supported the required calculation of pro
rata refunds for students who withdraw on or before the 60 percent
point in time in the period of enrollment for which the student has
been charged. One commenter felt that permitting institutions to
subtract any unpaid institutional charges from the initial pro rata
refund amount is unfair since it encourages students to withhold
payment of the unpaid charges.
Discussion: The Secretary notes that the statutory definition of a
pro rata refund calls for the subtraction of unpaid charges from the
calculated refund amount. The Secretary agrees that the statutory
subtraction of unpaid charges from the refund amount may encourage
students to withhold payment of unpaid charges. The Secretary is also
concerned that this provision may encourage institutions to enroll
students who are more likely to withdraw because Title IV, HEA program
funds will be used to pay the first dollars earned under the enrollment
contract rather than a student's contribution, should the student
withdraw. However, the Secretary notes that this benefit to students is
also consistent with the protections inherent in the extended length of
the pro rata refund policy.
Changes: None.
Comments: One commenter supported the provision that allows a
student to return equipment if it is in good condition allowing for
reasonable wear and tear, and then have the amount the student paid for
the equipment included as part of the pro rata refund. The commenter
did not believe that there should be any other circumstances beyond
health and sanitary reasons that would permit an institution to reject
equipment that is returned by a student. One commenter felt that used
books, even those in good condition, allowing for reasonable wear and
tear, are not marketable and an institution should not be forced to
include these in the calculation of a refund. One commenter suggested
that the Secretary allow an institution to exclude equipment charges
from the pro rata refund calculation if the equipment cannot be
redistributed to a newly enrolled student upon his or her entrance into
a program. This would include books with student names, but would not
include transcription machines.
Discussion: The Secretary agrees that students should be permitted
to return equipment and have the charge for the equipment included in
the calculation of the student's refund barring any circumstances that
would prevent the institution from reissuing the equipment. The
Secretary believes that the determination of whether equipment can be
reissued should remain with the institutions. However, the Secretary
notes that institutions will be responsible for demonstrating that
their policies for unreturnable equipment are reasonable, consistent
and fair to the student. The Secretary does not believe it is
reasonable or fair to the student to classify all used books as
unreturnable. An institution must demonstrate that there are specific
circumstances, beyond the fact that the book has been used by other
students, that prevent the institution from reissuing the equipment.
The Secretary does not believe that it is reasonable to classify a book
with a student's name on it as unusable for other students.
Changes: None.
Comments: One commenter suggested that the definition of ``other
charges assessed by the institution'' not include the documented cost
for services provided by the institution as a convenience to the
student. For example, a book charge would not be an institutional
charge if the institution permitted the purchase of the books as a
convenience and the book charge was not included in the enrollment
agreement.
Discussion: The Secretary notes that, consistent with policy under
the previous FFEL program regulations, an institution is required to
include the full amount of charges for equipment in the calculation of
a pro rata refund if a separate charge exists for the equipment by the
institution or if the institution requires the student to purchase the
equipment from a certain vendor. If an institution does not have a
separate charge for equipment and the student has the option of
purchasing the equipment from more than one source, the institution
would not have to include the equipment charge in the pro rata refund
calculation.
Changes: None.
Comments: One commenter stated that requiring that refunds be made
within 30 days was unreasonable, in light of the proposed 20-day return
period for equipment, books, or supplies. These commenters believed it
is unfair to allow a student a 20-day period in which to return
equipment, only to force the institution to rush the calculation and
processing of a refund. The commenter suggested that a student be
allowed 15 days to return equipment so that the institution would have
a more reasonable 15 days to process the refund.
Discussion: The Secretary does not believe that it is unreasonable
to require an institution to make a refund within 30 days, even though
an institution may not know if equipment is to be counted as returned
or unreturned until the twentieth day. The Secretary notes that the
return of equipment is only one area of a refund calculation. The
Secretary believes that 10 days is sufficient time for an institution
to complete the calculation of a refund and make any refund due to a
student.
Changes: None.
Comments: Two commenters believed that the administrative fee
should not be required to be a real institutional charge to students.
One commenter believed that an institution should be permitted to count
a withdrawal fee as part or all of an administrative fee.
Discussion: The pro rata refund calculation determines what portion
of institutional charges paid can be retained by the institution; the
Secretary believes it is unreasonable to allow the retention of a fee
that was not actually charged or paid. An institution may count a
charge as part of this administrative fee if the charge is used to
cover administrative work at the institution. The fee must be
publicized up-front and applied across the board to all students.
Because a withdrawal fee is only charged to those students who withdraw
and not to all students, it may not be included in an institution's
administrative fee.
Changes: None.
Comments: Three commenters suggested that the Secretary add the
provision of the February 28, 1994 NPRM that would have allowed an
institution to exclude board credits in excess of the attributable
prorated portion based on the period attended by the student prior to
withdrawal. One commenter noted that the pro rata formula assumes that
services are provided evenly throughout the term. The commenter
suggested that the cost for all services that are provided on an uneven
basis be excluded from the pro rata refund calculation if the
institution can document that the service was provided in full. One
commenter felt that the definition of ``other charges assessed the
student by the institution'' should be modified to address charges that
are collected by an institution and passed on to an outside entity (for
example, physicals, required immunizations, outside housing deposits,
uniform purchases, and bus passes). The commenter felt that an
institution should not be required to pro rate these charges.
Discussion: The Secretary continues to find the provision contained
in the February 28, 1994 NPRM allowing for the exclusion of expended
board credits in excess of the attributable prorated portion based on
the period attended by the student to be excessively complicated and
not entirely effective for purposes of this section. The Secretary
agrees that the statutory pro rata refund formula assumes that services
are provided evenly throughout the term. The Secretary believes that
excluding all institutional costs that are provided on an uneven basis
from the pro rata refund calculation is contrary to the requirements of
the law. The Secretary continues to believe that certain costs (i.e.,
passed-through room charges, and group health insurance fees) warrant
treatment other than standard proration and has therefore specifically
named such costs and permitted an institution to exclude the charges
from the calculation. The Secretary believes the specific regulation of
the treatment of these costs will avoid institutional abuse of these
allowances and ensure greater equity in the payment of refunds. The
Secretary does not believe it is appropriate to extend this treatment
to all charges that are passed through the institution to another
entity.
Changes: None.
Comments: Four commenters felt that requiring an institution to use
hours completed instead of scheduled hours for purposes of calculating
the 60 percent point in time ignores that institutions have to provide
space, utilities and instruction, whether a student is in attendance or
not. One commenter felt that this went against congressional intent
which was clearly communicated through the use of the phrase ``in
time.'' The commenters felt that this penalizes the student with good
attendance who withdraws by in effect charging him or her more than a
student with poor attendance who withdraws. Two commenters felt that it
is discriminatory to not allow a clock hour institution to determine
the 60 percent point in time by using weeks, as credit hour
institutions do. The commenters felt that this restriction does not
permit a clock hour institution to factor in absences in determining
the 60 percent point in time.
Discussion: Because a student's progression in a clock-hour program
is measured solely in clock hours completed, the Secretary believes
that it is most reasonable to use the number of hours completed by the
student in determining the percentage of the enrollment period that has
elapsed for these programs. In accordance with past guidance issued by
the Department, excused absences may be counted when determining hours
completed by the student if the institution has a written excused
absence policy allowing for a reasonable number of absences which do
not need to be made up to complete the program. If an institution's
policy for excused absences is reasonable, the Secretary does not
believe that an inequity in treatment will exist between a student with
good attendance who withdraws and a student with ``poor attendance''
who withdraws. The Secretary acknowledges that this and other
provisions of the Title IV, HEA programs differentiate between
institutions based on whether programs are measured in clock or credit
hours, and based on whether the institutions use standard terms. The
Secretary notes that this differentiation is due to the Secretary's
efforts to take into account the many variables and circumstances that
exist in the postsecondary educational community.
Changes: None.
Comments: One commenter felt that it was discriminatory not to
allow all institutions to use weeks to determine the portion of the
period of enrollment that remains.
Discussion: The Secretary notes that the ``portion of the period of
enrollment that remains'' is defined by statute.
Changes: None.
Period of Enrollment for Which the Student Has Been Charged
Comments: A few commenters requested a change to the definition of
the minimum period of enrollment for which a student has been charged
for clock-hour programs and credit-hour programs without terms. Seven
commenters believed that it is unfair to define the minimum period of
enrollment for which the student has been charged for a non-term
institution as the lesser of the length of the educational program or
an academic year. Six commenters felt that it was inconsistent for the
Secretary to try to dissuade institutions from charging up front for a
program, yet prohibit institutions with programs measured in clock
hours or credit hours without terms from charging by anything less than
the program length or an academic year. Several commenters were
particularly concerned with this provision's effect on the calculation
of a student's scheduled cash payment. The commenters noted that a
student charged for a lengthy period of time is more likely to have a
larger unpaid amount of his or her scheduled cash payment. 13
commenters suggested that institutions be permitted to charge by the
actual period of time for which the student is charged without the
imposition of a minimum period. 12 commenters suggested that an
institution be permitted to define its minimum period of enrollment for
which a student has been charged as a payment period. Two supported the
use of a month. One suggested the use of one-third of an academic year.
Two commenters suggested that an institution that charges by the
program be allowed to calculate refunds for an academic year (if the
program is no longer than the academic year) because this will make it
easier to determine the aid awarded.
Discussion: The Secretary believes that a definition of a minimum
period of enrollment for which the student has been charged is crucial
to preventing abuse in the making of refunds. The Secretary seeks to
prevent institutions from establishing short periods to minimize the
effectiveness of the pro rata refund requirements, which only apply to
first-time students who withdraw on or before the 60 percent point in
time in the period of enrollment for which the student has been
charged. Upon further examination, the Secretary agrees that this goal
may be achieved for programs measured in clock hours or credit hours
without terms by permitting a shorter minimum period than that
specified in the April 29, 1994 final regulations. The Secretary has
established a minimum for programs that are longer than an academic
year, and a minimum for programs that are shorter than an academic
year. The Secretary believes that a minimum period of the greater of
the payment period or one-half of the academic year is an appropriate
minimum for a program that is measured in clock hours or credit hours
and does not use terms that is longer than or equal to the academic
year in length. The Secretary does not believe it is adequate to simply
permit a minimum period equal to a payment period because the minimum
length of a payment period is institutionally controlled. The Secretary
believes it is reasonable to define the minimum period of enrollment
for which the student has been charged in the case of an educational
program that is measured in credit hours or clock hours and does not
use terms and is shorter than the academic year in length, as the
length of the educational program. The Secretary believes that these
periods are sufficient to provide first-time students with the benefits
of the pro rata refund provisions for a satisfactory period of time.
The Secretary believes that these changes will also provide relief in
the calculation of a student's scheduled cash payment. Scheduled cash
payments are discussed further in the section of the Analysis of
Comments and Changes that addresses ``Repayments to Title IV, HEA
Programs of Institutional Refunds and Repayments.'' The Secretary
stresses that these minimum periods are to be used by institutions that
charge by these periods, or periods less than the minimum. An
institution that charges for periods longer than the minimum period
specified in the regulations must use the period for which the
institution actually charges the student as the period of enrollment
for which the student has been charged. The Secretary believes it is
reasonable for an institution that requires a student to commit to
payment for an entire program to provide a refund based on that same
period.
Changes: Section 668.22(e)(i) has been amended to define the
minimum ``period of enrollment for which the student has been charged''
as the semester, trimester, quarter, or other academic term in the case
of an educational program that is measured in credit hours or clock
hours and uses semesters, trimesters, quarters, or other academic
terms. Section 668.22(e)(ii) has been amended to define the minimum
``period of enrollment for which the student has been charged'' in the
case of an educational program that is measured in credit hours or
clock hours and does not use terms and is longer than or equal to the
academic year in length, as the greater of the payment period or one-
half of the academic year. Section 668.22(e)(ii) is also amended to
define the minimum ``period of enrollment for which the student has
been charged'' in the case of an educational program that is measured
in credit hours or clock hours and does not use terms and is shorter
than the academic year in length, as the length of the educational
program.
Comments: 11 commenters believed that the minimum period of
enrollment for which a student has been charged should be the term for
clock-hour institutions using terms. The commenters felt that clock-
hour institutions using terms should be treated the same as credit-hour
institutions using terms. One commenter noted the need to ensure that
the same time period is used for purposes of determining eligibility
for student assistance and refund calculations.
Discussion: The Secretary agrees that the minimum period of
enrollment for which a student has been charged should be the term for
clock-hour programs using terms, as it is for credit-hour programs that
use terms. The Secretary strongly agrees with the commenter who noted
the need to ensure that the same time period is used for other Title
IV, HEA program purposes. For example, the Secretary would expect an
institution that states that it is a term-based institution for refund
purposes to demonstrate that it has disbursed Title IV, HEA program
funds to students as required for term-based institutions.
Changes: None.
Comments: One commenter felt that it is too difficult to determine
the amount of funds received for the period of enrollment for which the
student has been charged. The commenter requested that worksheets be
provided to reflect the calculation of refunds and repayments without
the use of attribution of funds.
Discussion: The Secretary notes that guidance on how to determine
the amount of funds received for the period of enrollment for which the
student has been charged was provided to institutions in the April 29,
1994 final regulations (59 FR 22356-22359). The Secretary will provide
further guidance in the Federal Student Financial Aid Handbook.
Changes: None.
Repayments to Title IV, HEA Programs of Institutional Refunds and
Repayments
Comments: 45 commenters understood and/or supported the rationale
for the provision that requires that an institution subtract any unpaid
amount of a scheduled cash payment from the amount the institution may
initially retain under refund calculations other than pro rata. In
particular, one commenter supported the shifting of liability from the
Federal government to the institution. The commenter agreed with this
approach because it makes more funds available to other students who
stay in school. The commenter stated that they had always had a liberal
refund policy and this provision will not affect the institution's
operations and cash flow.
One hundred and forty-one commenters opposed the requirement as
written. The commenters asserted that the unpaid charges provision
unfairly leaves students owing large balances to the institution which
would otherwise have been paid by Title IV, HEA program assistance, and
that this result obviously is not fair and equitable under the statute.
Seven commenters believed that this provision flies in the face of the
language of the statute which clearly states that unpaid charges are to
be subtracted from the amount of a refund to a student, and does not
require that an institution subtract unpaid charges from the amount the
institution may retain. Eight commenters believed that an institution
should not be required to subtract any unpaid amount of a scheduled
cash payment from the amount the institution may retain before the
institution compares the amount of refunds under State, accrediting
agency and pro rata policies. Five commenters believed that
institutions who use policies developed by States, accrediting
agencies, or the institution itself that choose to use pro rata across
the board should be permitted to subtract any unpaid charges from the
amount of the refund.
Thirty-nine commenters felt that these provisions were not fair and
equitable because institutions will be providing education for periods
of time for which they will not receive compensation. One commenter
felt that this provision will force institutions to raise tuition. Four
commenters contended that this provision will force institutions to
overfund students with loans or other types of aid. Three commenters
felt that this provision would require institutions to demand payment
in full at the start of classes. The commenters stated that demanding
payment in full at the start of classes will either entirely exclude
disadvantaged low-income students from access to education or cause
institutions to reimburse the students when financial assistance
arrives at a later date. One commenter felt that this provision will
encourage institutions to lower their satisfactory progress standards
and simplify curricula to reduce the number of early withdrawals, as
the institutions are penalized when students withdraw before they have
received most of their aid. Two commenters felt that this provision
will result in institutions withholding a student's academic transcript
until unpaid charges are paid.
Fourteen commenters contended that many of these students qualified
for aid because they do not have the resources to pay for their own
education (for example, a student with an EFC of 0) and, therefore,
will not have the resources to pay an institution large amounts of
unpaid charges. One commenter felt that the Secretary's intent with
this provision was to exclude low-income individuals from participation
in the Title IV, HEA programs, particularly for attendance at non-
degree granting institutions. 11 commenters felt that this provision
violates a student's entitlement to Title IV, HEA program assistance
(particularly Federal Pell Grant funds) by requiring the student to
assume responsibility for charges when they withdraw that they were not
responsible for when they enrolled. One commenter stated that the
Secretary appears to be in breach of a contract made with the student
or, in the case of FFEL program funds, an interference with third-party
contracts between the students and their banks. One commenter suggested
that an institution not be required to return Federal Pell Grant funds
if unpaid charges exist which the institution must collect from the
student. One commenter felt that this provision also does not protect
the institution or the FFEL program.
Discussion: The provision that requires that an institution
subtract any unpaid amount of a scheduled cash payment from the amount
the institution may initially retain under certain refund calculations
was introduced to address an inequity which existed between students
who paid their share of institutional charges, and those who did not.
As demonstrated by examples set forth in the December 23, 1991 NPRM,
all other things being equal, the student who did not pay his or her
share of institutional charges received a greater benefit from Title
IV, HEA program funds than the student who had paid. Under the current
provision, Title IV, HEA program funds may no longer be used to pay for
the amount owed by the student. This provision reaffirms the basic
principle of student financial aid: the family (or student) makes its
contribution first before financial aid is expended.
The Amendments of 1992 reinforced the Secretary's use of this
provision by stating that an institution shall have in place a fair and
equitable refund policy under which it returns unearned tuition, fees,
room and board, and other charges. In keeping with prior practice as
set out in the final regulations published on June 8, 1993, the
Secretary has applied this analysis of what charges are earned against
the enrollment contract executed between the student and the
institution. After a determination is made of how much money the
institution has earned against the total contract price, the unearned
funds are returned to their sources in accordance with Section 485 of
the HEA and Section 668.22(h) of the regulations.
In accordance with the Amendments of 1992, a modified procedure is
used to calculate pro rata refunds for first-time students. Under this
procedure, students receiving the benefit of the elongated refund
period have the unpaid charges on the contract removed from the
calculation in determining how much of the earned funds the institution
keeps. In exchange for the longer pro rata refund period, this
calculation provides some benefit to the institution because its
earnings are paid from funds already received without regard to the
unpaid charges on the contract.
The Secretary is unwilling to depart from the existing treatment of
unpaid charges for all other refund calculations. The Secretary
believes it is clear that Title IV, HEA program funds are provided for
students who receive an education. The Secretary realizes that a
certain percentage of students can be expected to withdraw or drop out
of an institution for reasons beyond the control of the institution.
However, the Secretary believes that all institutions, especially those
with withdrawal rates that threaten the institution's financial health,
must share responsibility for a situation that does not benefit the
student or, if the student is a recipient of Title IV, HEA program
funds, the taxpayer. The Secretary's intent was not to bar low-income
individuals from access to education. However, the Secretary notes that
providing a student with access to education is not beneficial if the
student does not complete the educational program and is left with
financial debt. The Secretary encourages institutions to properly
counsel and, where appropriate, screen applicants for admission to the
institution.
The Secretary expects that institutions will seek to reduce their
losses of income through refunds by working to keep students enrolled
rather than overburdening students with loans, raising tuition, or
demanding payment in full for long periods of enrollment. Obviously,
keeping students enrolled by lowering satisfactory academic progress
standards and simplifying curricula to reduce the number of early
withdrawals does not provide students with the skills necessary to
market their education. The Secretary encourages institutions to charge
by the minimum periods of enrollment specified in the regulations in
order to reduce a student's liability should he or she withdraw from
the institution. An institution may withhold a student's academic
transcript until unpaid charges are paid if it so chooses. However, the
Secretary notes that an institution may not withhold a student's
financial aid transcript until unpaid charges are paid.
The Secretary notes that the receipt of all awarded Title IV, HEA
program assistance (including Federal Pell Grant funds) is intended to
enable a student to complete a program. Indeed, the statute specifies
that, should a student withdraw from an institution, any amount of a
refund must first be returned to the Title IV, HEA program funds,
including the Federal Pell Grant program, up to the full amount
received from the programs. Prospective students and students in
attendance should be informed of this fact.
Changes: None.
Comments: Four commenters asserted that pro rata was designed to
afford first-time students who withdraw within the first 60 percent of
a program with maximum protection. The commenters contended that
Congress clearly intended that the pro rata refund policy be used for
these students.
Discussion: The Secretary notes that the statute does not require
that all first-time students who withdraw within the first 60 percent
of a program be provided a refund under the pro rata refund
calculation. To the contrary, the statute requires an institution to
compare refund amounts under the pro rata calculation, the requirements
of State law, and the specific refund standards of an institution's
accrediting agency and make a refund of at least the largest amount.
Changes: None.
Comments: Nineteen commenters felt that defining the most generous
refund as the policy that returns the most funds to sources of aid
without regard to the amount a student owes to the institution is
unreasonable and does not benefit the student. Six commenters felt that
a debt to an institution for unpaid charges will prevent a student from
continuing his or her education.
Discussion: The Secretary believes that the intent of section 485
of the HEA was to reduce a student's Title IV, HEA loan obligation when
a student withdraws from an institution. The Secretary does not believe
that it is better for the student to owe a debt on a Title IV, HEA
program loan rather than owing money to the institution. A student who
defaults on a Title IV, HEA program loan is barred from receipt of
further Title IV, HEA program funds. This will most likely prevent the
student from continuing his or her education at any other institution.
Further, the Secretary believes that it is appropriate to require the
return of funds to the Title IV, HEA programs, where they will be
available to students who are continuing to receive an education.
Changes: None.
Comments: Seventeen commenters contended that a student's scheduled
cash payment should be limited to the amount of institutional charges a
student is responsible for paying at the beginning of the student's
program; it should not include the amount of other sources of aid that
was not received by the student at the time of withdrawal. The
commenters suggested that scheduled cash payment be defined as the
amount of institutional charges minus the amount of aid awarded to the
student. One commenter suggested that, alternatively, an institution
should calculate the percentage of costs to be paid by aid and by the
student at the time of enrollment. The institution should apply the
appropriate refund policy and retain no more than the percentage of the
total amount the school has earned from each source. The commenter felt
that this would ensure that both the government and the student pay
their share of expenses while the school receives no more than the
amount earned. One commenter asserted that an institution should only
be required to hold a student accountable for any cash payments against
institutional charges that are due at the time the student withdraws.
One commenter asserted that this provision creates an inequity between
students who have not received their financial aid at the same rate.
Seventy-six commenters believed that a student's scheduled cash payment
should be attributed to payment periods as it was in the past. The
commenters feel that it is unreasonable to hold a student accountable
for charges that were scheduled to be covered by sources of aid.
Discussion: The Secretary found that the recommended alternatives
for calculating unpaid charges based on the amount of student financial
assistance awarded to a student, rather than the amount of student
financial assistance received by the student at the time of his or her
withdrawal, did not adequately address all the areas of concern that
are currently addressed by the existing provisions on unpaid charges.
As stated previously, a refund is calculated by determining how much
money the institution has earned against the total contract price, and
then returning all unearned funds. The Secretary believes that this
calculation must be based on information available at the time the
student withdraws from the institution. Also, a student is awarded
Title IV, HEA program funds under the assumption that the student will
remain enrolled for at least the period for which the aid is awarded.
Therefore, it is not accurate to use the amount of aid awarded to
determine a refund for a student who has not met his or her enrollment
obligation as this is not an accurate indicator of the amount of
institutional costs for which a student should be held responsible at
the time of his or her withdrawal. Although all Title IV, HEA program
funds awarded may exceed institutional charges at the time of a
student's enrollment, some of these funds may be disbursed to the
student for noninstitutional costs. Further, for various reasons Title
IV, HEA program funds awarded may not be received by the time the
student withdraws. The Secretary believes that it is only at the point
when a student withdraws that the unearned portion of institutional
charges may be determined. In addition, the Secretary believes that
changing the calculation of a student's unpaid charges to use the
amount of aid awarded would encourage institutions to overload students
with Title IV, HEA loans so that the Title IV, HEA program assistance
awarded is always greater than or equal to institutional charges.
The Secretary believes that he has addressed some of the most vital
concerns of the commenters by revising the definition of the period of
enrollment for which the student has been charged for certain types of
programs. The revisions will permit institutions who charge by the
payment period for programs longer than or equal to an academic year
that are measured in clock hours or credit hours and do not use
academic terms to use the payment period to determine a student's
refund, including the calculation of a student's unpaid charges. The
payment period must be at least as long as one-half of the academic
year. This change is discussed in more detail in the section of the
Analysis of Comments and Changes that addresses the definition of
``period of enrollment for which the student has been charged.''
Changes: See changes to the definition of ``period of enrollment
for which the student has been charged.''
Comments: Two commenters believe that it is unfair to require
institutions to return funds to a student if the subtraction of unpaid
charges from the initial amount the institution may retain is a
negative amount.
Discussion: The Secretary notes that the regulations do not require
an institution to return funds to a student if the subtraction of
unpaid charges from the initial amount the institution may retain is a
negative amount. The regulations require an institution to return the
total amount of Title IV, HEA program assistance (other than amounts
received from the FWS Program) paid for institutional charges if the
amount of a student's unpaid charges is greater than or equal to the
amount that may be retained by the institution under the institution's
refund policy.
Changes: None.
Comments: Four commenters believed that the unpaid charges
provision directly contradicts the 85/15 regulations, that require an
institution to derive no more than 85 percent of revenues from Title
IV, HEA program funds. One commenter stated that the refund provisions
count cash payments by students as the first funds used toward
institutional charges, while the 85/15 calculation requires Title IV
funds to be counted as the first funds used for payment. Two commenters
stated that the 85/15 regulations require an institution to look to
sources of income other than Title IV, HEA program assistance. On the
other hand, the commenter feels that the unpaid charges provision
requires an institution to move away from these other sources of aid
since many institutions provide funds on a contingency basis. If a
student who received aid on a contingency basis withdraws, he or she
will be responsible for the amount of assistance that has not been
received. One commenter stated that the late disbursement provision
allows a State to withhold State aid until after the refund period. The
commenter felt that the regulations should be changed so that a student
is not held responsible for a State's failure to honor its aid
commitment.
Discussion: The Secretary disagrees with the analysis used by these
commenters. The calculation used for the 85/15 regulations makes no
assumption concerning the order in which institutions receive funds,
but only examines the composition of the total funds received by the
institution as of the end of the award year. Furthermore, to the extent
that these refund calculations require institutions to recover earned
funds from sources other than Title IV assistance, institutions whose
eligibility may be at risk under the 85/15 regulations may benefit from
the increase in the percentage of funds received from sources other
than the Title IV programs. The Secretary cannot control the extent to
which other parties make aid available only on a contingency basis, and
the institution will be primarily responsible for determining what
steps are taken to ensure that it will be able to recover earned funds
under its contract with the student.
The regulations permit an institution to count late disbursements
of State aid to reduce a student's unpaid charges ``in accordance with
the applicable State's written late disbursement policies.'' The
regulations set a maximum period of time (60 days) beyond which late
disbursements of State aid will not be counted. States and other
sources of student financial assistance set the requirements and
procedures for the attainment of aid that they provide. If another
source of assistance is not providing the assistance in accordance with
applicable procedures, an institution must deal directly with that
source to resolve the issue. The Secretary does not believe it is
appropriate to interfere with these decisions. However, the Secretary
encourages other sources of aid to keep the best interests of the
students in mind.
Changes: None.
Comments: One commenter stated that they did not feel it was bad to
charge students for a program up-front. The commenter noted that this
benefits the student by ensuring that there will be no increases in
institutional charges over the course of the program. Further, the
commenter stated that these students are not actually required to pay
the full amount of institutional charges up front, but billed
throughout the program.
Discussion: How an institution chooses to charge a student is
purely an institutional decision. However, as stated above, the
Secretary encourages institutions to charge by the minimum periods of
enrollment specified in the regulations in order to reduce a student's
liability should he or she withdraw from the institution. The Secretary
commends those institutions who seek to ensure that institutional
charges are not raised over the course of a student's program. However,
the Secretary believes that an institution can commit to keeping
institutional charges static without holding students liable for the
entire cost of a program up-front. The Secretary would like to clarify
that in determining the period of enrollment for which the student had
been charged, he is most concerned with a student's period of
liability. For an institution that ``contracts'' with a student for an
entire program, but bills the student in increments throughout the
program, the institution may use the billing periods as the period of
enrollment for which the student is charged provided that: (1) the
student is not held liable for any amount beyond the billing period
that he or she is currently attending; and (2) the billing periods meet
the regulatory definition of ``period of enrollment for which the
student has been charged.''
Changes: None.
Comments: Five commenters contended that an institution should be
permitted to automatically credit to a student's account any portion of
a refund that is scheduled to go to the student if the student had
unpaid institutional charges. However, one of these commenters felt
that an institution should be required to inform the student in writing
that the portion of the refund that was to be returned to the student
has been applied to unpaid institutional charges.
Discussion: Upon further examination, the Secretary has decided
that it is permissible for an institution to automatically credit any
calculated refund amount slotted for return to a student if the student
owes a repayment of noninstitutional funds or has unpaid charges that
he or she owes to the institution. Section 484B requires that an
institution have in effect a fair and equitable refund policy under
which the institution refunds unearned institutional charges. By using
the amount of the refund due to a student to cover unpaid charges, an
institution would be covering charges that had been earned by the
institution for the portion of the period of enrollment for which the
student was in attendance. The Secretary agrees that an institution
must inform all students in writing that the portion of the refund that
was to be returned to the student has been applied to unpaid
institutional charges. Further, as this would be a part of an
institution's refund policy, an institution must inform all prospective
and currently enrolled students of this policy in the written statement
required under Sec. 668.22(a)(2). This change represents a change in
policy and requires no change to regulatory language.
Changes: None.
Comments: Seven commenters requested that the Secretary reconsider
the provision proposed in the February 28, 1994 NPRM that provided that
an institution would not have to return any refund of $25 or less. One
commenter suggested that the Secretary provide that an institution
would not have to return any refund of $300 or less. The commenters
felt that it is unreasonable to require an institution to expend the
administrative resources necessary to make refunds of such a small
amount. Two commenters felt that section 490 of the HEA does not
preclude the Secretary from permitting this. The commenters felt that
the bulk of the administrative costs of processing the refund do come
after the refund is calculated. Further, the commenters stated that
because the administrative fee is a small percentage of the charges, it
does not cover the cost of processing the refunds.
Discussion: Upon further consideration and in response to
commenters, the Secretary has decided to permit an institution to not
pay a refund if the institution demonstrates that the amount of the
refund would be $25 or less, provided that the institution has obtained
written authorization from the student in the enrollment agreement to
retain any amount of the refund that would be allocated to the Title
IV, HEA loan programs. The Secretary notes that an institution would
not have to actually calculate the refund to demonstrate that the
amount of the refund would be $25 or less if the institutional charges
are so low that it would not be possible to arrive at a refund of $25
or less. The Secretary agrees that, in instances where the total refund
is demonstrated to be $25 or less, no refund is required of Federal
Pell Grant funds or of Title IV, HEA loan funds, provided that the
institution has obtained authorization from the student in the
enrollment agreement to keep such loan funds. Because the return of
funds to reduce a student's loan balance constitutes funds that the
student will otherwise be required to repay, the institution cannot
retain such funds without a student's permission. The institution must
obtain permission from the student through the student's signature on
an enrollment agreement that the institution may retain these funds.
The enrollment agreement must clearly explain to a student that he or
she is permitting the institution to retain the funds, rather than
having the funds used to reduce the student's Title IV, HEA loan debt,
should the student withdraw. Since the effective date of these
regulations is July 1, 1995, institutions have sufficient time to
incorporate any necessary changes into their enrollment agreements if
they choose to avail themselves of this option. The Secretary believes
that $25 is the most reasonable number suggested for establishing this
threshold.
Changes: Section 668.22(g)(3)(iii)(B) has been added to provide
that an institution does not have to pay a refund if the institution
demonstrates that the amount of a refund would be $25 or less.
Allocation of Refunds and Overpayments
Comments: Two commenters stated that it was illegal to designate
where funds must be returned after all Title IV, HEA program assistance
sources have been satisfied. Fifty-six commenters felt it is unfair to
ignore significant contributions by other sources of aid by requiring
that the majority (if not all) of a refund is returned to the Title IV,
HEA programs. Fifteen commenters requested that the Secretary return to
the use of the fraction or adopt another method of proportionately
allocating refunds to the Title IV, HEA programs and other sources of
aid. The commenters felt that the current allocation of refunds
inequitably treats other sources of aid that contribute equally to a
student's education. One commenter felt that this provision provides
institutions with an incentive to withhold disbursements of aid sources
other than Title IV until after the student is no longer entitled to a
refund. In addition, the commenter asserted that the provision provides
a disincentive for other sources of aid to award assistance, as most
likely none of the aid will be returned to its source when a student
withdraws. One commenter contended that the statute did not require
that the refund to the Title IV, HEA programs exceed the federal
government's portion of financial aid received by the student, nor did
it preclude use of the fraction.
Discussion: The Secretary notes that section 485(a)(1)(F) of the
HEA specifies the order of return of funds after a refund has been
calculated, including the return of funds to sources other than the
Title IV, HEA programs. In fact, the Technical Amendments of 1993
changed section 485 of the HEA to specify that refunds may be returned
to other sources of student assistance only after the refund is
returned to the Title IV, HEA program funds in the specified order of
allocation. The Secretary further notes that funds are to be returned
to the Title IV, HEA programs (and other sources of aid) only up to the
amount awarded to the student under those programs. The Secretary
recognizes that some States, institutions, or private sources of aid
may deliberately withhold funds from otherwise eligible students who
have received Title IV, HEA program assistance. This is a decision over
which the Secretary has no control.
Changes: None.
Refund Dates
Comments: One commenter felt that tutorial, computer assisted
instruction, counseling, academic advising, study group notes, and/or
dormitory records should be admissible forms of documentation for
determining a student's last date of attendance.
Discussion: An institution may use documentation that it believes
is appropriate to demonstrate that a student has remained in academic
attendance through a specified point in time. The institution must
demonstrate that a last date of class attendance is based on an event
that the institution routinely monitors and is confirmed by an employee
of the institution. With the exception of dormitory records, the
examples listed above may be acceptable forms of documentation if the
institution can demonstrate that they meet these requirements. The
Secretary does not consider dormitory records to be a proper form of
documentation of attendance as they indicate only that the student may
have been physically present at the institution for a longer period of
time without providing assurances that the student was attending
classes.
Changes: None.
Comments: Fifty-two commenters felt strongly that a student who
takes an approved leave of absence should not be counted as a
withdrawal for refund and repayment purposes. Fourteen commenters
stressed that there is a difference between a student who officially
withdraws or drops out and a student who intends to continue his or her
education in a program by taking a leave of absence from an
institution. The commenters noted that frequently a student must take a
leave of absence for circumstances beyond his or her control. Five
commenters contended that this provision unfairly affects
nontraditional students with child care needs, work scheduling
problems, military reserve duty and/or short-term medical problems, and
denies them the access to education that the student aid programs are
supposed to guaranty. One commenter felt that this provision is unfair
to students affected by natural disasters who are forced to take a
leave of absence.
Several commenters described what they felt were unfair
consequences of this provision. Thirty-two commenters felt that this
provision creates too much additional paperwork and burden for
institutions, lenders, and/or students since a refund must be
processed, the lender informed of the withdrawal, and the student must
reapply for Title IV, HEA assistance when he or she returns to the
institution. Thirty-seven commenters believed that it is unfair to
require a student to pay another origination fee to secure a Title IV,
HEA loan upon re-enrollment. Nineteen commenters noted that it may be
more difficult for a returning student who only has a short period of
enrollment left to find a lender to make a loan for a small amount. One
commenter noted that the process of canceling and reapplying for a loan
is unduly complicated, especially where a student is crossing over
award years. Twenty-five commenters felt that this provision will place
a great financial burden on students. Eight commenters believed that
the financial and/or the administrative burden placed on students who
take a leave of absence will cause more students to completely withdraw
from the institution. Five commenters felt that this would increase the
institution's withdrawal rate and, therefore, jeopardize the
institution's administrative capability. Three commenters believed that
this provision could cause institutions to not approve any leaves of
absence, and therefore students would drop out. Six commenters
contended that requiring the repayment of loan funds during a time of
personal upheaval may cause students to be unable to return to school
and increases the likelihood of default. Eight commenters felt that a
student who takes a leave of absence will have his or her financial aid
reduced below what the student requires. Three commenters contended
that this provision will add costs to the Title IV, HEA programs.
A few commenters felt that this provision was unnecessary. One
commenter noted that the student's loan funds will have to be paid back
anyway if the student doesn't return to school. Two commenters felt
that the Secretary should address the abuse of institutions not
calculating a refund for students who do not return from a leave of
absence by aggressively enforcing that provision, not by requiring a
leave of absence to be treated as a withdrawal.
A few commenters made observations of the temporary nature of most
leaves of absence and suggested limitations that the Secretary could
place on leaves of absence to guard against abuse if the Secretary
permitted an institution to consider students on certain leaves of
absence to still be enrolled. Two commenters felt that interruptions
caused by a leave of absence are usually temporary and are usually
resolved in 30 to 60 days. One commenter noted that the regulations for
the FFEL program prohibit an institution from charging a student for a
leave of absence. The commenter noted that this provides an incentive
to schools to be selective in granting a leave of absence. Two
commenters suggested that the Secretary permit a student to take a
leave of absence for 30 days or less without requiring that the student
be counted as a withdrawal for refund purposes. One commenter suggested
that a student be permitted to take one leave of absence not to exceed
60 days within an academic year or calendar year. One commenter
suggested that if the student did not return from the leave of absence,
the student's date of withdrawal would be the last date of attendance.
One commenter stated that this would be similar to State law in Texas
which allows a student to take a leave of absence for a minimum of
three days and a maximum of thirty. State law also limits a student to
one leave of absence every twelve months. Three commenters suggested
that the Secretary could protect Title IV, HEA program funds by
requiring that funds for a student on a leave of absence be held in an
escrow account until the student returns. One commenter suggested that
an institution be required to make a refund to a student who has not
returned from a leave of absence within 30 days of the scheduled date
of return or the date the student notified the institution that he or
she did not intend to return from the leave of absence.
Discussion: Upon further consideration of the commenters' concerns,
the Secretary has decided to allow institutions to treat a student on
an approved leave of absence as enrolled for purposes of this section.
In the April 29, 1994 final regulations, the Secretary stated that all
students on a leave of absence must be treated as having withdrawn from
an institution for purposes of calculating a refund in order to ensure
consistency among the Title IV HEA programs, some of which considered
the student to have withdrawn and some of which considered the student
to still be enrolled. To achieve this consistency while addressing the
concerns of the commenters, a student on an approved leave of absence
is no longer considered to have withdrawn from an institution for
purposes of all Title IV, HEA programs. Also, a Title IV, HEA program
loan borrower on an approved leave of absence is not considered to have
withdrawn from an institution, for purposes of terminating the
student's in-school status. Although the Secretary is concerned with
abuse in this area, the Secretary agrees that requiring an institution
to treat a student on a leave of absence as having withdrawn from the
institution in all cases is unduly burdensome, both administratively
and financially, for the student, the institution, and lenders. The
Secretary notes that it is the practice of the Department to provide
specific relief to students and institutions affected by certain
natural disasters. An institution is not permitted to waive statutory
and regulatory requirements unless otherwise permitted to do so by
regulation or law.
The Secretary agrees that certain limitations need to be set on the
granting of leaves of absences by institutions. The Secretary agrees
with the commenter that suggested that an approved leave of absence be
limited to 60 days and that only one leave of absence be granted to a
student within any twelve-month period. As stated previously, the
Secretary believes it is clear that Title IV, HEA program funds are
designed for students who are receiving an education. Although the
Secretary agrees that absences for short periods of time (60 days or
less) may be necessary, the Secretary believes it is unfair to the
taxpayer and other students to tie up Title IV, HEA funds for students
who will not be receiving any education for an extended period of time.
The Secretary also believes that the likelihood that a student will
return to an institution from a leave of absence decreases as the
length of the leave of absence increases. The Secretary does not
believe that it is unreasonable to require a student who has been
absent from an institution for over 60 days to reapply for Title IV,
HEA program funds upon his or her return to the institution.
The Secretary also agrees with the commenter who felt that
prohibiting an institution from charging a student for a leave of
absence provides an incentive to schools to be selective in granting a
leave of absence. Therefore, the Secretary requires that an approved
leave of absence may not involve additional charges by the institution
to the student. The Secretary also believes it is important to prevent
falsification of leaves of absences. In order to have evidence that a
student has requested a leave of absence the Secretary requires that,
in order for a leave of absence to be approved, the student must
request the leave of absence in writing.
The Secretary agrees with the commenter who suggested that if the
student does not return from an approved leave of absence, the
student's date of withdrawal should be the last date of attendance. The
Secretary believes that, consistent with other provisions in this
section, this last date of attendance must be documented by the
institution. The Secretary believes this is also an appropriate date of
withdrawal for a student who takes a leave of absence that is not
approved in accordance with the regulations, as a student in this
situation must be treated as a withdrawal for purposes of this section.
The Secretary agrees with the commenter who suggested that an
institution be required to make a refund to a student who has not
returned from a leave of absence within 30 days of the expiration of
the leave of absence or the date the student notified the institution
that he or she did not intend to return from the leave of absence,
whichever is earlier.
The Secretary has also added provisions for the timely payment of a
refund to a student who takes a leave of absence that is not approved
in accordance with the regulations. If a student takes a leave of
absence that is not approved in accordance with the regulations, the
institution must pay a refund due to a student within 30 days after the
last recorded date of class attendance, as documented by the
institution.
Changes: Changes have been made to Secs. 668.22(a)(1)(ii),
(f)(1)(i), and (h)(2)(iv) to remove language that would have required
an institution to treat a student on a leave of absence as a withdrawal
for purposes of this section. Section 668.22(j)(1)(ii) has been amended
to define the withdrawal date for a student who does not return to the
institution at the expiration of an approved leave of absence or takes
a leave of absence that is not approved, as the student's last recorded
date of class attendance as documented by the institution. Section
668.22(j)(2) has been added to specify that a leave of absence is
approved for purposes of this section if no other leave of absence has
been granted within a twelve-month period, the leave of absence does
not exceed 60 days, the student makes a written request to be granted
the leave of absence, and the leave of absence does not involve
additional charges by the institution to the student. Section
668.22(j)(4)(iii)(A) has been amended to require that an institution
pay a refund that is due to a student who does not return to the
institution at the expiration of an approved leave of absence, within
30 days of the date of expiration of the leave of absence. Section
668.22(j)(4)(iii)(B) has been added to require that an institution pay
a refund that is due to a student who is taking an unapproved leave of
absence, within 30 days after the student's last recorded date of class
attendance as documented by the institution.
Appendix A, Standards for Acceptable Refund Policies by
Participating Institutions
Comments: Four commenters contended that the requirement that
institutions use the Appendix A, Standards for Acceptable Refund
Policies by Participating Institutions refund policy when no State or
accrediting agency standards exist and the pro rata refund policy does
not apply further complicates the refund process and is unduly costly.
Five commenters felt that the Secretary had exceeded his statutory
authority by mandating use of Appendix A, Standards for Acceptable
Refund Policies by Participating Institutions in certain situations to
fix a loophole in the law. The commenters contended that any loophole
must be fixed by changing the law.
Discussion: As the Secretary has consistently stated, the Secretary
believes the Amendments of 1992 clearly give every student who receives
Title IV, HEA program assistance the right to a fair and equitable
refund as defined in the statute. The Secretary notes that there are
instances wherein an institution's State and accrediting agency do not
have specific refund policies and a particular student is not entitled
to a pro rata refund. In such a case, the Secretary has afforded these
students access to a fair and equitable refund policy as required by
law. The Secretary is committed to providing an acceptable refund
standard in the absence of all other standards.
Changes: None.
Comments: One commenter felt that the provisions of Appendix A,
Standards for Acceptable Refund Policies by Participating Institutions
are arbitrary, do not take into account the actual expenses incurred by
students who withdraw, goes beyond the industry standard developed by
the National Association of College and University Business Officers
(NACUBO), and is not in conformance with generally acceptable
accounting principles. The commenter noted that Appendix A, Standards
for Acceptable Refund Policies by Participating Institutions does not
address unofficial withdrawals. One commenter felt that the
requirements of Appendix A, Standards for Acceptable Refund Policies by
Participating Institutions are unnecessarily burdensome. In particular,
the commenter contended that, while it is reasonable for an institution
to have the amount of tuition to be refunded reviewed by the governing
board and subject to consumer comment, it is unreasonable to require
the same review of all decisions affecting institutional refund
policies.
One commenter felt that it is impossible for an institution to
comply with Appendix A, Standards for Acceptable Refund Policies by
Participating Institutions if the institution is not allotted a
reasonable period of time to implement the various administrative
requirements. The commenter felt it was inexcusable that the Secretary
did not provide an example of an Appendix A, Standards for Acceptable
Refund Policies by Participating Institutions calculation in the
preamble to the regulations.
Discussion: The Secretary agrees that certain aspects of Appendix
A, Standards for Acceptable Refund Policies by Participating
Institutions are unduly burdensome for institutions. The Secretary
therefore decided to replace Appendix A, Standards for Acceptable
Refund Policies by Participating Institutions with a Federal refund
calculation incorporated into the regulations themselves. The
percentage calculation of the refund under the Federal refund
calculation has not changed from the calculation required under
Appendix A, Standards for Acceptable Refund Policies by Participating
Institutions of the April 29, 1994 final regulations. However, the
Secretary has agreed to eliminate the majority of the administrative
requirements of Appendix A, Standards for Acceptable Refund Policies by
Participating Institutions from the Federal refund calculation.
Instead, the Secretary believes it is reasonable to require an
institution to use any applicable guidance for the calculation of a pro
rata refund under this section to calculate a refund under the Federal
refund calculation. The Secretary believes that this will reduce
administrative burden for institutions because, by law, all
institutions must be familiar with the pro rata refund requirements in
order to calculate the pro rata refund for first-time students who
withdraw on or before the 60 percent point in time in the period of
enrollment for which the student has been charged. In addition to the
reduction in institutional burden, these more limited provisions would
continue to provide the Secretary with the protection necessary to
reduce fraud and abuse.
The Secretary has therefore adopted the following provisions from
the pro rata refund provisions in the Federal refund provisions: (1) An
institution may exclude from the calculation of a Federal refund under
this paragraph a reasonable administrative fee as defined by
regulation; (2) As defined by regulation, an institution may exclude
from the calculation of a Federal refund the documented cost to the
institution of unreturnable equipment or of returnable equipment if the
student does not return the equipment; (3) An institution may not delay
its payment of the portion of a refund allocable to a Title IV, HEA
program or a lender by reason of the process for return of equipment
specified in the regulations; (4) ``Room'' charges do not include
charges that are passed through the institution from an entity that is
not under the control of, related to, or affiliated with the
institution; and (5) ``Other charges assessed the student by the
institution'' do not include fees for group health insurance, if this
insurance is required for all students and the purchased coverage
remains in effect for the student throughout the period for which the
student was charged. The Secretary expects institutions to follow any
policy guidance issued for these areas of the regulations as it relates
to the calculation of pro rata refunds.
As the commenter pointed out, Appendix A, Standards for Acceptable
Refund Policies by Participating Institutions required that a refund be
calculated for only those students who notified the institution in
writing of their withdrawal. The Secretary has made the Federal refund
calculation applicable to all students who withdraw from the
institution. The Secretary believes that the HEA makes clear that
students who withdraw from an institution for whatever reason are
entitled to any refund owed in accordance with the law and applicable
regulations, and therefore, corrects a provision that excluded students
who do not officially withdraw from the institution from the benefits
of a fair and equitable refund calculation.
As stated above, the Secretary agrees that certain administrative
aspects of Appendix A, Standards for Acceptable Refund Policies by
Participating Institutions are unduly burdensome for institutions.
Therefore, for the 1994-95 award year, the Secretary expects an
institution to be able to demonstrate that it has made (and will
continue to make) an effort to implement as many of the administrative
aspects of Appendix A, Standards for Acceptable Refund Policies by
Participating Institutions as it reasonably can until these regulations
become effective. However, the Secretary expects that all institutions
that are required to calculate refunds under Appendix A, Standards for
Acceptable Refund Policies by Participating Institutions have properly
calculated the percentage of institutional charges that must be
refunded.
Changes: Section 668.22(b)(1)(iv) has been changed to require that,
if the pro rata refund calculation does not apply and no State or
accrediting agency refund standards exist, an institution must provide
a refund of at least the larger of the institution's refund policy or
the Federal Refund Calculation specified in this section, instead of
the refund standards contained in Appendix A, Standards for Acceptable
Refund Policies by Participating Institutions to this part.
Accordingly, Appendix A, Standards for Acceptable Refund Policies by
Participating Institutions has been removed from this part.
A new section 668.22(d) has been added to define the Federal refund
calculation.
Comments: Two commenters felt that no appropriate rationale was
provided for the required calculations of a refund under Appendix A,
Standards for Acceptable Refund Policies by Participating Institutions.
The commenters reasoned that since Appendix A, Standards for Acceptable
Refund Policies by Participating Institutions was created to provide a
standard until the approval of accrediting agency standards is
completed, and accrediting agency standards are not being approved, the
purpose of Appendix A, Standards for Acceptable Refund Policies by
Participating Institutions is moot and it should be deleted. One
commenter felt that requiring institutions to provide refunds for
students through the 50 percent point seems extreme and may force an
institution to reduce or eliminate services required under
administrative capability such as counseling, job placement and
academic advisement. One commenter felt it is unreasonable to expect an
institution to meet the standards of section VIII (the actual
calculation of the refund amount) as it would mean expending
significant effort for a result that did not significantly affect
students. The commenter cited no more than a 12 percent difference
between the refund amount provided under Appendix A, Standards for
Acceptable Refund Policies by Participating Institutions and the refund
amount provided under its institutional policy. Four commenters felt
that the refund requirements of Appendix A, Standards for Acceptable
Refund Policies by Participating Institutions should not extend beyond
the 20 percent point in time in the period of enrollment for which the
student has been charged or only through the third week of instruction.
The commenter felt that measuring in weeks is easier for an auditor to
follow.
Discussion: As stated in the February 28, 1994 NPRM, the Secretary
sought to develop a refund policy that provides a reasonable amount of
protection for continuing students. The Secretary adapted a
proportionate calculation that is similar to refund policies used by
many proprietary institutions. The Secretary does not believe it is
unreasonable to provide a student with a refund of at least 25 percent
of institutional charges if the student withdraws between the 25
percent and the 50 percent point in the student's period of enrollment
for which the student has been charged. Although one commenter noted
that the refund amount did not vary greatly from the amount provided
under its institutional refund policy, the Secretary has had experience
with institutional refund policies that are far from adequate. The
Secretary has not specified how an institution must determine the point
in time that a student has withdrawn from the institution for purposes
of a Federal refund calculation. However, the Secretary encourages
institutions to follow the requirements of Sec. 668.22(b)(2) that
delineate how an institution must determine the 60 percent point in
time for purposes of determining if a student is eligible for a pro
rata refund.
The Secretary does not agree with the commenters who reasoned that
since Appendix A, Standards for Acceptable Refund Policies by
Participating Institutions was created to provide a standard until the
approval of accrediting agency standards is completed, and accrediting
agency standards are not being approved, the purpose of Appendix A,
Standards for Acceptable Refund Policies by Participating Institutions
is moot and it should be deleted. To the contrary, because the
Department chose not to mandate that all accrediting agencies have
refund policies, the Secretary is even more concerned that continuing
students who are not guaranteed protection under an accrediting agency
policy (and when a State policy does not exist) be provided with a fair
and equitable refund. The Secretary continues to encourage institutions
and accrediting agencies and States to work together in developing
refund standards which can be better suited to the particular needs and
circumstances of individual institutions. As noted above, the
administrative requirements of Appendix A, Standards for Acceptable
Refund Policies by Participating Institutions have not been carried
over to the Federal refund calculation that will be in effect for the
1995-96 award year and beyond.
Changes: See discussion on the removal of Appendix A, Standards for
Acceptable Refund Policies by Participating Institutions above.
Section 668.23 Audits, Records, and Examinations
Comments: One commenter suggested that all of the audit
requirements, both financial and compliance, be placed under a single
section in the regulations to facilitate an institution's ability to
understand all of the new audit requirements.
Discussion: The Secretary does not believe that the centralization
of the financial and compliance audit requirements would make
comprehension of those requirements easier for the affected parties. On
the contrary, the Secretary believes that by providing separate
sections in the regulations for the financial audit requirements and
the compliance audit requirements, institutions and third-party
servicers are more easily able to determine which requirements apply to
them because the section contents are smaller and therefore easier to
understand.
Changes: None.
Comments: Five commenters suggested that a third-party's
cooperation with certain entities in the conduct of audits,
investigations, and program reviews authorized by law of the servicer
should only take place during the course of a review of a specific
institution that contracts with the servicer. The commenters believed
that audits, investigations, and program reviews of third-party
servicers should only be used for the purpose of reviewing the
compliance of the institution that contracts with the servicer, and not
the compliance of the actual third-party servicer.
Discussion: The Secretary does not agree with the commenters.
Section 487(c) of the HEA specifically provides that a third-party
servicer's administration of an institution's participation in the
Title IV, HEA programs must be audited on an annual basis. Section
487(c) further provides for an emergency action or the limitation,
suspension, or termination of the eligibility of a third-party servicer
to contract with any institution. The Secretary interprets these
statutory provisions to mean that third-party servicers are to be held
accountable directly to the Secretary for violations by the servicer of
Title IV, HEA program requirements. Therefore, the Secretary believes
that third-party servicers must be required to cooperate with approved
entities in the conduct of audits, investigations, and program reviews
authorized by law of the servicer at any time and not just when an
institution is being audited, investigated, or reviewed for program
compliance.
Changes: None.
Comments: Five commenters suggested that references to the SPRE
should be clarified to mean the SPRE for the State in which the
institution that contracts with a third-party servicer is located. The
five commenters further suggested that a SPRE should only be able to
conduct a review of a third-party servicer if the SPRE has been
requested by the Secretary to review the institution that contracts
with the servicer.
Discussion: SPRE reviews are governed by the procedures set forth
under 34 CFR part 667. Under those procedures, a specific SPRE may only
review a third-party servicer that contracts with an institution that
is located in the same State as that SPRE unless the institution has
locations in more than one State. If the institution has locations in
more than one State, then it is possible that a SPRE other than the
SPRE in the State in which the institution is located may review a
third-party servicer that contracts with the institution, pursuant to
34 CFR 667.9(e). A SPRE may conduct a review of an institution and its
third-party servicers even if the institution was not referred to the
SPRE by the Secretary pursuant to 34 CFR 667.6.
Changes: None.
Comments: Two commenters argued that third-party servicers should
not be required to disclose the results of audits to entities other
than the Department of Education and institutions receiving the third-
party servicer's services. One commenter recommended that a third-party
servicer should not be required to provide a copy of the servicer's
audit to a guaranty agency unless the servicer is servicing a loan that
was guaranteed by the agency. One commenter recommended striking the
requirement that a third-party servicer should provide a copy of the
servicer's audit to lenders in the FFEL programs. The commenter
believed that if a third-party servicer has a business relationship
with a lender participating in the FFEL programs, the lender would
receive a copy of the servicer's audit under their contractual
agreement. Five commenters recommended that third-party servicers
should only be required to provide copies of audits to those entities
that are reviewing an institution that has a contract with the
servicer. The commenters believed that this would limit the access of
confidential information.
Discussion: The Secretary disagrees with the commenters. Under
section 487(c)(6) of the HEA, the Secretary is authorized to provide
information obtained as a result of audits conducted under section
487(c) to guaranty agencies, lenders, accrediting agencies, the
Secretary of Veterans Affairs, and SPREs under subpart 1 of part H of
Title IV. The Secretary believes that by providing information-sharing
among the appropriate authorized entities that the Secretary relies on
to help provide oversight of Title IV, HEA program participants, the
Secretary is responding to Congressional intent. A third-party servicer
acts as an agent of the institution and is responsible for
administering a portion of an institution's participation. As such, the
various entities involved in program oversight will have a genuine need
for access to records of, or information about, the servicer. The
Secretary therefore considers that the audit results of third-party
servicers must be included in the information available to the
appropriate oversight bodies monitoring institutional compliance with
Title IV, HEA program requirements.
Changes: None.
Comments: One commenter was concerned that third-party servicers
are required to disclose privileged client information under this
section to the Secretary or officials designated by the Secretary
without the applicable client's knowledge. The commenter believed that
this requirement could subject the servicer to a significant liability
exposure. The commenter suggested that institutions be notified before
the information is released.
Discussion: Third-party servicers as agents of an institution are
required to provide access to all records or other information
applicable to the third-party servicer's administration of any aspect
of an institution's participation in the Title IV, HEA programs. A
third-party servicer is not required to provide to the Secretary or to
officials designated by the Secretary, any additional information that
an institution itself is not required to provide to the Secretary to
remain in compliance with the Title IV, HEA program requirements. An
institution thus has no legitimate expectation that information
regarding its compliance or non-compliance would be withheld from the
Secretary. Since a third-party servicer provides access to information
pursuant to regulation and statute, there should be no liability
exposure to the servicer.
Changes: None.
Comments: One commenter believed that a review of financial
statements prepared by a certified public accountant (CPA) should take
the place of a comprehensive compliance audit of an institution's
participation in the Title IV, HEA programs.
Discussion: Section 487(c)(1) of the HEA specifically requires that
institutions have performed annually an audit that examines an
institution's participation in the Title IV, HEA programs. The
Secretary does not believe that a financial audit alone is sufficient
where large amounts of Title IV, HEA program funds are disbursed to
students through the institution although the Secretary does consider
the audit requirement to be satisfied if the audit is conducted in
accordance with the Single Audit Act or OMB Circular A-128 or A-133.
The Secretary will continue to review the concept of a single audit,
for those institutions that do not submit an audit in accordance with
the Single Audit Act or OMB Circular A-128 or A-133, that covers both
the financial and compliance audit standards and may in the future
adopt a single audit concept for those institutions upon further review
of the new audited financial statement requirements under Sec. 668.15.
Changes: None.
Comments: One commenter requested that the Secretary clarify if the
audit requirements of Sec. 668.23 and Sec. 682.416(e) were intended to
be the same. If the requirements were intended to be the same, the
commenter requested that Sec. 682.416(e) be modified to be consistent
with Sec. 668.23. If the requirements were not intended to be the same,
the commenter requested that the regulations clearly delineate the
differences between the requirements.
Discussion: Section 487(c)(1)(C) of the HEA mandates that third-
party servicers of institutions, lenders, or guaranty agencies must
have performed an annual audit of the servicer's administration of any
aspect of the administration of the institution's, lender's, or
guaranty agency's participation in the Title IV, HEA programs. Because
third-party servicers of institutions contract with an institution to
administer aspects of the institution's participation in the Title IV,
HEA programs, the Secretary believes that it is only logical that
third-party servicers of institution should be required to have the
same audit requirements as institutions. Likewise, it is only logical
that third-party servicers of lenders or guaranty agencies are required
to comply with applicable audit requirements for those entities. The
Secretary believes that the regulations adequately address the
individual requirements for third-party servicers that contract with
institutions and third-party servicers that contract with lenders or
guaranty agencies.
Changes: None.
Comments: One commenter requested that the regulations provide for
a single audit report to cover a third-party servicer's participation
in all of the Title IV, HEA programs, including the FFEL programs.
Discussion: The Secretary disagrees with the commenter. Third-party
servicer audits for institutions need to be separate from third-party
servicer audits for lenders or guaranty agencies because third-party
servicers of institutions provide markedly different services for their
clients than third-party servicers of lenders or guaranty agencies do
for their clients.
Changes: None.
Comments: Five commenters recommended that the regulations clarify
that an institution could use a third-party servicer's audit, under
Sec. 668.23(c)(1)(iii), to satisfy the institution's obligation to have
an audit performed of its compliance with Title IV, HEA program
requirements in those areas that the servicer has contracted to provide
services.
Discussion: The Secretary disagrees with the commenters.
Institutions may not use the audits of their third-party servicers to
satisfy the institution's obligation to have an audit performed of the
institution's compliance with Title IV, HEA program requirements in
those areas that the institution has contracted out to its third-party
servicer. Institutions are fiduciaries of the funds received from the
Federal government and institutions may not delegate their fiduciary
responsibility to a third-party servicer because the institution is
ultimately liable for any program violations incurred by itself or by
its third-party servicer. Therefore, an institution must have performed
an audit that covers the institution's entire participation in the
Title IV, HEA programs, regardless of whether the institution uses a
third-party servicer to help administer some or all aspects of the
institution's participation in the Title IV, HEA programs. An audit of
a third-party servicer only would be too limited in its scope. Such an
audit would not address, for example, the internal control structure of
the institution in those areas of the Title IV, HEA program
administration that the institution delegated to its third-party
servicer.
Changes: None.
Comments: One commenter believed that no audit could reasonably
satisfy the requirement that a compliance audit cover every aspect of a
third-party servicer's administration of an institution's participation
in the Title IV, HEA programs. The commenter recommended that the
regulatory language reflect those aspects of a third-party servicer's
administration that will be included in the guide developed by the
Department of Education's Inspector General. The commenter also
recommended, in the case of a third-party servicer that contracts with
more than one institution, that the auditor evaluate the effectiveness
of the servicer's internal control structure over compliance with
specified requirements, rather than compliance with all aspects of all
requirements pertaining to the Title IV, HEA programs. The commenter
believed that this approach would provide appropriate assurance of
compliance in a cost effective manner.
Discussion: The Secretary agrees with the commenter that the
language in the April 29, 1994 final regulations is somewhat broad and
can be more specifically focused. The Secretary did not intend an audit
of a third-party servicer to be broader than an audit of an
institution. The Secretary believes that a third-party servicer should
only be held to the same compliance audit standards as institutions
since a third-party servicer contracts with an institution to act as an
agent of the institution to administer the Title IV, HEA programs on
the institution's behalf. As with an institution, the compliance audit
standards for which a third-party servicer will be audited will include
a review of the third-party servicer's internal control structure over
the servicer's compliance with applicable Title IV, HEA program
requirements.
Changes: A change has been made. Section 668.23(c)(1)(ii) has been
amended to specify that a third-party servicer shall have performed at
least annually a compliance audit, meeting the compliance audit
standards for institutions, of the servicer's administration of the
participation in the Title IV, HEA programs of each institution with
which the servicer has a contract. In addition, Sec. 668.23(c)(1)(iii)
has similarly been amended to parallel the change to
Sec. 668.23(c)(1)(ii).
Comments: Seven commenters requested that the Secretary provide for
audit exceptions for low dollar volume third-party servicers as
published in the February 17, 1994 NPRM. The commenters felt that
consensus had been reached during negotiated rulemaking on this issue.
Two commenters recommended that institutions that receive less than a
million dollars in Title IV, HEA program assistance per year should
only be required to file a ``level 2'' audit.
Discussion: The Secretary disagrees with the commenters. As
previously stated in the final regulations published in the Federal
Register on April 29, 1994, the Secretary believes that section 487(c)
of the HEA requires institutions and third-party servicers to have
performed, on an annual basis, a compliance audit of the institution's
administration of its Title IV, HEA programs or a third-party servicer
to have performed, on an annual basis, a compliance audit of the
servicer's administration of an institution's participation in a Title
IV, HEA program.
Changes: None.
Comments: Four commenters supported the provision that requires a
third-party servicer's first audit to cover the first full fiscal year
after the effective date of the regulations as well as any period from
the effective date to the start of the servicer's first full fiscal
year. Five commenters believed that a third-party servicer's first
audit should only include the servicer's first full fiscal year that
begins after the effective date of the regulations.
Three commenters argued that the new audit requirements should take
effect for the institution's first full fiscal year after the effective
date of the regulations. One commenter recommended that the first
submission of audit reports under the new regulations should not be
required prior to January 1, 1995.
One commenter believed that the period covered by a third-party
servicer's first audit should not begin until after an audit guide has
been published by the Department of Education's Inspector General.
Another commenter suggested that there should be some flexibility of
the audit report due date because the audit guide had not been
published.
Four commenters were concerned that the 120-day deadline for
submission of compliance audit reports was not enough time for
institutions with fiscal years ending on June 30 to have performed an
audit of their participation in the Title IV, HEA programs. In
addition, four commenters noted that the Fiscal Operations and
Application to Participate (FISAP) report is not due until September 30
and therefore an auditor would not be able to complete a compliance
audit report until after the submission of the FISAP report. One
commenter recommended leaving the audit report due date at March 31.
Two commenters recommended that the audit report due date be amended so
that the audit report is not due until 120 days after receipt by the
institution of the final FISAP edit from the Department of Education
or, if applicable, in accordance with the deadlines established in the
Single Audit Act.
One commenter recommended developing a cycle for submissions of
audit reports that would take advantage of the full twelve months of
the year with institutions that have outstanding audits being required
to submit their reports first.
Four commenters argued that basing a compliance audit on a fiscal
year did not make sense because compliance with the regulations could
only be accomplished through an audit of a specific award year.
One commenter requested clarification as to which period of time
the compliance audit was supposed to cover.
Five commenters recommended that the regulations should provide a
third-party servicer with the option of being able to submit the
servicer's audit report to the Secretary within six months after the
end of the servicer's fiscal year if the servicer is required to have
an audit performed under 34 CFR part 682. One commenter recommended
that the due date for audit reports in this section should be changed
to six months to be consistent with the audit due date established
under the FFEL programs. One commenter recommended that the audit
report deadline be extended from 4 months to 6 months.
Two commenters requested that the regulations specify that an audit
conducted in accordance with OMB Circular A-133 would be due in
accordance with the guidance provided in that circular. The commenters
also requested that 34 CFR 682.416(e) be modified similarly.
Discussion: The Secretary has reexamined his position with regard
to having an annual compliance audit performed on a fiscal year basis.
Based on public comment, the Secretary believes that it is necessary to
resume having the compliance audit based upon the award year, instead
of a fiscal year, since most of the requirements in the Title IV, HEA
programs are geared to the award year and must be examined within that
context and time period. The Secretary believes that several commenters
supported this change and appreciates the support from those
commenters.
This change does not mean that the compliance audit report due date
will now be tied to the award year. The Secretary believes that it is
still appropriate to continue using the end of the institution's or
third-party servicer's fiscal year as the basis for submitting the
compliance audit reports. By tying the audit report due date to a
fiscal year cycle, the Secretary believes that institutions and third-
party servicers will have greater access to independent auditors
because the fiscal years of institutions and third-party servicers are
staggered and therefore not all institutions and third-party servicers
will be submitting compliance audit reports at the same time.
The Secretary also agrees with those commenters who were concerned
with the 120-day compliance audit report submission deadline and
suggested changing the submission due date of the compliance audit
report to six months after the end of the institution's or third-party
servicer's fiscal year. The Secretary acknowledges that institutions
whose fiscal year coincides with the award year may need more time
after the final FISAP reconciliation to submit their compliance audit
report. The Secretary believes that institutions and third-party
servicers, as applicable, must be given a reasonable amount of time to
have performed an annual compliance audit. Therefore, the Secretary
will consider that an institution or third-party servicer has submitted
its compliance audit report in a timely fashion if the compliance audit
report is submitted within six months of the end of the institution's
or third-party servicer's fiscal year. The Secretary believes that six
months is sufficient time for an institution or third-party servicer to
submit a compliance audit report. In addition, the submission deadline
for this report now parallels the submission deadlines established for
lenders and third-party servicers that contract with lenders or
guaranty agencies. The Secretary notes that the submission due date for
an institution's annual audited financial statement under 34 CFR 668.15
remains unchanged.
With respect to those comments that requested that the regulations
clarify that an audit conducted in accordance with OMB Circular A-133
are due in accordance with the submission deadlines in that circular,
the Secretary believes that the regulations are clear. Because the
regulations specify that an audit conducted under the Single Audit Act
or OMB Circular A-133 satisfies the annual compliance audit
requirement, which includes submission dates for compliance audits, the
Secretary does not believe that regulatory clarification is necessary.
Changes: Changes have been made. Section 668.23(c)(2)(ii) has been
revised to specify that a third-party servicer's first audit must cover
the third-party servicer's activities for the award year that begins on
or after July 1, 1994, in which the servicer began administering any
aspect of an institution's participation in the Title IV, HEA programs.
In addition, Sec. 668.23(c)(3) has been amended to specify that an
institution's or third-party servicer's compliance audit must be
submitted to the Department of Education within six months after the
end of the institution's or servicer's fiscal year that ends on or
after the most recently concluded award year for which the audit is
performed.
Comments: One commenter believed that it was unreasonable to
require foreign institutions to submit an audit report that covered the
institution's participation in the Title IV, HEA programs back to when
the institution first began to participate in the Title IV, HEA
programs because of the long timeframes involved.
Discussion: The Secretary believes that the commenter has raised a
valid point. Many foreign institutions have been participating in the
Title IV, HEA programs since the enactment of the HEA and have never
been required to submit a compliance audit report to the Department of
Education. To require an audit report from a foreign institution to
examine compliance with Title IV, HEA requirements back to the
beginning of the foreign institution's participation would create undue
burden on the foreign institution unless the foreign institution had
only been participating in the Title IV, HEA programs for a short-time.
The Secretary believes that a foreign institution should only be
required to have performed an audit report that covers the foreign
institution's participation in the Title IV, HEA programs for the two
most recently concluded award years unless the Secretary has reason to
require an audit report to cover a longer period of time which would be
no longer than the five most recently concluded award years.
Changes: A change has been made. Under Sec. 668.23(c)(2)(i)(B), a
foreign institution's first audit report must cover the foreign
institution's two most recently concluded award years or, if the
foreign institution has been participating in the Title IV, HEA
programs for less than two award years, the entire period of time since
the foreign institution began to participate in the Title IV, HEA
programs. However, the Secretary reserves the right to request a
foreign institution's first audit report to cover up to the foreign
institution's five most recently concluded award years if the Secretary
has reason to believe that such coverage in the audit report will
protect the Federal interest in the student financial assistance funds
that are used by students to pay for their education at the foreign
institution.
Comments: One commenter argued that the provisions in this section
relating to a third-party servicer's responsibility to agree to allow
its employees to be questioned in private raised questions of due
process. Four commenters stressed that the presence of management is
sometimes necessary to clarify the misconceptions of an employee who
works in a limited area and is not fully aware of the entire procedure.
One commenter also noted that this process could provide disgruntled
employees an opportunity to damage a third-party servicer's
credibility. Two commenters recommended that these provisions be
stricken from the regulations.
Discussion: The Secretary has already responded to similar comments
in the preamble to final regulations for 34 parts 600 and 668 that were
published in the Federal Register on July 31, 1991 (56 FR 36682). The
Secretary continues to disagree with these views and does not believe
that these requirements impose any additional requirements beyond what
is currently required for institutions that participate in the Title
IV, HEA programs. Because a third-party servicer is an agent of an
institution, voluntarily, the Secretary believes that the servicer must
be subject to the same requirements that an institution is subject to
in the conduct of audits, investigations, and program reviews that are
authorized by law.
Changes: None.
Comments: One commenter recommended that the provisions relating to
job placement recordkeeping in this section of the regulations should
be removed. The commenter argued that the definition of a placement
service was unclear and too broad. The commenter further believed that
the issue of institutional claims regarding job placement of students
was adequately addressed in other sections of the regulations and
therefore was not needed in this section.
One commenter objected to the requirement that an institution
establish and maintain records that are relevant to the institution's
admission standards and that support the educational qualifications of
each regular student admitted to the institution whether or not that
student receives Title IV, HEA program assistance. The commenter
believed that this requirement went beyond the type of records required
to ensure an institution's compliance with sections 1201(a), 481 (b),
and (c) of the HEA.
One commenter argued that the requirement to have available for
review records required by the Title IV, HEA program regulations at the
geographical location where the student will receive his or her degree
or certificate of program or course completion is unnecessarily
burdensome. The commenter argued that institutions with multiple
branches or additional locations should not be required to house
records at those additional sites; rather, the institution should be
able to house their records in one central location. The commenter
suggested that upon notification by the Secretary, an institution could
provide the physical records at the appropriate geographical location
and that computer records would always be readily available.
Discussion: The Secretary has taken the comment regarding removal
of the job placement record retention provision under consideration and
concluded that there is no need for the provision in this section of
the regulations. The regulations contain other regulatory provisions
governing job placement rates that require an institution to retain
documentation to support job placement computations.
The Secretary disagrees with the commenter who objected to the
requirement that an institution establish and maintain records that are
relevant to the institution's admission standards and that support the
educational qualifications of each regular student admitted to the
institution whether or not that student receives Title IV, HEA program
assistance. Section 1201(a)(1) of the HEA requires that an institution
of higher education may only admit as regular students individuals that
have a certificate of graduation from a school providing secondary
education, or the recognized equivalent of such a certificate. The
Secretary construes from this statutory authority that an eligible
institution must document that each student that it admits is a regular
student with a high school diploma or a recognized equivalent of a high
school diploma, as that term is defined in 34 CFR 600.2, in order to
comply with the statutory language in sections 481 (a), (b), (c), and
1201(a) of the HEA. However, upon further examination of these
requirements, the Secretary believes that there is no need in
regulation to differentiate between institutions whose programs are all
fully eligible and institutions that have only some programs that are
eligible. The Secretary believes that by simplifying the regulatory
language in this area, that the mandates of Executive Order (E.O.)
12866 are being carried out, in terms of promulgating regulations that
are easier to understand.
The Secretary also disagrees with the commenter who questioned the
requirement that an institution have available for review records
required by the Title IV, HEA program regulations at the geographical
location where the student will receive his or her degree or
certificate of program or course completion. Timely access to relevant
records at a particular geographical location are very important to
ensure appropriate oversight over institutional participation in the
Title IV, HEA programs. Ordinarily, program reviews and audits are
conducted according to an established schedule. If an institution is on
that schedule, the Department contacts the institution in advance and
requests access to the institution's records. Every effort is made to
accommodate the institution's schedule. However, at times, immediate
access to an institution is warranted. An institution is expected to
have its records organized and readily available at the geographical
location where a student will receive his or her certificate or degree
of program or course completion and should not object to providing
prompt access to those records. It is essential for proper
accountability that the independent auditor, the Secretary, the
Department of Education's Inspector General, the Comptroller General of
the United States, or their authorized representatives have immediate
access to institutional records. Housing records at a location other
than the geographical location where a student will receive his or her
certificate or degree of program or course completion defeats the
purpose of immediate access to Title IV, HEA program records and
prevents the proper accountability of an institution's participation in
the Title IV, HEA programs.
Changes: Changes have been made. Section 668.23(h)(1)(v),
concerning institutional documentation and record retention of job
placement rates for Title IV, HEA program student recipients, has been
removed from the regulations. In addition, Secs. 668.23(h)(2) (i) and
(ii) have been removed and replaced by a single provision under
Sec. 668.23(h)(2) that incorporates both of the removed provisions, so
that an institution shall establish and maintain records regarding the
admission requirements and educational qualifications of each regular
student enrolled in any eligible program offered by the institution,
whether the student received Title IV, HEA program assistance or not.
Executive Order 12866
These final regulations have been reviewed in accordance with
Executive Order 12866. Under the terms of the order the Secretary has
assessed the potential costs and benefits of this regulatory action.
The potential costs associated with the final regulations are those
resulting from statutory requirements and those determined by the
Secretary to be necessary for administering the Title IV, HEA programs
effectively and efficiently. Burdens specifically associated with
information collection requirements for the April 29, 1994 final
regulations were identified and explained in those regulations
(approved by the Office of Management and Budget under control number
1840-0537).
In assessing the potential costs and benefits--both quantitative
and qualitative--of these regulations, the Secretary has determined
that the benefits of the regulations justify the costs.
The Secretary has also determined that this regulatory action does
not unduly interfere with State, local, and tribal governments in the
exercise of their governmental functions.
Paperwork Reduction Act of 1980
Sections 668.3, 668.8, 668.15, 668.16, 668.22, and 668.23 contain
information collection requirements. As required by the Paperwork
Reduction Act of 1980, the Department of Education will submit a copy
of these sections to the Office of Management and Budget (OMB) for its
review. (44 U.S.C. 3504(h))
These regulations affect the following types of entities that
participate in the programs authorized under Title IV of the HEA:
individuals, States, large and small businesses, for-profit
institutions or other for-profit organizations, non-profit
institutions, and public institutions. The Department needs and uses
the information to enable the Secretary to improve the monitoring and
accountability of institutions and third-party servicers participating
in the Title IV, HEA programs.
Annual public collecting, reporting, and recordkeeping burden for
this collection of information is estimated to decrease by 23,272 hours
and 11,692 respondents from the 123,485 hours for 64,695 respondents
estimated in the April 29, 1994 final regulations, including time for
reviewing instructions, searching existing data sources, gathering and
maintaining the data needed, and completing and reviewing the
collection of information. These numbers represent aggregate totals.
For further information contact the Department of Education contact
person.
Organizations and individuals desiring to submit comments on the
information collection requirements should direct them to the Office of
Information and Regulatory Affairs, OMB, Room 3002, New Executive
Office Building, Washington, D.C. 20503; Attention: Daniel J. Chenok.
Comments on this burden estimate should be submitted by December 29,
1994.
List of Subjects
34 CFR Part 600
Administrative practice and procedure, Colleges and universities,
Consumer protection, Education, Grant programs--education, Loan
programs--education, Reporting and recordkeeping requirements, Student
aid.
34 CFR Part 668
Administrative practice and procedure, Colleges and universities,
Consumer protection, Education, Grant programs--education, Loan
programs--education, Reporting and recordkeeping requirements, Student
aid.
34 CFR Part 682
Administrative practice and procedure, Colleges and universities,
Loan programs--education, Reporting and recordkeeping requirements,
Student Aid, Vocational education.
(Catalog of Federal Domestic Assistance Numbers: 84.007 Federal
Supplemental Educational Opportunity Grant Program; 84.032 Federal
Stafford Loan Program; 84.032 Federal PLUS Program; 84.032 Federal
Supplemental Loans for Students Program; 84.033 Federal Work-Study
Program; 84.038 Federal Perkins Loan Program; 84.063 Federal Pell
Grant Program; 84.069 State Student Incentive Grant Program; 84.268
Federal Direct Student Loan Program; and 84.272 National Early
Intervention Scholarship and Partnership Program. Catalog of Federal
Domestic Assistance Number for the Presidential Access Scholarship
Program has not been assigned.)
Dated: November 18, 1994.
Richard W. Riley,
Secretary of Education.
The Secretary amends Parts 600, 668, and 682 of Title 34 of the
Code of Federal Regulations as follows:
PART 600--INSTITUTIONAL ELIGIBILITY UNDER THE HIGHER EDUCATION ACT
OF 1965, AS AMENDED
1. The authority citation for Part 600 continues to read as
follows:
Authority: 20 U.S.C. 1088, 1091, 1094, 1099b, 1099c, and 1141,
unless otherwise noted.
2. Section 600.5 is amended by revising paragraph (e)(1) to read as
follows:
Sec. 600.5 Proprietary institutions of higher education.
* * * * *
(e)(1) An institution shall substantiate the calculation required
in paragraph (a)(8) of this section by having the certified public
accountant who prepares its audited financial statement under 34 CFR
668.15 report on the accuracy of the institution's calculation based on
performing an agreed-upon procedures attestation engagement in
accordance with the American Institute of Certified Public Accountants
(AICPA) Statement on Standards for Attestation Engagements, and include
that report as part of the audit report.
* * * * *
PART 668--STUDENT ASSISTANCE GENERAL PROVISIONS
3. The authority citation for Part 668 continues to read as
follows:
Authority: 20 U.S.C. 1085, 1088, 1091, 1092, 1094, 1099c, and
1141, unless otherwise noted.
4. Section 668.2 is amended by revising the definitions of
``Academic year'' and ``Third-party servicer'' in paragraph (b) to read
as follows:
Sec. 668.2 General definitions
* * * * *
(b) * * *
Academic year: (1) A period that begins on the first day of classes
and ends on the last day of classes or examinations and that is a
minimum of 30 weeks (except as provided in Sec. 668.3) of instructional
time during which, for an undergraduate educational program, a full-
time student is expected to complete at least--
(i) Twenty-four semester or trimester hours or 36 quarter hours in
an educational program whose length is measured in credit hours; or
(ii) Nine hundred clock hours in an educational program whose
length is measured in clock hours.
(2) For purposes of this definition--
(i) A week is a consecutive seven-day period;
(ii)(A) For an educational program using a semester, trimester, or
quarter system or an educational program using clock hours, the
Secretary considers a week of instructional time to be any week in
which at least one day of regularly scheduled instruction,
examinations, or preparation for examinations occurs; and
(B) For an educational program using credit hours but not using a
semester, trimester, or quarter system, the Secretary considers a week
of instructional time to be any week in which at least 12 hours of
regularly scheduled instruction, examinations, or preparation for
examinations occurs; and
(iii) Instructional time does not include periods of orientation,
counseling, vacation, or other activity not related to class
preparation or examinations.
(Authority: 20 U.S.C. 1088)
* * * * *
Third-party servicer: (1) An individual or a State, or a private,
profit or nonprofit organization that enters into a contract with an
eligible institution to administer, through either manual or automated
processing, any aspect of the institution's participation in any Title
IV, HEA program. The Secretary considers administration of
participation in a Title IV, HEA program to--
(i) Include performing any function required by any statutory
provision of or applicable to Title IV of the HEA, any regulatory
provision prescribed under that statutory authority, or any applicable
special arrangement, agreement, or limitation entered into under the
authority of statutes applicable to Title IV of the HEA, such as, but
not restricted to--
(A) Processing student financial aid applications;
(B) Performing need analysis;
(C) Determining student eligibility and related activities;
(D) Certifying loan applications;
(E) Processing output documents for payment to students;
(F) Receiving, disbursing, or delivering Title IV, HEA program
funds, excluding lock-box processing of loan payments and normal bank
electronic fund transfers;
(G) Conducting activities required by the provisions governing
student consumer information services in subpart D of this part;
(H) Preparing and certifying requests for advance or reimbursement
funding;
(I) Loan servicing and collection;
(J) Preparing and submitting notices and applications required
under 34 CFR part 600 and subpart B of this part; and
(K) Preparing a Fiscal Operations Report and Application to
Participate (FISAP);
(ii) Exclude the following functions--
(A) Publishing ability-to-benefit tests;
(B) Performing functions as a Multiple Data Entry Processor (MDE);
(C) Financial and compliance auditing;
(D) Mailing of documents prepared by the institution;
(E) Warehousing of records; and
(F) Providing computer services or software; and
(iii) Notwithstanding the exclusions referred to in paragraph
(1)(ii) of this definition, include any activity comprised of any
function described in paragraph (1)(i) of this definition.
(2) For purposes of this definition, an employee of an institution
is not a third-party servicer. The Secretary considers an individual to
be an employee if the individual--
(i) Works on a full-time, part-time, or temporary basis;
(ii) Performs all duties on site at the institution under the
supervision of the institution;
(iii) Is paid directly by the institution;
(iv) Is not employed by or associated with a third-party servicer;
and
(v) Is not a third-party servicer for any other institution.
(Authority: 20 U.S.C. 1088)
* * * * *
5. Section 668.3 is amended by revising paragraph (c) and adding a
new paragraph (d) to read as follows:
Sec. 668.3 Reductions in the length of an academic year.
* * * * *
(c) Longterm reduction. (1) The Secretary may grant the request of
any institution that satisfies the requirements of paragraph (a) of
this section for a longterm reduction in the minimum period of
instructional time of the academic year. In making this determination,
the Secretary considers circumstances including, but not limited to:
(i) A demonstration to the satisfaction of the Secretary by the
institution of unique circumstances that justify granting the request;
(ii) In the case of a participating institution, demonstration that
the institution awards, disburses, and delivers, and has since July 23,
1992, awarded, disbursed, and delivered, Title IV, HEA program funds in
accordance with the definition of academic year in section 481(d) of
the HEA;
(iii) Approval of the institution's nationally recognized
accrediting agency or State body that legally authorizes the
institution to provide postsecondary education, including specific
review and approval of the length of the academic year for each
educational program offered at the institution; and
(iv) The number of hours of attendance and other coursework that a
full-time student is required to complete in the academic year for each
of the institution's educational programs.
(2) An institution that is granted a reduction in the minimum of 30
weeks of instructional time for an academic year in accordance with
paragraph (c)(1) of this section and that wishes to continue to use a
reduced number of weeks of instructional time must reapply to the
Secretary for a reduction whenever the institution is required to apply
to continue to participate in a Title IV, HEA program.
(d) An institution may demonstrate compliance with paragraphs
(b)(3) and (c)(1)(ii) of this section by making arrangements that are
satisfactory to the Secretary to repay any overawards that resulted
from the improper awarding, disbursing, or delivering of Title IV, HEA
program funds.
(Authority: 20 U.S.C. 1088)
6. Section 668.8 is amended by removing paragraph (j)(2) and
redesignating paragraphs (j) (3) and (4) as (j) (2) and (3) and
revising paragraphs (b)(3)(ii), (f)(2), (k)(1), and (k)(2) to read as
follows:
Sec. 668.8 Eligible program.
* * * * *
(b) * * *
(3) * * *
(ii) For an educational program using credit hours but not using a
semester, trimester, or quarter system, the Secretary considers a week
of instruction to be any week in which at least 12 hours of regularly
scheduled instruction, examinations, or preparation for examinations
occurs; and
* * * * *
(f) * * *
(2) Subtract from the number of students determined under paragraph
(f)(1) of this section, the number of regular students who, during that
award year, withdrew from, dropped out of, or were expelled from the
program and were entitled to and actually received, in a timely manner
in accordance with Sec. 668.22(j)(4), a refund of 100 percent of their
tuition and fees (less any permitted administrative fee) under the
institution's refund policy.
* * * * *
(k) * * *
(1) The program is at least two academic years in length and
provides an associate degree, a bachelor's degree, a professional
degree, or an equivalent degree as determined by the Secretary; or
(2) Each course within the program is acceptable for full credit
toward that institution's associate degree, bachelor's degree,
professional degree, or equivalent degree as determined by the
Secretary, provided that the institution's degree requires at least two
academic years of study.
* * * * *
7. Section 668.9 is revised to read as follows:
Sec. 668.9 Relationship between clock hours and semester, trimester,
or quarter hours in calculating Title IV, HEA program assistance.
(a) In determining the amount of Title IV, HEA program assistance
that a student who is enrolled in a program described in Sec. 668.8(k)
is eligible to receive, the institution shall apply the formula
contained in Sec. 668.8(l) to determine the number of semester,
trimester, or quarter hours in that program, if the institution
measures academic progress in that program in semester, trimester, or
quarter hours.
(b) Notwithstanding paragraph (a) of this section, a public or
private nonprofit hospital-based school of nursing that awards a
diploma at the completion of the school's program of education is not
required to apply the formula contained in Sec. 668.8(l) to determine
the number of semester, trimester, or quarter hours in that program for
purposes of calculating Title IV, HEA program assistance.
(Authority: 20 U.S.C. 1082, 1085, 1088, 1091, 1141)
8. Section 668.12 is amended by revising paragraphs (b)(2) and
(c)(1)(i) to read as follows:
Sec. 668.12 Application procedures.
* * * * *
(b) * * *
(2) Include in the institution's participation in a Title IV, HEA
program--
(i) A branch campus that is not currently included in the
institution's participation in the program; or
(ii) Another location that is not currently included in the
institution's participation in the program, if the Secretary requires
the institution to apply for certification under paragraph (c) of this
section;
(c) * * *
(1) * * *
(i) Include in its participation in a Title IV, HEA program a
location that is not currently included in the institution's
participation in the program and that offers at least 50 percent of an
educational program; or
* * * * *
9. Section 668.15 amended by revising paragraphs (b)(5), (7)(i) and
(8)(i)(B), and (d)(1) and by adding a new paragraph (g) to read as
follows:
Sec. 668.15 Factors of financial responsibility.
* * * * *
(b) * * *
(5) Except as provided in paragraph (d) of this section, in
accordance with procedures established by the Secretary, submits to the
Secretary an irrevocable letter of credit, acceptable and payable to
the Secretary equal to 25 percent of the total dollar amount of Title
IV, HEA program refunds paid by the institution in the previous fiscal
year;
* * * * *
(7) * * *
(i)(A) Demonstrates at the end of its latest fiscal year, an acid
test ratio of at least 1:1. For purposes of this section, the acid test
ratio shall be calculated by adding cash and cash equivalents to
current accounts receivable and dividing the sum by total current
liabilities. The calculation of the acid test ratio shall exclude all
unsecured or uncollateralized related party receivables;
(B) Has not had operating losses in either or both of its two
latest fiscal years that in sum result in a decrease in tangible net
worth in excess of 10 percent of the institution's tangible net worth
at the beginning of the first year of the two-year period. The
Secretary may calculate an operating loss for an institution by
excluding from net income: extraordinary gains or losses; income or
losses from discontinued operations; prior period adjustment; and, the
cumulative effect of changes in accounting principle. For purposes of
this section, the calculation of tangible net worth shall exclude all
assets defined as intangible in accordance with generally accepted
accounting principles; and
* * * * *
(8) * * *
(i) * * *
(B) Demonstrates at the end of its latest fiscal year, an acid test
ratio of at least 1:1. For purposes of this section, the acid test
ratio shall be calculated by adding cash and cash equivalents to
current accounts receivable and dividing the sum by total current
liabilities. The calculation of the acid test ratio shall exclude all
unsecured or uncollateralized related party receivables.
* * * * *
(d) Exceptions to the general standards of financial
responsibility. (1)(i) An institution is not required to meet the
standard in paragraph (b)(5) of this section if the Secretary
determines that the institution--
(A)(1) Is located in, and is legally authorized to operate within,
a State that has a tuition recovery fund that is acceptable to the
Secretary and ensures that the institution is able to pay all required
refunds; and
(2) Contributes to that tuition recovery fund.
(B) Has its liabilities backed by the full faith and credit of the
State, or by an equivalent governmental entity; or
(C) As determined under paragraph (g) of this section,
demonstrates, to the satisfaction of the Secretary, that for each of
the institution's two most recently completed fiscal years, it has made
timely refunds to students in accordance with Sec. 668.22(j)(4), and
that it has met or exceeded all of the financial responsibility
standards in this section that were in effect for the corresponding
periods during the two-year period.
(ii) In evaluating an application to approve a State tuition
recovery fund to exempt its participating schools from the federal cash
reserve requirements, the Secretary will consider the extent to which
the State tuition recovery fund:
(A) Provides refunds to both in-state and out-of-state students;
(B) Allocates all refunds in accordance with the order delineated
in Sec. 668.22(h); and
(C) Provides a reliable mechanism for the State to replenish the
fund should any claims arise that deplete the funds assets.
* * * * *
(g) Two-year performance requirement. (1) The Secretary considers
an institution to have satisfied the requirements in paragraph
(d)(1)(C) of this section, if the institution--
(i) Has not failed for the preceding 2 years to make timely refund
payments or to demonstrate financial responsibility under this section,
with such showing supported by its compliance audits and audited
financial statements for the most recent 2-year period; and
(ii) Was not cited in a review report for either of those years, by
the Secretary, a State postsecondary review entity designated under 34
CFR part 667, or other State agency, for its failure to make timely
refunds or its failure to meet the federal financial responsibility
standards during the preceding 2 years.
(2) If an institution is cited in an audit or review referenced in
paragraph (g)(1)(i) for a condition that would no longer permit it to
use the exemption in 668.15(d)(1), the institution must notify the
Secretary of that fact within 30 days of receiving such notice from its
auditor, and must take immediate steps to secure the letter of credit
required under paragraph (b)(5) of this section.
* * * * *
10. Section 668.16 is amended by revising paragraphs (e) and (l) to
read as follows:
Sec. 668.16 Standards of administrative capability.
* * * * *
(e) For purposes of determining student eligibility for assistance
under a Title IV, HEA program, establishes, publishes, and applies
reasonable standards for measuring whether an otherwise eligible
student is maintaining satisfactory progress in his or her educational
program. The Secretary considers an institution's standards to be
reasonable if the standards--
(1) Are the same as or stricter than the institution's standards
for a student enrolled in the same educational program who is not
receiving assistance under a Title IV, HEA program;
(2) Include the following elements:
(i) A qualitative component which consists of grades (provided that
the standards meet or exceed the requirements of Sec. 668.7(c)), work
projects completed, or comparable factors that are measurable against a
norm.
(ii) A quantitative component that consists of a maximum timeframe
in which a student must complete his or her educational program. The
timeframe must--
(A) For an undergraduate program, be no longer than 150 percent of
the published length of the educational program measured in academic
years, terms, credit hours attempted, clock hours completed, etc. as
appropriate;
(B) Be divided into increments, not to exceed the lesser of one
academic year or one-half the published length of the educational
program;
(C) Include a schedule established by the institution designating
the minimum percentage or amount of work that a student must
successfully complete at the end of each increment to complete his or
her educational program within the maximum timeframe; and
(D) Include specific policies defining the effect of course
incompletes, withdrawals, repetitions, and noncredit remedial courses
on satisfactory progress;
(3) Provide for consistent application of standards to all students
within categories of students, e.g., full-time, part-time,
undergraduate, and graduate students, and educational programs
established by the institution;
(4) Provide for a determination at the end of each increment by the
institution as to whether the student has met the qualitative and
quantitative components of the standards (as provided for in paragraphs
(e)(2)(i) and (ii) of this section);
(5) Provide specific procedures under which a student may appeal a
determination that the student is not making satisfactory progress; and
(6) Provide specific procedures for a student to re-establish that
he or she is maintaining satisfactory progress.
* * * * *
(1) For an institution that seeks initial participation in a Title
IV, HEA program, does not have more than 33 percent of its
undergraduate regular students withdraw from the institution during the
institution's latest completed award year. The institution must count
all regular students who are enrolled during the latest completed award
year, except those students who, during that period--
(1) Withdrew from, dropped out of, or were expelled from the
institution; and
(2) Were entitled to and actually received in a timely manner, a
refund of 100 percent of their tuition and fees (less any permitted
administrative fee) under the institution's refund policy;
* * * * *
11. Section 668.22 is revised to read as follows:
Sec. 668.22 Institutional refunds and repayments.
(a) General. (1) An institution shall have a fair and equitable
refund policy under which the institution makes a refund of unearned
tuition, fees, room and board, and other charges to a student who
received Title IV, HEA program assistance, or whose parent received a
Federal PLUS loan or Federal Direct PLUS loan on behalf of the student
if the student--
(i) Does not register for the period of enrollment for which the
student was charged; or
(ii) Withdraws, drops out, is expelled from the institution, or
otherwise fails to complete the program on or after his or her first
day of class of the period of enrollment for which he or she was
charged.
(2) The institution shall provide a clear and conspicuous written
statement containing its refund policy, including the allocation of
refunds and repayments to sources of aid to a prospective student prior
to the earlier of the student's enrollment or the execution of the
student's enrollment agreement. The institution must make available to
students upon request examples of the application of this policy and
inform students of the availability of these examples in the written
statement. The institution shall make its policy known to currently
enrolled students. The institution shall include in its statement the
procedures that a student must follow to obtain a refund, but the
institution shall return the portion of a refund allocable to the Title
IV, HEA programs in accordance with paragraph (f) of this section
whether the student follows those procedures or not. If the institution
changes its refund policy, the institution shall ensure that all
students are made aware of the new policy.
(3) The institution shall publish the costs of required supplies
and equipment and shall substantiate to the Secretary upon request that
the costs are reasonably related to the cost of providing the supplies
and equipment to students.
(b) Fair and equitable refund policy. (1) For purposes of paragraph
(a) of this section, an institution's refund policy is fair and
equitable if the policy provides for a refund of at least the larger of
the amount provided under--
(i) The requirements of applicable State law;
(ii) The specific refund standards established by the institution's
nationally recognized accrediting agency if those standards are
approved by the Secretary;
(iii) The pro rata refund calculation described in paragraph (c) of
this section, for any student attending the institution for the first
time whose withdrawal date is on or before the 60 percent point in time
in the period of enrollment for which the student has been charged; or
(iv) For purposes of determining a refund when the pro rata refund
calculation under paragraph (b)(1)(iii) of this section does not apply,
and no standards for a refund under State law under paragraph (b)(1)(i)
and no standards established by the institution's accrediting agency
under (b)(1)(ii) of this section exist, the larger of--
(A) The Federal refund calculation contained in paragraph (d) of
this section; or
(B) The institution's refund policy.
(2) For purposes of the calculation of a pro rata refund under
paragraph (b)(1)(iii) of this section, ``the 60 percent point in time
in the period of enrollment for which the student has been charged''
is--
(i) In the case of an educational program that is measured in
credit hours, the point in calendar time when 60 percent of the period
of enrollment for which the student has been charged, as defined in
paragraph (e) of this section, has elapsed; and
(ii) In the case of an educational program that is measured in
clock hours, the point in time when the student completes 60 percent of
the clock hours scheduled for the period of enrollment for which the
student is charged, as defined in paragraph (e) of this section.
(3) The institution must determine which policy under paragraph
(b)(1) of this section provides for the largest refund to that student.
(4) For all refund calculations other than the pro rata refund
calculation under paragraph (b)(1)(iii) of this section, an institution
must subtract the unpaid amount of a scheduled cash payment from the
amount the institution may retain in accordance with paragraph (f)(2)
of this section.
(c) Pro Rata refund. (1) ``Pro rata refund,'' as used in this
section, means a refund by an institution to a student attending that
institution for the first time of not less than that portion of the
tuition, fees, room, board, and other charges assessed the student by
the institution equal to the portion of the period of enrollment for
which the student has been charged that remains on the withdrawal date,
rounded downward to the nearest 10 percent of that period, less any
unpaid amount of a scheduled cash payment for the period of enrollment
for which the student has been charged.
(2) A ``scheduled cash payment'' is the amount of institutional
charges that is not paid for by financial aid for the period of
enrollment for which the student has been charged exclusive of--
(i) Any amount scheduled to be paid by Title IV, HEA program
assistance that the student has been awarded that is payable to the
student even though the student has withdrawn;
(ii) Late disbursements of loans made under the Federal Stafford
Loan, Federal SLS, and Federal PLUS programs in accordance with 34 CFR
682.207(d), and allowable late disbursements of unsubsidized Federal
Stafford loans and loans made under the Federal Direct Student Loan
Program in accordance with 34 CFR 685.303(d); and
(iii) Late disbursements of State student financial assistance, for
which the student is still eligible in spite of having withdrawn, made
in accordance with the applicable State's written late disbursement
policies. The late disbursement must be made within 60 days after the
student's date of withdrawal, as defined in paragraph (j)(1) of this
section, or the institution must--
(A) Recalculate the refund in accordance with this section,
including recalculating the student's unpaid charges in accordance with
this paragraph without consideration of the State's late disbursement
amount; and
(B) Return any additional refund amounts due as a result of the
recalculation in accordance with paragraph (h) of this section.
(3) The ``unpaid amount of a scheduled cash payment'' is computed
by subtracting the amount paid by the student for the period of
enrollment for which the student has been charged from the scheduled
cash payment for the period of enrollment for which the student has
been charged.
(4) An institution may exclude from the calculation of a pro rata
refund under this paragraph a reasonable administrative fee not to
exceed the lesser of--
(i) Five percent of the tuition, fees, room and board, and other
charges assessed the student; or
(ii) One hundred dollars.
(5)(i) For purposes of this section, ``other charges assessed the
student by the institution'' include, but are not limited to, charges
for any equipment (including books and supplies) issued by an
institution to the student if the institution specifies in the
enrollment agreement a separate charge for equipment that the student
actually obtains or if the institution refers the student to a vendor
operated by the institution or an entity affiliated or related to the
institution.
(ii) The institution may exclude from the calculation of a pro rata
refund under this paragraph the documented cost to the institution of
unreturnable equipment issued to the student in accordance with
paragraph (c)(5)(i) of this section or of returnable equipment issued
to the student in accordance with paragraph (c)(5)(i) of this section
if the student does not return the equipment in good condition,
allowing for reasonable wear and tear, within 20 days following the
date of the student's withdrawal. For example, equipment is not
considered to be returned in good condition and, therefore, is
unreturnable, if the equipment cannot be reused because of clearly
recognized health and sanitary reasons. The institution must clearly
and conspicuously disclose in the enrollment agreement any restrictions
on the return of equipment, including equipment that is unreturnable.
The institution must notify the student in writing prior to enrollment
that return of the specific equipment involved will be required within
20 days of the student's withdrawal.
(iii) An institution may not delay its payment of the portion of a
refund allocable under this section to a Title IV, HEA program or a
lender under 34 CFR 682.607 by reason of the process for return of
equipment prescribed in paragraph (c)(5) of this section.
(6) For purposes of this section--
(i) ``Room'' charges do not include charges that are passed through
the institution from an entity that is not under the control of,
related to, or affiliated with the institution; and
(ii) ``Other charges assessed the student by the institution'' do
not include fees for group health insurance, if this insurance is
required for all students and the purchased coverage remains in effect
for the student throughout the period for which the student was
charged.
(7)(i) For purposes of this section, a student attending an
institution for the first time is a student who--
(A) Has not previously attended at least one class at the
institution; or
(B) Received a refund of 100 percent of his or her tuition and fees
(less any permitted administrative fee) under the institution's refund
policy for previous attendance at the institution.
(ii) A student remains a first-time student until the student
either--
(A) Withdraws, drops out, or is expelled from the institution after
attending at least one class; or
(B) Completes the period of enrollment for which he or she has been
charged.
(8) For purposes of this paragraph, ``the portion of the period of
enrollment for which the student has been charged that remains'' is
determined--
(i) In the case of an educational program that is measured in
credit hours, by dividing the total number of weeks comprising the
period of enrollment for which the student has been charged into the
number of weeks remaining in that period as of the student's withdrawal
date;
(ii) In the case of an educational program that is measured in
clock hours, by dividing the total number of clock hours comprising the
period of enrollment for which the student has been charged into the
number of scheduled clock hours remaining to be completed by the
student in that period as of the student's withdrawal date; and
(iii) In the case of an educational program that consists
predominantly of correspondence courses, by dividing the total number
of lessons comprising the period of enrollment for which the student
has been charged into the number of lessons not submitted by the
student.
(d) Federal refund. (1) ``Federal refund,'' as used in this
section, means a refund by an institution to a student attending that
institution of not less than the portion of tuition, fees, room, board,
and other charges assessed the student by the institution to be
refunded as follows--
(i) The institution must refund 100 percent of the tuition charges,
less an administrative fee that does not exceed the lesser of $100 or 5
percent of the tuition, if a student withdraws from the institution on
or before the first day of classes for the period of enrollment for
which the student was charged;
(ii) The institution must refund at least 90 percent of the tuition
charges if the student withdraws between the end of the period of time
specified in paragraph (d)(1) of this section and the end of the first
10 percent (in time) of the period of enrollment for which the student
was charged;
(iii) The institution must refund at least 50 percent of the
tuition charges if the student withdraws between the end of the first
10 percent (in time) of the period of enrollment for which the student
was charged and the end of the first 25 percent (in time) of that
period of enrollment; and
(iv) The institution must refund at least 25 percent of the tuition
charges if the student withdraws between the end of the first 25
percent (in time) of the period of enrollment for which the student was
charged and the end of the first 50 percent (in time) of the period of
enrollment.
(2) An institution may exclude from the calculation of a Federal
refund under this paragraph a reasonable administrative fee not to
exceed the lesser of--
(i) Five percent of the tuition, fees, room and board, and other
charges assessed the student; or
(ii) One hundred dollars.
(3)(i) For purposes of this section, ``other charges assessed the
student by the institution'' include, but are not limited to, charges
for any equipment (including books and supplies) issued by an
institution to the student if the institution specifies in the
enrollment agreement a separate charge for equipment that the student
actually obtains or if the institution refers the student to a vendor
operated by the institution or an entity affiliated or related to the
institution.
(ii) The institution may exclude from the calculation of a Federal
refund under this paragraph the documented cost to the institution of
unreturnable equipment issued to the student in accordance with
paragraph (d)(3)(i) of this section or of returnable equipment issued
to the student in accordance with paragraph (d)(3)(i) of this section
if the student does not return the equipment in good condition,
allowing for reasonable wear and tear, within 20 days following the
date of the student's withdrawal. For example, equipment is not
considered to be returned in good condition and, therefore, is
unreturnable, if the equipment cannot be reused because of clearly
recognized health and sanitary reasons. The institution must clearly
and conspicuously disclose in the enrollment agreement any restrictions
on the return of equipment, including equipment that is unreturnable.
The institution must notify the student in writing prior to enrollment
that return of the specific equipment involved will be required within
20 days of the student's withdrawal.
(iii) An institution may not delay its payment of the portion of a
refund allocable under this section to a Title IV, HEA program or a
lender under 34 CFR 682.607 by reason of the process for return of
equipment prescribed in paragraph (c)(3) of this section.
(4) For purposes of this section--
(i) ``Room'' charges do not include charges that are passed through
the institution from an entity that is not under the control of,
related to, or affiliated with the institution; and
(ii) ``Other charges assessed the student by the institution'' do
not include fees for group health insurance, if this insurance is
required for all students and the purchased coverage remains in effect
for the student throughout the period for which the student was
charged.
(e) Period of enrollment for which the student has been charged.
(1) For purposes of this section, ``the period of enrollment for which
the student has been charged,'' means the actual period for which an
institution charges a student, except that the minimum period must be--
(i) In the case of an educational program that is measured in
credit hours or clock hours and uses semesters, trimesters, quarters,
or other academic terms, the semester, trimester, quarter or other
academic term; or
(ii) In the case of an educational program that is measured in
credit hours or clock hours and does not use semesters, trimesters,
quarters, or other academic terms and is--
(A) Longer than or equal to the academic year in length, the
greater of the payment period or one-half of the academic year;
(B) Shorter than the academic year in length, the length of the
educational program.
(2) If an institution charges by different periods for different
charges, the ``period of enrollment for which the student has been
charged'' for purposes of this section is the longest period for which
the student is charged. The institution must include any charges
assessed the student for the period of enrollment or any portion of
that period of enrollment when calculating the refund.
(f) Overpayments. (1) An institution shall determine whether a
student has received an overpayment for noninstitutional costs for the
period of enrollment for which the student has been charged if--
(i) The student officially withdraws, drops out, or is expelled, on
or after his or her first day of class of that period; and
(ii) The student received Title IV, HEA program assistance other
than from the FWS, Federal Stafford loan, Federal PLUS, Federal SLS,
Federal Direct Stafford, or Federal Direct PLUS Program for that
period.
(2)(i) To determine if the student owes an overpayment, the
institution shall subtract the noninstitutional costs that the student
incurred for that portion of the period of enrollment for which the
student has been charged from the amount of all assistance (other than
from the FWS, Federal Stafford Loan, Federal PLUS, Federal SLS Program,
Federal Direct Stafford, or Federal Direct PLUS) that the institution
disbursed to the student.
(ii) Noninstitutional costs may include, but are not limited to,
room and board for which the student does not contract with the
institution, books, supplies, transportation, and miscellaneous
expenses.
(g) Repayments to Title IV, HEA programs of institutional refunds
and overpayments. (1)(i) An institution shall return a portion of the
refund calculated in accordance with paragraph (b) of this section to
the Title IV, HEA programs if the student to whom the refund is owed
received assistance under any Title IV, HEA program other than the FWS
Program.
(ii) The portion of the refund that an institution shall return to
the Title IV, HEA programs may not exceed the amount of assistance that
the student received under the Title IV, HEA programs other than under
the FWS Program for the period of enrollment for which the student has
been charged.
(2) For purposes of this section, for all refund calculations other
than the pro rata refund calculation required under paragraph
(b)(1)(iii) of this section--
(i) An institutional refund means the amount paid for institutional
charges for the period of enrollment for which the student has been
charged minus the amount that the institution may retain under
paragraph (g)(2)(iii) of this section for the portion of the period of
enrollment for which the student has been charged that the student was
actually enrolled at the institution;
(ii) An institution may not include any unpaid amount of a
scheduled cash payment in determining the amount that the institution
may retain for institutional charges. A scheduled cash payment is the
amount of institutional charges that has not been paid by financial aid
for the period of enrollment for which the student has been charged,
exclusive of--
(A) Any amount scheduled to be paid by Title IV, HEA program
assistance that the student has been awarded that is payable to the
student even though the student has withdrawn;
(B) Late disbursements of loans made under the Federal Stafford,
Federal SLS, and Federal PLUS programs in accordance with 34 CFR
682.207(d), and allowable late disbursements of unsubsidized Federal
Stafford loans and loans made under the Federal Direct Student Loan
Program in accordance with 34 CFR 685.303(d); and
(C) Late disbursements of State student financial assistance, for
which the student is still eligible in spite of having withdrawn, made
in accordance with the applicable State's written late disbursement
policies. The late disbursement must be made within 60 days after the
student's date of withdrawal, as defined in paragraph (j)(1) of this
section, or the institution must--
(1) Recalculate the refund in accordance with this section,
including recalculating the student's unpaid charges in accordance with
this paragraph without consideration of the State late disbursement
amount; and
(2) Return any additional refund amounts due as a result of the
recalculation in accordance with paragraph (h) of this section;
(iii) In determining the amount that the institution may retain for
the portion of the period of enrollment for which the student has been
charged during which the student was actually enrolled, an institution
shall--
(A) Compute the unpaid amount of a scheduled cash payment by
subtracting the amount paid by the student for that period of
enrollment for which the student has been charged from the scheduled
cash payment for the period of enrollment for which the student has
been charged; and
(B) Subtract the unpaid amount of the scheduled cash payment from
the amount that may be retained by the institution according to the
institution's refund policy; and
(iv) An institution shall return the total amount of Title IV, HEA
program assistance (other than amounts received from the FWS Program)
paid for institutional charges for the period of enrollment for which
the student has been charged if the unpaid amount of the student's
scheduled cash payment is greater than or equal to the amount that may
be retained by the institution under the institution's refund policy.
(3)(i) A student must repay to the institution or to the Title IV,
HEA programs a portion of the overpayment as determined according to
paragraph (f) of this section. The institution shall make every
reasonable effort to contact the student and recover the overpayment in
accordance with program regulations (34 CFR parts 673, 674, 675, 676,
690, and 691).
(ii) The portion of the overpayment that the student or the
institution (if the institution recovers the overpayment) shall return
to the Title IV, HEA programs may not exceed the amount of assistance
received under the Title IV, HEA programs other than the FWS, Federal
Stafford Loan, Federal PLUS, Federal SLS, Federal Direct Stafford, or
Federal Direct PLUS Program for the period of enrollment for which the
student has been charged.
(iii) Unless otherwise provided for in applicable program
regulations--
(A) If the amount of the overpayment is less than $100, the student
is considered not to owe an overpayment, and the institution is not
required to contact the student or recover the overpayment; and
(B) If an institution demonstrates that the total amount of a
refund would be $25 or less, the institution is not required to pay the
refund, provided that the institution has obtained written
authorization from the student in the enrollment agreement to retain
any amount of the refund that would be allocated to the Title IV, HEA
loan programs.
(h) Allocation of refunds and overpayments. (1) Except as provided
in paragraph (h)(2) of this section, if a student who received Title
IV, HEA program assistance (other than assistance under the FWS
Program) is owed a refund calculated in accordance with paragraph (b)
of this section, or if a student who received Title IV, HEA program
assistance (other than assistance under the FWS, Federal Stafford Loan,
Federal PLUS, Federal SLS, Federal Direct Stafford, or Federal Direct
PLUS Program) must repay an overpayment calculated in accordance with
paragraph (f) of this section, an institution shall allocate that
refund and any overpayment collected from the student in the following
order:
(i) To eliminate outstanding balances on Federal SLS loans received
by the student for the period of enrollment for which he or she was
charged.
(ii) To eliminate outstanding balances on unsubsidized Federal
Stafford loans received by the student for the period of enrollment for
which he or she was charged.
(iii) To eliminate outstanding balances on subsidized Federal
Stafford loans received by the student for the period of enrollment for
which he or she was charged.
(iv) To eliminate outstanding balances on Federal PLUS loans
received on behalf of the student for the period of enrollment for
which he or she was charged.
(v) To eliminate outstanding balances on unsubsidized Federal
Direct Stafford loans received by the student for the period of
enrollment for which he or she was charged.
(vi) To eliminate outstanding balances on subsidized Federal Direct
Stafford loans received by the student for the period of enrollment for
which he or she was charged.
(vii) To eliminate outstanding balances on Federal Direct PLUS
loans received on behalf of the student for the period of enrollment
for which he or she was charged.
(viii) To eliminate outstanding balances on Federal Perkins loans
received by the student for the period of enrollment for which he or
she was charged.
(ix) To eliminate any amount of Federal Pell Grants awarded to the
student for the period of enrollment for which he or she was charged.
(x) To eliminate any amount of Federal SEOG Program aid awarded to
the student for the period of enrollment for which he or she was
charged.
(xi) To eliminate any amount of other assistance awarded to the
student under programs authorized by Title IV of the HEA for the period
of enrollment for which he or she was charged.
(xii) To repay required refunds of other Federal, State, private,
or institutional student financial assistance received by the student.
(xiii) To the student.
(2) The institution must apply the allocation policy described in
paragraph (h)(1) of this section consistently to all students who have
received Title IV, HEA program assistance and must conform that policy
to the following:
(i) No amount of the refund or of the overpayment may be allocated
to the FWS Program.
(ii) No amount of overpayment may be allocated to the Federal
Stafford Loan, Federal PLUS, Federal SLS, Federal Direct Stafford Loan
or Federal Direct PLUS Program.
(iii) The amount of the Title IV, HEA program portion of the refund
allocated to the Federal Stafford Loan, Federal PLUS, Federal SLS
programs must be returned to the appropriate borrower's lender by the
institution in accordance with program regulations (34 CFR part 682).
(iv) The amount of the Title IV, HEA program portion of the refund
allocated to the Title IV, HEA programs other than the FWS, Federal
Stafford Loan, Federal PLUS, and Federal SLS programs must be returned
to the appropriate program account or accounts by the institution
within 30 days of the date that the student officially withdraws, is
expelled, or the institution determines that a student has unofficially
withdrawn.
(v) The amount of the Title IV, HEA program portion of the
overpayment allocated to the Title IV, HEA programs other than the FWS,
Federal Stafford Loan, Federal PLUS, Federal SLS, Federal Direct
Stafford, and Federal Direct PLUS programs must be returned to the
appropriate program account or accounts within 30 days of the date that
the student repays the overpayment.
(i) Financial aid. For purposes of this section ``financial aid''
is assistance that a student has been or will be awarded (including
Federal PLUS loans and Federal Direct PLUS loans received on the
student's behalf) from Federal; State; institutional; or other
scholarship, grant, or loan programs.
(j) Refund dates. (1) Withdrawal date. (i) Except as provided in
paragraph (j)(1)(ii) and (iii) of this section, a student's withdrawal
date is the earlier of--
(A) The date that the student notifies an institution of the
student's withdrawal, or the date of withdrawal specified by the
student, whichever is later; or
(B) If the student drops out of the institution without notifying
the institution (does not withdraw officially), the last recorded date
of class attendance by the student, as documented by the institution.
(ii) If the student does not return to the institution at the
expiration of an approved leave of absence under paragraph (j)(2) of
this section, or takes a leave of absence that is not approved under
paragraph (j)(2) of this section, the student's withdrawal date is the
last recorded date of class attendance by the student, as documented by
the institution.
(iii) If the student is enrolled in an educational program that
consists predominantly of correspondence courses, the student's
withdrawal date is normally the date of the last lesson submitted by
the student, if the student failed to submit the subsequent lesson in
accordance with the schedule for lessons established by the
institution. However, if the student establishes in writing, within 60
days of the date of the last lesson that he or she submitted, a desire
to continue in the program and an understanding that the required
lessons must be submitted on time, the institution may restore that
student to ``in school'' status for purposes of funds received under
the Title IV, HEA programs. The institution may not grant the student
more than one restoration to ``in school'' status on this basis.
(2) Approved leave of absence. A student who has been granted a
leave of absence by an institution is not considered to have withdrawn
from the institution and is considered to be on an ``approved leave of
absence'' for purposes of this section (and, for a Title IV, HEA
program loan borrower, for purposes of terminating the student's in-
school status) under the following conditions--
(i) In any twelve-month period, the institution may grant a single
leave of absence to a student, not to exceed 60 days;
(ii) The student must make a written request to be granted a leave
of absence; and
(iii) The leave of absence may not involve additional charges by
the institution to the student.
(3) Timely determination of withdrawal for students who drop out.
An institution must determine the withdrawal date for a student who
drops out within 30 days after the expiration of the earlier of the--
(i) Period of enrollment for which the student has been charged;
(ii) Academic year in which the student withdrew;
(iii) Educational program from which the student withdrew
(4) Timely payment. An institution shall pay a refund that is due
to a student--
(i) If a student officially withdraws or is expelled, within 30
days after the student's withdrawal date;
(ii) If a student drops out, within 30 days of the earliest of
the--
(A) Date on which the institution determines that the student
dropped out;
(B) Expiration of the academic term in which the student withdrew;
or
(C) Expiration of the period of enrollment for which the student
has been charged;
(iii) If a student--
(A) Does not return to the institution at the expiration of an
approved leave of absence under paragraph (j)(2) of this section,
within 30 days of the earlier of the date of expiration of the leave of
absence or the date the student notifies the institution that the
student will not be returning to the institution after the expiration
of an approved leave of absence; (B) Is taking a leave of absence that
is not approved under paragraph (j)(2) of this section, within 30 days
after the last recorded date of class attendance by the student, as
documented by the institution.
(Authority: 20 U.S.C. 1091b, 1092, 1094)
12. Section 668.23 is revised to read as follows:
Sec. 668.23 Audits, records, and examinations.
(a) An institution that participates in the Federal Perkins Loan,
FWS, FSEOG, Federal Stafford Loan, Federal PLUS, Federal Pell Grant,
PAS, or FDSL Program shall comply with the regulations for that program
concerning--
(1) Fiscal and accounting systems;
(2) Program and fiscal recordkeeping; and
(3) Record retention.
(b)(1) An institution that participates in any Title IV, HEA
program shall cooperate with an independent auditor, the Secretary, the
Department of Education's Inspector General, the Comptroller General of
the United States, or their authorized representatives, a guaranty
agency in whose program the institution participates, the appropriate
nationally recognized accrediting agency, and the appropriate State
postsecondary review entity designated under 34 CFR part 667, in the
conduct of audits, investigations, and program reviews authorized by
law.
(2) A third-party servicer shall cooperate with an independent
auditor, the Secretary, the Department of Education's Inspector
General, and the Comptroller General of the United States, or their
authorized representatives, a guaranty agency in whose program the
institution contracting with the servicer participates, the appropriate
nationally recognized accrediting agency of an institution with which
the servicer contracts, and the State postsecondary review entity
designated under 34 CFR part 667, in the conduct of audits,
investigations, and program reviews authorized by law.
(3) The institution's or servicer's cooperation must include--
(i) Providing timely access, for examination and copying, to the
records (including computerized records) required by the applicable
regulations and to any other pertinent books, documents, papers,
computer programs, and records;
(ii) Providing reasonable access to personnel associated with the
institution's or servicer's administration of the Title IV, HEA
programs for the purpose of obtaining relevant information. In
providing reasonable access, the institution or servicer shall not--
(A) Refuse to supply any relevant information;
(B) Refuse to permit interviews with those personnel that do not
include the presence of the institution's or servicer's management; and
(C) Refuse to permit interviews with those personnel that are not
tape recorded by the institution or servicer.
(c)(1)(i) An institution that participates in the FDSL, Federal
Perkins Loan, FWS, FSEOG, Federal Stafford Loan, Federal PLUS, Federal
SLS, Federal Pell Grant, or PAS Program shall have performed at least
annually a compliance audit of its Title IV, HEA programs.
(ii) A third-party servicer shall have performed at least annually
a compliance audit that meets the compliance audit standards for
institutions of the servicer's administration of the participation in
the Title IV, HEA programs of each institution with which the servicer
has a contract, unless--
(A) The servicer contracts with only one participating institution;
and
(B) The audit of that institution's participation involves every
aspect of the servicer's administration of that Title IV, HEA program.
(iii) To meet the requirements of paragraph (c)(1)(ii) of this
section, a third-party servicer that contracts with more than one
participating institution may submit a single compliance audit report
that meets the compliance audit standards for institutions and that
covers the servicer's administration of the participation in the Title
IV, HEA programs of each institution with which the servicer contracts.
(iv) The audit required under paragraph (c)(1) (i) or (ii) of this
section shall be conducted by an independent auditor in accordance with
the general standards and the standards for compliance audits in the
U.S. General Accounting Office's (GAO's) Government Auditing Standards.
(This publication is available from the Superintendent of Documents,
U.S. Government Printing Office, Washington, DC 20402.)
(2)(i)(A) The institution's first audit must cover the
institution's activities for the entire period of time since the
institution began to participate in the Title IV, HEA programs. Each
subsequent audit must cover the institution's activities for the entire
period of time since the preceding audit.
(B) A foreign institution's first audit must cover the foreign
institution's activities for the two most recently concluded award
years in which the foreign institution has participated in the Title
IV, HEA programs, unless otherwise specified by the Secretary. A
foreign institution that has participated in the Title IV, HEA programs
for less than two years must have performed an audit that covers the
entire period of time since the foreign institution began to
participate in the Title IV, HEA programs. Each subsequent audit must
cover the foreign institution's activities for the entire period of
time since the preceding audit.
(ii) The third-party servicer's first audit must cover the
servicer's activities for the award year, ending on or after July 1,
1994, in which the servicer began to administer any aspect of an
institution's participation in the Title IV, HEA programs. Each
subsequent audit that the servicer has performed must cover the
servicer's activities for the entire period of time since the
servicer's preceding audit.
(3) The institution or servicer, as applicable, shall submit its
audit report to the Department of Education within six months of the
end of the institution's or servicer's fiscal year ending on or after
the most recently concluded award year for which the audit is performed
or, if applicable, in accordance with deadlines established in--
(i) The Single Audit Act;
(ii) Office of Management and Budget Circular A-133, ``Audits of
Institutions of Higher Education and Other Nonprofit Organizations;''
or
(iii) Office of Management and Budget Circular A-128, ``Audits of
State and Local Governments.''
(4) The Secretary may require the institution or servicer to
provide, upon request, to cognizant guaranty agencies and eligible
lenders under the FFEL programs, State agencies, the Secretary of
Veterans Affairs, nationally recognized accrediting agencies, and State
postsecondary review entities designated under 34 CFR part 667, the
results of any audit conducted under this section.
(d) Procedures for audits are contained in audit guides developed
by, and available from, the Department of Education's Office of
Inspector General. These audit guides do not impose any requirements
beyond those imposed under applicable statutes and regulations and
GAO's Government Auditing Standards. (This publication is available
from the Superintendent of Documents, U.S. Government Printing Office,
Washington, DC 20402.)
(e)(1) An institution or a third-party servicer that has an audit
conducted in accordance with this section shall--
(i) Give the Secretary and the Inspector General access to records
or other documents necessary to review the audit; and
(ii) Include in any arrangement with an individual or firm
conducting an audit described in this section a requirement that the
individual or firm shall give the Secretary and the Inspector General
access to records or other documents necessary to review the audit.
(2) A third-party servicer shall give the Secretary and the
Inspector General access to records or other documents necessary to
review an institution's audit.
(3) An institution shall give the Secretary and the Inspector
General access to records or other documents necessary to review a
third-party servicer's audit.
(f) The Secretary considers the audit requirement in paragraph (c)
of this section to be satisfied by an audit conducted in accordance
with--
(1) The Single Audit Act (Chapter 75 of title 31, United States
Code);
(2) Office of Management and Budget Circular A-133, ``Audits of
Institutions of Higher Education and Other Nonprofit Organizations;''
or
(3) Office of Management and Budget Circular A-128, ``Audits of
State and Local Governments.''
(g) Upon written request, an institution or a third-party servicer
shall give the Secretary access to all Title IV, HEA program and fiscal
records, including records reflecting transactions with any financial
institution with which the institution or servicer deposits or has
deposited any Title IV, HEA program funds.
(h)(1) In addition to the records required under the applicable
program regulations and this part, for each recipient of Title IV, HEA
program assistance, the institution shall establish and maintain, on a
current basis, records regarding--
(i) The student's admission to, and enrollment status at, the
institution;
(ii) The educational program and courses in which the student is
enrolled;
(iii) Whether the student is maintaining satisfactory progress in
his or her educational program;
(iv) Any refunds due or paid to the student, the Title IV, HEA
program or accounts, and the student's lender under the Federal
Stafford Loan, Federal PLUS, and Federal SLS programs;
(v) The student's prior receipt of financial aid (see Sec. 668.19);
(vi) The verification of student aid application data; and
(vii) Financial and other institutional records necessary to
determine the institutional eligibility, financial responsibility, and
administrative capability of the institution; and
(2) An institution shall establish and maintain records regarding
the admission requirements and educational qualifications of each
regular student enrolled in any eligible program offered by the
institution, whether the student received Title IV, HEA program
assistance or not.
(3) Records required under applicable program regulations and this
part shall be--
(i) Systematically organized;
(ii) Readily available for review by the Secretary at the
geographical location where the student will receive his or her degree
or certificate of program or course completion; and
(iii) Retained by the institution for the longer of at least five
years from the time the record is established or the period of time
required under the applicable program regulations or this part.
(Authority: 20 U.S.C. 1088, 1094, 1099c, 1141 and section 4 of Pub.
L. 95-452, 92 Stat. 1101-1109)
13. Section 668.81 is amended by adding paragraph (e) and revising
the authority citation to read as follows:
Sec. 668.81 Scope and special definitions.
* * * * *
(e) This subpart does not apply to the termination of the
eligibility of an institution to participate in the Title IV, HEA
programs if that termination results from the Secretary's receipt of a
notice from a State postsecondary review entity under 34 CFR part 667
that indicates the SPRE has determined that the institution should not
be eligible to participate in those programs.
(Authority: 20 U.S.C. 1094 and 1099a-3(h))
* * * * *
14. Section 668.116 is amended by revising paragraph (e)(1)(vi) to
read as follows:
Sec. 668.116 Hearing.
* * * * *
(e)(1) * * *
(vi) Other Department of Education records and materials if the
records and materials were provided to the hearing official no later
than 30 days after the institution's or servicer's filing of its
request for review.
* * * * *
15. Appendix A to Part 668 is revised to read as follows:
BILLING CODE 4000-01-P
Appendix A to Part 668--Flow Charts for Procedures for Calculating
Refunds Under Sec. 668.22
TR29NO94.000
TR29NO94.001
TR29NO94.002
BILLING CODE 4000-01-C
PART 682--FEDERAL FAMILY EDUCATION LOAN (FFEL) PROGRAMS
16. The authority citation for Part 682 continues to read as
follows:
Authority: 20 U.S.C. 1071 to 1087-2, unless otherwise noted.
17. Section 682.413 is amended by revising paragraph (e)(1) to read
as follows:
Sec. 682.413 Remedial actions.
* * * * *
(e)(1) The Secretary's decision to require repayment of funds,
withhold funds, or to limit, suspend, or terminate a lender, agency, or
third-party servicer from participation in the FFEL programs does not
become final until the Secretary provides the lender, agency, or
servicer with written notice of the intended action and an opportunity
to be heard thereon, at a time and in a manner the Secretary determines
to be appropriate to the resolution of the issues on which the lender,
agency, or servicer requests an opportunity to be heard.
* * * * *
[FR Doc. 94-29048 Filed 11-28-94; 8:45 am]
BILLING CODE 4000-01-P
