[Federal Register Volume 59, Number 82 (Friday, April 29, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-10140]
[[Page Unknown]]
[Federal Register: April 29, 1994]
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Part VIII
Department of Education
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34 CFR Parts 668, 682, and 690
Student Assistance General Provisions; Federal Family Education Loan
Programs; Federal Pell Grant Program; Interim Final Rule
DEPARTMENT OF EDUCATION
34 CFR Parts 668, 682, and 690
RIN 1840-AB85 and 1840-AB80
Student Assistance General Provisions; Federal Family Education
Loan Programs; Federal Pell Grant Program
AGENCY: Department of Education.
ACTION: Interim final regulations with invitation for comment.
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SUMMARY: The Secretary amends the Student Assistance General Provisions
regulations, the Federal Family Education Loan (FFEL) Program
regulations, and the Federal Pell Grant Program regulations to
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 changes also establish standards of administrative and
financial responsibility for third-party servicers that administer any
aspect of a guaranty agency's or lender's participation in the FFEL
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. The Secretary invites
comment on these regulations.
DATES: Effective Date: These regulations take effect July 1, 1994 with
the exception of Secs. 668.3, 668.8, 668.12, 668.13, 668.14, 668.15,
668.16, 668.17, 668.22, 668.23, 668.25, 668.26, 668.90, 668.96,
668.113, appendix A to 34 CFR part 668, 682.414, 682.416, 682.711, and
690.83. Sections 668.3, 668.8, 668.12, 668.13, 668.14, 668.15, 668.16,
668.17, 668.22, 668.23, 668.25, 668.26, 668.90, 668.96, 668.113,
appendix A to 34 CFR part 668, 682.414, 682.416, 682.711, and 690.83
will become effective after the information collection requirements
contained in these sections have been submitted by the Department of
Education and approved by the Office of Management and Budget under the
Paperwork Reduction Act of 1980. If you want to know the effective date
of these regulations, call or write the Department of Education contact
persons. A document announcing the effective date will be published in
the Federal Register.
Comment Date: Comments on these interim final regulations must be
received on or before June 20, 1994.
ADDRESSES: All comments concerning these regulations should be
addressed to Greg Allen and Wendy Macias, U.S. Department of Education,
400 Maryland Avenue, SW. (Regional Office Building 3, room 4318),
Washington, DC 20202-5343.
FOR FURTHER INFORMATION CONTACT: Greg Allen or Wendy Macias, U.S.
Department of Education, 400 Maryland Avenue, SW. (Regional Office
Building 3, room 4318), Washington, DC 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 6 p.m., Eastern time, Monday through
Friday.
SUPPLEMENTARY INFORMATION: 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.
On February 28, 1994, the Secretary published a Notice of Proposed
Rulemaking (NPRM) for parts 668 and 690 in the Federal Register (59 FR
9526). The NPRM included a discussion of the major issues surrounding
the proposed changes which will not be repeated here. The following
list summarizes those issues and identifies the pages of the preamble
to the NPRM on which a discussion of those issues can be found:
The Secretary proposed to clarify the terms used in the statutory
definition of academic year (pages 9529-9530);
The Secretary proposed a 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 proposed
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 proposed further provisions to evaluate
the quality of short-term programs (pages 9530-9531);
The Secretary proposed to add 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 proposed procedures to codify new statutory
provisions governing provisional certification procedures for
participation in a Title IV, HEA program (pages 9533-9536);
The Secretary proposed to amend 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
proposed provisions to amend the regulations governing program
participation agreements (pages 9536-9539);
The Secretary proposed significant changes to the section governing
the evaluation of an institution's financial responsibility. The
Secretary proposed to strengthen the factors used to evaluate an
institution's financial responsibility and to reflect statutory changes
(pages 9539-9544);
The Secretary proposed to strengthen and expand the standards of
administrative capability for participating institutions, addressing
areas previously not regulated or for which there were only guidelines
(pages 9544-9549);
The Secretary proposed to amend the provisions governing default
reduction measures to reflect statutory changes made by the Amendments
of 1992 and current departmental practices. The provisions in the
Technical Amendments of 1993 that address institutional appeals of
cohort default rates were not included in the NPRM (pages 9549-9551);
The Secretary proposed to clarify the terms used in the statutory
definition of a fair and equitable refund policy (pages 9551-9556);
The Secretary proposed to implement the statutory requirement that
institutions have annual compliance audits. The Secretary proposed to
extend the audit requirements to foreign institutions (pages 9556-
9557); and
The Secretary proposed to amend 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
(page 9558).
On February 17, 1994, the Secretary published an NPRM proposing
amendments to parts 668 and 682 in the Federal Register (59 FR 8044).
The NPRM included a discussion of the major issues involved in the
proposed changes. The following list summarizes those issues and
identifies the pages of the preamble to the NPRM on which a discussion
of those issues can be found:
The Secretary proposed 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 (page 8045);
The Secretary proposed to expand the factors of financial
responsibility of an institution to take into consideration substantial
control over both institutions and third-party servicers (pages 8046-
8047);
The Secretary proposed annual audit requirements for third-party
servicers as necessary to implement statutory provisions under the
Amendments of 1992 (pages 8047-8048);
The Secretary proposed notification requirements for third-party
servicers against which the Secretary has assessed a liability for a
violation of a Title IV, HEA program violation (pages 8048-8049);
The Secretary proposed to create 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 would be
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 8049-8050);
The Secretary proposed to apply against a third-party servicer the
sanctions under subpart G of the Student Assistance General Provisions
that currently solely apply to institutions for any violation of a
Title IV, HEA program requirement (pages 8050-8051);
The Secretary proposed to apply the fiduciary standards that
currently only apply to institutions to third-party servicers so that
third-party servicers would be required to act at all times with the
competency necessary to qualify them as a fiduciary (page 8051);
The Secretary proposed a definition of third-party servicer
applicable to those individuals or organizations that contract with a
lender or guarantee agency to administer any aspect of the lender's or
guarantee agency's participation in the FFEL programs (page 8055);
The Secretary proposed 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 8055-8056); and
The Secretary proposed a new section to codify Federal requirements
for third-party servicers that contract with lenders or guaranty
agencies. A third-party servicer would be 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 would require a third-party servicer to have
performed an annual audit of the servicer's administration of a
lender's or guaranty agency's participation in the FFEL programs (page
8056);
Program Integrity Triad
In order to approve a postsecondary education institution to
participate in the student financial assistance programs authorized
under Title IV of the HEA (referred to as ``Title IV, HEA programs'')
and many other Federal programs, the Secretary must determine, in part,
that the institution satisfies the statutory definition of an
``institution of higher education.'' Under the HEA and many other
Federal statutes, one element of that definition requires an eligible
institution of higher education to be accredited or preaccredited by an
accrediting agency recognized by the Secretary as a reliable authority
as to the quality of the education or training provided by the
institution. Another element requires an eligible institution to be
legally authorized to provide an education program beyond the secondary
level in the State in which it is located. In addition, to participate
in the Title IV, HEA programs, the institution must be certified by the
Secretary as administratively capable and financially responsible.
Thus, the HEA provides the framework for a shared responsibility among
accrediting agencies, States, and the Federal government to ensure that
the ``gate'' to Title IV, HEA programs is opened only to those
institutions that provide students with quality education or training
worth the time, energy, and money they invest in it. The three
``gatekeepers'' sharing this responsibility have traditionally been
referred to as ``the triad.''
While the concept of a triad of entities responsible for
gatekeeping has had a long history, originating in 1952, the Higher
Education Amendments of 1992, Pub. L. 102-325, significantly increased
the gatekeeping responsibilities of each member of the triad.
Specifically, Congress amended the HEA to provide for a new part H of
Title IV entitled ``Program Integrity Triad.'' Under the new part H,
the requirements that accrediting bodies must meet if they are to be
recognized by the Secretary as ``gatekeepers'' for Title IV or other
Federal purposes are specified in detail. Part H also provides a new
oversight responsibility for States: the State Postsecondary Review
Program. Altogether, part H establishes a set of responsibilities for
accrediting agencies, States, and the Secretary that creates a stronger
and more coordinated evaluation of institutions that participate, or
wish to participate, in the Title IV, HEA programs.
The Secretary recognizes that the approach to significantly
increased gatekeeping activity outlined in the statute for the three
members of the triad is a new one. This approach will require
leadership in both implementation and evaluation if it is to achieve
the effectiveness that Congress intended. The Secretary will take steps
to assure that the various responsibilities of the triad members are
carried out in a manner that, in fact, results in the identification of
institutions that should not participate in the Title IV, HEA programs,
on the basis of either the quality of education they offer or their
inability to handle program funds. At the same time, the Secretary is
committed to carrying out the responsibility for coordinating the
activities of the triad members that are inherent in the statute in a
manner that causes the least burden to institutions participating in
the Title IV, HEA programs.
To these ends, the Secretary is committed to effective management
of the gatekeeping function. The Secretary will review carefully the
applications of accrediting bodies and the standards and operating
plans proposed by State Postsecondary Review Entities (SPREs) under the
State Postsecondary Review Program to insure that they meet the
requirements of the statute and these regulations and will enable these
triad agencies to fulfill their statutory purposes. The Secretary will
also place a priority on the completion of the ``Postsecondary
Education Participation System,'' the Department's new integrated data
base, which will contain the information that the Secretary generates
in the course of the Secretary's oversight of institutions
participating in Title IV, HEA programs. The Secretary will use the
data base to inform accrediting bodies and SPREs of actions taken by
the Secretary so that they may in turn carry out their
responsibilities. This expanded data base is also critical to the
Secretary's effective selection of institutions for program review.
Monitoring the results of the gatekeeping process is a very
important key to effective management. The Secretary will evaluate the
activities of accrediting agencies, SPREs, and the Department to
determine their effectiveness in improving the integrity of
institutions participating in Title IV programs and will take such
steps as may be indicated to improve the results. Finally, as provided
in the statute, the Secretary will seek the advice and counsel of the
National Advisory Committee on Institutional Quality and Integrity in
evaluating the effectiveness of the triad.
The Secretary believes that the approach best suited to achieving
the objectives of the statute is a complementary one, with each member
of the triad focusing its evaluation on its obligations within the
context of the HEA. Thus, the focus for accrediting agencies is the
quality of education or training provided by the institutions or
programs they accredit. States, in addition to providing the legal
authority to operate within the state required for participation in the
Title IV, HEA programs, will review institutions that meet certain
statutory review criteria related to institutional performance in the
Title IV, HEA programs. The focus of the Secretary's evaluation of
institutions is on the administrative and financial capacity of those
institutions to participate in the Title IV, HEA programs.
While the functions and responsibilities of each of the triad
members are generally different, the statute does require, in some
instances, that all members of the triad evaluate similar areas. For
the most part, the principle of complementary functions will lead to
the members evaluating those same areas from different perspectives for
different purposes. For example, all three of the triad members are
required to examine the finances of an institution. If each looks at
financial strength from a perspective complementary to that of the
others, accrediting agencies would focus principally on the capacity of
the institution to continue to offer programs at a level of quality
sufficient to meet accrediting agency standards and to fulfill the
institution's mission over a 5-10 year period of accreditation. The
emphasis of a review by a SPRE would be on whether or not the
institution possesses the full range of resources needed to serve
students currently attending the institution. The Secretary's
responsibilities focus on the institution's finances in light of its
ability to provide the services described in its official publications
and statements, to provide the administrative resources necessary to
comply with its Title IV, HEA program responsibilities, and to meet all
of its financial obligations, including, but not limited to, refunds of
institutional charges and repayments to the Secretary for liabilities
and debts incurred in programs administered by the Secretary.
Despite the Secretary's efforts to encourage complementary
functions for each of the triad members, it is theoretically possible
that, in some instances, an institution could be subject to three
different standards regulating the same area of operation. For this
reason, where a Title IV standard has been promulgated at the Federal
level, the Secretary expects accrediting agencies and States to take
this into account in establishing their own standards to insure that
varying standards do not pose an unnecessary burden on institutions. It
is also important that accrediting agencies and States do not impose
any standard that is weaker than comparable Title IV, HEA program
standards. The Secretary believes coordination of this is a federal
responsibility.
In view of the complementary approach to the functions of the triad
members, the Secretary believes, for example, that institutions should
not have to develop different methodologies to provide data that the
three members of the triad may require. The Secretary also believes
that, to the extent feasible, any other requests for data about the
institution, its students, or its graduates should rely on information
already in the institution's possession. To that end, the Secretary
expects accrediting agencies and States either to accept student data
based on the methodology that will be specified in the regulations
governing ``Student Right to Know,'' also mandated by the Higher
Education Amendments of 1992, or, where the institution may have other
methodologies for calculating data, such as a system designed to
provide data to a State higher education commission or other State
agency, to accept data in the format already being used by the
institution. Similarly, the Secretary expects accrediting agencies and
SPREs to use the audited financial statements institutions are now
required to provide to the Secretary on an annual basis to the extent
those statements are compatible with the nature of the reviews
conducted under their respective standards.
The Secretary also recognizes that other Federal agencies, such as
the Department of Labor and the Veterans Administration, also regulate
institutions in some areas that are similar to those included in part
H. The suggestion has been made that the Secretary should promulgate
Federal standards in the areas of overlap so that institutions would
not be subject to varying standards developed by other Federal agencies
and the triad members. However, the Secretary interprets part H as
permitting States and accrediting agencies to establish their own
standards, as opposed to using a Federal standard, and also believes
that this is the most effective approach. In addition, it is not clear
how the requirements of the different agencies are compatible with the
requirements of part H. The purposes of these programs administered by
other agencies may be very different. As a result, the Secretary has
not pursued this alternative. The Secretary does believe that it would
be useful to explore how the varying requirements of other Federal
agencies that are similar to those of part H might be coordinated to
reduce any burden on institutions and will initiate such exploration.
The Secretary believes that, where possible, data developed at the
national level should be made available to institutions, as well as to
States and accrediting agencies to assist them in carrying out their
responsibilities under part H. In particular, data concerning labor
markets and compensation for specific fields and information concerning
graduation and withdrawal rates at various types of institutions may be
helpful to both triad members and institutions. The Secretary will
facilitate the development of this type of information and, where
possible under the auspices of the Department, will coordinate the
development of data that will be helpful to institutions and the triad.
Finally, as part of the commitment to providing leadership to the
triad, the Secretary will convene representatives of the triad members
and institutions to exchange information about the gatekeeping process
and to discuss how the triad is functioning, both in identifying
institutions whose performance is questionable and in reporting
requirements that have proven to be unreasonably burdensome. The
Secretary invites comments concerning the functioning of the triad, as
it is implemented through these and other regulations governed by part
H. The Secretary will seek improvement, where possible, within existing
regulations and will propose modifications to regulations and to the
statute itself if experience indicates those changes are both necessary
to achieve effective gatekeeping, with minimal burden, and compatible
with the need to maintain, and assure the public of, the integrity of
the Title IV, HEA programs.
Substantive Changes to the NPRMs
Part 668--Student Assistance General Provisions
Subpart A--General
Section 668.2 General Definitions
Academic Year. In the February 28, 1994 NPRM, the Secretary
requested comment on how 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. The Secretary did not propose specific criteria
to implement this technical amendment in the February 28, 1994 NPRM,
but instead requested comments on a definition of ``good cause'' and
requested comments on ways of implementing this provision that
addressed the Secretary's concern that reductions in the award year
would encourage many institutions to seek that treatment routinely.
After reviewing public comments on defining good cause, and developing
safeguards to discourage routine requests for reductions in the
academic year, the Secretary has implemented this technical amendment
in new Sec. 668.3.
Under this section, for the purpose of awarding Title IV, HEA
funds, the Secretary may reduce the length of an academic year for an
institution that submits a written request to the Secretary. Section
668.3 provides for a two-year ``phase-in'' period for institutions that
are currently participating, have an academic year of 26-29 weeks, and
meet the other applicable standards of the section. The Secretary will
consider all other requests for a reduction in the minimum number of
weeks of instructional time to not less than 26 weeks on a case-by-case
basis in accordance with the requirements of Sec. 668.3. Section 668.3
is discussed in greater detail in the section of the Analysis of
Comments and Changes that addressed the definition of an academic year
(Sec. 668.2).
In the February 28, 1994 NPRM, the Secretary requested comment on
how to address 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. The
Secretary 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. However, rather than changing the proposed definition of
full-time student to require measurement of student workloads, a
modification has been 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. The Secretary believes it is important to ensure that
full-time students are performing comparable workloads regardless of
the type of institution they are attending, and that such work should
be ratably allocated throughout the period of instruction. The
Secretary notes that this is an area of abuse that is not fully
addressed by the implementation of the ``clock hour/credit hour''
regulations. A corresponding change has been made to the definition of
an eligible program.
One-third of an academic year and two-thirds of an academic year.
In response to public comment, the Secretary has defined one-third of
an academic year and two-thirds of an academic year in order to clarify
the procedure for prorating awards under the FFEL and NDSL programs.
Undergraduate student. Because the Secretary recognizes that, at
this time, there are legitimate reasons supported by statute for
separate definitions of an undergraduate student under the various
Title IV, HEA program regulations the definition of undergraduate
student has been deleted in these final regulations.
Section 668.8 Eligible Program
Qualitative factors. Section 668.8(e)(1)(iii) requires that, for a
short-term program, the length of the program may not exceed by more
than 50 percent the minimum number of clock hours required for training
in the recognized occupation for which the program prepares students,
as established by the State in which the program is offered, if the
State has established such a requirement. In response to public
comment, this provision has been amended to also prohibit a short-term
eligible program from exceeding by 50 percent any applicable minimum
number of clock hours required by a Federal agency for training in the
recognized occupation for which the program prepares students.
In response to public comment, Sec. 668.8(e)(2) has been revised to
clarify that, since a certified public accountant cannot certify the
accuracy of an institution's completion or placement-rate calculations,
the institution shall substantiate these calculations by having the
certified public accountant follow the procedures of an attestation
engagement.
Calculation of completion rate. Section 668.8(f)(4) has been
amended to require that a student must complete the educational program
in which he or she is enrolled within 150 percent of the published
length of the educational program in order to be counted as a completer
for purposes of this calculation. This change was made to conform with
the calculation of a completion rate under the Student Right-to-Know
provisions. The Secretary notes that the Department will continue to
evaluate the feasibility of replacing this methodology with the
methodology developed relative to the Student Right-to-Know Act once
that methodology has been published in final regulations.
Calculation of Placement Rate. In response to public comment, the
requirement in proposed Sec. 668.8(g)(1)(ii) that an institution
exclude from the calculation of a placement rate students who are hired
by the institution has been deleted from these regulations.
In response to public comment, a change has been made to the
placement rate calculation to clarify that every student must be
employed for at least 13 weeks in a recognized occupation for which
they were trained or in a related comparable occupation before that
student can be counted as placed.
The Secretary has amended Sec. 668.8 by revising paragraph (k) to
remove the provision that an institution offering an undergraduate
educational program measured in credit hours and at least two academic
years in length 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.
Paragraphs (k) and (l) were originally published in final
regulations on July 23, 1993 (58 FR 39618). In those final regulations,
the Secretary exempted from the requirements of the regulations,
undergraduate educational programs that were at least two years in
length and lead to an associate, bachelor's, professional, or an
equivalent degree as determined by the Secretary or if each course
within that program was fully acceptable for credit toward one of those
degree programs at that institution. The Secretary believed that it was
prudent to exempt programs that lead to an equivalent degree because
there might be a type of degree being offered (not an associate,
bachelor's, or professional degree) that the Secretary had not yet
encountered. The Secretary wanted to be able to examine the degree to
determine if that degree was in fact equivalent to an associate,
bachelor's, or professional degree. If the Secretary determined that
the degree was equivalent to an associate, bachelor's, or professional
degree, and was at least two academic years in length, the Secretary
would exempt from the regulations undergraduate educational programs
that lead to the equivalent degree or if each course within the program
was fully acceptable for credit toward that institution's equivalent
degree.
However, since publication of the final regulations on July 23,
1993, the Secretary has yet to encounter a degree that the Secretary
would consider to be an equivalent of an associate, bachelor's, or
professional degree. Conversely, dozens of institutions have submitted
to the Secretary arguments that their diploma programs are the
equivalent of an associate degree program. The regulations were never
meant to permit a determination that a nondegree program be classified
as the equivalent of a degree program. The regulations only applied to
a determination of whether a degree resulting from an educational
program is equivalent to an associate, bachelor's, or professional
degree. Because the diploma programs are not in themselves degree
programs, the Secretary does not consider those programs to lead to an
equivalent degree.
Because of this misconception by many institutions that
``equivalent degree'' means an educational program equivalent to a
degree granting program, and because the Secretary has not yet found a
true instance of an equivalent degree that is not an associate,
bachelor's, or professional degree, the Secretary is removing the
phrase ``equivalent degree as determined by the Secretary'' from
paragraph (k).
Subpart B--Standards for Participation in the Title IV, HEA Programs
Section 668.13 Certification Procedures
Period of participation. In response to concerns of many commenters
about the consequences (particularly the potential for provisional
certification) to a participating institution in the event that the
Secretary does not complete a review of the institution's application
prior to the expiration of the institution's program participation
agreement, even if the institution had filed its renewal application in
a timely manner, Sec. 668.13(b) is amended to provide that full
certification will be extended on a month to month basis following the
expiration of a program participation agreement where the institution's
application for recertification was materially complete, and submitted
at least 90 days prior to the expiration date.
Provisional certification. In response to public comment, proposed
Sec. 668.13(c)(1)(ii) that provided that the Secretary may
provisionally certify an institution if the financial responsibility
and administrative capability of the institution was being determined
for the first time has been deleted from these regulations. Although
this provision is statutory, the Secretary has decided that the other
standards requiring the use of provisional certification are adequate
to identify institutions that would be captured by this provision where
greater monitoring and procedural restrictions are appropriate.
Section 668.13(c)(2)(i) has been amended to clarify the maximum
permissible length of periods of provisional certification. Upon
further consideration, the Secretary has decided to repeat the language
of the statute that provides that periods of participation under
provisional certification should be for ``complete award years.'' So,
for example, the regulations will permit the Secretary to provisionally
certify an initial applicant for one complete award year, rather than
for a period of 12 months as proposed in the February 28, 1994 NPRM.
This will provide the Secretary with a complete award year of data on
which to base determinations of further participation for the
institution.
In response to public comment, Sec. 668.13(d)(1) that lists the
requirements for provisional certification to participate on a limited
basis for institutions that are not financially responsible has been
amended to make clear that the criteria of this section are not
required for an institution that meets the exceptions to the general
standards of financial responsibility under Sec. 668.15(d).
In response to public comment Sec. 668.13(d)(1)(ii) has been
amended to clarify that any required submission of a letter of credit
must be in an amount and in a form acceptable to the Secretary.
Proposed Sec. 668.13(d)(1)(iii)(B) has been revised, consistent
with similar changes in Sec. 668.15(b) (3) and (4), to make clear how
an institution demonstrates that it has met all of its financial
obligations and is current in its debt payments. This provision is
explained in greater detail in the section of the Analysis of Comments
and Changes that addresses the factors of financial responsibility
(Sec. 668.15).
In response to public comment, Sec. 668.13(d)(2) has been clarified
to explain that financial guarantees are only required if the
institution comes within the requirements of Sec. 668.15(c)(2), or
where the institution fails to demonstrate financial responsibility
under its current audit and has failed to do so at least one other time
under the standards in effect during the preceding five years.
In response to public comment, a new paragraph (e) is added to
Sec. 668.13 which provides for denial of certification to initial
applicants for participation in a Title IV, HEA program and to
participants that have undergone a change of ownership resulting in a
change of control, if the State in which those applicants or
participants are located does not participate in the State
Postsecondary Review Program. This addition conforms these regulations
to the requirements of the State Postsecondary Review Program in 34 CFR
part 667, and provides some further explanation of the consequences to
an institution if the State in which the institution is located does
not participate in the State Postsecondary Review Program. Under
paragraph (e), the Secretary may provisionally certify a participating
institution or branch campus in that State. Section 668.13(c)(2)(ii)
has also been revised to provide that the provisional certification of
an institution under these circumstances expires at the end of the
third complete award year following the date of the provisional
certification.
In response to public comment, a change has been made to provide
for notices of revocation of provisional certification to be sent by
certified mail, instead of registered mail.
In response to public comment, Sec. 668.13(f)(4)(i) has been
modified to provide that the official reviewing a request for
reconsideration of provisional certification must be different from,
and not subject to supervision by, the official that issued the notice
of revocation.
Section 668.14 Program Participation Agreement
In response to public comment, Sec. 668.14(b)(1) has been amended
to clarify that an institution must comply with all special
arrangements, agreements, or limitations entered into under the
authority of statutes applicable to Title IV of the HEA. Corresponding
changes have been made throughout the sections of 34 CFR part 668 and
34 CFR part 682 contained in this regulatory package.
In response to public comment, Sec. 668.14(b)(4) has been amended
to provide that an institution must provide information relating the
administrative capability and financial responsibility of the
information to a SPRE only if the institution was referred by the
Secretary under 34 CFR 667.5.
The proposed regulations prohibited any type of incentive payments,
particularly those based on ``retention.'' In response to public
comment, the Secretary has amended Sec. 668.14(b)(22) to allow that
token gifts may be given to students or alumni for referring other
students for admission to the institution, as long as:
(1) The gift is not money, check or money order;
(2) No more than one such gift is given to any student or alumnus;
and
(3) The value of the gift is no more than twenty-five dollars.
In response to public comment, proposed Sec. 668.16(k) that
requires that an institution: (1) Demonstrate a reasonable relationship
between the length of the program and occupational entry level
requirements and (2) establish the need for the training has been moved
to Sec. 668.14(b)(26). Further, the requirements of this provision have
been amended to require an institution to demonstrate a reasonable
relationship between the length of the program and occupational entry
level requirements established by any Federal agency.
Section 668.15 Factors of Financial Responsibility
Sections 668.15(b) (1), (2), and (3) have been amended to clarify
that, in order to be financially responsible, an institution must be
providing the services described in its official publications and
statements; providing the administrative resources necessary to comply
with the requirements of subpart B; and meeting all if its financial
obligations. This is a change from the proposed regulations that would
have required an institution to demonstrate that it was able to provide
and meet these requirements. The Secretary believes these changes more
accurately reflect the intent of the regulations.
In response to public comment, Sec. 668.15(b)(4) further defines
the requirement that an institution be current in its debt payments.
The Secretary considers an institution to be current in its long-term
debt obligations if it is not in violation of existing loan agreements
at the end of the institution's fiscal year. The Secretary considers an
institution to not be current in all of its debt obligations whenever
the institution is more than 120 days delinquent in making payments,
and a legal claim has been initiated against the institution or a lien
has been filed on its assets due to the non-payment of the obligation.
The Secretary believes that an institution's non-payment of obligations
is a serious concern because the possibility exists that legal actions
brought by creditors may result in forfeiture of some or all of an
institution's assets. Consistent with the determination that payment
delinquencies place the institution at risk, the Secretary notes that
such actions are also often precede an action by creditors to force a
company into bankruptcy.
In response to public comment, Sec. 668.15(b)(5) has been amended
to require that the amount of an institution's required cash reserve
shall be one-quarter of the amount the institution paid in refunds
during its previous year, as shown in its audited financial statement.
By using historical information specific to the individual institution,
the Secretary provides for adequate reserves for all institutions,
rather than establishing an across the board measure which would be
inadequate for some and inappropriate for others. Also, in response to
the comments, the regulations have been changed to require the cash
reserve to be maintained as a cash deposit in a federally insured bank
account or an investment in U.S. Treasury securities, with an original
maturity of three months or less.
Proposed Sec. 668.15(b)(6)(ii) that would have provided that an
institution is financially responsible if the institution does not have
a finding of unauthorized use of donor restricted net assets to meet
current operating expenses, has been removed from these regulations.
This change was made based upon general considerations that were
presented in the public comments concerning the need to implement
consistent standards for determining financial responsibility for for-
profit and nonprofit institutions, and to simplify the administrative
resources necessary to determine whether institutions were in
compliance with the regulations.
In response to numerous public comments, Sec. 668.15(b)(7)(i)(A)
and (b)(8)(i)(B) have been amended to require that both for-profit
institutions and nonprofit institutions must meet an acid test ratio of
1:1 to replace the proposed ratio requirements that differed for for-
profit and nonprofit institutions. The acid test ratio is defined as
the sum of cash and current accounts receivable, divided by current
liabilities. The Secretary has kept the regulatory exclusions of
unsecured or uncollateralized related party receivables because they
represent capital outflows from an institution that do not contain
provisions for repayment. The Secretary has allowed the inclusion of
the institution's cash reserve requirement in the calculation of the
acid test ratio.
In response to public comment concerning the proper development of
standards for nonprofit and for-profit institutions,
Sec. 668.15(b)(7)(i)(B) has been amended to require that a for-profit
institution may not have operating losses in one or both years
exceeding ten percent of equity capital. The Secretary's intent is to
determine whether a trend of continuing losses exists, or if a loss
occurs in any one year that it's magnitude is such that it does not
materially impact the equity of the institution. The Secretary has
changed the reference year used in the calculation to be that of the
beginning of the first year in the two year period rather than the most
recently completed fiscal year.
In response to public comment, Sec. 668.15(b)(7)(ii), (b)(8)(ii),
and (b)(9)(v) have been added to provide that a for- profit
institution, a nonprofit institution, or a public institution may
demonstrate that it is financially responsible if it submits evidence
of a superior bond rating as an alternative to having to meet the tests
for financial responsibility. The Secretary considers an institution to
be financially responsible if the institution has currently issued an
outstanding debt obligations that are, without insurance, guarantee, or
credit enhancement rated at or above the second highest level of rating
given by a nationally recognized statistical rating organization.
Section 668.15(b)(8)(i)(C)(1) has been changed from the NPRM to
incorporate the existing requirement that a nonprofit institution must
have a positive unrestricted current fund balance or positive
unrestricted net assets. This requirement is unchanged from the former
requirement in effect for more than fourteen years that a nonprofit
have a positive unrestricted current fund balance.
Section 668.15(b)(8)(i)(C)(2) has been amended to require that a
nonprofit institution may not have excess current fund expenditures in
either or both of two years that results in a decrease in the current
unrestricted fund or a decrease in unrestricted net assets of greater
than ten percent of the institution's unrestricted current fund balance
or unrestricted net assets in the beginning of the first year of the
two year period. The proposed regulation would have required that a
nonprofit institution not have a decrease in total net assets of such
significance that if continued would result in a current ratio of less
than 1:1. As in the requirement for for-profit institutions, the
Secretary's intent is to determine whether a trend of continuing excess
expenditures exists, or if a significant excess expenditure in any one
year is so great in magnitude that it materially affects the
unrestricted current fund balance or the unrestricted net assets of the
institution.
In the NPRM the Secretary proposed that a public institution is
financially responsible only if it has its liabilities backed by the
full faith and credit of a state. In response to public comment,
Sec. 668.15(b)(9) has been revised to add three alternatives that a
public institution may employ to demonstrate that it is financially
responsible: for institutions reporting under the Single Audit Act, a
positive unrestricted current fund balance; a positive unrestricted
current fund balance in a state's Higher Education Fund, as presented
in the general purpose financial statements of the state; or the
submission of a statement by the State Auditor General that the
institution has sufficient resources to meet all of its financial
obligations.
In response to public comment, Sec. 668.15(d)(ii) has been amended
to identify the circumstances where an institution that does not
otherwise demonstrate financial responsibility can continue to
participate fully by showing that it meets certain conditions to
demonstrate that it has sufficient resources to ensure against its
precipitous closure.
In response to public comment, Sec. 668.15(e)(3) has been added to
clarify that the submission of an audit performed in accordance with
the Single Audit Act satisfies the requirement for a submission of an
audited financial statement under Sec. 668.15(e)(1).
Section 668.16 Standards of Administrative Capability
In response to public comment, the Secretary has modified the
proposed administrative standards significantly. The Secretary made
some changes and clarified implementation of standards where commenters
pointed out that the Secretary could achieve the same goal by requiring
less detail or action by those institutions that have demonstrated a
history of compliance with regulations governing the Title IV, HEA
programs and by imposing more requirements or restrictions on
institutions that either have no track record or have a record of
problems administering the Title IV, HEA programs. The Secretary
removed other sections of the proposed standards because there was
overlap with the responsibilities of accrediting agencies or SPREs or
duplication of other sections of the regulations.
In response to public comment, Sec. 668.16(a) clarifies that an
institution must administer the Title IV, HEA programs in accordance
with all the statutory and regulatory provisions, and with any
applicable special arrangement, agreement or limitation entered into
under the authority of statutes applicable to Title IV of the HEA.
In response to public comment, Sec. 668.16(b)(1) is amended by
adding documented success in administering Title IV, HEA programs to
the list of factors the Secretary may consider in determining whether
an individual is capable. The Secretary intends to use the list of
factors in Sec. 668.16(b)(2) primarily to assess the adequacy of staff
levels at institutions that apply for initial participation, change of
ownership, or the addition of a location or branch campus; institutions
that make other changes that have an impact on the administrative
capability of the institution, such as ceasing to use a financial aid
servicer; and institutions with documented compliance violations.
In the preamble to the February 28, 1994 NPRM, the Secretary
solicited comment on the regulation of appropriate staffing levels at
institutions. In response to public comment, the Secretary does not
plan to specifically regulate in this area at this time. However,
Sec. 668.16 has been amended to clarify that the Secretary will look at
the number and distribution of financial aid staff when determining if
an institution uses an adequate number of qualified persons to
administer the Title IV, HEA programs. The Secretary believes this
addition is inherent to this provision and should be clearly stated.
However, the Secretary does not plan to closely scrutinize the number
or distribution of financial aid staff at an institution unless the
Secretary finds other indications that the institution may not be
administratively capable due to understaffing or a poor distribution of
staff at the institution.
In response to public comment, use of third-party servicers is
added to the list of factors in Sec. 668.16(b)(2).
After consideration of public comment, the Secretary agrees that
the burden to an institution of having to prepare written procedures
for or written information indicating the nature and frequency of
communication of pertinent information among all the offices that have
an impact on the administration of the Title IV, HEA programs outweighs
the benefit that this provision would provide to the Secretary.
Therefore, proposed Sec. 668.16(b)(4)(i) has been removed from these
final regulations. The Secretary also agrees that, unless compliance
problems relevant to the listed responsibilities are identified,
institutions may satisfy the requirement in Sec. 668.16(b)(4) that an
institution have written procedures for or written information
indicating the responsibilities of the various offices with respect to
the approval, disbursement, and delivery of Title IV, HEA program
assistance and the preparation and submission of reports to the
Secretary by a general written description of the responsibilities of
the various offices.
In response to public comment, Sec. 668.16(e)(3)(B) is amended to
clarify that a maximum time frame in which a student must complete his
or her educational program must be no longer than 150 percent of the
published length of the educational program for full-time students.
This section is also amended to clarify that the time frame must be
divided into increments of equal size. The Secretary is making this
change, as well as the change from previous regulations that requires
increments to be the lesser of an academic year or one-half of the
length of the program, to make clear that no increment can coincide
with the length of the maximum time frame.
Some institutions have used the previous provision as a means of
avoiding determining satisfactory academic progress for a student until
the student completes his or her program. Increments of the maximum
time frame are expected to coincide with an institution's payment
period, however. For example, in a program of one academic year that is
structured on a quarter basis, the increments would be expected to be
the quarters.
In response to public comment, Sec. 668.16(f)(3) has been modified
to include documentation of a student's social security number in the
information normally available to an institution and for which the
institution must have a system to identify and resolve discrepancies.
In response to public comment, Sec. 668.16(g) has been amended to
clarify that an institution must only refer to the Office of the
Inspector General of the Department of Education credible information
indicating fraud and abuse.
In response to public comment, the following sections have been
removed from these regulations: proposed Sec. 668.16(i) that provided
that an institution that serves significant numbers of students with
special needs must have and implement plans for providing students with
information about how to meet their needs; proposed Sec. 668.16(j) that
would require institutions to have procedures for receiving,
investigating, and resolving student complaints; proposed
Sec. 668.16(l), requiring that certain information be made available to
students; proposed Sec. 668.16(m) that required that an institution
have advertising, promotion, and student recruitment practices that
accurately reflect the content and objective of the educational
programs offered at the institution; proposed Sec. 668.16(o) which
addressed the issue of outstanding liabilities; and proposed
Sec. 668.16(r), which proposed consideration of completion, placement
and pass rate standards. The specific reasons for the removal of these
provisions are discussed in the section of the Analysis of Comments and
Changes that addresses administrative capability (Sec. 668.16).
In response to public comment, proposed Sec. 668.16(k) that
requires that an institution: (1) demonstrate a reasonable relationship
between the length of the program and occupational entry level
requirements and (2) establish the need for the training has been moved
to the program participation agreement section (Sec. 668.14).
In response to public comment, Sec. 668.16(j) has been amended to
specify that the significant problems identified in reviews of the
institution that the Secretary will take into account in determining
administrative capability, relate to the administration of Title IV,
HEA programs.
Proposed Sec. 668.16(s), which would have made an annual cohort
default rate of 20% in the FFEL programs and a 15% default rate in the
Federal Perkins Loan Program immutable standards of administrative
capability, has been modified in these final regulations in
Sec. 668.16(m) as follows. The Secretary accepted commenters' arguments
that it would be more logical to use a 25% cohort default rate for the
FFEL programs over a three-year period. Further, the Secretary has
specified in this section of the regulations that if an institution
cannot be determined administratively capable solely because the
institution fails to comply with this section, the Secretary will
provisionally certify the institution in accordance with
Sec. 668.13(c). An institution will have the right to appeal
noncompliance with this provision by submitting an appeal in accordance
with Sec. 668.17(d). The Secretary has amended Sec. 668.17(c)(6) to
specify that this standard will not apply to tribally controlled
colleges, HBCUs, and Navajo community colleges.
In response to public comment, the Secretary has amended
Sec. 668.16(l) to provide for the use of net enrollment figures, after
deduction of students who were entitled to a 100 percent refund, in the
calculation of withdrawal rate. In addition, the Secretary has now
restricted the calculation of withdrawal rates to withdrawals of
undergraduate students. The Secretary believes that the undergraduate
enrollment pattern is an adequate measurement of an institution's
ability to administer the Title IV, HEA programs.
Section 668.17 Default Reduction Measures
In accordance with statute, Sec. 668.17(c)(6) has been amended to
extend the exemption of historically black colleges or universities
(HBCUs), tribally controlled community colleges, and Navajo community
colleges from the provisions of Sec. 668.17(c)(1) to July 1, 1998.
Section 668.17(c)(1) addresses the loss of participation in the FFEL
programs for institution's with cohort default rates above the
specified thresholds.
Section 668.17(f) which addresses Federal SLS Program participation
has been deleted since the Federal SLS Program is no longer in
existence.
Section 668.22 Institutional Refunds and Repayments
Section 668.22(a)(1)(ii), (e)(1)(i), (g)((2)(iv), (i)(1)(i)(B), and
(i)(2)(iii) have been revised to reflect that a student who has taken
an approved leave of absence is considered to have withdrawn for
purposes of Title IV, HEA program refunds and repayments. This change
has been made to ensure the treatment of leaves of absence is
consistent for all Title IV, HEA programs. The Federal Pell Grant
Program regulations consider a student on a leave of absence to have
withdrawn for purposes of receiving Federal Pell Grant Program funds.
This was inconsistent with the FFEL programs regulations, which allowed
an institution to consider a student on a leave of absence to still be
enrolled. The FFEL programs treatment of leaves of absence remains in
effect, but only for in-school deferment purposes, not for purposes of
Title IV, HEA refunds and repayments. All Title IV, HEA programs will
now treat a leave of absence as a withdrawal for refund and repayment
purposes. Corresponding changes have been made by removing the language
addressing leaves of absence in proposed Sec. 668.22(i)(1)(ii), (i)(2),
and (i)(3)(iii).
Section 668.22(a)(2) has been amended to clarify that the
institution must provide refund examples to students only upon request,
and must inform students of the availability of these examples in the
written statement of its refund policy. The language proposed in the
February 28, 1994 NPRM was unclear and implied that the required
written refund statement must include the refund examples themselves.
In response to public comment, Sec. 668.22(c)(2) and (f)(2)(ii) has
been amended to include allowable late disbursements of unsubsidized
Federal Stafford loans and loans made under the FDSL Program when
calculating a student's unpaid charges. This language has also been
changed to allow for the inclusion of late disbursements of State
student financial assistance, provided the State in question has a
standard written late disbursement policy which the institution follows
in calculating unpaid charges and provided the student is eligible to
receive the late disbursement in spite of having withdrawn. If an
institution chooses to count a late disbursement of State student aid
in this manner, the institution will be liable for any amount not
disbursed within 60 days after the student's withdrawal. If the late
disbursement of State aid does not come in, the institution must
recalculate the Title IV, HEA program refund and return any additional
amounts required to the appropriate Title IV, HEA program accounts or
to the lender within the applicable regulatory deadlines.
The February 28, 1994 NPRM proposed that certain fees could be
subtracted from the refund due under a pro rata refund calculation.
This treatment was consistent with previous pro rata guidance given
under the FFEL programs. The February 28, 1994 NPRM pointed out that,
as proposed, the calculation included the fees in the institutional
costs, allowed the institution to retain a prorated portion of those
institutional costs, and then allowed the full amount of those fees to
be subtracted from the resulting refund. The resulting ``double-
counting'' allowed the institution to retain more than the actual fees
that were charged. In response to commenters that supported the
elimination of such double-counting, Sec. 668.22(c)(4) has been revised
to allow an institution to exclude certain fees from the pro rata
refund calculation so that the most an institution would be allowed to
retain is 100 percent of an institutional charge.
Further, in response to comment, the reference to an application
fee as an excludable fee has been deleted as it is not necessary to
specifically allow for such an exclusion. The Secretary agrees with the
commenters that asserted that an application fee should not be a factor
in the calculation of an institutional refund for Title IV, HEA program
purposes, because it is not an educational cost.
The provision allowing for the exclusion of expended board credits
in excess of the attributable prorated portion (proposed
Sec. 668.22(c)(1)(iv)), based on the period attended by the student
prior to withdrawal, has been removed. After further examination, the
Secretary has found this provision to be excessively complicated and
not entirely effective in the purpose intended. No support for this
provision was received from commenters and the Secretary plans to
revisit this issue in the future, after seeking further input from the
financial aid community. Except for treatment under the provision in
Sec. 668.22(c)(6)(i), all room and board charges must be included in
the pro rata refund calculation and refunded at the applicable
percentage, as required by the Amendments of 1992.
The language of Sec. 668.22(c)(5) (and corresponding language in
Appendix A) has been changed to clarify the specific requirements
related to ``other charges assessed the student by the institution''
under the pro rata refund calculation. ``Other charges'' includes, but
is not limited to, charges for any equipment, books, or supplies issued
by an institution to the student, provided that the enrollment
agreement signed by the student specifies a separate charge for such
equipment or provided that the institution refers the student to an
affiliated vendor for purchase of the equipment. An institution may
exclude the documented cost of such equipment from the pro rata refund
calculation in the following instances: For unreturnable equipment, if
the student actually receives and keeps the equipment; or for
returnable equipment, the student does not return the equipment in good
condition allowing for reasonable wear and tear, within 20 days after
withdrawal. For example, an item is not considered to be in good
condition and, hence, is unreturnable, if it cannot be reused because
of clearly recognized health and sanitary reasons. Institutions must
clearly disclose in the enrollment agreement any restrictions on the
return of equipment, including identifying equipment that is
unreturnable. The regulatory language has been changed to reflect that
an institution must notify the student in writing, prior to enrollment,
that return of such equipment will be required within 20 days of
withdrawal. It is the responsibility of the institution to determine
whether specific equipment is returnable or not, in accordance with
State and accrediting agency guidelines. This change conforms with a
similar provision from the FFEL programs regulations. The Secretary
believes that it would be unreasonable to expect a student to return
equipment within a certain time period without ensuring that the
student has been informed of the conditions of acceptable return of
equipment.
The February 28, 1994 NPRM proposed that institutions be exempted
from making refunds of $25 or less, because the burden and cost of
making such a refund would exceed the amount refunded. However, that
proposed change will not be made. Section 668.22(f)(3)(iii) has been
amended to remove the proposed minimum dollar amount below which a
refund would not have to be made. After further consideration, the
Secretary believes that this proposed provision is inconsistent with
the amendment made to section 490 of the HEA that established criminal
penalties for failure to pay refunds, specifically including refunds of
less than two hundred dollars. Further, the Secretary believes that by
the time the institution has determined the amount of the refund, most
of the administrative effort and cost has been expended. The Secretary
believes that neither the institution nor the student would benefit
from the proposal to allow institutions to forego making refunds of $25
or less. Also, the Secretary believes that part of the institution's
administrative costs are recouped through the administrative fee that
is allowed to be excluded from the pro rata refund calculation.
In response to public comment, language has been added to
Sec. 668.22(i)(1)(ii) to limit an institution's determination of a
student's unofficial withdrawal to no later than 30 days after the
expiration of the enrollment period, the academic year, or the program,
whichever is earlier.
Section 668.22(i)(2) has been amended to clarify that the refund
deadline in that paragraph is applicable only to refunds made to
students, and does not alter or affect the FFEL regulatory deadlines
for returning a refund to a lender or the regulatory deadline for
returning a refund to a Title IV, HEA program account.
In response to public comment, the Secretary has provided the
following examples to aid in the implementation of the refund
requirements:
Example #1
Fair and Equitable Refund: Term Institution
Institutional Profile. Term Community College (TCC) offers two-
and four-year programs, measured in credit hours, and its academic
year is divided into two semesters, each 15 weeks long. TCC
participates in the Federal Pell Grant program, the Federal Family
Education Loan (FFEL) programs, and the Federal campus-based
programs. TCC charges by the semester: $1800 for tuition, $2500 for
on-campus housing and meals, $25 for application, and $75 for
administrative costs. Noninstitutional charges include: books and
supply costs (because these items are purchased separately by the
student, from the campus bookstore or an unaffiliated vendor),
living expenses and meals (if the student lives in off-campus
housing), transportation, and personal miscellaneous expenses.
(Noninstitutional costs vary by student budget, depending in part
upon the educational program in which the student enrolls.)
Applicable Refund Policies. The State in which TCC is located
has a modified pro rata refund policy: students who withdraw on or
before the 25 percent point of the enrollment period receive a 75
percent refund; students who withdraw after the 25 percent point but
on or before the 50 percent point of the enrollment period receive a
50 percent refund; and students who withdraw after the 50 percent
point but on or before the 75 percent point of the enrollment period
receive a 25 percent refund. (Students withdrawing after the 75
percent point of the enrollment period receive no refund under State
guidelines.)
TCC's accrediting agency refund guidelines offer a 50 percent
refund to students who withdraw in the first four weeks of the
enrollment period, and a 25 percent refund to those who withdraw
after four weeks but before the beginning of the ninth week.
(Students withdrawing after that point receive no refund under the
accrediting agency policy.)
Student Profile. Sam the Student enrolled in a two-year program
at TCC, moved into on-campus housing, and began attending classes.
Sam made a cash payment of $500 toward institutional charges.
Financial Aid Package and Disbursements. Sam's financial aid
package for the academic year consisted of a $2200 Federal Pell
Grant, a $2400 Federal Stafford Loan, a $1600 FSEOG, and $1000 in
Federal Work-Study funds. Sam's first disbursement of Federal Pell
Grant funds ($1100), his first disbursement of Federal Stafford Loan
funds ($1116--loan and origination fees have been subtracted), and
his first disbursement of FSEOG funds ($800), were credited to his
institutional account. Sam received $400 of his Federal Work-Study
award, paid directly to him for living expenses, before he
officially withdrew at the end of the fifth week.
Step One: Figuring the Educational Costs. Only institutional
costs are included in the refund calculation. TCC must use the
institutional costs as charged, by the term, for a total of $4375--
$1800 tuition, $2500 on-campus housing and meals (because Sam lives
on-campus), and $75 for administrative costs. (The $25 application
fee is not a cost of education, so it is not included.)
Noninstitutional costs are treated in the repayment calculation.
(See Example #3.)
Step Two: Figuring the Totals Paid to Institutional Costs. TCC's
records show that Sam paid $500 in cash toward his institutional
costs, and that a total of $3016 in student aid was paid toward
institutional charges [$1100 Federal Pell+$1116 Federal Stafford+800
FSEOG=$3016]. (The Federal Work-Study funds are not reflected in
this total, because funds earned through work-study cannot be
required to be refunded or returned, and are therefore not included
in the calculation of a refund.)
The total paid to institutional costs (student payments and
financial aid) is $3516 [$500+$3016=$3516]. Only funds paid to
institutional charges are included in the refund calculation; aid
disbursed to the student for noninstitutional expenses is treated in
the repayment calculation. (See Example #3.)
Step Three: Checking for Pro Rata Eligibility Under the Law. To
determine whether Sam is eligible for a statutory pro rata refund
calculation, TCC must determine if he's a first-time student and if
he withdrew on or before the 60 percent point in time of the
enrollment period for which he was charged. Sam is a first-time
student, because he's never attended classes at TCC prior to this
term. He withdrew at the end of the fifth week in the term; the term
is 15 weeks long, and the 60 percent point is figured in calendar
time for term institutions [15 weeks x .60=9, so any withdrawal
prior to the end of the ninth week falls within the 60 percent
requirement of statutory pro rata]. Sam withdrew at the end of the
fifth week, so he is entitled to a statutory pro rata refund
calculation.
Step Four: Calculating the Unpaid Charges. Because a student's
unpaid charges impact the refund calculation, TCC must first
calculate Sam's unpaid charges (as defined in Sec. 668.22(c) and
(f)) using the following formula:
Total Institutional Costs
-Total Aid Paid to Institutional Costs
----------------------------------------------------------------------
=Student's Scheduled Cash Payment (SCP)
-Student's Cash Paid to Institutional Costs
----------------------------------------------------------------------
=Unpaid Charges
To calculate Sam's unpaid charges, TCC subtracts the $3016 in total
aid paid to institutional costs (from Step Two, above) from the
Total institutional costs of $4375 (from Step One, above). The
resulting scheduled cash payment is $1359 [$4375-$3016=$1359]. From
that total, TCC subtracts Sam's cash payment of $500 (from Step Two,
above) and Sam's unpaid charges equal $859 [$1359-$500=$859]. This
amount ($859) will be used in all three refund calculations.
Step Five: Calculating a Fair and Equitable Refund. Under the
Amendments of 1992, TCC must calculate Sam's refund under State and
accrediting agency guidelines, and under statutory pro rata
requirements. TCC must then use whichever calculation provides the
largest refund.
In accordance with the June 8, 1993 Student Assistance General
Provisions regulations, for all refunds other than statutory pro
rata refunds, the student's unpaid charges must be subtracted from
the amount the institution may otherwise retain. Therefore, in
calculating Sam's refund under State and accrediting agency
guidelines, $859 (from Step Four, above) must be subtracted from the
amount TCC could otherwise retain.
The State refund guidelines allow Sam a 50 percent refund (he
withdrew after the 25 percent point but before the 50 percent
point), which means TCC is allowed to retain 50 percent of the
institutional charges. Total institutional costs (from Step One,
above) are $4375. Assessed at 50 percent, this allows TCC to retain
$2188 [$4375 x .50=$2187.5]. (Figures are rounded to the nearest
dollar.) However, in accordance with the June 8, 1993 regulations,
TCC must subtract Sam's unpaid charges of $859 (from Step Four,
above) from this amount. Therefore, TCC is actually allowed to
retain $1329 [$2188-$859=$1329]. Sam's refund under the State policy
is $2187, figured by subtracting the amount TCC can retain from the
total paid to institutional costs (from Step Two, above)
[$3516-$1329=$2187].
The accrediting agency refund guidelines allow Sam a 25 percent
refund (he withdrew after four weeks but before the beginning of the
ninth week), which means TCC is allowed to retain 75 percent of the
institutional charges. Total institutional costs (from Step One,
above) are $4375. Assessed at 75 percent, this allows TCC to retain
$3281 [$4375 x .75=$3281.25]. (Figures are rounded to the nearest
dollar.) However, in accordance with the June 8, 1993 regulations,
TCC must subtract Sam's unpaid charges of $859 (from Step Four,
above) from this amount. Therefore, TCC is actually allowed to
retain $2422 [$3281-$859=$2422]. Sam's refund under the accrediting
agency policy is $1094, figured by subtracting the amount TCC can
retain from the total paid to institutional costs (from Step Two,
above) [$3516-$2422=$1094].
To figure Sam's refund under the statutory pro rata refund
calculation, TCC must first calculate the portion of the enrollment
period that remains (in accordance with Sec. 668.22(c)) by using the
following formula for credit-hour programs:
Weeks Remaining in Period
Total Weeks in Period
----------------------------------------------------------------------
=Portion of Enrollment Period That Remains
Sam withdrew at the end of the fifth week of a fifteen-week
semester, so 10 weeks remain in the term. TCC calculates that for
Sam, 60 percent of the enrollment period remains [10+15=.666,
rounded down to the nearest tenth]. The statutory pro rata
calculation allows Sam a refund proportionate to the portion of the
enrollment period that remains: 60 percent. Total institutional
costs (from Step One, above) are $4375. However, under the statutory
pro rata refund calculation, TCC is allowed to exclude from this
amount an administrative charge, not to exceed the lesser of $100 or
5 percent of the institutional charges (provided that the fee is a
real and documented charge). Therefore, the $75 administrative fee
charged to all TCC students can be excluded, making the total
institutional costs for statutory pro rata purposes equal $4300
[$4375-$75=$4300]. (Had the administrative fee exceeded $100 or 5
percent of TCC's total institutional charges, TCC could only have
excluded the allowable portion of the fee.) Total institutional
costs are assessed at 60 percent, making Sam's initial refund equal
$2580 [$4300 x .60=$2580]. However, in accordance with the law, TCC
must subtract Sam's unpaid charges of $859 (from Step Four, above)
from his initial refund amount. Therefore, Sam's actual refund under
the statutory pro rata refund calculation is $1721
[$2580-$859=$1721].
After calculating all of Sam's possible refunds, TCC must use
the calculation which provides for the largest refund. In this case,
the largest refund is provided by the State refund calculation:
$2187. This refund amount must be returned, in Sam's behalf, first
to the Title IV, HEA programs and then to Sam, in accordance with
the allocation priorities in Sec. 668.22(g); no portion of the
refund due can be used to pay Sam's unpaid charges to TCC.
Example #2
Fair and Equitable Refund: Nonterm Institution.
Institutional Profile. Nonterm Technical Institute (NTI) offers
900-hour and 1200-hour programs, measured in clock hours, and its
academic year is 30 weeks long. NTI participates in the Federal Pell
Grant program and the Federal Family Education Loan (FFEL) programs.
NTI charges by the program and requires payment up-front. The
institutional costs of the 900-hour program are: $3000 for tuition;
$520 for equipment, books, and supplies; and a $100 administrative
fee. Institutional costs for the 1200-hour program are: $4000 for
tuition; $740 for equipment, books, and supplies; and a $150
administrative fee. Noninstitutional charges include: living
expenses and meals (NTI has no on-campus housing or food service),
transportation, and personal miscellaneous expenses.
(Noninstitutional costs vary by student budget, depending in part
upon the educational program in which the student enrolls.)
Applicable Refund Policies. The State in which NTI is located
provides a 90 percent refund to students who withdraw before
completing 10 percent of the program; students who withdraw after
the 10 percent point but before completing 25 percent of the program
receive a 70 percent refund; students who withdraw after the 25
percent point but before completing 50 percent of the program
receive a 45 percent refund; and students who withdraw after the 50
percent point but before completing 75 percent of the program
receive a 20 percent refund. (Students withdrawing after completing
75 percent of the program receive no refund under State guidelines.)
NTI's accrediting agency gives an 80 percent refund to students
who withdraw before completing 15 percent of the program; students
who withdraw after the 15 percent point but before completing 45
percent of the program receive a 50 percent refund; and students who
withdraw after the 45 percent point but before completing 60 percent
of the program receive a 25 percent refund. (Students withdrawing
after completing 60 percent of the program receive no refund under
the accrediting agency policy.)
Student Profile. Susan the Student, who lives in an off-campus
apartment, enrolled in a 900-hour program at NTI and began attending
classes. Susan made a cash payment of $800 toward institutional
charges.
Financial Aid Package and Disbursements. Susan's financial aid
package for the program consisted of a $2000 Federal Pell Grant and
a $2325 Federal Stafford Loan. Susan's first Federal Pell Grant
disbursement ($1000) and the first disbursement of her Federal
Stafford Loan ($1081--loan and origination fees have been
subtracted) were credited to her institutional account. At the end
of the academic year, NTI determined that Susan had unofficially
withdrawn. The last record of Susan's attendance was a midterm exam
she'd taken after completing 450 hours of the program.
Step One: Figuring the Educational Costs. Only institutional
costs are included in the refund calculation. NTI must use the
institutional costs as charged, by the term, for a total of $3620--
$3000 tuition, $520 for equipment, books, and supplies, and $100 for
administrative costs. Noninstitutional costs are treated in the
repayment calculation. (See Example #3.)
Step Two: Figuring the Totals Paid to Institutional Costs. NTI's
records show that Susan paid $800 in cash toward her institutional
costs, and that a total of $2081 in student aid was paid toward
institutional charges [$1000 Federal Pell+$1081 Federal
Stafford=$2081].
The total paid to institutional costs (student payments and
financial aid) is $2881 [$800+$2081=$2881]. Only funds paid to
institutional charges are included in the refund calculation; aid
disbursed to the student for noninstitutional expenses are treated
in the repayment calculation. (See Example #3.)
Step Three: Checking for Pro Rata Eligibility Under the Law. To
determine whether Susan is eligible for a statutory pro rata refund
calculation, NTI must determine if she's a first-time student and if
she withdrew on or before the point in time when she had completed
60 percent of the clock hours scheduled for the period of enrollment
for which she was charged. Susan enrolled last year in the same
program at NTI, but she never began attending classes and so was
entitled to a 100 percent refund. Therefore, in accordance with the
regulatory definition in Sec. 668.22(c), Susan is a first-time
student. Susan's last recorded date of attendance was at the point
of having completed 450 clock hours; 900 clock hours are scheduled
for the program, and 60 percent of the scheduled hours would be 540
clock hours [900 hours x .60=540]. Because Susan is a first-time
student and she withdrew before completing 60 percent of the hours
scheduled, she is entitled to a statutory pro rata refund
calculation.
Step Four: Calculating the Unpaid Charges. Because a student's
unpaid charges impact the refund calculation, NTI must first
calculate Susan's unpaid charges (as defined in Sec. 668.22(c) and
(f)) using the following formula:
Total Institutional Costs
-Total Aid Paid to Institutional Costs
----------------------------------------------------------------------
=Student's Scheduled Cash Payment (SCP)
-Student's Cash Paid to Institutional Costs
----------------------------------------------------------------------
=Unpaid Charges
To calculate Susan's unpaid charges, NTI subtracts the $2081 in
total aid paid to institutional costs (from Step Two, above) from
the total institutional costs of $3620 (from Step One, above). The
resulting scheduled cash payment is $1539 [$3620-$2081=$1539]. From
that total, NTI subtracts Susan's cash payment of $800 (from Step
Two, above) and Susan's unpaid charges equal $739 [$1539-$800=$739].
This amount ($739) will be used in all three refund calculations.
Step Five: Calculating a Fair and Equitable Refund. Under the
Amendments of 1992, NTI must calculate Susan's refund under State
and accrediting agency guidelines, and under statutory pro rata
requirements. NTI must then use whichever calculation provides the
largest refund.
In accordance with the June 8, 1993 Student Assistance General
Provisions regulations, for all refunds other than statutory pro
rata refunds, the student's unpaid charges must be subtracted from
the amount the institution may otherwise retain. Therefore, in
calculating Susan's refund under State and accrediting agency
guidelines, $739 (from Step Four, above) must be subtracted from the
amount NTI could otherwise retain.
The State refund guidelines allow Susan a 20 percent refund (she
withdrew after the 50 percent point but before completing 75 percent
of the program), which means NTI is allowed to retain 80 percent of
the institutional charges. Total institutional costs (from Step One,
above) are $3620. Assessed at 80 percent, this allows NTI to retain
$2896 [$3620 x .80=$2896]. However, in accordance with the June 8,
1993 regulations, NTI must subtract Susan's unpaid charges of $739
(from Step Four, above) from this amount. Therefore, NTI is actually
allowed to retain $2157 [$2896-$739=$2157]. Susan's refund under the
State policy is $724, figured by subtracting the amount NTI can
retain from the total paid to institutional costs (from Step Two,
above) [$2881-$2157=$724].
The accrediting agency refund guidelines allow Susan a 25 percent
refund (she withdrew after the 45 percent point but before completing
60 percent of the program), which means NTI is allowed to retain 75
percent of the institutional charges. Total institutional costs (from
Step One, above) are $3620. Assessed at 75 percent, this allows NTI to
retain $2715 [$3620 x .75=$2715]. However, in accordance with the June
8, 1993 regulations, NTI must subtract Susan's unpaid charges of $739
(from Step Four, above) from this amount. Therefore, NTI is actually
allowed to retain $1976 [$2715-$739=$1976]. Susan's refund under the
accrediting agency policy is $905, figured by subtracting the amount
NTI can retain from the total paid to institutional costs (from Step
Two, above) [$2881-$1976=$905].
To figure Susan's refund under the statutory pro rata refund
calculation, NTI must first calculate the portion of the enrollment
period that remains (in accordance with Sec. 668.22(c)) by using the
following formula for clock-hour programs:
Hours Remaining in Period
Total Hours in Period
=Portion of Enrollment Period That Remains
Susan's last recorded date of attendance was at the point of having
completed 450 clock hours, so 450 hours remain in the program. NTI
calculates that for Susan, 50 percent of the enrollment period
remains [450900=.50]. The statutory pro rata calculation
allows Susan a refund proportionate to the portion of the enrollment
period that remains: 50 percent. Total institutional costs (from
Step One, above) are $3620. However, under the statutory pro rata
refund calculation, NTI is allowed to exclude from this amount an
administrative charge, not to exceed the lesser of $100 or 5 percent
of the institutional charges (provided that the fee is a real and
documented charge). Therefore, the $100 administrative fee charged
to all NTI students can be excluded, making the total institutional
costs for statutory pro rata purposes equal $3520
[$3620-$100=$3520]. (Had the administrative fee exceeded $100 or 5
percent of NTI's total institutional charges, NTI could only have
excluded the allowable portion of the fee.) NTI could also exclude
(from the total institutional costs) the documented cost of any
returnable equipment that Susan failed to return in accordance with
Sec. 668.22(c), and the documented cost of any unreturnable
equipment that was actually issued to Susan (and kept by Susan) in
accordance with 668.22(c). Total institutional costs are assessed at
50 percent, making Susan's initial refund equal $1760
[$3520 x .50=$1760]. However, in accordance with the law, NTI must
subtract Susan's unpaid charges of $739 (from Step Four, above) from
her initial refund amount. Therefore, Susan's actual refund under
the statutory pro rata refund calculation is $1021
[$1760-$739=$1021].
After calculating all of Susan's possible refunds, NTI must use
the calculation which provides for the largest refund. In this case,
the largest refund is provided by the statutory pro rata refund
calculation: $1021. This refund amount must be returned, in Susan's
behalf, first to the Title IV, HEA programs and then to Susan, in
accordance with the allocation priorities in Sec. 668.22(g); NTI
cannot bill Susan for any unpaid charges, because under the
statutory pro rata refund calculation, those charges have been paid
by Title IV, HEA program funds.
Example #3
Repayment Calculation
Institutional Profile. United States Academy (USA) offers one-
and two-year programs on a semester system; its academic year is 30
weeks long and divided into two equal semesters, each 15 weeks in
length. USA participates in the Federal Pell Grant program and the
Federal Family Education Loan (FFEL) programs. USA charges $800
tuition per semester. Noninstitutional costs are assessed by the
semester at the following average rates: $3000 for living expenses
and meals (USA has no on-campus housing or food service), $250 for
books and supplies (not purchased through the institution), $600 for
transportation, and $300 for personal miscellaneous expenses.
(Noninstitutional cost assessments are amended as necessary based on
individual student needs and circumstances.)
Institutional Repayment Policy. In keeping with the local
bookstore's refund policy, 50 percent of the books and supplies
allowance is incurred at the time of purchase. All other
noninstitutional (living) expenses are prorated based on the
percentage of the semester completed.
Student Profile. Sarah the Student, who lives in an off-campus
apartment, enrolled for the winter semester at USA and began
attending classes. She made a $400 cash payment toward her tuition
costs. Her noninstitutional costs are adequately reflected in the
institution's average student budget.
Financial Aid Package and Disbursements. Sarah's financial aid
package for the program consisted of a $1800 Federal Pell Grant and
a $2000 Federal Stafford Loan. Sarah's first Federal Pell Grant
disbursement ($900) was applied first to her tuition balance ($400)
and the remaining $500 was then disbursed to her in cash. The first
disbursement of her Federal Stafford Loan ($930--loan and
origination fees have been subtracted) was also disbursed directly
to her. Sarah officially withdrew after attending 4 weeks.
Step One: Figuring Expenses Actually Incurred. Only
noninstitutional costs are included in a repayment calculation.
Institutional costs are treated in the refund calculation. (See
Examples #1 and #2.) According to USA's repayment policy, 50 percent
of Sarah's $250 books and supplies allowance was incurred at the
time of purchase [$250 x .50=$125]. The rest of her semester
expenses, for living expenses and meals, transportation, and
personal miscellaneous expenses, are prorated based on the
percentage of the term completed. Total noninstitutional costs equal
$3900 [$3000+$600+$300=$3900]. Because Sarah completed 4 of 15
weeks, these costs should be prorated at 27 percent
[415=.266, rounded to the nearest tenth]. Therefore, Sarah's
noninstitutional costs incurred equal $1053 [$3900 x .27=$1053].
Step Two: Figuring the Total Federal Student Financial Aid (SFA)
Disbursed as Cash. Sarah received $500 of her Federal Pell Grant in
cash, and all of her first Stafford Loan disbursements, $930, in
cash. However, in accordance with Sec. 668.22(e), the repayment
calculation does not include any Title IV, HEA program loan amounts
disbursed as cash, because those loan funds will have to be repaid
by the student anyway. Therefore, a total of $500 cash disbursed is
considered for repayment purposes. (As with the refund calculation,
the repayment calculation does not include any Federal Work-Study
funds disbursed as cash, because repayment of work earnings cannot
be required. Notice that students Sam and Susan, from Examples #1
and #2 respectively, would not have owed repayments because they
received no cash disbursements other than FFELP loan funds or
Federal Work-Study funds.)
Step Three: Calculating the Repayment Owed. To calculate Sarah's
owed repayment, USA must subtract the total costs incurred ($1053,
from Step One above) from the total cash disbursed ($500, from Step
Two above). In Sarah's case, this calculation results in a negative
number [$500-$1053=0], which means she owes no repayment. If her
cash disbursement had exceeded her costs incurred, however, she
would have been required to repay the balance back to the Title IV,
HEA program funds (the Federal Pell Grant program, in this case), in
accordance with the allocation priorities in Sec. 668.22(g); if
Sarah had owed unpaid charges to USA, no portion of the repayment
owed could be used to pay those charges.
Section 668.23 Audits, Records, and Examinations
The Secretary has amended Sec. 668.23 by requiring an institution
or a third-party servicer with which the institution contracts to
cooperate with the institution's nationally recognized accrediting
agency in the conduct of audits, investigations, or program reviews
authorized by law, in addition to the other authorized entities that
were stipulated in the NPRMs.
In addition, the Secretary has amended this section to require an
institution to have performed, without exception, on an annual basis, a
compliance audit of an institution's administration of its Title IV,
HEA programs or a third-party servicer to have performed, without
exception, on an annual basis, a compliance audit of a third-party's
administration of an aspect of an institution's participation in a
Title IV, HEA program.
The Secretary is removing the audit exceptions proposed in the
NPRMs that would have exempted certain institutions and third-party
servicers from some or all of the audit requirements of this section
because upon further review, the Secretary has determined that the
proposed exemptions were inconsistent with the requirement in section
487(c) of the HEA that annual compliance audits be provided for in
these regulations. However, changes are planned for the Student
Financial Assistance Programs Audit Guide to reduce administrative
costs by allowing institutions meeting certain performance-based or
funding criteria to submit compliance audits under a reviewed or
compiled basis rather than a full compliance audit.
Paragraph (c)(3) is revised to specify that an institution's or
third-party servicer's audit report must be submitted to the Department
of Education's Office of Inspector General within 120 days after the
end of the institution's or servicer's fiscal year. An institution or
third-party servicer that submits an audit conducted in accordance with
the Single Audit Act (Chapter 75 of Title 31, United States Code) is
required to submit that audit report in accordance with the deadlines
established in that act.
Finally, paragraph (c)(4) is revised to include the Secretary of
Veterans Affairs in the list of entities that the Secretary may require
an institution or a third-party servicer to provide, upon request, the
results of any audit conducted under this section.
Subpart G--Fine, Limitation, Suspension and Termination Proceedings
Section 668.82 Standard of Conduct
The Secretary has revised paragraph (d)(1)(D) to clarify that a
third-party servicer violates its fiduciary duty and that of any
institution with which the servicer contracts if the servicer uses or
contracts in a capacity that involves any aspect of the administration
of the Title IV, HEA programs any person, agency, or organization that
has been or whose officers or employees are guilty of a crime or
judicially or administratively determined to have committed fraud or
other material violation of law with respect to government funds.
Section 668.92 Fines
The Secretary has revised this section to take into account
additional criteria when determining the amount of a fine against a
third-party servicer. Paragraph (a)(5) is revised so that a repeated
mechanical systemic unintentional error is not counted as a single
violation if the third-party servicer, against whom the fine is
assessed, had already been cited for a similar violation and had not
taken the appropriate steps to correct the problem. The Secretary will
also take into consideration in determining the amount of the fine, the
amount of Title IV, HEA program funds that were wasted as a result of
the repeated mechanical systemic unintentional error. The Secretary
also makes a conforming change in Sec. 682.413 to parallel the changes
described in this section.
Part 682--Federal Family Education Loan Programs
Subpart D--Guaranty Agency Programs
Section 682.413 Remedial Actions
The Secretary has revised the provisions of this section governing
the means of collecting a liability that results from a third-party
servicer's violation of applicable Title IV, HEA program requirements
in administering a lender's or guaranty agency's FFEL programs. A
third-party servicer is required to repay any outstanding liabilities
because of its violation only if the lender or guaranty agency has not
paid the full amount of the liability or has not made satisfactory
arrangements to pay the amount of the liability within 30 days from the
date that the lender or guaranty agency receives the notice from the
Secretary of the liability. If the 30-day period elapses and the lender
or guaranty agency has not paid the full amount of the liability within
that time frame or has not set up a payment plan acceptable to the
Secretary to repay that liability, the Secretary will attempt to
collect any remaining amount owed by offsetting the lender's or
guaranty agency's first bill to the Secretary for interest benefits or
special allowance. After that, if the liability has not been completely
paid, the Secretary will seek payment for the remainder of the
liability from the third-party servicer.
Section 682.416 Requirements for Third-Party Servicers and Lenders
Contracting With Third-Party Servicers
The Secretary has revised paragraph (b) to specify that the
Secretary will apply the provisions of 34 CFR 668.15(b) (1)-(4) and
(6)-(9) to determine that a third-party servicer is financially
responsible under this part. Any references to an institution under
those provisions shall be understood to mean the third-party servicer,
for this purpose.
Analysis of Comments and Changes
In response to the Secretary's invitation in the NPRMs, 84 parties
submitted comments on the NPRM published on February 17, 1994 and 421
parties submitted comments on the NPRM published on February 28, 1994.
An analysis of the comments and of the changes in the regulations since
publication of the NPRMs follows.
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.
General comments that refer to broad issues rather than a specific
section or sections of the proposed regulations are discussed first,
followed by a discussion of other issues in the order in which they
appeared in the NPRMs.
It should be noted that not all comments are addressed in these
final regulations. There are several reasons for this. First, many of
the concerns expressed by commenters were directed to the statute, not
the proposed regulations. In some instances, those comments are
mentioned in the discussion that follows because of the importance of
the issues that were raised. In most instances, however, they are not
mentioned because the Secretary is not legally authorized to make the
changes suggested by commenters. Second, many commenters made excellent
suggestions for editorial and technical changes, as well as other minor
changes, that, in the Secretary's opinion, strengthened the
regulations; the Secretary has merely incorporated these suggestions
without comment. Third, some comments appeared to be based on
misunderstandings of what was actually in the NPRMs. For example, a few
commenters expressed concern about the absence of a particular
provision that was, in fact, included in the NPRMs. In general, these
types of comments are not discussed.
General Comments
The Secretary received numerous comments about the overall impact
of the proposed regulations. In general, commenters opposed to the
proposed regulations believed that the February 28, 1994 NPRM did not
achieve the coordinated balance of responsibilities among the triad
members that it sought to achieve, and that it provided for extensive
and duplicative data collection and reporting requirements that created
a costly and unnecessary burden on the higher education community.
Further, they believed that the regulations did not regulate ``narrowly
to the law,'' as they purported to do. In general, these commenters
suggested that the Secretary should review each requirement in the
proposed regulations to determine if it was required by the statute and
should further ensure that all requirements that meet this test and are
included in the final regulations are implemented in the most
reasonable and cost effective manner. This, they believed, would ensure
the Department's compliance with Executive Order 12866.
The more specific concerns of commenters opposed to the proposed
regulations may be summarized as follows:
(1) The proposed regulations are overly prescriptive and excessive
in detail and either exceed the statutory authority of the Secretary or
significantly expand the statute beyond Congressional intent.
(2) The proposed regulations will force institutions and third-
party servicers to engage in excessive and duplicative information
gathering and reporting, at considerable cost, with no net increase in
the quantity or quality of information available to the public, and
will result in the diversion of institutions' and third-party
servicers' already scarce resources away from their primary mission of
providing a quality education.
(3) The proposed regulations threaten the diversity of American
higher education and fail to focus oversight properly on vocational
institutions.
In addition to receiving comments in opposition to the proposed
regulations, the Secretary received comments supportive of the NPRM.
For example, these commenters favored the increased protections for
students in the changes to the refund provisions, and approved of the
strengthening of the administrative capability and financial
responsibility standards.
Finally, the Secretary received suggestions from several commenters
that the Department should strongly encourage all triad members to work
together and adopt the same or similar language for the various
standards, should collect the necessary data through a common source
such as readily available public information or IPEDS, and should use
common methodologies for various calculations such as completion or
withdrawal rates.
Discussion: As suggested by several commenters, the Secretary has
carefully reviewed each requirement in the proposed regulations in
light of statutory intent. The Secretary has also carefully considered
both the burden of the proposed regulations on institutions and third-
party servicers, in terms of cost, duplication of effort, and the added
recordkeeping and reporting requirements. Similarly, the Secretary has
considered the benefits of the proposed regulations, not just to
institutions and third-party servicers but to students and the general
public as well. A particular concern of the Secretary has been how to
ensure that the regulations hold the three members of the triad
accountable for the manner in which they fulfill their responsibilities
under the HEA yet still provide each member of the triad the
flexibility to determine the appropriate means to carry out those
responsibilities.
In general, the Secretary has responded to the concerns of
commenters by eliminating much of what was perceived as excessive
detail in the February 28, 1994 NPRM, thus providing institutions more
flexibility to meet a particular requirement in the manner that best
suits their needs. The final regulations make it quite clear that the
Secretary continues to bear the primary responsibility for enforcing
standards and requirements to ensure that institutions and third-party
servicers administer Title IV, HEA program funds properly.
The Secretary does not believe that the Department's role
overshadows those of the accrediting agencies or the States. These
regulations not only speak to the responsibilities of each member of
the triad, but also establish the Federal requirements for institutions
and third-party servicers under the HEA. Therefore, the Federal role in
these regulations may appear larger than that envisioned for the States
and accrediting bodies, but this appearance is due to the inclusion of
the implementing regulations for these responsibilities. Without
question, the States and accrediting bodies will exercise their
responsibilities by promulgating and implementing standards for HEA
program participants, and the Secretary anticipates that any overview
of all such requirements by the triad would show that the Federal role
has been appropriately established. The Secretary notes that some of
the commenters specific concerns are addressed in the Analysis of
Comments and Changes section of these regulations.
Finally, with regard to the issue of whether the regulations
properly focus on vocational institutions, the Secretary wishes to note
that Congress found abuses in all sectors of higher education, not just
the vocational sector. For this reason, the regulations apply to all
institutions.
Changes: The specific changes to the regulations are discussed
below.
Part 668--Student Assistance General Provisions
Subpart A--General
Section 668.2 General Definitions.
Academic Year. Comments: Many commenters argued that the proposed
definition of a week in determining the length of an academic year
should not be based on the number of days of instructional time for
institutions that use clock hours to measure program length. These
commenters suggested that a week of instructional time should be based
on the number of clock hours completed by a student. Some of these
commenters suggested that a week of instructional time should be
defined as 24 clock hours; another commenter suggested 30 clock hours.
A number of these commenters suggested that this approach was more
consistent with the regulatory requirements for calculating pro-rata
refunds, which relies on the number of clock hours completed by
students.
Discussion: Section 481(d)(1) of the HEA requires that an academic
year must be a minimum of 30 weeks of instructional time in which a
full-time student is expected to complete at least 900 clock hours at
an institution that measures program length in clock hours. Thus, the
statute requires a minimum of 30 weeks and a minimum of 900 clock
hours; both standards must be met.
Changes: None.
Comments: Many commenters recommended that the Secretary implement
the provision in the Technical Amendments of 1993 that provides that
the Secretary may reduce, for good cause, the 30-week minimum to not
less than 26 weeks of instructional time.
Many of these commenters suggested that ``good cause'' should be
based on educational outcomes, such as placement rates or completion
rates. Some commenters suggested the same standard that was proposed
for short-term programs in Sec. 668.8--a 70 percent completion rate and
a 70 percent placement rate. Other commenters suggested that approval
by an institution's nationally recognized accrediting agency or State
postsecondary review entity (SPRE) would demonstrate good cause. Some
commenters suggested that good cause should be based on whether an
educational program has historically provided instruction for less than
30 weeks in previous academic years. Other factors suggested for
defining good cause included fiscal stability of an institution,
scheduling adjustments due to natural disasters, ethnic composition of
an institution's student population, an accelerated or concentrated
educational program, and educational programs that offer advanced
placement.
Some commenters recommended that no reductions in the 30-week
minimum should be permitted or that reductions should be approved on an
extremely limited basis in order to avoid inequitable treatment of
institutions and students.
Discussion: The Secretary did not propose specific criteria to
implement this technical amendment in the February 28, 1994 NPRM, but
instead requested comments on a definition of ``good cause'' and
requested comments on ways of implementing this provision that
addressed the Secretary's concern that reductions in the award year
would encourage many institutions to seek that treatment routinely.
After reviewing public comments on defining good cause, and developing
safeguards to discourage routine requests for reductions in the
academic year, the Secretary has implemented this technical amendment
through regulation.
In an effort to discourage routine requests, the Secretary will
grant a reduction for institutions that can demonstrate a commitment to
changing to a 30-week academic year, but will not permit the period of
reduction to exceed two years. For institutions that do not demonstrate
a commitment to changing to a 30-week academic year, the Secretary may
grant a reduction for a limited period, on a case-by-case basis.
The Secretary agrees with the commenters that suggested approval by
an institution's nationally recognized accrediting agency or State body
that authorizes the institution to provide postsecondary programs
should be considered as factors in determining good cause on a case-by-
case basis, but such approval may not be a sufficient reason for
granting an institution's request. 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.
The Secretary does not believe that placement rates, completion
rates or other educational outcomes that may measure the quality of an
educational program are relevant in determining whether the instruction
offered in less than thirty weeks is sufficient to justify a reduction
in the minimum standard. Other factors suggested by commenters 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.
Every institution that requests a reduction must also 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, as the requirements became applicable to the various
Title IV, HEA programs. The Secretary believes institutions must have
made a good faith effort to comply with the requirements of the
statute. Institutions that did not comply with the law should not now
expect to receive a temporary waiver.
Changes: A new Sec. 668.3 is established, under which, for the
purpose of awarding Title IV, HEA funds, the Secretary may reduce the
length of an academic year for an institution that submits a written
request to the Secretary. The request must identify each educational
program for which a reduced academic year is requested and specify the
requested length, which may not be less than 26 weeks of instructional
time. The Secretary considers requests for reducing an academic year
only for educational programs at institutions that provide 2-year and
4-year programs leading to associate degrees or baccalaureate degrees,
respectively. In addition, an institution must 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.
In addition, for an institution that currently has an academic year
of less than 30 weeks and demonstrates that it is in the process of
changing to a 30-week academic year, the Secretary will grant a
reduction for a period not to exceed two years.
For an institution that meets all of the above requirements other
than demonstrating a commitment to changing to a 30-week academic year,
the Secretary may grant a reduction for a limited period, on a case-by-
case basis, The Secretary considers such factors as approval of the
academic year for each educational program by the institution's
accrediting agency or State body that legally authorizes the
institution to provide postsecondary education, 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.
Comments: Some commenters supported the proposed definition of a
week as a seven-day period of instructional time in which one day of
regularly scheduled instruction, examination, or preparation for
examination occurs. Some commenters argued that the standard of one day
a week was too lax and susceptible to abuse. One commenter suggested
that the minimum standard for one week of instructional time should be
revised to require one instructional hour per week. Another commenter
suggested that the definition of an academic year should be based on
the total number of days of scheduled instruction.
Discussion: The Secretary agrees with those commenters who were
concerned that the proposed definition of a week of instructional time
was susceptible to abuse. Based on these comments and on information
the Secretary has received regarding abuses in this area, the Secretary
believes that the standard of one regularly scheduled instructional day
per week needs to be increased to five days of regularly scheduled time
per week for educational programs using credit hours and not using a
semester, trimester, or quarter system. Under the proposed definition
published in the February 28, 1994 NPRM, institutions could structure
programs that do not use clock hours or standard academic terms to
provide one class a week and permit those classes to be ``made up''
later in the program, in order to maximize the amount of Title IV, HEA
program funds received by the institution.
Changes: A change has been made. 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 five days of regularly scheduled instruction,
examinations, or preparation for examinations occurs. A corresponding
change has been made to the definition of an eligible program.
Comments: A number of commenters suggested that instructional time
should include internships. Some commenters suggested including other
activities, such as periods of orientation, cooperative education,
independent study, special studies, and research.
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. In most cases, research is not considered to be
regularly scheduled instruction. Orientation programs 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: Several commenters argued that the proposed academic year
definition would make it difficult for institutions to develop creative
programs that allow students to accelerate their educational programs.
One commenter believed that, if the Secretary does not account for
these types of programs, a student will no longer have an incentive to
accelerate his or her educational program, and the Department will
expend more Title IV, HEA program funds on longer periods of study.
Discussion: Because the cost of a student's education includes
living expenses in addition to the cost of tuition and fees, the
Secretary believes that students who have an incentive to reduce their
costs by accelerating their educational programs will still have a
strong incentive to pursue a more concentrated or intensive course
load. In addition, the Secretary will consider unique circumstance in
determining whether to reduce the academic year for programs that are
eligible for such consideration.
Changes: None.
Comments: A commenter suggested that the Secretary define two-
thirds of an academic year as a minimum of 15 weeks of instructional
time and one-third of an academic year as 10 weeks of instructional
time in order to clarify the procedure for prorating the awards for
students attending programs that are less than an academic year.
Discussion: The Secretary agrees that the procedure for prorating
the awards for students attending programs that are less than an
academic year needs to be clarified. However, the Secretary does not
believe that 15 weeks of instructional time is an adequate minimum
standard for two-thirds of an academic year. If the minimum standard
for a full academic year is 30 weeks, the minimum standard for two-
thirds of an academic year should be two-thirds of 30 weeks (20 weeks).
Changes: A change has been made. In Sec. 668.2, the Secretary
defines two-thirds of an academic year as a period that is at least
two-thirds of an academic year as determined by an institution. At a
minimum, two-thirds of an academic year must be a period that begins on
the first day of classes and ends on the last day of classes or
examinations and is a minimum of 20 weeks of instructional time during
which, for an undergraduate course of study, a full-time student is
expected to complete at least 16 semester or trimester hours or 24
quarter hours in an educational program whose length is measured in
credit hours or 600 clock hours in an educational program whose length
is measured in clock hours. For an institution whose academic year has
been reduced under Sec. 668.3, one-third of an academic year is the
pro-rated equivalent, as measured in weeks and credit or clock hours,
of at least two-thirds of the institution's academic year.
In Sec. 668.2, the Secretary also defines one-third of an academic
year as a period that is at least one-third of an academic year as
determined by an institution. At a minimum, one-third of an academic
year must be a period that begins on the first day of classes and ends
on the last day of classes or examinations and is a minimum of 10 weeks
of instructional time during which, for an undergraduate course of
study, a full-time student is expected to complete at least 8 semester
or trimester hours or 12 quarter hours in an educational program whose
length is measured in credit hours or 300 clock hours in an educational
program whose length is measured in clock hours. For an institution
whose academic year has been reduced under Sec. 668.3, one-third of an
academic year is the pro-rated equivalent, as measured in weeks and
credit or clock hours, of at least one- third of the institution's
academic year.
Comments: Several commenters suggested that the definition of an
academic year in Sec. 668.2 should be amended to reflect the provision
in the Technical Amendments of 1993 specifying that the definition of
academic year in section 481 of the HEA applies only to an
undergraduate course of study.
Discussion: The Secretary agrees that a limitation in the
definition of academic year needs to be included in Sec. 668.2.
However, the Secretary notes that the requirement that an academic year
require a minimum of 30 weeks of instructional time applies to both
undergraduate and graduate courses of study.
Changes: A change has been made to clarify that the amount of
instruction that a full-time student is required to complete during an
academic year applies only to an undergraduate course of study.
Full-time student. Comments: Several commenters believed that the
Secretary should address the potential for abuse under the definition
of academic year for educational programs that are measured in credit
hours. One commenter suggested that the Secretary establish a weekly
minimum full-time workload for full-time students in these programs by
tying quarter hours to actual quarters to prevent an institution from
claiming to offer a full academic year's worth of work over a thirty-
week period by giving a full-time student a small amount of
instruction, which the institution claims to be equivalent to 24
semester or 36 quarter hours. The commenter also suggested that the
Secretary eliminate the use of quarter or semester hours for
institutions that do not have quarters or semesters and instead require
those institutions to measure their programs in clock hours.
Two commenters urged the Secretary to reject any mechanism where
the institution would be responsible for self-measuring the quantity of
work required because it would be too easy for unscrupulous
institutions to evade. Instead, the commenters recommended that only
bona fide courses, related work, research, or special studies would
count toward whether a student would be full-time, and that each
institution's quantification would have to be approved during the
certification process set forth in Sec. 668.13. One commenter also
suggested that the Secretary change the procedures and not permit
institutions to measure workloads for term or semester based schools in
clock hours, because the clock hour schedules permitted institutions to
compress the course offerings into too short a time period.
A few commenters advised that the clock hour/credit hour regulation
would provide the protection necessary for the weekly schedules of
students enrolled at institutions offering credit hours without terms,
and recommended that no further action be taken in changing the
proposed definition of full-time student. Several other commenters
stated that they believed the proposed definition was sufficient to
prevent abuse without further additions to establish a minimum full-
time course workload. One commenter suggested that no stricter
definition be adopted for full-time students enrolled at institutions
offering credit hours without terms because this area is currently
addressed by accrediting agencies, which are in a better position to
evaluate the variety of delivery systems used by postsecondary
institutions. One commenter also questioned whether it was fair to
adopt a more stringent criterion for credit hour programs without
academic terms rather than adopting uniform criteria and standards for
full-time students for all sectors of postsecondary education.
One commenter suggested that the proposed definition was unfair
because it requires the same number of credit hours for a student
regardless of whether the courses are measured in semester hours or
quarter hours, resulting in students having to perform a greater
quantity of work during a quarter calendar if they were taking semester
hours. Several other commenters suggested that the proposed definition
was unfair because it would prohibit students from taking cooperative
employment for periods that were less than eighteen weeks. These
commenters suggested that shorter periods of cooperative education
should be accepted in conjunction with a smaller number of credits so
long as the workload was pro-rated to match the academic workload of a
full-time student. For example, a student taking cooperative education
for one-fourth of the credits necessary to be a full-time student would
have to complete the cooperative training in one-fourth of the time
allotted to a full-time student in an eighteen week program. Two other
commenters stated that the proposed definition would establish
workloads that could not readily be satisfied by part-time students or
students that were taking evening or weekend classes. These commenters
believed that students in these circumstances were often making many
more sacrifices to pursue their education than full-time day students,
and that it was unfair to reduce or eliminate aid that these students
currently receive because they do not carry enough credits to qualify
for comparable aid under the proposed regulations.
One commenter suggested that the in-class attendance should be the
only component of the student workload considered for this provision,
and that under that standard the definition for full-time student would
require at least 12 hours of attendance per week to correspond to the
12 credit hour workload.
A few other commenters suggested that the proposed definition be
clarified to show that only students taking classes ``entirely'' by
correspondence would not be required to meet the workload requirements
set out in the proposed definition. Others suggested that the language
for credit hour workloads be amended to show that trimester hours would
require the equivalent workload for semester hours for academic terms
and academic years.
Discussion: As stated in the February 28, 1994 NPRM, this
definition of full-time student is based primarily on the longstanding
definition found in the Federal Pell Grant and the campus-based program
regulations. The Secretary believes this definition of full-time
student has proved to be appropriate and effective and does not believe
any substantive changes are necessary. The Secretary notes that this
definition is now applicable for purposes of all Title IV, HEA
programs. The individual Title IV, HEA program regulations will be
amended at a later date to remove the definition of full-time student.
The Secretary believes that additional changes 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 terms have more flexibility in shifting
the workload requirements for their programs over an indefinite period,
and the Secretary believes that it is appropriate to establish some
minimum instructional periods that must be used for full-time 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 terms.
The Secretary also believes it is important to ensure through
regulations that full-time students are performing comparable workloads
regardless of the type of institution they are attending, and that such
work should be ratably allocated throughout the period of instruction.
The Secretary notes that this is an area of abuse that is not fully
addressed by the implementation of the ``clock hour/credit hour''
regulations.
Rather than changing the proposed definition of full-time student
to require measurement of student workloads, a modification is being
made to require a minimum number of days of instruction per week for
institutions that offer credit hour programs without terms. A
discussion of the specific change is included in the section of the
Analysis of Comments and Changes that addresses the definition academic
year (Sec. 668.2).
Changes: None.
Undergraduate student. Comments: Several commenters objected to
defining an undergraduate student as a student who has not earned a
baccalaureate or first professional degree. The commenters noted that
this would prevent students who were pursuing further undergraduate
studies from receiving any Title IV, HEA program assistance. The
commenters noted that this was a departure from current departmental
practice that permits such a student to receive assistance under the
Title IV, HEA loan programs.
Discussion: The Secretary recognizes that there are legitimate
reasons supported by statute for separate definitions of an
undergraduate student based upon the different statutory requirements
for the various Title IV, HEA program regulations. The Secretary
believes it is not appropriate at this time to include a general
definition of an undergraduate student in the Student Assistance
General Provisions regulations.
Changes: The definition of undergraduate student has been removed
from these final regulations.
Third-party servicer. Comments: Many commenters asked the Secretary
not to include computer services or software in the examples of
activities that constitute administration of a Title IV, HEA program,
on the grounds that this type of service encompasses activities in a
broad spectrum, from computer software distributors of popular
commercial spreadsheet programs to computer on-line Federal news
services. Several commenters stated that computer services are simply
technological means utilized in administering the programs; computer
servicers who actually perform administrative functions would be
covered, therefore there is no need to separately include such
providers in the definition. Other commenters argued for the inclusion
of computer services or software in the examples of a Title IV-related
activity. These commenters argued that it was necessary to include
providers of computer services and software in the definition of third-
party servicer because many distributors of software certify that their
computer programs--represented to satisfy Title IV, HEA program
requirements--comply with all applicable Title IV, HEA program
requirements. As a result, institutions contracting with a provider for
the software take for granted that the software is in compliance with
all Title IV, HEA program requirements. If a violation of a Title IV,
HEA program requirement occurs because of the software, the provider of
that software should be held responsible. Several commenters argued
that those software providers could be subject to potential liabilities
for Title IV, HEA program violations, even though the computer programs
of the provider could be modified by the user.
Discussion: The Secretary agrees with those commenters who either
objected to the inclusion of computer services or software providers in
the examples of Title IV-related activities, or who saw no need to
separately include such providers. In adopting the definition of third-
party servicer, the Secretary is not including providers of those
services or software because the Secretary believes that this type of
service is simply a technological means to assist in carrying out
certain administrative functions that are already included in the
proposed definition of a third-party servicer.
Changes: None.
Comments: Two commenters were concerned that a third-party servicer
could avoid the requirements of these regulations by simply not
entering into a written contract with an eligible institution to
administer any aspect of that institution's participation in the Title
IV, HEA programs. The commenters recommended that the regulations
stipulate that the acceptance of fees by the servicer from the
institution for administration of any aspect of the institution's
participation in a Title IV, HEA program would constitute a contract
with the institution for purposes of the definition of third-party
servicer under these regulations.
Discussion: The Secretary disagrees with the commenters that a
third-party servicer that contracts with an eligible institution could
be exempt from these regulations simply by not executing a written
contract with that institution. A third-party servicer is defined as
anyone who contracts with an institution, and is not limited to only
those entering a written contractual agreement. Oral contracts, payment
of fees for services rendered and other arrangements also constitute
enforceable contracts. The Secretary recognizes these types of
contracts and will consider an individual or organization employing
such a method to contract with an institution to administer any aspect
of the institution's participation in the Title IV, HEA programs to be
a third-party servicer and therefore subject to these regulations. The
Secretary cautions institutions and third-party servicers that verbal
contracts or other non-written contracts do not exempt institutions
from documenting in writing the contractual obligations of both
parties, including the requirements in Sec. 668.25, and submitting a
copy to the Secretary, if so instructed by the Secretary.
Changes: None.
Comments: One commenter felt that the activities of Multiple Data
Entry (MDE) Processors and the Central Processor should be included in
the examples of what constitutes administration of participation in a
Title IV, HEA program because the data generated by MDEs or the Central
Processor is the foundation for determining a student's eligibility for
Title IV, HEA program assistance.
Discussion: The Secretary disagrees with the commenter. The
Secretary has previously explained in the NPRM published on February
17, 1994, that MDEs serve under contract with the Department and are
already bound by that contract and other Department of Education
requirements. Therefore, the Secretary does not believe it necessary to
separately regulate MDE activities as part of these regulations.
Changes: None.
Comments: One commenter was of the opinion that the activities of
administering or scoring ability-to-benefit tests should be included in
the examples of what the Secretary considers to be a third-party
servicer activity because these activities constitute the determination
of student eligibility.
Discussion: The Secretary agrees with the commenter that these
activities could be considered to be an aspect of the administration of
Title IV, HEA programs and therefore should be regulated. However, the
Secretary believes that any abuses in these types of activities will be
protected against in the regulations governing the administration of
ability-to-benefit tests. The Secretary plans to issue an NPRM on this
subject shortly. Therefore, the Secretary does not believe it necessary
to regulate administering or scoring ability-to-benefit test activities
as part of these regulations.
Changes: None.
Comments: A few commenters requested that attorneys litigating on
behalf of institutions to collect loan funds or interpreting statutory
or regulatory requirements be excluded from the definition of third-
party servicer.
Discussion: The Secretary generally considers attorneys not to be
covered by the definition of a third-party servicer under these
regulations. The Secretary, in promulgating the definition of third-
party servicer, applied the definition to a set of activities relating
to the administration of the Title IV, HEA programs, and thus is not
regulating distinct entities by their identity but rather the
activities that individuals or organizations perform in contracting
with institutions. Provision of legal advice is not one of these
activities. However, it is conceivable that an attorney would be
considered 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 would not
be 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 signature or by non-attorneys working for
attorneys or their law firms.
Changes: None.
Section 668.8 Eligible Program
Definitions. Comments: Some commenters believed that the definition
of ``equivalent of an associate degree'' would be difficult to
administer because colleges do not have consistent standards for
accepting two-year programs for full credit toward a bachelor's degree
and for qualifying a student for admission into the third year of a
bachelor's degree program. Some of these commenters suggested that any
person who completes the equivalent number of credit hours necessary to
receive an associate degree should be included in this definition as
long as the person earned those credits from an institution that was
accredited by a nationally recognized accrediting agency. Other
commenters suggested that any program that leads to an occupational
objective that requires licensing or certification and equals at least
the length of a typical associate degree program, should be added to
the proposed definition. Another commenter expressed support for the
provision as written in the February 28, 1994 NPRM.
Discussion: As stated in the February 28, 1994 NPRM, this
definition is modeled after section 1201(a)(3) of the HEA, and is
designed to measure the educational backgrounds of students admitted to
programs offered by a proprietary institution of higher education and
postsecondary vocational institutions. The Secretary believes that a
student does not have the equivalent of an associate degree unless he
or she has completed an educational program that includes two critical
characteristics: the student successfully completed at least a two-year
program that is acceptable for full credit toward a bachelor's degree
and the student qualifies for admission into the third year of a
bachelor's degree program. The alternatives suggested by commenters
lack these characteristics.
In response to comments about the absence of consistent standards,
the Secretary notes that inconsistent standards apply to students with
associate degrees as well. The two-year programs completed by students
with an associate degree may be fully transferable to some institutions
offering bachelor's degree, but not to other institutions. Institutions
that have programs leading to a bachelor's degree also have different
standards for determining a transfer student's standing.
Changes: None.
Qualitative Factors. Comments: Some commenters argued that short-
term programs (programs of less than 600 clock hours) should not be
required to be in existence for a year before establishing eligibility
because the rate of technological change in the workplace dictates
rapid responses by institutions in offering educational programs to
meet those changes. Some of these commenters also believed that factors
related to quality should be determined by accrediting agencies.
Another commenter suggested that initial eligibility for these programs
should be based on an institution's track record of success rather than
the existence of the program for one year.
Discussion: The Secretary believes that a good track record of
success is whether an institution can maintain a new program for one
year. The Secretary agrees that the quality of these programs should
continue to be monitored by accrediting agencies, but the history of
abuse in these programs necessitates Federal regulatory standards as
well. Institutions are not prevented from responding rapidly to the
demands of the economy by offering new short-term programs, but
institutions must be able to demonstrate that these new programs can
meet the minimum placement and completion rate standards before Title
IV, HEA funds are provided to students enrolled in these programs.
Obviously, this data cannot be provided unless the program has been in
existence for a period of time.
Changes: None.
Comments: A number of commenters objected to limiting the length of
a program to no more than 150 percent of the minimum number of clock
hours required for training in the recognized occupation for which the
program prepares students, as established by the State in which the
program is offered, if the State has established such a requirement.
Some of these commenters observed that the requirement would create
inconsistent standards because States have different requirements and
that maximum program lengths should be determined by accrediting
agencies. Another commenter argued that differing State standards would
make it difficult to train students from neighboring States if those
States have higher standards.
Some commenters believed that ``course stretching'' was a frequent
source of abuse. They cited examples of institutions' combining short
programs into one accredited course that does not specifically lead to
licensure, purely for the purpose of exceeding the statutory 600 clock
hour minimum. These commenters recommended that the standard in the
February 28, 1994 NPRM was too lenient and that the program length
should not exceed the minimum State standard. Some commenters suggested
that the minimum licensing standards of the Federal government should
also be taken into account in limiting the length of a program. Another
commenter suggested that exceptions should be made to the general
standard if the education provided by a particular program was better
than average.
Discussion: The Secretary believes that 150 percent of the State
minimum allows enough latitude for institutions to provide quality
programs and furnishes a sufficient safeguard against the abuses of
course stretching. Because States have different licensing standards,
the Secretary does not believe that a single standard for a maximum
program length is appropriate. The argument made by one commenter about
training students from neighboring States with higher standards only
serves to illustrate the importance of recognizing each State's
requirements. Training students who will not be able to meet the
licensing requirements of the States in which they intend to work is a
terrible disservice to those students. The Secretary agrees that these
regulations ought to recognize any minimum standards established by
various Federal agencies for applicable short-term programs.
Changes: This provision is revised to prohibit a short-term
eligible program from exceeding by 50 percent any applicable minimum
number of clock hours required by a Federal agency for training in the
recognized occupation for which the program prepares students.
Comments: Some commenters argued that programs with a small number
of graduates would not provide a statistically valid measure for
completion or placement rates.
Discussion: The Secretary believes these rates are statistically
valid unless fewer than thirty students complete a program in an award
year. The percentage of educational programs this size participating in
the Title IV, HEA programs is so small, that the issue of statistical
validity does not need to be addressed in the regulations.
Changes: None.
Award Year. Comments: Many commenters suggested that the period of
time for calculating the placement rate should be based on the most
recent calendar year or on the award year ending twelve months earlier
(i.e., for 1995-96, the placement rate would apply to students who
graduated in 1993-94) instead of the immediately preceding award year,
to account fully for the 180-day period permitted to demonstrate that a
graduate has been placed and the 13-week period required to count an
employed student as placed. The ability to count individuals as
placements under these circumstances becomes increasingly difficult as
graduation dates approach the end of an award year. Some of these
commenters believed that this approach would be consistent with the
reporting procedures of many States and accrediting agencies.
Other commenters suggested that the burden on institutions would be
reduced significantly if the formula for calculating placement and
completion rates were the same as the Department's Student-Right-to-
Know provisions, and if the same formulas were used by accrediting
agencies and State licensing agencies.
Discussion: As noted in the earlier discussion, one reason that
the Secretary has adopted the requirement for a short-term program to
be in existence for at least one year is to allow for a track record of
completion and placement rates. If the calculation of these rates were
to be based on an earlier award or calendar year than the one specified
in these regulations, the Secretary would need to require that newly
established short-term programs remain ineligible for an even longer
period so that track record could be established. The Secretary does
not wish to discourage the creation of legitimate, high quality short-
term programs by requiring too great a period of ineligibility for
those programs. The Secretary notes, of course, that once these
regulations have been in effect for at least a year, data for currently
eligible programs, based on earlier years, will be available for
review.
The Secretary agrees that a standard rate is desirable, to the
extent that a standard rate will provide the information the Department
and other entities seek to obtain. Some rates may have to differ in
order to achieve the purpose for which they are mandated. For example,
a rate that is designed purely for consumer information purposes may
require different data or time periods, than a rate that must coincide
with student aid program calendars or a rate that is used for long-term
academic studies. The Secretary cannot control the design of placement
rates required by State agencies or accrediting agencies, but a
standard rate or rates that can be calculated from the same data
sources would help to reduce the burden on institutions. The Secretary
encourages States and accrediting agencies to foster the development of
uniform standards the Secretary could adopt, or adopt the standards in
these regulations.
The Student-Right-to-Know regulations are currently being drafted
with the intention of developing a completion rate that will be useful
for all Title IV, HEA programs when the statute so permits; but the
Student-Right-to-Know regulations will not require a placement rate
calculation.
Changes: None.
Calculation of Completion Rate. Comments: Some commenters
suggested that the definition of ``enrolled'' for purposes of
calculating completion rates should be amended to reflect only students
who begin attending classes.
Another commenter noted that some institutions do not charge new
students for any institutional costs during the first month that the
students attended classes, because administrators at these institutions
believe that if these students withdrew before tuition and fees were
assessed, the students could be excluded from the calculation of a
completion rate.
Discussion: As stated in the February 28, 1994 NPRM, when
calculating the completion rate, an institution would subtract from the
number of regular students who were enrolled in the program those
students who withdrew, dropped out of, or were expelled from the
program and were entitled to and actually received in a timely manner
in accordance with the refund requirements of these regulations, a
refund of 100 percent of their tuition and fees (less any permitted
administrative fee) under the institution's refund policy. The
Secretary believes that this provision addresses the commenters
concerns.
Changes: None.
Comments: Some commenters suggested that students who transfer to
another program or who withdraw because they have found a new job,
should be excluded from the completion-rate formula.
Discussion: The Secretary believes that transfer students and
students who withdraw for the purpose of starting new jobs or withdraw
for other reasons are accounted for by allowing up to 30 percent of the
enrolled students to withdraw from the program.
Changes: None.
Calculation of Placement Rate. Comments: Many commenters objected
to the requirement that a student must be employed for at least 13
weeks following graduation from an institution to be included in that
institution's placement-rate calculation. These commenters believed
that this requirement is overly burdensome because the institution
would have to track those students for long periods. They believed that
an institution should not be held accountable for factors that are
beyond the institution's control, such as layoffs, plant closings,
illnesses, forced relocations, or the motivation of students. Some
commenters suggested that instead of tracking students (who tend to be
very mobile) for 13 weeks, evidence of the initial hiring by an
employer should suffice. A commenter suggested that the period of
employment should be reduced to 30 days.
Discussion: As discussed in the February 28, 1994 NPRM, the
Secretary believes that an employment requirement of 13 weeks will help
stem abuses by institutions that may arrange to have students hired for
short-term jobs in order to boost placement rates. In addition, a
period of time beyond the initial hiring by an employer should be used
to determine that the student received adequate training from the
institution. The Secretary believes that extraneous factors affecting a
student's employment are accounted for by using a placement rate that
excludes up to 30 percent of the institution's graduates. The 13-week
period is consistent with the period of time a student must be employed
to be counted in the institution's placement rate under the procedures
delineated in Sec. 668.17(d) for the appeal of an institution's loss of
participation due to an unacceptable cohort default rate
Changes: None.
Comments: A commenter suggested that students who are placed in
jobs that are not related to their training should be counted, or at
least excluded from the placement-rate formula. Another commenter
suggested that placements should be limited to graduates who obtained a
job in the recognized occupation for which they were trained in order
to prevent program abuse.
Discussion: Students who are placed in jobs not related to their
training should be treated in the formula in the same manner as
students who are not employed. The placement rate is designed to
measure the effectiveness of the training provided by the institution,
and employment in an unrelated job does not demonstrate that the
training was effective. The Secretary believes that graduates who are
employed in occupations that are comparable and related to the
occupation for which they have been trained should be included in the
numerator of the placement rate formula. In these circumstances, the
training provided by the school is likely to have been a contributing
factor in obtaining employment. However, the Department may revise this
provision in the future if there are numerous incidents of abuse in
this area.
Changes: None.
Comments: A number of commenters contended that it would be too
burdensome for institutions to document the placement rates of students
because students and employers would have little incentive to provide
written verification of employment. Some commenters believed the
substantiation requirement would discourage employers from hiring
students from institutions that solicited documentation. Some
commenters recommended that the institution should be required to
record information, such as the name, address, and telephone number of
the employer, the job title, and the starting date of employment,
instead of obtaining the documentation proposed in the February 28,
1994 NPRM. A State agency, or the Department's reviewers, or an auditor
could then use this information to verify the placement. Other
commenters suggested that a written statement from the student that his
or her employment was a result of the institution's training would be
sufficient verification; or that an institution should merely be
required to document its attempt to obtain written verification from
employers or graduates.
Many commenters also were concerned about the cost of the
Secretary's proposed requirement that an institution's auditor should
review the documentation of placement rates for each student in the
placement-rate calculation. Some of these commenters suggested that the
auditor be permitted to verify the placement rates by selecting a
random sample. Some commenters suggested that the Department should
administer and pay for its own placement substantiation procedures.
Discussion: As stated in the preamble to the February 28, 1994
NPRM, the Secretary believes that requiring institutions to document
this data and requiring an auditor to review this data will help curb
abuse by institutions that may overstate their placement rates to
achieve and maintain eligibility for short-term programs. In order to
address this concern, the Secretary believes that documentation of
employment must be made by a reliable source and that written
statements by the student or the institution are not sufficient. The
failure of an employer or student to respond to requests for
documentation is accounted for by using a placement rate that excludes
up to 30 percent of the institution's graduates.
The Secretary disagrees with comments that the requirement of
auditing each placement rate is unnecessary or prohibitively expensive.
The audit will be conducted as part of the institution's annual
compliance review and specific guidance provided in the Department of
Education's audit guide should be drafted in a manner sufficient to
detect abuse and avoid unnecessary costs.
Changes: None.
Comments: Some commenters suggested that based on auditing
literature, certified public accountants cannot certify the accuracy of
an institution's placement-rate calculations, but must instead follow
the procedures of an attestation engagement.
Discussion: The Secretary agrees with the commenters that a
clarification is necessary.
Changes: This section has been amended to require that an
institution shall substantiate the calculation of its completion and
placement rates by having the certified public accountant who prepares
its audit report required under Sec. 668.23 report on the institution's
calculations based on performing an attestation engagement in
accordance with the Standards for Attestation Engagements of the
American Institute of Independent Certified Public Accountants (AICPA).
Section 668.24 has also been amended to reflect the same type of change
discussed here.
Comments: Some commenters argued that students who are hired by an
institution either before or after they receive a degree or certificate
from that institution, should not be excluded from the placement rate
calculation. The commenters suggested that institutions would be
penalized for hiring the most qualified candidate and that any abuse in
this area could be easily detected. Other commenters suggested that
graduates who are employed by separate businesses that are operated by,
or financially linked to, an institution's owner(s) should be excluded
from the placement-rate calculation. Some commenters suggested that
graduates who were student employees should not be subtracted from the
number of students who have degrees or certificates if they find a
position with another employer.
Discussion: Upon further consideration, the Secretary agrees that
including students who are hired by an institution would have a
negligible effect on the institution's placement rate, particularly if
the hiring is based on a legitimate employment selection process.
The Secretary does not agree with the suggestion to exclude
graduates from an institution's placement-rate formula if they are
hired by separate businesses that have some financial connection to the
institution. In many of these cases, the potential for abuse is not as
great because the economic interests of the parties that control the
separate businesses do not necessarily coincide with the financial
interests of the institutions.
The Secretary agrees that student employees who are no longer
employed by the institution upon graduation and who are hired by
another employer after graduation, should not be excluded from the
placement rate calculation.
Changes: The requirement that an institution exclude from the
calculation of a placement rate students who are hired by the
institution has been deleted from these regulations.
Comments: Some commenters believed that the placement rate
calculation may be misinterpreted by some institutions because the
proposed placement rate calculation requires the school to include
students in the numerator who, ``on the date of this calculation are
employed, or have been employed for at least 13 weeks following receipt
of the credential by the institution.'' These commenters suggested that
the phrase ``are employed'' will be interpreted to mean that any
student employed at the time the calculation is made, regardless of
whether they have met the 13-week standard, can be included in the
numerator.
Discussion: Every student must be employed for at least 13 weeks in
a recognized occupation for which they were trained or in a related
comparable occupation before that student can be counted as placed. The
Secretary agrees to clarify this provision.
Changes: A change has been made to clarify that every student must
be employed for at least 13 weeks in a recognized occupation for which
they were trained or in a related comparable occupation before that
student can be counted as placed by inserting a comma after the words
``have been employed.''
English as a Second Language. Comments: Some commenters argued that
the purpose of the testing requirement for students who completed a
program in English as a Second Language (ESL) was unclear, and that
testing the proficiency of these students was an intrusion on an
institution's internal academic affairs and a violation of the
Department of Education Organization Act. Another commenter recommended
testing students before they enrolled in an ESL program to determine
whether they needed to improve their proficiency skills, as well as
testing students who completed the program. A commenter suggested that
the ESL testing provisions should also apply to vocational programs
that include ESL education within the curriculum. Another commenter
expressed support for the provision as written in the February 28, 1994
NPRM.
Discussion: As discussed in the February 28, 1994 NPRM, the purpose
of this requirement, which is based on a California law, is to curb
abuses by institutions. Some institutions have received significant
amounts of Federal Pell Grant funds for students who have not attained
an adequate proficiency in written and spoken English to use already
existing knowledge, training and skills. Because this testing
requirement is limited to ESL programs that are ancillary to an
institution's academic programs, the Secretary does not believe it is
an intrusion on an institution's internal academic affairs.
The suggestions to add a pre-test requirement or to extend the
testing requirement to vocational programs that include ESL courses
were not adopted at this time. However, the Secretary intends to
monitor reports of abuse in these areas to see if regulation is
necessary. Institutions are encouraged to test all students before and
after they enroll in ESL courses to determine whether the students need
to improve their proficiency skills and to determine whether the
students have attained the desired proficiency skills after completing
the courses.
Changes: None.
Subpart B--Standards for Participation in the Title IV, HEA Programs
Section 668.11 Scope
Comments: A few commenters opposed subjecting a third-party
servicer to proceedings under subpart G of this part, which governs
emergency actions, fines, and limitation, suspension, or termination of
participation in the Title IV, HEA programs. The commenters felt that
since the Secretary has noted that institutions are ultimately
responsible for any liabilities incurred that the institutions should
be responsible for monitoring the activities of the organization with
which they contract.
Discussion: The Secretary disagrees with the commenters who argued
that third-party servicers should not be subject to proceedings under
subpart G of this part. The statute specifically requires the Secretary
to apply subpart G proceedings to third-party servicers. The Secretary
agrees with commenters that institutions have a duty to monitor the
actions of their third-party servicers, and that an institution is
always ultimately liable for any violations caused by those servicers,
but, the Secretary believes that Congress clearly intended for the
Secretary to directly hold third-party servicers accountable for any
program violations through the use of all sanctions that the Secretary
is able to impose. The sanctions under subpart G of this part are an
appropriate recourse to use to correct program violations because a
third-party servicer, as an agent of an institution, contracts with
institutions to provide services that parallel an institution's
responsibilities under the institution's program participation
agreement.
Changes: None.
Section 668.12 Application Procedures
Applications for continued participation. Comments: This section of
the regulations generated many comments. Some commenters were concerned
about the circumstances under which their institutions might be
required to file an application in order to continue to participate in
a Title IV, HEA program. The majority of the comments concerned the
need for institutions to be notified enough in advance of the
expiration of their program participation agreements so they could file
an application for reapproval and the corresponding need for the
Secretary to act on an institution's renewal application prior to the
expiration of the institution's program participation agreement.
A number of commenters were concerned that the provision requiring
institutions to apply for recertification upon the request of the
Secretary allowed the Secretary too much discretionary authority and
would mean that the Secretary would act in an arbitrary and capricious
manner. Many of these commenters believed that the regulations should
identify the specific circumstances or significant events that would
trigger a request from the Secretary and should require the Secretary
to explain the reasons for the request. Two commenters recommended
further that the regulations make clear that the Secretary will
initiate action only if there is reliable evidence affecting an
institution's financial responsibility or administrative capability.
This commenter also said that it should be made clear that such an
application would not be considered an initial application and that if
the Secretary were to determine, on the basis of the application, that
the institution should no longer participate in a Title IV, HEA
program, the institution would have recourse to the appeal procedures
specified in subpart G of this part.
Over seventy commenters were very concerned about the
recertification process. Their understanding of the process was that
even were an institution to file an application for reapproval in a
timely manner, if the Secretary did not approve the institution prior
to the expiration date of its program participation agreement, the
institution either would lose approval altogether or would be
provisionally certified. Because provisional certification connotes
lesser status to these commenters and confers fewer appeal rights than
full certification, the commenters viewed provisional certification
under these circumstances to be unfair and unacceptable.
Many commenters provided concrete, constructive recommendations for
addressing their concerns. The majority of these commenters asked that
the Secretary notify institutions in advance of the scheduled
expiration dates of the program participation agreements and supply the
necessary application forms. One group of commenters suggested that the
Secretary establish time frames for the submission and the processing
of applications. The time frames proposed by the commenters varied
greatly, with one commenter urging that the Secretary be required to
send applications to institutions 18 months in advance of the
expiration dates of the program participation agreements and another
stating that six months would be sufficient. Other commenters would
have the regulations require that the Secretary act on an application
within 45 or 60 days of receipt. The approach taken by another group of
commenters was to recommend that if an institution submitted an
application for renewal within a specific time frame, such as a certain
number of days prior to the expiration date of the program
participation agreement, the Secretary should extend the certification
of the institution, as necessary, until the Secretary's review is
complete.
Discussion: The Secretary finds it necessary to reserve the right
to require a participating institution to submit an application for
certification if the Secretary has reason to believe the financial
responsibility or administrative capability of the institution is in
question. The Secretary refers those concerned to a discussion of the
Secretary's position on page 9533 of the preamble to the NPRM published
on February 28, 1994. The Secretary reiterates that the Secretary
expects to exercise this authority rarely and to advise the affected
institution of the reason for the request. An application submitted
under these provisions is not considered an initial application,
because the institution is a participating institution. The institution
continues to be governed by the program participation agreement in
effect at the time the institution submits its application until that
program participation expires, the institution signs a new program
participation agreement, or the Secretary limits or terminates the
institution's program participation agreement under the procedures in
subpart G of this part.
The Secretary understands the concerns expressed regarding the
processing of renewal applications and agrees that an institution
should not be penalized if it files an application in a timely manner
but the Secretary is unable to complete a review of the institution
prior to the expiration date of the institution's program participation
agreement. For a full discussion of this issue, see the section of the
Analysis of Comments and Changes that addresses certification
procedures (Sec. 668.13).
Changes: None.
Notification and application requirements for additional locations.
Comments: There were a number of comments on this section, and they
conveyed a wide range of concerns. Many of the commenters were
concerned that institutions would be required to notify the Secretary
of each new location, regardless of the percentage of the educational
program offered at the location. Many of these commenters asserted that
the provision would prohibit community colleges from responding to
community needs, because community colleges are constantly offering
training and education at new locations.
Other commenters could discern no reason why the addition of a
branch campus or other location at which 100 percent of an eligible
program is offered should trigger a certification review of an entire
institution. These commenters suggested that because accrediting
agencies and State licensing bodies review additional locations, there
is no need for the Secretary also to conduct a review. One commenter
went so far as to recommend that Sec. 668.12(b)(2) be removed, to
guarantee that if the Secretary were to decide to certify a branch
campus or other location, the decision could not trigger a
recertification review of the entire institution.
Commenters were concerned about the effect of these regulations on
the ability of institutions to continue to offer internships on sites
apart from their main campuses. Commenters complained about the effect
of these provisions on an institution that contracts with a company to
provide training for the company's employees on the site of the
company's facilities.
A few commenters supported the Secretary's need to monitor the
financial responsibility and administrative capability of institutions
that establish locations that offer at least 50 percent of an
educational program. Two commenters recommended that the regulations be
expanded to require that a location that offers less than 50 percent of
an educational program be reported to the Secretary if the volume of
activity at the location exceeded a certain threshold.
Discussion: The comments reflect a good deal of confusion about the
current requirements for reporting the addition of locations, current
application procedures, and the proposed regulations.
The current Institutional Eligibility regulations, published on
April 5, 1988, specify in Sec. 600.30(a)(3) that institutions are to
notify the Secretary of any changes in the name or number of locations
since the institution's last eligibility application. As a practical
matter, the Secretary has required institutions to report only changes
to those locations at which the institution offered a complete
educational program. This policy has been reflected for several years
in the application and instructions. Thus, the notification requirement
in these regulations, and the corresponding requirement in the new
Institutional Eligibility regulations at Sec. 600.30, are actually less
onerous than the requirements in earlier regulations. Under these final
regulations, community colleges and other institutions that frequently
establish outreach locations at which they offer one or two courses
need not report these locations. And, unless the internship portion of
a student's program constitutes at least 50 percent of that program,
there would be no need to report the location at which an internship is
performed. Similarly, there is no need to report locations that offer
only continuing education classes and do not have students who are
eligible to receive Title IV, HEA program funds.
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. In addition, section 498(b) of the HEA requires the
Secretary to have a form on which the institution describes the
relationship between a main campus of an institution and all of its
branch campuses. It follows then that the Secretary cannot scrutinize a
branch campus in a vacuum. Thus, this provision is a codification of
the Secretary's longstanding policy and application procedures and new
statutory requirements.
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 employer is paying for the cost of training and no Title
IV, HEA program funds are involved, there is no need for the
institution to notify the Secretary.
The Secretary has established a requirement that an institution
must notify the Secretary of a location that offers at least 50 percent
of an educational program 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 in such
situations, but the Secretary expects to make requests for complete
recertification applications only rarely.
Changes: None.
Notification and application requirements for changes in name,
location, or address. Comments: Two commenters stated that the
Secretary should not require an institution to undergo a
recertification review if the institution changed only its name,
address, or location.
Discussion: This section requires only that institutions notify the
Secretary of such changes.
Changes: None.
Required forms and information. Comments: A few commenters asserted
that the proposed requirement of Sec. 668.12(e)(2) for an institution
to provide to the Secretary upon request all information that the
Secretary needs to certify an institution was too broad. Their
perception was that the requirement would give the Secretary unlimited
access to institutional information under the guise of a certification
review. They recommended that the provision be revised to state that
the Secretary would request only the information and documentation
specified on the application form.
Discussion: This provision refers only to information and
documentation needed to certify that the institution meets the
standards in this subpart, particularly the factors of financial
responsibility and standards of administrative capability. The
application form clearly specifies the information and documents that
institutions must submit with their application. However, the Secretary
must retain the flexibility to request additional information or
documentation to clarify or support an institution's response on the
application, should that be necessary. The Secretary notes that this
provision would not require an institution to provide information such
as tenure information contained in faculty records.
Changes: None.
Section 668.13 Certification Procedures
Requirements for certification. Comments: A few commenters objected
to the proposal that an institution could be refused full certification
that the institution meets the standards of subpart B and may
participate in the Title IV, HEA programs because of a problem
identified at one of its branch campuses. These commenters suggested
that it was not fair to restrict the certification for an institution
based upon a problem that was identified at its branch location.
Discussion: The commenters misunderstood the purpose of this
provision. Section 498(j) of the HEA requires a branch campus, as
defined by the Secretary, to be certified under the requirements of
this subpart to be included in an institution's participation in a
Title IV, HEA program. Thus, a branch campus must separately
demonstrate to the Secretary's satisfaction that it meets, for example,
the factors of financial responsibility and standards of administrative
capability. The commenters should note that the Secretary has defined
branch campus narrowly, in part for this reason, in the Institutional
Eligibility regulations. A more complete discussion of the implications
of meeting that definition is found in those regulations.
Changes: None.
Comments: Several comments were received recommending that an
institution's financial aid officer be included in the list of
personnel that are required to have precertification training.
Discussion: Pursuant to the administrative capability standards set
out in Sec. 668.16, every institution is required to designate a
capable individual that is responsible for administering the Title IV,
HEA programs at the institution. This designated individual, who is
usually a financial aid administrator, is required to have
precertification training.
Changes: None.
Period of participation. Comments: A few commenters suggested that
the Secretary provide greater detail in the regulations concerning when
an institution would receive full certification for a period of less
than four years.
Discussion: As noted in the discussion for the proposed
regulations, the full four year certification period will generally be
used for institutions. There may be a limited number of times when an
institution would receive a shorter period of full certification, based
upon the specific circumstances presented. One instance where a shorter
period of full certification would be used is where an institution has
submitted a materially complete application for renewal in a timely
manner, but no decision is issued before the institution's
certification expires. In that instance, as explained in the discussion
concerning provisional certification below, the institution's full
certification would be extended on a month to month basis until a
decision on its application was issued. Other situations will arise
where a certification of less than four years will be appropriate, but
it is not feasible to try and identify such infrequent actions by
referencing them specifically in the regulations.
Changes: None.
Provisional certification. Comments: Several commenters were
concerned that the proposed implementation of provisional certification
in the regulations was very broad, and would impose hardships on a
number of institutions. The commenters suggested that the Secretary
treat the administrative capability and financial responsibility
requirements as indicators of instances where provisional certification
could be used, but would not necessarily be required if the institution
could demonstrate that it should be permitted to participate under full
certification. Numerous commenters suggested that it was inappropriate
to use provisional certification for institutions whose cohort default
rates exceeded the thresholds set out in the proposed regulations at
Sec. 668.16. Other commenters recommended that the regulations be
amended to clarify that provisional certification could be renewed.
Some commenters suggested that the regulations be amended to
provide for the provisional certification of all institutions in a
State where no SPRE has been established. These commenters believed
that this use of provisional certification was consistent with the
intent of the HEA for the Secretary to monitor institutions more
closely in this situation.
Discussion: The Secretary believes it is appropriate to use the
administrative capability and financial responsibility thresholds as
events that will require provisional certification, rather than as
indicators that might or might not result in provisional certification
being required. Provisional certification will be used to permit these
institutions to continue participating in the Title IV, HEA programs
while correcting over time the items that were identified that caused
the institution to be placed under provisional certification. The
categories and thresholds set out in the regulations provide sufficient
notice to institutions of the standards to which they will be held
accountable. The proposed mechanism for provisional certification also
provides administrative efficiency in reviewing applications for
certification, and encourages institutional improvements over time to
meet and maintain these standards.
The Secretary has responded to concerns about the cohort default
rate measures by adjusting the administrative capability thresholds in
Sec. 668.16 that would trigger a requirement that an institution would
receive provisional certification based upon its reported cohort
default rates. See the section of the Analysis of Comments and Changes
that addresses administrative capability (Sec. 668.16). The Secretary
intends that institutions that have participated successfully under
provisional certification, but who still do not satisfy certain
requirements for full certification, will be permitted to renew their
provisional certification. No specific changes are needed to reflect
this procedure in the regulations, because such decisions will be made
in response to the applications for certification that institutions
will submit in response to the expirations of their current
certifications.
The Secretary agrees that technical changes are needed to make
these regulations conform to the requirements of the State
Postsecondary Review Program in 34 CFR part 667, and has decided to
provide some further explanation here of the consequences to an
institution if the State in which the institution is located does not
participate in the State Postsecondary Review Program.
Section 494(a) of the HEA prohibits the Secretary from designating
as eligible to participate in a Title IV, HEA program any institution
seeking initial participation in that Title IV, HEA program, or any
participating institution that has undergone a change of ownership
resulting in a change of control, as determined under 34 CFR 600.31, if
the institution is in a State that does not participate in the State
Postsecondary Review Program. The Secretary also is prohibited from
designating for initial inclusion in any institution's eligibility for
participation a Title IV, HEA programs branch campus located in a State
that does not participate in the State Postsecondary Review Program,
even if the institution itself is in a State that participates in the
State Postsecondary Review Program.
Further, the Secretary may grant no more than provisional
certification for participation in a Title IV, HEA program to any
participating institution or branch campus in a State that does not
participate in the State Postsecondary Review Program.
Currently, all States participate in the State Postsecondary Review
Program. The Secretary does not anticipate that any State will fail to
comply with the requirements of the State Postsecondary Review Program
to the extent that the State will cease to participate in the program.
Nevertheless, the regulations need to incorporate these statutory
provisions so that institutions may be aware of the potential
consequences of a State's failure to participate in the program.
Changes: A new paragraph (e) is added to provide for denial of
certification to initial applicants for participation in a Title IV,
HEA program and to participants that have undergone a change of
ownership resulting in a change of control, if the State in which those
applicants or participants are located does not participate in the
State Postsecondary Review Program. Under paragraph (e), the Secretary
may provisionally certify a participating institution or branch campus
in that State. Section 668.13(c)(2)(ii) has also been revised to
provide that the provisional certification of an institution under
these circumstances expires at the end of the third complete award year
following the date of the provisional certification.
Comments: Several commenters voiced concern over the proposed
language in the regulations that would subject institutions to
provisional certification where the financial responsibility and
administrative capability was being determined for the first time.
Suggestions were made that schools be exempted from this provision if
they had been in operation for a number of years without problems being
identified concerning their financial condition or administrative
capability.
Discussion: The Secretary believes that the other standards
requiring the use of provisional certification are adequate to identify
institutions where greater monitoring and procedural restrictions are
appropriate. The Secretary agrees that longstanding institutions with
no previous problems identified in their administrative capability or
financial condition will not require the use of provisional
certification where the current audits and application submitted by the
institution satisfies the financial and administrative requirements
under the regulations. Furthermore, since provisional certification is
required for initial applicants and for existing institutions whose
financial condition or administrative capability cannot be shown to
meet the required standards, there does not appear to be a
corresponding need to require provisional certification if a
participating institution satisfies the proposed standards when the
Department reviews its application for the first time.
Changes: The provision that provided that the Secretary may
provisionally certify an institutions if the financial responsibility
and administrative capability of the institution was being determined
for the first time has been deleted from these regulations.
Comments: A number of commenters objected to the proposal that
provisional certification be used for all occasions where the
institution undergoes a change in ownership that results in a change of
control. Instead, the commenters suggested that there were numerous
instances where a transfer of an institution to a new owner should be
viewed as a positive step that should be encouraged by using full
certification, especially where the transfer was to an owner that had
already established a good track record with the Department. Some
comments also recommended that transfers to family members or to
employees that had experience operating the institution should not
require provisional certification.
Discussion: The Secretary agrees that some transfers to family
members or to personnel that own stock in an institution who have also
worked for the institution should be treated differently from other
changes of ownership that result in a change of control. These
transfers to family members or to certain other owners have been
exempted from treatment as a change of ownership resulting in a change
of control in the regulations codified at 34 CFR part 600. In all other
situations where there is a change of ownership resulting in a change
of control, the Secretary believes it is appropriate to use provisional
certification in order to provide more protection to the Federal
interests while the new owner demonstrates the ability to operate that
institution successfully. Such concern is especially warranted where a
financially troubled institution has been acquired for little or no
capital investment by the new owner, because the risk of loss is
minimized if the institution fails as a business investment. Even
though it may be a positive step for an institution to be bought by a
new owner who can provide greater resources and experience in its
operations, it is also reasonable to provide for the greater oversight
and protection to Title IV, HEA program funds that are available under
provisional certification. Also, the period of provisional
certification may be established for a shorter period where the
particular facts so warrant.
Changes: None.
Comments: A number of commenters were concerned that an institution
that had applied for recertification in a timely manner would be placed
on provisional certification if the Department had not processed the
application before the institution's participation agreement expired.
These commenters objected to changing an institution from full
certification to provisional certification where the delays were
attributable to the Department's review process rather than to a tardy
application for renewal from the institution. Some remarks were also
submitted by these commenters suggesting that formal notice be required
from the Secretary of the expiration date for an institution's period
of participation before any such ending date could become effective.
Discussion: The Secretary agrees that delays in processing
applications by the Department should not be the cause for transferring
an institution from full certification to provisional certification. In
such a circumstance where a complete application for renewal was timely
submitted, it is appropriate to provide for a mechanism that will
continue the institution's full certification on an interim basis. The
Secretary has decided to establish a target date for institutions to
submit certification renewal applications at least 90 days before the
ending date for the institution's current program participation
agreement. Provided that the application is materially complete when
submitted, the institution's full certification will continue beyond
its expiration date on a month-to-month basis until the Department
issues its decision on the application. If the institution's
application is not approved for full certification, the program
participation agreement will expire on the last business day of the
month in which the decision is sent to the institution. If the
application for full certification is not made at least 90 days before
the ending date for the institution's program participation agreement,
the institution will only be permitted to participate under provisional
certification while an application for recertification is pending. When
an institution is notified that its application for recertification was
not materially complete when submitted, the Department will exercise
reasonable discretion in determining whether to deny the application as
submitted or to request additional information, and to determine
whether the institution may continue to participate under provisional
certification while the application is reviewed.
The Secretary continues to believe that it is appropriate for the
institution to monitor the expiration date for its participation rather
than relying upon the Secretary to tell it when it must reapply.
Although the Secretary may provide routine notices to institutions
concerning upcoming expiration dates, the institution will be held
responsible for submitting an application for recertification in a
timely manner in accordance with the expiration date on its program
participation agreement, regardless of whether the institution receives
a notice of expiration from the Secretary.
Changes: Section 668.13(b) is amended to provide that full
certification will be extended on a month to month basis following the
expiration of a program participation agreement where the institution's
application for recertification was materially complete, and submitted
at least 90 days prior to the expiration date.
Requirements for provisional certification to participate on a
limited basis for institutions that are not financially responsible.
Comments: A number of commenters stated that an institution should not
be placed under provisional certification if the institution satisfied
the criteria for provisional certification to participate on a limited
basis for institutions that are not financially responsible. These
commenters believed sufficient protection of Title IV, HEA program
funds was obtained from the required posting of a reduced surety in
conjunction with using a funding arrangement other than the advance
payment system without the additional requirement of only granting
provisional certification to the institution. Several of the commenters
also argued that any institution meeting these criteria should be
considered to be financially responsible, and therefore not placed
under the provisional certification that would trigger heightened
monitoring by the Department and by the other members of the triad. The
commenters also observed that institutions that were in financial
difficulties would probably experience further hardship by being
required to post a surety and receive Title IV, HEA program funding
through an alternate mechanism.
A few commenters noted that this provision appeared to require
provisional certification if an institution did not demonstrate
financial responsibility under the general standards of financial
responsibility set out in Sec. 668.15(b), and that such a construction
of the regulation would mean that institutions demonstrating financial
responsibility under the exceptions to the general standards of
financial responsibility set out in Sec. 668.15(d) could still be
required to use provisional certification.
Some commenters also suggested that the reference to a letter of
credit be modified to explain that it would be an irrevocable letter of
credit rather than some other type that the institution could revoke
without notice to the Department. These commenters also suggested that
institutions could withhold information about the amount of Title IV,
HEA program funds disbursed through the institution that would
otherwise increase the amount of the letter of credit that would be set
based upon the information available to the Department for the
institution's prior award years.
Some commenters suggested that the requirement that an institution
show that it has met all of its financial obligations during the
preceding two award years be expanded to acknowledge that normal
business practices would permit institutions to refinance debts to
change payment terms or obtain lower interest rates.
Several commenters also stated that the proposed regulation was
unfair because it would require provisional certification for any
institution that had not demonstrated financial responsibility during
the preceding five years, regardless of whether the institution
currently demonstrated financial responsibility under its most recent
audit. These commenters believed that such a procedure would be unfair
because it could penalize an institution that met current financial
responsibility standards based upon its prior financial condition.
Other commenters suggested that the Secretary should exercise
discretion in determining when financial guarantees would be required
rather than making them mandatory whenever an institution triggered
these provisions.
Discussion: The Secretary disagrees that the standards for
provisional certification to participate on a limited basis for
institutions that are not financially responsible should be deemed to
constitute a sufficient demonstration of financial responsibility that
would warrant granting full certification to such institutions.
Institutions that are not able to meet the general standards of
financial responsibility in Sec. 668.15(b) or the exceptions to the
general standards of financial responsibility in Sec. 668.15(d) are in
a financial situation that is demonstrably different from their
counterparts that do satisfy the requirements under these sections.
Institutions that only meet the standards for provisional certification
to participate on a limited basis for institutions that are not
financially responsible warrant the additional monitoring and
protection to Title IV, HEA program funds that provisional
certification provides. Even though such funding restrictions and
surety postings may be difficult for some institutions that are already
experiencing financial restraints, such protections and the heightened
ability to act quickly to protect Title IV, HEA program funds are
essential for improving the Department's oversight and gatekeeping
responsibilities. Provisional certification will permit some
institutions to improve their financial operations over time without
compromising their administration of the Title IV, HEA programs.
The Secretary would like to clarify that any letter of credit that
an institution is required to submit to the Secretary must be in a form
and amount acceptable to the Secretary.
The Secretary agrees with the commenters on the provision requiring
an institution to have met all its financial obligations during the
preceding two award years. The Secretary has decided to clarify this
provision in the manner in which a similar provision has been clarified
in Sec. 668.15 (see the discussion in Sec. 668.15 on this issue).
The Secretary would also like to clarify when third party financial
guarantees or assumptions of liabilities by owners are required.
Institutions that demonstrate financial responsibility under the
requirements of Sec. 668.15(b) and Sec. 668.15(d) and are in compliance
with all other requirements of this subpart generally are entitled to
full certification. An institution that, despite meeting the
requirements of Sec. 668.15(b) and (d), falls within one of the
categories in Sec. 668.15(c)(2) is not considered financially
responsible and therefore cannot be fully certified. These categories
include a limitation, suspension, or termination by the Secretary or a
guaranty agency of the institution's participation at any time within
the previous five years or a settlement to resolve such an action. Also
included are audit or program review findings during the two most
recent audits or program reviews amounting to more than five percent of
the institution's Title IV, HEA program funds for a given award year, a
citation for failure to submit acceptable audit reports in a timely
fashion during any of the previous five years, and a failure to address
satisfactorily any compliance problems still identified in program
reviews or audits after the institution has exhausted its appeals of
those findings. The Secretary considers any of these characteristics
sufficiently detrimental to the integrity of the Title IV, HEA programs
to provide that an institution meeting them is not financially
responsible.
Further, to emphasize the seriousness with which the Secretary
views these institutional failings, to protect Federal funds, and to
deter institutions from acting in a manner that could cause them to
fall within one of these categories, the Secretary will refuse even to
provisionally certify such an institution, unless the appropriate
additional financial guarantees and assumptions of liability are
furnished. In the February 28, 1994 NPRM, the Secretary had also
proposed to apply this treatment regarding provisional certification to
any institution failing the financial responsibility standards of
Sec. 668.15 during the previous five years. The Secretary believes that
a modification of this last provision is in order. The Secretary
therefore wishes to clarify that any institution that fails to
demonstrate financial responsibility under its current audit, and that
has failed to do so at least once under the standards in effect during
the preceding five years (other than for a reason described in
Sec. 668.15(c)(2)) is also required to post financial guarantees and
furnish assumptions of liability in accordance with Sec. 668.13(d)(2).
This additional safeguard is warranted where an institution does not
meet the current standard for demonstrating financial responsibility
and has failed to do so at least once during the preceding five years.
The Secretary believes that it is appropriate to put in place a
procedure where such financial guarantees and assumptions of liability
will be required from institutions that come within the provisions in
Sec. 668.13(d)(2). Rather than exercising discretion in whether to
require such guarantees at all, the Department will examine the
specific circumstances presented by each such institution and set the
required amount and terms of the financial guarantees and assumptions
of liability in accordance with the regulation.
Changes: The requirements for provisional certification to
participate on a limited basis for institutions that are not
financially responsible have been amended to make clear that the
criteria of this section are not required for an institution that meets
the exceptions to the general standards of financial responsibility
under Sec. 668.15(d). The regulations have been amended to clarify that
any required submission of a letter of credit must be in an amount and
in a form acceptable to the Secretary. Section 668.13(d)(2) has been
clarified to explain that financial guarantees are only required if the
institution comes within the requirements of Sec. 668.15(c)(2), or
where the institution fails to demonstrate financial responsibility
under its current audit and has failed to do so at least one other time
under the standards in effect during the preceding five years.
Revocation of provisional certification. Comments: A number of
commenters complained that the lack of a formal appeal process for
revocation of provisional certification was unfair to the institution
because it provided much less due process than is available to other
institutions under the appeal procedures in subpart G of the
regulations. Some of these commenters also indicated that they believed
it would be more appropriate to offer provisionally certified
institutions the full appeal rights under subpart G of the regulations,
and several commenters believed that more extensive appeal procedures
were required to revoke provisional certification than were described
in the regulations.
Some commenters also suggested that a revocation notice should not
be made effective upon the date of the mailing, but either upon receipt
by the institution or until a specified number of days after the
mailing. A few commenters also recommended that first class mail be
used because it is an accepted means of filing legal documents in the
court system, or that certified mail be used as an alternative to
registered mail.
Many commenters also requested that the provision that provides
that an institution may request reconsideration of a revocation of
provisional certification be modified to provide that any request for
reconsideration of a revocation of provisional certification be decided
by someone other than the person issuing the revocation. These comments
stated that it was important that such requests for reconsideration be
made to a different official because it would be more meaningful than
having the request be presented to the person that had already made a
decision adverse to the institution.
Discussion: The Secretary disagrees with the commenters that
revocations of provisional certification should receive the same appeal
procedures given to fully certified institutions under subpart G of the
regulations. Institutions receiving provisional certification are being
given the opportunity to participate under limiting conditions because
a heightened risk to Title IV, HEA program funds has been identified,
either by the institution's current financial condition or through
prior problems in the administration of the Title IV, HEA programs by
the institution or its owners. Furthermore, section 498(h) of the HEA
provides that provisionally certified institutions may be terminated if
the Secretary determines that an institution is unable to meet its
responsibilities under its program participation agreement. This
language is significantly different from the requirement in section
487(c)(1)(F) of the HEA that provides that an adverse action against a
fully participating institution be determined after reasonable notice
and opportunity for hearing. The regulations require that the notice
revoking the provisional certification contain the basis for the
action, explain to the institution the consequences of such revocation,
and detail the procedures required to request reconsideration of the
action. The notice and opportunity to request reconsideration of the
decision to revoke the institution's provisional certification provide
adequate protection to the institution that it will have the
opportunity to respond directly to the stated basis for the action, and
establish a reasonable mechanism to resolve the dispute in a fair
manner. The Secretary believes that such procedure provides an
institution with a fair opportunity to be heard, and the final agency
decision will be subject to Federal court review to ensure that the
action was not arbitrary and capricious.
The Secretary does not agree that a notice of revocation of an
institution's provisional certification should be effective on a date
other than the date that the letter is sent to the institution. An
institution that participates under provisional certification does so
with the understanding that it is subject to greater scrutiny with
fewer procedural rights when problems are identified. A notice advising
the institution that its provisional certification is revoked will
identify the reasons for such action and give the institution an
opportunity to request reconsideration of that decision. The effective
date of the revocation is the date that the notice is mailed; this
provides greater protection of Title IV, HEA program funds while still
giving the institution an opportunity to have that decision
subsequently set aside.
The Secretary agrees that it would be more appropriate to provide
that notices of revocation decisions will be sent by certified mail,
return receipt requested, rather than by registered mail. The Secretary
notes that certified mail is already used to initiate adverse actions
against fully participating institutions under subpart G of the
regulations, and therefore believes that it is appropriate to
standardize this notice requirement for revocations of provisional
certification. The regulation also provides that, where practical, more
expeditious notice may be provided through facsimile or overnight mail.
The Secretary agrees that the designated department official making
the decision concerning an institution's request for reconsideration of
a revocation should be different from, and not subject to supervision
by, the official who initiated the revocation of the institution's
provisional certification. This separation of function will ensure that
the official making the final decision for the Department is
independent from the supervision of the official issuing the initial
decision, and this procedural protection strengthens the integrity of
the review procedures for revocation of provisional certification.
Changes: A change has been made to provide for notices of
revocation of provisional certification to be sent by certified mail.
The regulations have been modified to require that the official
reviewing a request for reconsideration of provisional certification
must be different from, and not subject to supervision by, the official
that issued the notice of revocation.
Section 668.14 Program participation agreement.
Comments: Five commenters suggested that an institution's program
participation agreement should only cover those branches or locations
which are specifically listed in the institution's notice of
eligibility. One commenter indicated that this provision makes clear
that the program participation agreement applies to each branch campus
or location of the institution.
Discussion: The provision emphasizes that the program participation
agreement applies only to those branch campuses and locations that meet
the applicable requirements of this part; therefore, additional
clarification is unnecessary.
Changes: None.
Comments: Four commenters asserted that the regulations should
specify that the terminology ``special arrangement, agreement, or
limitation'' applies only to the Title IV, HEA programs, and not any
other programs in which the institution participates. Two commenters
suggested that the proposed regulations marked a radical departure from
existing regulations, and that a ``phase- in'' period was in order.
Discussion: The Secretary would like to clarify that any ``special
arrangements, agreements, or limitations'' included in an institution's
program participation agreement by the Secretary should apply only to
those special arrangements, agreements, or limitations entered into
under the authority of statutes applicable to Title IV of the HEA.
Considering that the language for this section of the regulations is
for the most part statutory, institutions have had access to this
information since July 1992 when the Amendments of 1992 were enacted.
The Secretary believes that institutions have had adequate time to set
in place any policies or procedures to comply with this section. A
``phase-in'' period is unnecessary.
Changes: Section 668.14(b)(1) has been amended to clarify that an
institution must comply with all special arrangements, agreements, or
limitations entered into under the authority of statutes applicable to
Title IV of the HEA. Corresponding changes have been made throughout
the sections of 34 CFR 668 and 34 CFR 682 contained in this regulatory
package.
Comments: One commenter agreed that a mechanism was needed to
ensure that an institution's fund requests meet only its immediate
Title IV, HEA program needs, but suggested that such a mechanism should
accommodate institutions where funds must first pass through a State
agency, adding to the time frame for expenditure. Four commenters
indicated that the proposed regulations may necessitate changes in
institutions' methods of accounting, programming, banking, fund
monitoring, etc. and recommended that institutions should be allowed a
reasonable ``phase-in'' period for the requirements, during which the
Secretary should provide significant guidance regarding implementation.
Discussion: The Department's requirements regarding immediate cash
needs have not changed with these proposed regulations. They have
simply been restated as a criterion of the program participation
agreement. These long established rules are explained in many
Department publications, and are included in annual Department training
sessions. A ``phase-in'' period for these requirements is unnecessary.
As for institutions that must wait for funds to pass through a State
agency, these institutions should have already addressed this issue in
an effort to comply with existing Title IV, HEA program guidance.
Changes: None.
Comments: A large group of commenters was concerned that the
information provided to the Secretary, SPRE, guaranty agency,
accrediting agency or State licensing agency relative to an
institution's administrative capability and financial responsibility
may be disclosed to the public, and recommended that the Secretary
provide a guarantee that such information must be kept confidential by
the above-listed parties. Three commenters suggested that the Secretary
develop a specific format for the reporting of data and that the data
be sent directly to the Secretary for dissemination to any of the above
organizations that might need it.
Discussion: The Secretary does not have the authority to create or
supersede laws that may relate to disclosure of potentially sensitive
information. Such laws vary from State to State and from agency to
agency; it would be inappropriate for the Secretary to address such an
issue. As for data provided directly to the Secretary, if that data
were discloseable under a freedom of information request, the Secretary
would have no choice but to release the information if it were
requested.
It is important to note that the provision only requires
institutions that have been selected for review under the State
Postsecondary Review Program process to provide the above-referenced
information to SPREs. By the nature of the selection procedures and
because of the limited number of institutions which the Secretary
anticipates will meet review-triggering criteria, the Secretary
believes most institutions will not be requested to provide this
information and therefore will not need to worry about potential public
disclosure.
The Secretary believes a specific format for reporting and a
centralized location for collection of data are unnecessary at this
time. As the information must only be provided upon request, each
organization can specify exactly what information is needed from an
institution and in what time frame. A format specified by the Secretary
might cause some institutions to be burdened with providing information
that is not needed.
Changes: Section 668.14(b)(4) has been amended to provide that an
institution must provide information relating the administrative
capability and financial responsibility of the information to a SPRE if
the institution was referred by the Secretary under 34 CFR 667.5.
Comments: Four commenters recommended that SPREs and guaranty
agencies be added as parties to whom institutions must submit reports
of information required by the Secretary. Four commenters also
suggested including Federal consolidation loans in the list of loan
programs described in this section.
Discussion: Other provisions in the regulations require reports to
be provided to SPREs and guaranty agencies. To restate those
requirements here would be redundant.
Federal consolidation loans are not a Title IV, HEA program in
which an institution must be certified for participation and
consequently should not be included in this section.
Changes: None.
Comments: Three commenters indicated that the proposed regulations
placed responsibility on institutions for knowing how much money
students may have borrowed while attending other institutions.
Discussion: The commenters are correct. Institutions do have a
responsibility to determine the amounts of Title IV, HEA program funds
students have received attending other institutions by obtaining
financial aid transcripts from those schools. Past abuses with this
system, caused chiefly by institutions which did not recognize the
importance of financial aid transcripts, have created the need to tie
this requirement to an institution's continuing participation in the
Title IV, HEA programs. While the Secretary does not anticipate that an
institution would be penalized for information of which it was not
aware, it must be stressed that an institution must do everything in
its power to ensure that no loan is certified for an amount in excess
of a student's allowable limits.
Changes: None.
Comments: Two commenters recommended that applicable institutions
not only be required to make graduation and placement statistics
available to prospective students, but also to publish the information
in their catalogs. One commenter suggested that an institution only be
required to provide to prospective students the job licensing
requirements for its programs relative to the State in which the school
is located.
Discussion: The Secretary believes the regulations go far enough in
requiring the institutions to make graduation and placement rates
available to prospective students. While some institutions may elect to
publish this information in their catalogs for convenience, such a
measure is not required. Concerning the comment on State licensing
requirements for jobs, neither the statute nor the proposed regulations
indicate that an institution must provide the criteria for any State
other than that in which the school is located.
Changes: None.
Comments: Three commenters are concerned that early deadlines for
applications for State grants may affect an institution's ability to
inform eligible student loan borrowers about the availability and
eligibility of those borrowers for State grant assistance in the State
in which the institution is located. Two commenters are concerned that
in having to inform students from other locations of State grant
information pursuant to their States, institutions will be required to
be aware of State grant information for a large number of States.
Discussion: If an institution is aware that a student has enrolled
or applied for financial assistance after the application date has
passed to receive State grant assistance that year in that State, it
must simply inform the student that he or she is not eligible for those
funds, and may apply the following year prior to the deadline.
Accordingly, the institution will then process the student's aid
package with no consideration of State grant funds for that award year.
The Secretary does not understand how this requirement could have any
adverse affect on an institution. In fact, it is the Secretary's
understanding that many institutions already publish State grant
application information in their catalogs or disseminate the
information through their financial aid offices. Regarding students
from other States, institutions are indeed required to inform them of
State grant assistance available to them from their own State; however,
the institutions are not expected to be experts on this information,
but rather to be sources of general information from which students may
learn who to contact in their State to apply for assistance. The
Secretary does not believe this requirement is unduly burdensome on
institutions.
Changes: None.
Comments: A large group of commenters was concerned that requiring
newly participating institutions or institutions that have changed
ownership to implement a default management plan equal to Appendix D,
for two years, was overly restrictive. Most suggested that institutions
be allowed to submit an alternate plan to the Secretary for approval.
Many of the commenters recommended that in the case of ownership
changes, institutions with default rates under a certain percentage
(10% or 20%) should be exempt from the requirement.
Discussion: The Secretary's proposal that newly participating
institutions and institutions that have changed ownership use Appendix
D as a default management plan was made only after careful review by
the Department showed that Appendix D is effective in helping reduce
student defaults. Moreover, Appendix D is simply a basic default
management plan. There is nothing in the statute or regulations that
would preclude an institution from adding elements. In fact, the
Secretary applauds such creative efforts and believes they may help to
further reduce student defaults. The Secretary believes institutions
with low default rates should not be exempted because there is no
reason to believe under different ownership the rates would remain as
low.
Changes: None.
Comments: Four commenters want to expand the regulations to include
Social Security Administration, Immigration and Naturalization Service,
Law Enforcement Agencies and Direct Lending Contractors as parties that
are authorized to share information pertaining to an institution's
Title IV, HEA eligibility or participation, or pertaining to fraud and
abuse.
Discussion: The Secretary does not have authority to include these
organizations in the regulations as they do not appear in the statute.
Changes: None.
Comments: Many commenters argued that the provisions in this
section governing an institution's ability to employ or contract with
individuals or organizations to administer any aspect of the Title IV,
HEA programs or the receipt of funds under those programs go far beyond
the scope of section 487(a)(16) of the HEA. These commenters pointed
out that the statute referred only to individuals or organizations that
have been convicted, have pled nolo contendere or guilty to a crime, or
that have been judicially determined to have committed fraud involving
Title IV, HEA program funds and not to administrative determinations,
other material violations of law, or misuse of State, local, or Federal
government funds (other than Title IV, HEA program funds) with respect
to an institution's ability to employ an individual or organization.
One commenter supported the Secretary's proposed restrictions. Five
commenters were concerned that an institution may be penalized for
hiring or contracting with a party convicted of fraud involving
government funds or a party that has been terminated from participation
under the HEA for an infraction involving government funds, even if
they were unaware of the conviction or termination. One commenter was
concerned that the institution may be penalized if it hired or
contracted with such a party, even if that person's job was to cut
grass or collect garbage.
Discussion: The Secretary disagrees with those commenters who
argued that the provisions in this section restricting an institution's
ability to employ or contract with certain individuals or organizations
go beyond the authority of the HEA. Section 487(a)(4) expressly
requires an institution to agree in its program participation agreement
to comply with financial and fiscal responsibility requirements
established by the Secretary. These requirements are part of the
financial responsibility provisions found in Sec. 668.15(c). In
proposing the additional restrictions in the NPRM, the Secretary
provided justification that these additional safeguards were necessary
to protect the Title IV, HEA programs and institutions participating in
those programs. The Secretary still believes those justifications to be
valid. The regulations state in regard to a participating institution's
responsibility, it will not ``knowingly'' employ or contract with an
individual, agency, organization, etc. which has violated any laws
involving any government funds. The Secretary believes the regulations
are clear that an institution will not be penalized for information of
which it is not aware. Furthermore, in safeguarding Federal funds, the
Secretary is concerned with any parties that may have previously
violated a law involving government funds, even if these parties now
perform janitorial or maintenance duties. By the provision, an
employment or contract relationship with such a party is not
appropriate, and by ``knowingly'' entering into such a relationship an
institution may well jeopardize its continued participation in the
Title IV, HEA programs. The Secretary believes the regulations make
this clear as well.
Changes: None.
Comments: Three commenters recommended that the regulations be
amended to prohibit contracts with institutions or third-party
servicers that have been terminated for any reason, not just for a
reason involving government funds.
Discussion: The purpose of this provision is to safeguard Federal
funds, not to punish institutions or servicers that may have been
terminated. For that reason, the Secretary believes the provision is
adequate in its present form to satisfy the intent of the statute.
Changes: None.
Comments: Five commenters advised that requiring institutions to
complete surveys conducted as part of the Integrated Postsecondary
Education System (IPEDS) in a timely manner and to the satisfaction of
the Secretary could be burdensome to institutions, especially if the
school did not have a large staff or computer systems capable of
collecting information. Three of the five commenters recommended that
the Secretary design forms or specify formats to make data collection
easier. One of the five commenters suggested that the Secretary
accommodate institutions not yet computerized with more time to
complete the surveys.
Discussion: The language for this provision is statutory and may
not be changed by the Secretary. In addition, the Secretary believes
that any survey conducted as part of IPEDS is necessary and will
provide valuable information to the Department. Those offices that
collect IPEDS information work diligently to create consistent, easy-
to-use forms and formats, not just because this makes data collection
easier for the institutions, but also because it makes tabulating and
sorting of the information easier. The Secretary does not believe this
requirement is unduly burdensome to institutions.
Changes: None.
Comments: One commenter suggested that by not allowing institutions
to impose penalties on students unable to meet their financial
obligations due to disbursement delays for loan proceeds, this
provision would force institutions to ``carry'' unpaid students
indefinitely, creating a financial burden. One commenter suggested it
was not the intent of the statute for an institution to allow an unpaid
student to remain enrolled if the delay in disbursement of loan
proceeds was caused by the student's failure to comply with a program
requirement. One commenter recommended that the regulations stipulate
that institutions would not be prohibited from withholding academic
transcripts and other graduate services from students as the result of
delayed disbursement of Title IV, HEA program funds.
Discussion: The language of this requirement is for the most part
statutory, and very clear in its intent. The Secretary does not believe
this requirement will cause a financial burden to institutions as this
situation should not frequently occur if an institution is complying
with all applicable regulations.
It is not probable that a student would deliberately cause the
delay of his or her loan disbursement by not complying with the
instructions of the institution or lender; nevertheless, if such a
situation occurred, the institution would not be prohibited from
imposing penalties on the student.
The withholding of a student's academic transcript or other
graduate services is considered a penalty by the Secretary.
Changes: None.
Comments: A very large number of commenters suggested that the
proposed regulations went beyond the scope of the statute by
prohibiting any type of incentive payments, particularly those based on
``retention.'' Most of those same commenters, plus another large group,
felt that token gifts to students and alumni should be excluded from
this requirement.
Discussion: The Secretary believes that even in incentive payment
structures based on retention there is room for abuse and, in fact, has
seen evidence of such abuse. Since July of 1992 when the Amendments of
1992 were enacted, many institutions have opted to change to retention-
based pay for admissions personnel. In that time, the Secretary has
seen evidence of lowered satisfactory progress standards and in extreme
cases, falsified attendance and leave of absence requests, all in an
effort to keep students enrolled. In many cases, these practices were
designed by admissions personnel who were duly paid after the student
passed a retention mark. After that mark, the students were dropped.
Furthermore, the Secretary has evidence that some of these students
were admitted using falsified ability-to-benefit tests, which further
ties the issue of retention to enrollment. The Secretary believes that
reputable and conscientious institutions can develop other creative
ways to reward their employees that will have no direct or indirect
relationship to success in securing enrollments. Regarding token gifts
for students and alumni who refer other students, the Secretary, after
reviewing the comments, has decided that such practices are widespread
and will cause no harm if the tokens are not monetary, and limits are
placed both on their value and frequency of distribution.
Changes: The Secretary has amended Sec. 668.14(b)(22) to allow that
token gifts may be given to students or alumni for referring other
students for admission to the institution, as long as:
(1) the gift is not money, check or money order;
(2) no more than one such gift is given to any student or alumnus;
and
(3) the value of the gift is no more than twenty-five dollars.
Comments: Seven commenters asserted that most institutions that
offer athletically related student aid are currently audited by the
National Collegiate Athletic Association (NCAA) and the Office of
Management and Budget (OMB), and that the regulations should be amended
to state that compilations and audits which together satisfy NCAA and
OMB also satisfy the requirements of paragraphs (d) and (e) of the
regulation. One commenter indicated that the proposed regulations
paralleled NCAA audit requirements and compliance should not pose a
problem for member institutions. One commenter pointed out that a
``compilation'' is a term defined under Statements on Standards for
Accounting and Review Services No.1 and only provides a representation
without any assurances on the statements. The commenter suggested that
the Secretary require preparation of a schedule, and have that schedule
audited.
Discussion: The Secretary believes that the requirements of the
statute and regulations stand on their own. It is up to each
institution to determine if a particular audit or compilation prepared
for a different organization satisfies the conditions specified in
paragraphs (d) and (e) of the regulation. The Secretary believes it is
unwise to give blanket approval to audits and compilations which,
although at present may satisfy the regulation, may not at a later
date. Furthermore, the language of this provision, as written, covers
all institutions, even those which are not NCAA members.
Changes: None.
Comments: Seven commenters indicated that by making the effective
date for participation in the Title IV, HEA programs the date that the
Secretary signs an institution's program participation agreement, there
may well be a lapse of time from the expiration of the prior program
participation agreement during which the institution may be ineligible.
The commenters felt this may create financial problems for both
institutions and students, and some recommended that program
participation be made retroactive to the date of application. Some
other commenters felt program participation should be made retroactive
to the date of the certification review.
Discussion: The language for this provision is statutory. The
Secretary has no reason to believe that Congress had any other intent
when the law was drafted. However, the Secretary understands the
concern of commenters that an institution's program participation
agreement might expire after an institution has submitted a renewal
application but before the Secretary signs a new program participation
agreement. The Secretary has modified Sec. 668.13 to address that
concern. See the section of the Analysis of Comments and Changes that
addresses certification procedures (Sec. 668.13).
Changes: None.
Section 668.15 Factors of Financial Responsibility
General. Comments: A few commenters supported all of the
Secretary's proposed regulations in Sec. 668.15. One of the commenters
recommended the inclusion of a debt to net worth ratio in considering
an institution's financial responsibility. One commenter, who disagreed
with the Secretary's rationale for increasing the current ratio
requirement from 1:1 to 1.25:1, suggested that the Secretary consider
other types of financial analysis such as a ``Z Score'' in evaluating
an institution's financial resources. Another commenter, who also
disagreed with the Secretary, believed that tangible net worth was not
an appropriate indicator of financial responsibility and recommended
that the Secretary consider cash flow statements in his evaluation.
Discussion: The Secretary considered a number of alternative ratio
tests that could be used to evaluate an institution's financial
condition. While the Secretary does consider minimum capitalization an
important factor in determining an institution's financial
responsibility, he has elected not to put such a standard into
regulation at this time. Based upon the limited information presented
by in the commenters, the Secretary is not convinced that a ``Z Score''
would be an appropriate measure of financial responsibility for an
institution. However, the Secretary will monitor the financial
information gathered in accordance with these regulations to determine
whether it would be appropriate to require either additional, or
alternative cash flow statement criteria as a factor in determining
financial responsibility.
Changes: None.
Comments: Many commenters responded to the Secretary's request for
comments regarding the acceptability of a ``bond rating'' as sufficient
indicia of a nonprofit institution's financial responsibility. The
majority of the commenters expressed support of the use of a bond
rating as a means of evaluating financial responsibility. One commenter
suggested that the Secretary consider an institution to be financially
responsible if it is able to demonstrate that it has a debt financing
arrangement that is acceptable to the College Construction Loan
Authority (Connie Lee). Another commenter believed that the Secretary
should broaden the definition of acceptable bonds to include other than
general obligation bonds because certain types of revenue bonds issued
by pubic nonprofit institutions also have ratings by nationally
recognized rating agencies. One commenter believed that the Secretary
should expand the provision to exempt for-profit institutions with an
acceptable bond rating.
Discussion: The Secretary believes that a superior bond rating may
serve as an effective proxy for demonstrating an institution's
financial responsibility. An institution that has the capacity to issue
a top rated debt security is, in general, considered to have the
financial resources necessary to meet all of its financial obligations.
The Secretary believes that the debt paying ability of an institution,
as determined by a comprehensive credit review conducted by a
nationally recognized statistical rating organization, is
representative of the institution's financial health. For an
institution's bond rating to serve as an acceptable proxy, the
institution must have the financial resources required to obtain a
rating at or above the second highest level used by the rating
organization. Furthermore, the Secretary requires that an institution
provide evidence that the issue has been rated without consideration of
any insurance, guarantee, or credit enhancement that may have been used
to lower the institution's cost of capital. The Secretary requires that
an institution provide an actual rating from a nationally recognized
statistical rating organization. Since Connie Lee is not a rating
organization, financing arrangements that are acceptable to Connie Lee
are only eligible for consideration to the extent that they are
separately rated by a nationally recognized rating organization that is
acceptable to the Secretary. The Secretary agrees with commenters that
the substitution of a bond rating for an institution's having to
demonstrate financial responsibility should be expanded to include
other forms of rated debt such as revenue bonds. The Secretary also
agrees that this provision should be applied to both nonprofit and for-
profit institutions.
Changes: Sections 668.15(b)(7)(ii), (b)(8)(ii) and (b)(9)(v) have
been added to provide that the Secretary shall consider an institution
to be financially responsible if the institution is able to demonstrate
to the satisfaction of the Secretary that it has an outstanding debt
obligation which has been rated by a nationally recognized statistical
rating organization at or above the second highest level rated by that
organization. To be acceptable to the Secretary, an institution's debt
must have been rated without consideration of any insurance, guarantee,
or credit enhancement employed by the institution to lower its cost of
capital.
General standards of financial responsibility. Comments: A few
commenters expressed concern that the Secretary's requirement that an
institution submit an audited financial statement without qualification
or disclaimer was particularly burdensome because the commenters
believed an institution is likely to be faced with a ``qualified''
statement as a result of adopting new accounting standards mandated
under FAS 117.
Discussion: The Secretary believes that the reliability of any
financial statement is dependent upon the ability of the institution's
independent auditor to determine and report that the information
contained within the financial statements is a fair representation of
the institution's financial resources. The auditor will issue a
qualified statement if the auditor is unable to determine that the
information is a fair representation because of any uncertainty. It is
the institution's responsibility to identify the cause of the
uncertainty and make every reasonable effort to correct it.
Changes: None.
Comments: Many commenters believed that the requirement for an
institution to be current on any debt service should be clarified to
take into consideration legitimate disputes that may arise in the
normal course of business. Several commenters believed that a single
instance or even a few instances of late payments would not necessarily
be indicative of financial problems. Many commenters believed that an
institution should be considered current, despite not having made
scheduled payments, if the institution is currently involved in
negotiations with creditors to restructure or reschedule outstanding
debt. A number of commenters suggested that a pattern of late payments
on the part of an institution would be a more reliable indicator of
financial difficulty than would a single instance of failure to pay.
Many of the commenters suggested that the Secretary rely on the
judgement of the institution's independent auditor in determining
whether or not such a pattern of late payment exists.
Discussion: In general, the Secretary believes that an
institution's ability to meet its financial obligations when due is
indicative of financial health. However, the Secretary recognizes that
over the normal course of a business cycle an institution may
occasionally delay payment to certain trade creditors as a result of
contractual disputes. Alternatively, the Secretary recognizes that an
institution that is experiencing cash flow problems will typically
delay payment to creditors in an effort to conserve cash. Clearly, if
the cause of an institution's delay in making payment is contractual in
nature, than the Secretary expects that this would occur infrequently.
If the cause is related to insufficient cash flow, then the Secretary
would expect to observe a recurring pattern of late payments to
creditors. The Secretary believes that payments related to long term
liabilities such as term loans from financial institutions, bonds,
debentures, or notes payable which become due beyond one year are of
significant importance because the institution's assets are typically
pledged, encumbered, or assigned to collateralize such obligations. The
Secretary agrees with the commenters that an institution is current,
despite having failed to make scheduled payments, if the institution
has reached an acceptable agreement with creditors to substantially
reschedule or restructure the outstanding debt. However, the Secretary
believes that a failure, on the part of the institution, to reach an
agreement with creditors after a reasonable period of time exposes the
institution to potential financial and legal problems that may
adversely affect the quality of the institution's educational program.
Information about the institution's outstanding debt is already
provided by the institution in its audited financial statement.
Furthermore, the institution's independent auditor has a responsibility
to disclose any failure, on the part of the institution, to be in
compliance with loan agreements in existence on the date the
institution's balance sheet was prepared.
Changes: Section 668.15(b)(4) is amended to provide that an
institution is not considered to be financially responsible if the
institution is not in compliance with all loan agreements in existence
on the date the institution's financial statements are prepared.
However, the Secretary considers an institution to be current in its
debt service if the institution can provide evidence that it has
reached a mutually acceptable agreement to restructure or reschedule
its obligations. If an institution is unable to reach a mutually
acceptable agreement with creditors after 120 days and the
institution's failure to pay its obligations has resulted in a creditor
taking legal action to attach the institution's assets or obtain a
judgment, then the institution shall not be considered to be
financially responsible.
Comments: Many commenters felt the requirement that an institution
maintain a cash reserve was excessive. A few commenters supported the
requirement of the cash reserve and provided suggestions for
alternative methods of calculating the amount of the reserve
requirement. A majority of the commenters who expressed a concern
believed that the establishment of a separate reserve account would
significantly reduce available working capital funds that might be
better applied to meet other operating expenditures. Many commenters
believed that nonprofit institutions should be allowed to include
amounts held in the cash reserve in the calculation of the ratio of
current assets to current liabilities. Some commenters supported the
Secretary's position that the cash reserve account should be excluded
from the calculation of the ratio for nonprofit institutions. A number
of the commenters thought that a more appropriate requirement would be
a cash reserve that is based on the institution's actual refund
experience. A few commenters suggested that the cash reserve
requirement be based on the residual of total unearned tuition
liability less accounts receivable, with an adjustment for refunds made
under the pro rata refund policy. Many commenters suggested that the
calculation of the reserve requirement on the basis of deferred tuition
revenue seemed arbitrary and indicated that it would vary greatly among
institutions depending on the timing of enrollments and the preparation
of year end financial statements. Other commenters recommended that the
Secretary consider an annual financial statement along with cash flow
projections for the next three enrollment periods as an alternative to
the cash reserve. A few commenters believed that the definition of
acceptable forms of the cash reserve should be expanded to include
money market instruments, that are highly liquid and trade in an active
secondary market. Overall, the majority of the commenters believed that
the provision should be removed.
Discussion: Section 498(c)(5) of the HEA requires the Secretary to
establish requirements for an institution to maintain sufficient cash
reserves to ensure repayment of any required refunds. The Secretary
proposed that a cash reserve based on the institution's deferred
tuition revenue would be appropriate because the balance of the
deferred tuition account generally reflects amounts collected by, or
contractually obligated to be received by, the institution in advance
of providing educational services. The Secretary believed an
institution could reasonably expect that some students would withdraw
prior to the completion of their educational program and be entitled to
a refund of amounts paid for services not yet rendered.
The Secretary believes that the commenters are correct in observing
that the balance of deferred tuition revenue would vary among
institutions depending on factors that have little to do with actual
refund payments by the institution, such as enrollment periods and
fiscal year ends. The Secretary believes that it would be more
consistent with the intent of the HEA for this provision to match the
reserve requirement more closely with an institution's historical
refund experience. The Secretary believes that a cash reserve balance
equal to one quarter of the institution's previous year's total refund
expenditure would be sufficient to satisfy the institutions cash
reserve requirement because that amount represents approximately three
months potential refund expenditure.
In order to establish the appropriate amount for the cash reserve,
the institution will have to disclose, in a note to its audited
financial statements, the dollar amount of total refunds paid in both
the current fiscal year and prior year. The Secretary does not consider
internally generated cash flow projections as reliable indicators of an
institution's ability to meet the cash reserve requirement. The
Secretary does not consider liquid investments, such as money market
funds, to be equivalent to cash because such investments do not
generally have a maturity date and are therefore more characteristic of
equity investments.
While the Secretary acknowledges the criticism from the commenters
that the establishment of a cash reserve reduces available working
capital, the Secretary points out that the establishment of a reserve
account requires the accumulation of cash on a one-time basis.
Contributions to the reserve account would be required only to the
extent that enrollment levels and refund experiences vary. On a
continuing basis, the resulting net outflow of working capital would be
the same despite the establishment of a cash reserve.
The Secretary agrees with the commenters that nonprofit
institutions should be treated consistently with for-profit
institutions, and allowed to include the cash reserve in the
calculation of the liquidity ratios. The reserve account is intended to
provide an immediately available source of cash that must be available
to make refunds at any time. It is reasonable to expect that if an
institution were to close at other than the end of an academic period
that the cash reserve funds would be used to pay the institution's
refund liability. Since unpaid refunds are generally recognized as a
current liability it is appropriate to recognize, in the institution's
ratio calculation, those assets which would actually be used to offset
the liability in the event of liquidation.
The regulation will restrict the type of account in which the cash
reserve must be kept because it must be maintained at a certain minimum
level at all times. Accordingly, an institution may not hold reserve
funds in any type of investment that is subject to significant price
variation. The Secretary believes only cash held in the form of a
demand deposit in a federally insured bank account, or short term
investments secured by the full faith and credit of the United States
meet this criteria.
Changes: The Secretary amends the cash reserve requirement in
Sec. 668.15(b)(5) to require an institution to maintain at all times, a
cash reserve equal to one-quarter of the total dollar amount of refunds
paid by the institution in the previous fiscal year. Such reserves
shall be maintained in a cash deposit in a federally insured bank
account or, in U.S. Treasury securities, backed by the full faith and
credit of the United States having an original maturity of three months
or less.
Comments: Many commenters believed that the requirement that for-
profit institutions maintain a ratio of current assets to current
liabilities of 1.25:1 was burdensome and exceeded the scope of the
statute. One commenter supported the ratio requirement and suggested
that a current ratio of 1.6:1 up to 2:1 might be a more appropriate
standard of financial responsibility. The majority of commenters who
expressed concern regarding the ratio requirement indicated that they
believed the Secretary's justification for applying a higher standard
to for-profit institutions was unsupported and discriminatory. Many
commenters believed that the Secretary should not attempt to
distinguish between for-profit and nonprofit institutions. Among the
commenters who expressed a concern, most believed that the
establishment of separate ratio tests for each type of institution was
not required by the HEA. Some of the commenters believed that the
exclusion of uncollateralized related party receivables from the
calculation of current assets was inconsistent with generally accepted
accounting principles. A number of commenters suggested that a phase-in
period ranging from twelve months to more than five years should be
granted to allow institutions time to build up working capital reserves
in order to comply with this standard.
Discussion: Many commenters believed that in applying this standard
the Secretary was effectively mandating that for-profit institutions
divert available funds away from capital assets such as facilities,
supplies, and equipment and into lower yielding short term investments.
While the Secretary recognizes the possibility that a higher current
ratio requirement could theoretically lead to greater inefficiencies in
the use of funds, the Secretary believes that higher levels of working
capital afford greater financial flexibility to institutions and thus
provide greater protection against the possibility of unexpected
closure. The Secretary believes that Congress intended to ensure
through regulation that students are afforded every reasonable
protection with regard to their attendance at an institution through
which they are receiving HEA funds. The Secretary also believes that
the numerous fundamental differences in accounting and funding methods
for nonprofit and for-profit institutions provide sufficient
justification for the application of different standards to them.
However, the Secretary believes that a change in the current ratio
requirement is appropriate to take into consideration differing
financial and operating structures while employing similar standards
for both for-profit and nonprofit institutions. In order to implement a
uniform standard that may be used for different types of institutions,
the Secretary believes that it is appropriate to exclude certain assets
and liabilities from the calculation of the analytical ratios. As
discussed in more detail below, the Secretary believes institutions
that are currently in compliance with the existing standards of
financial responsibility will not require a grace period to meet the
new standards.
Changes: In Secs. 668.15(b)(7)(i)(A) and (b)(8)(i)(B), the
Secretary has replaced the current ratio requirement of 1.25:1 with an
acid test ratio of 1:1, representing the ratio of the sum of cash and
cash equivalents, and current accounts receivable divided by current
liabilities. In applying this standard, the Secretary excludes from the
ratio calculation all unsecured or uncollateralized related party
receivables as well as all other assets not specifically identified in
the above ratio calculation.
Comments: Several commenters were concerned that the Secretary is
involved in attempting to set accounting standards by requiring
classified statements of financial position for nonprofit institutions
reporting under Financial Accounting Standards Board Statement 117
(FASB 117), Financial Statements for Not-for-Profit Organizations.
Discussion: The Secretary is aware that presenting the statement of
financial position of a nonprofit institution as a classified statement
of financial position is a matter of management decision. However,
during the negotiated rule making process, the need for comparable
financial responsibility and accounting standards became evident. This
need must be reconciled in some manner, despite the varying accounting
standards between for-profit and nonprofit entities. The Secretary does
not permit this information to be presented in a supplementary schedule
because supplementary schedules are not subject to audit tests, as are
notes to the financial statements. The information concerning current
assets and current liabilities does not have to be included as part of
the audit but may be included in the notes to the financial statements.
Preparation of a classified statement of financial position is included
as an option under FASB 117. The Secretary is therefore not setting
standards but merely requiring that presentation be made in accordance
with one of those options in particular.
Changes: None.
Comments: Many commenters believed that implementation of the
proposed regulations should be delayed for at least a year, with most
commenters expressed stating that the increased current ratio
requirement and cash reserve requirement would require institutions to
accumulate additional cash or other liquid assets.
Discussion: The Secretary believes institutions that are in
compliance with the current standards for financial responsibility will
not require a significant period of time to implement the proposed
changes. For many institutions, the acid test ratio proposed by the
Secretary will measure exactly the same elements as the former current
ratio did. The establishment of a separate cash reserve should not
impact the calculation to a great extent because the cash reserve
balance will be included in the ratio calculation. Because the acid
test ratio is a more stringent measure of liquidity, the Secretary only
requires that an institution demonstrate parity between its most liquid
assets and its current obligations. The accumulation of significant
liquid assets would generally not be required by an institution. The
Secretary believes that it is reasonable to expect that an institution
has at least as much cash on hand and current receivables as it does
current obligations.
Changes: None.
Past performance of an institution or persons affiliated with an
institution. Comments: Two commenters were concerned about the proposal
to expand the requirements whereby an institution is not considered to
be financially responsible if an individual, who exercises substantial
control over any other existing institutions or defunct institution or
third-party servicer, owes a liability for a violation of a Title IV
requirement, and is not making payments according to an agreement
established with the Secretary to repay the liability. Several
commenters wanted all references to a member or members of a person's
family deleted from the regulations citing that people should not be
held financially or legally responsible for the actions of members of
their family who have reached their majority. Another commenter was
concerned about the inclusion of a member of the person's family
without regard to whether there is any partnership between the
individuals and felt that this requirement unnecessarily broadens the
scope of the requirement. Several commenters suggested that the
percentage of ownership interest used to establish substantial control
over an institution or third-party servicer be set at 50 percent rather
than 25 percent stating that a 25 percent ownership interest does not
mean that the person has control of the business.
Discussion: Section 498(e)(4)(B) refers to audit findings of more
than 5 percent of an institution's Title IV, HEA program funds for any
award year. The Secretary considers this statutory provision to be
designed to require the consideration of the loss of that amount of
Title IV, HEA program funds, regardless of whether that loss was
identified from an audit or as the result of a program review.
The Secretary considers the criteria in the provisions of
Sec. 668.15(c)(2) to be indicative of serious problems with financial
responsibility. An institution in one of these categories has already
failed to comply properly with the Title IV, HEA program requirements
and has had the opportunity, during its appeal process or other
negotiations with the Department's officials, to demonstrate any
mitigating circumstances that might have justified reducing or
eliminating the sanction or finding. The Secretary agrees with the
commenters who suggested that one of the categories of past performance
problems should be revised to reflect a failure of an institution to
resolve satisfactorily any significant compliance problem.
The Secretary is satisfied that citing an institution for a failure
to submit acceptable required audit reports in a timely fashion is a
better standard of past performance problems than a final
determination. A final determination is issued only after an acceptable
audit report has been submitted and the findings have been formally
issued to the institution. An institution can be cited for failure to
submit an audit report in a timely fashion, and an institution can have
its audit report returned because the report is unacceptable. These
actions do not imply that the institution has committed any other
violations of Title IV, HEA program requirements, but it is essential
for the Secretary to have acceptable audit reports on time so that the
Secretary can evaluate whether the institution is appropriately
administering its participation in the Title IV, HEA programs.
Changes: The criterion in paragraph (c)(2)(iv) of this section has
been revised to provide that the failure to resolve satisfactorily any
significant problem identified in a program review or audit report
causes an institution not to be considered financially responsible.
Exceptions to the general standards of financial responsibility.
Comments: Three commenters suggested that performance bonds should be
accepted to meet the standard for surety amounting to at least 50
percent of total Title IV HEA program funding under the statute. The
commenters contended that performance bonds may provide equal, if not
better, protection to the Secretary than letters of credit because it
is often possible to collect on performance bonds even after the
expiration date.
Discussion: The Secretary has determined that the level of
protection afforded by performance bonds is not sufficient due to the
relative difficulty in collecting against such instruments compared to
recoveries under a letter of credit. In some instances involving school
closures where a performance bond was in place, the Secretary might be
required to submit and document claims on a student-by-student basis
before a third party before collecting the full amount of institutional
liabilities. Collection under an irrevocable letter of credit has
proven to be reliable and effective in protecting the federal
interests.
Changes: None.
Comments: A number of commenters responded to the Secretary's
request in the February 28, 1994 NPRM for specific standards that might
be employed to measure the acceptability of a State's tuition recovery
fund. Several commenters recommended that the Department only require
states to certify that the fund can pay all required refunds on behalf
of schools that close precipitously. Some of the commenters recommended
that the Secretary take into consideration the success of various
teach-out measures which exist in the various states. One commenter
recommended removal of the exemption because many charges associated
with attending an institution that are properly included in refunds are
not considered part of tuition, and would not be recoverable by the
student in the event an institution closes. The commenter went on to
recommend that the Secretary require an actuarial analysis and
certification of full funding before considering a fund acceptable.
Some of the commenters believed that a State's tuition recovery fund
should be acceptable if the State has taxing authority to require
schools to contribute to the fund. One commenter provided the
Department with a number of suggestions including: assessing the extent
of refund obligation that the fund would cover, the current funding
level, maximum fund balance, amounts of annual assessments, amount of
annual claims, the authority of the fund's administrator and the
historical experience of the fund. One commenter believed that the
Department would not effectively be able to evaluate the State's
tuition recovery fund. Another commenter suggested that the
acceptability of the state's tuition recovery fund should be determined
by comparing a State fund's established maximum payout to an individual
institution's annual loan volume.
Discussion: In general, the Secretary believes that a State's
tuition recovery fund will be found to be acceptable where it has the
backing of the full faith and credit of the State and agrees to
administer such refund payments in accordance with the requirements of
the HEA programs. Based upon historical experience, State tuition
recovery funds have been poorly capitalized and fund administrators
have little authority to levy assessments. Many of the funds will pay
refunds only for students currently enrolled, and not to students that
were owed refunds when the institution closed. Other State tuition
recovery funds have only provided protection to in-state residents and,
in general, have capped payments at a predetermined maximum level
without regard to the refund owed under the HEA programs. Some problems
have also arisen where refunds were being made directly to students on
a first-come, first-served basis that exhausted the available funds
without apportioning them ratably to the funding sources that should
have received the refunds for the benefit of those students.
Given these concerns regarding the acceptability of State tuition
recovery funds, the Secretary does not believe it is appropriate to
address these criteria through regulation at this time. The Secretary
will continue to review this issue to determine what standards, if any,
may be set out through regulation.
Changes: None.
Comments: One commenter supported the requirement that an
institution maintain a minimum cash reserve equal to 10 percent of
deferred tuition revenue but believed that an institution's
contributions to a State's tuition recovery fund should be included in
calculating the reserve requirement. One commenter noted that the North
Carolina General Statute 115D-90 requires an institution to maintain a
guaranty bond in an amount equivalent to an institution's deferred
tuition revenue at peak enrollment. The commenter believed that
students were already afforded reasonable protection under the bond
requirement and suggested that the cash reserve be required when no
other form of protection exists. Another commenter believed that the
Secretary should fully exempt institutions which retain deferred
tuition amounts through independently administered escrow arrangements.
Discussion: Section 498(c)(5) of the HEA requires that all
institutions maintain a minimum cash reserve. The requirement for an
institution to maintain a cash reserve does not apply to institutions
which reside in a State that has a tuition recovery fund if that
state's tuition recovery fund is acceptable to the Secretary. As
discussed above, under certain situations an institution may be able to
demonstrate that the State tuition recovery fund to which it
contributes will supplant the institution's requirement to maintain a
separate cash reserve. In such an instance, the institution will not be
able to treat its contributions to the State tuition recovery fund as a
portion of its current assets.
Changes: None
Comments: One commenter believed that the requirement for an
institution to demonstrate a positive tangible net worth would
discourage employee ownership of institutions because amounts invested
in employee stock ownership plans (ESOP's) are treated as intangibles
and would be excluded from the calculation of net worth. Furthermore,
the commenter believed that this particular provision was retroactive
because intangibles that may have been acquired several years ago would
still appear on an institution's balance sheet. The same commenter
believed that the expense item representing amortization of intangibles
should be excluded from the calculation of operating loss in view of
the Secretary's exclusion of intangible assets from the calculation of
tangible net worth. Another commenter requested that the Secretary
consider the market value of assets purchased years ago and carried at
depreciated book value on the institution's financial statement. One
commenter believed that intangibles should be excluded only if the
Secretary has reason to believe that the value of these assets does not
reflect an arm's length valuation.
Discussion: In general, an intangible asset has no physical
existence and depends on some expected future benefit to derive its
value. While the Secretary believes that the presence of an intangible
on an institution's balance sheet can, and often does, imply some
future economic benefit to the institution, the Secretary does not
believe that such an asset should be included in the institution's net
worth calculation to determine whether the institution demonstrates
financial responsibility for HEA program purposes. The Secretary does
not believe that it would be necessary to exclude the expense item in
the calculation of operating losses. Generally accepted accounting
principles require that an institution show asset values at historical
cost less accumulated depreciation. In the ordinary course of business,
it would not be possible for the Secretary to make a determination
regarding the current market value of any asset unless that asset was
actually sold in an arm's length transaction or an actuarial valuation
was obtained in a manner acceptable to the Secretary. Administrative
efficiency and a preference for certainty as documented through the
audited financial statements warrant the exclusion of such items.
Changes: None.
Documentation of financial responsibility. Comments: Two commenters
felt that audited financial statements should be submitted only once
every four years, when most institutions are recertified. The
commenters believed that the statute allows for this limited reporting.
A few commenters believed that the submission of an audited financial
statement should be accepted by the Secretary as sufficient evidence to
establish an institution's financial responsibility without regard to
the content of the statements.
Discussion: The statute is clear in making annual audited financial
statements a requirement. Further, the Secretary believes that the
Department has a responsibility to verify on an annual basis that
institutions have sufficient financial strength to provide the
educational services for which its students are contracting. The
Secretary has prescribed an acid test ratio in accordance with
Sec. 498(c)(2) of the HEA. The calculation of the acid test ratio is
based on information contained in an institution's audited financial
statement as prescribed in Sec. 498(4). The Secretary believes that the
acid test ratio provides reliable information about the financial
condition of an institution.
Changes: None.
Comments: One commenter believed that the requirement that an
institution submit a financial statement for its two most recently
complete fiscal years should be clarified by the Secretary to require
two years of financial information in only the first year following the
implementation of the regulation because annual financial statements
would be required thereafter.
Discussion: The Secretary requires the submission of two years of
financial data on an annual basis. To be considered financially
responsible, an institution must demonstrate that it has not
experienced operating losses in either or both of its two most recently
completed fiscal years that 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 shall make this determination on the
basis of financial information submitted by the institution in the form
of an audited comparative financial statement representing each of the
institution's two most recently completed fiscal years or by comparing
information provided by the institution in the form of two individual
audited financial statements, each representing one of the
institution's two most recently completed fiscal years.
Changes: None.
Comments: Many commenters believed that the requirement for an
institution to submit an audited financial statement within four months
of the institution's fiscal year end was burdensome because
institutions were also required to perform compliance audits during the
year at points that did not necessarily coincide with the institution's
fiscal year end. As a result the institution would be required to incur
additional audit costs that would be unnecessary if both audits could
be performed simultaneously. To accomplish this, the commenters
requested that the Secretary extend the period in which audits are due
from four months to within six months of the institution's fiscal year
end. Two commenters believed that the requirement for an institution to
submit an audited financial statement within four months of the fiscal
year end contradicted the objectives of the Single Audit Act, and OMB
circular A-128 and A-133, because timing differences related to the
availability of information would result in an institution being
required perform both a financial audit and a compliance audit. Another
commenter noted that audits prepared in accordance with the Single
Audit Act were acceptable under 34 CFR 668.23(f), and suggested that an
audit prepared in accordance with the Single Audit Act ought to be
acceptable to the Secretary in other sections of the same regulation.
Discussion: The Secretary believes that a four month period
provides ample opportunity for an institution to accomplish the
preparation and audit of fiscal year end financial statements. The
reliability of any financial statement, as a fair representation of the
institution's true financial condition, is largely dependent on the
timeliness of the financial report. The Secretary believes that four
months is reasonable and notes that many thousands of publicly traded
corporations make timely submissions under the 3 month time frame set
by the Securities and Exchange Commission for the submission of annual
audited financial statements. The Secretary may, however, grant an
extension on an individual basis where the institution demonstrates a
sufficient basis for the extension. An institution that is required to
report in accordance with OMB circular A-128 or A-133 under the Single
Audit Act will continue to be governed by the reporting requirements
specified under that act.
Changes: The Secretary has added Sec. 668.15(e)(3) to show that
audits submitted in accordance with the Single Audit Act meet the
reporting requirements under this section.
Section 668.16 Standards of Administrative Capability
Comments: Proposed changes to this section generated many comments.
Some commenters asserted that many of the proposed standards go far
beyond the issue of administrative capability. Some argued that the
Secretary would exceed the authority of the HEA if the proposed
revisions were retained in final regulations. Some commenters argued
that some of the issues addressed in this section were subject to
review by accrediting agencies or SPREs and inclusion in these
standards would result in duplication of effort on the part of the
Triad agencies and institutions. Some commenters believed the proposed
standards to be needlessly detailed and complex. Some commenters stated
that the proposed standards were too broad. Some commenters strongly
opposed the clarification that institutions would be expected to comply
with all the standards in order to be fully certified. Some commenters
noted that there was no effort to weigh the relative importance of the
various proposed elements of administrative capability and recommended
that the section be revised to prioritize the various standards. Some
commenters recommend that the elements of administrative capability in
Sec. 668.16 be considered indicators, not absolutes. Some commenters
requested that the Secretary provide more specificity in the
regulations so that institutions would know precisely what was
requested of them and when.
Discussion: The Secretary appreciates the many thoughtful comments
on the various aspects of regulating in the area of administrative
capability. The Secretary found many of the constructive
recommendations made by commenters to be useful in modifying some
standards, crafting more precise language for other standards, and
understanding why some proposed standards are unnecessary or should not
be imposed at this time.
Based on the comments, the Secretary has modified the proposed
administrative standards significantly. While specific changes are
discussed in detail in connection with the applicable section, the
Secretary believes it may be useful to note some of the principles and
rationale which guided the refinement of the administrative standards.
The Secretary made many changes in sections where commenters pointed
out that the same goal could be reached by requiring less detail or
action by those institutions that demonstrated a history of compliance
with regulations governing the Title IV, HEA programs and imposing more
on requirements or restrictions on institutions that have either no
track record or have a record of problems administering the Title IV,
HEA programs. The Secretary also made adjustments in those proposed
standards where there was overlap with the responsibilities of
accrediting agencies or SPREs.
The Secretary did not find persuasive the comments of those who
urged that the elements be considered as indicators of administrative
capability instead of absolutes, or that the standards be prioritized
to indicate relative importance. Requiring that institutions meet each
and every standard is critical to successful enforcement by the
Secretary. If institutions were not required to do so, institutions
could argue that they had substantially complied with the
administrative capability standards and it would be difficult for the
Department to enforce compliance. The Secretary has determined that
only way to become a more effective gatekeeper is to select critical
standards, put institutions on notice that they are responsible for
adhering to them--by requiring that each standard of administrative
capability be met--and taking action when they are not.
Changes: None.
Comments: The majority of commenters believed the Secretary should
clarify that an institution must administer the Title IV, HEA programs
in accordance with all statutory provisions, regulatory provisions, or
applicable special arrangement, agreement or limitation. Two commenters
believed the paragraph to be overly broad and unnecessary.
Discussion: The Secretary appreciates the support of those
commenters who understand the importance of making it clear that an
institution is expected to comply with all applicable statutes,
regulations, and any special agreement or arrangement into which the
institution has entered with the Secretary. The Secretary agrees to
clarify that special agreements, limitations, or arrangements are those
entered into under statutes applicable to Title IV of the HEA.
Changes: Section 668.16(a) is amended to clarify that an
institution must administer the Title IV, HEA programs in accordance
with all statutory provisions, regulatory provisions, or applicable
special arrangements, agreements or limitations entered into under the
authority of statutes applicable to Title IV of the HEA. A conforming
change has been made to Sec. 668.14(b)(1).
Comments: Many commenters supported the idea that the Department
recognize quality training provided by State, regional, or national
financial aid administrators or guaranty agencies as a factor in the
determination of a designated individual's ability to administer the
Title IV, HEA programs at an institution. One commenter noted that
while attendance at training workshops may be beneficial, the workshops
have no means of assessing whether attendees have achieved a given
level of knowledge. While a few commenters acknowledged that the
caliber of training varies and suggested a system that recognizes a
variety of training options, no one responded to the Secretary's
request for criteria to consider in approving non-Federal training.
A majority of the commenters recommended that to be deemed a
``capable individual'' an aid administrator should be required to
satisfy a training or certification requirement. Many commenters noted
that a continuing education requirement might be appropriate, also.
Some of the commenters who advocated a continuing education requirement
recommended that such training be required to be reported to the
Secretary or be attested to by the institution's auditor.
Of those commenters who advocated a certification requirement, most
opposed national certification because they felt it would be costly and
might duplicate State certification efforts. However, two commenters
did advocate national certification or credentials. A few commenters
opposed certification and noted that one State had discarded
certification several years ago; one commenter noted that the Secretary
has not shown any evidence that State-certified training leads to or
correlates with improved administration of the Title IV, HEA programs.
One commenter who recommended that experience, training, or
certification be required specified that the requirement should apply
to ``at least'' the individual operationally in charge of the financial
aid office.
Several commenters provided additional suggestions for factors to
use in determining whether an individual is capable: An individual's
record of timeliness and accuracy in administration of Title IV, HEA
programs; an individual's years of experience administering Title IV,
HEA programs; an individual's on-going attendance at workshops and
seminars during each award year; and an individual's record of
compliance with Title IV, HEA program regulations.
Discussion: The Secretary appreciates the comments from those
individuals and organizations that supported making some kind of
training, certification, or continuing education a requirement. The
Secretary continues to believe that State certification, as well as
participation in and completion of quality workshops and training
programs, are good indicators of a ``capable individual'' and intends
to consider these factors in evaluating capability. However, the
Secretary does not see the need at this time to make training or
certification a requirement.
Despite the lack of response to the solicitation of suggestions on
training elements the Secretary might use to evaluate and approve
nondepartmental training, the Secretary believes that quality training
programs exist outside the Department that would be beneficial in
determining an individual's capability and will continue to solicit
advice as to how such programs might be identified and approved. To
encourage suggestions on appropriate approval of training programs and
to facilitate the use of any training programs approved in the future
to evaluate capability, the Secretary retains, without change, the
provision in the final regulations that would accommodate training
approved by the Secretary.
The Secretary agrees that previous experience and documented
success in properly administering Title IV, HEA programs are germane to
the evaluation of an individual's capability.
Changes: Previous experience and documented success in properly
administering Title IV, HEA programs are added to the list of factors
in Sec. 668.16(b)(1) that the Secretary may consider in determining
whether an individual is capable.
Comments: The vast majority of commenters opposed strongly the use
of any prescriptive staffing standards to evaluate the adequacy of
staffing levels at institutions. Many commenters were concerned that
there are too many variables--number and type of professional programs
offered by an institution, level of staff experience, degree of
centralized processing, use of third-party servicers, and diversity of
the student body, in addition to the factors listed in
Sec. 668.16(b)(2)--to permit an accurate assessment of the adequacy of
staff levels. A number of commenters expressed the concern that small
institutions would be penalized if staff levels were stipulated in
regulations. Many commenters stated that adequate staffing should not
be an issue unless an institution demonstrates problems administering
the Title IV, HEA programs, as reflected in audits, program reviews, or
student complaints. One commenter noted that during the negotiated
rulemaking sessions, non-Federal negotiators explained and stressed the
potential negative impact on current aid office staffing levels that
could result from creating an artificial ratio of aid applicants or
recipients to financial aid administrators.
A few commenters provided suggestions on how to evaluate the
adequacy of staffing levels at institutions or recommended that the
Secretary analyze workload issues and develop appropriate formulae.
Other commenters recommended to the Secretary a recent staffing survey
conducted for the National Association of Student Financial Aid
Administrators (NASFAA) as an appropriate model to use in developing
more precise measures of staff adequacy. A few commenters believed that
currently participating institutions should be judged on the basis of
their track record, but thought that use of ratios of aid applicants or
recipients to financial aid administrators might be helpful in the
assessment of the administrative capability of institutions applying
for participation in the Title IV, HEA programs for the first time.
Discussion: The Secretary believes that, in general, a currently
participating institution's compliance with the other standards of
administrative capability can serve as a reliable indicator that a
financial aid office is staffed adequately. However, if an institution
adds a branch campus or other location, starts using or stops using a
third-party servicer, or makes other changes that would have an impact
on the administrative capability of the institution, the Secretary
believes it may be necessary to look more closely at the institution's
staffing pattern. Further, an institution that undergoes a change of
ownership that results in a change of control may experience a change
in its enrollment level and financial aid office personnel and should
be subject to review of its staffing level.
In general, the Secretary intends to use the list of factors in
this section especially to assess the adequacy of staffing at
institutions that make these changes, at institutions that are applying
for initial participation, and at institutions with documented
compliance violations. However, the Secretary expects all institutions
to be able to demonstrate that they have an adequate number of
qualified persons to administer the Title IV, HEA programs properly.
In addition to those factors identified in the proposed
regulations, the Secretary agrees with those commenters that the use of
third-party servicers could have a significant impact on the
institution's ability to administer the Title IV, HEA programs.
Given the lack of information available currently about
establishing meaningful ratios of staff to student applicants or
recipients, the Secretary is not adding a ratio to the factors used to
evaluate even new institutions at this time.
Changes: The Secretary has amended Sec. 668.16(b)(2) by adding the
use of third-party servicers to the list of factors to be considered in
assessing adequacy of staff levels.
Comments: A few commenters argued that requiring communication of
information from any institutional office that receives information
that has a bearing on student eligibility for Title IV, HEA program
assistance to the person designated to be responsible for administering
Title IV, HEA programs was very labor intensive and should be removed.
One commenter stated that the specifications for interoffice
communications bear no relationship to an expected outcome.
Discussion: The Secretary notes that this requirement has existed
for some time. The Secretary continues to believe that it is an
appropriate administrative standard inasmuch as proper communication
among offices is essential to ensuring that students are eligible for
the amounts of Title IV, HEA program assistance they receive and that
the status of borrowers is updated, when appropriate.
Changes: None.
Comments: A dozen commenters objected to the proposed requirement
that institutions have written procedures or information regarding
several key aspects of the administration of the Title IV, HEA
programs. Most of these commenters stated that the proposed requirement
was burdensome and would create a lot of paperwork with no discernible
benefit. One commenter noted that communications processes and
structures are dynamic by nature and thus subject to frequent changes.
Another commenter expressed concern that the Secretary was trying to
dictate the pattern and frequency of communications among college
offices. This commenter added that while development of written
procedures such as those proposed would be good management practice,
the Secretary should not regulate such practices. Some of the
commenters recommended that this proposed requirement be removed
entirely. Other commenters recommended that the requirement be imposed
only on institutions that did not have a record of administering the
Title IV, HEA programs successfully or only on larger institutions.
Several commenters suggested that institutions be able to show
compliance through their computer systems. One commenter, concerned
that the time required to provide detailed documentation would take
valuable time away from the smoothly running delivery of aid,
recommended that general delineation of responsibilities be considered
sufficient. Another commenter recommended that institutions be
permitted to work out the method and frequency of communication. One
commenter asked that the Secretary clarify how this provision relates
to multi-campus institutions if the proposal were retained in final
regulations.
Discussion: The Secretary is not persuaded that mandating written
procedures or information covering certain aspects of Title IV, HEA
administration is an inappropriate or unnecessary administrative
standard. However, the Secretary appreciates the concern of commenters
who perceived certain areas of the proposal to be unduly burdensome.
The Secretary agrees that the burden to an institution of having to
prepare written procedures for or written information indicating the
nature and frequency of communication of pertinent information among
all the offices that have an impact on the administration of the Title
IV, HEA programs outweighs the benefit that this provision would
provide to the Secretary. The Secretary also agrees that, unless
compliance problems relevant to the listed responsibilities are
identified, institutions may satisfy the requirement that an
institution have written procedures for or written information
indicating the responsibilities of the various offices with respect to
the approval, disbursement, and delivery of Title IV, HEA program
assistance and the preparation and submission of reports to the
Secretary by a general written description of the responsibilities of
the various offices.
Changes: The requirement that an institution has to prepare written
procedures for or written information indicating the nature and
frequency of communication of pertinent information among all the
offices that have an impact on the administration of the Title IV, HEA
programs has been removed from these regulations.
Comments: A number of commenters discussed the issue of appropriate
separation of awarding and disbursing functions. Many of these
commenters said the prohibition on having family members perform the
two functions would be onerous, particularly in a small, family-run
institution. In a similar vein, some commenters noted that in a small
institution the owner works and has responsibility over all facets of
the institution. At small institutions, it is very difficult to provide
for organizational independence. Many commenters suggested deleting the
new language that references family members and individuals that have
control over both functions and relying on the annual audit process to
test for adequate internal controls.
Discussion: This standard was strengthened to provide additional
deterrence to collusion, which is a big 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.
While the Secretary understands the concern of small family-run
institutions that arranging for someone outside the family to perform
one or both tasks will be burdensome, the suggestion that the Secretary
delete the new language and rely on the required financial and
compliance audit is not realistic. At very small institutions, the
auditor would probably conclude that there are no internal controls
because there are only two or three employees--often the owners.
Changes: None.
Comments: The Secretary received in excess of sixty comments on the
provisions that address satisfactory academic progress. The vast
majority of commenters were opposed to the proposed addition of
Sec. 668.16(e)(3)(ii)(B), which stipulates that undergraduate students
would be expected to complete their educational programs within 150% of
the published length of the programs as a standard for measuring a
student's satisfactory academic progress. They recommended that the
proposed new provision be removed. A few commenters argued that
implementation of the provision would be an infringement of the
academic freedom of institutions. Many others asserted that requiring
this level of detail in an institution's satisfactory academic progress
standards is unwarranted, because it interferes with institutions'
academic procedures, and argued that the proposed new requirement bears
no discernible relationship to administrative capability standards. A
few commenters opposed the inclusion of any satisfactory academic
progress requirements in the standards for determining administrative
capability.
Many commenters were opposed to the proposed new criterion
governing the maximum time frame because they believed that it does not
take into consideration the academic career patterns of nontraditional
students who work and have varying hours, attend part-time, or need
remedial academic help, often interspersing developmental courses with
courses taken for credit. One commenter contended that this provision
would discriminate against students who change majors or eligible
programs. Some commenters argued that implementation of the proposed
provision would result in the cut-off of Title IV, HEA program funds to
students in these categories even though the students may be serious
and highly motivated. Thus, students who would otherwise be able to
complete an eligible program would be denied that opportunity because
they could continue with their education only if they received Title
IV, HEA program assistance.
Two commenters recommended that students be permitted to appeal
this provision on a case-by-case basis. One commenter concurred with
the provision as written and stated the standard is part of the current
policy of the commenter's institution. One commenter stated that the
required increments of time for the establishment of a maximum time
frame in which the student must complete his or her educational program
do not work for a program such as court reporting, where the time it
takes students to complete a given amount of work may vary from 3 to 12
months.
Discussion: Because students are required by Title IV of the HEA to
maintain satisfactory progress to receive Title IV, HEA program
assistance, it is only 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. The proposed addition is a codification of longstanding policy
and is consistent with the requirements of the Student-Right-to-Know
Act.
As stated in the February 28, 1994 NPRM, the establishment of a
maximum time frame would take into account a student's enrollment
status. Institutions are currently required to monitor enrollment
status of students receiving Title IV, HEA program funds and 150% of
published program length can and should be viewed only in the context
of an individual student's enrollment status. Thus, if a nontraditional
student who is enrolled in a baccalaureate program that a full-time
student is expected to complete in four years and a half-time student
is expected to complete in eight years, vacillates between full-time
and half-time enrollment, that student would have a computed maximum
enrollment period somewhere between six and 12 years. Further, because
the requirement is designed to set an upper limit on the period of time
for which a student may receive Title IV, HEA program assistance,
periods of nonenrollment, during which the student is not receiving
Title IV, HEA program funds, would not be counted against the length of
time the student is pursuing a degree or certificate. Thus, a student
who enrolls and receives Title IV, HEA program funds sporadically would
be treated differently from a full-time student who pursues a degree or
certificate without interruption.
Paragraph (e)(1)(vii) of this section requires an institution to
have procedures under which a student may appeal a determination that
the student is not making satisfactory progress. With regard to
eligible programs of an academic year or less, these regulations make
even clearer the longstanding requirement that the maximum time frame
must be divided into increments. Satisfactory academic progress
policies are expected to measure whether students are progressing
satisfactorily toward their educational goals and should serve also as
a device for counseling students about their need to improve their
progress, if applicable. If maximum time frames are not divided into
increments, these policies are not serving their purpose. This
principle applies to programs shorter than an academic year no less
than to longer programs.
Changes: Section 668.16(e)(3)(B) is amended to clarify that a
maximum time frame in which a student must complete his or her
educational program must be no longer than 150 percent of the published
length of the educational program for full-time students.
Comments: Two commenters recommended expanding the requirement that
an institution must develop and apply an adequate system to identify
and resolve discrepancies in the information that the institution
receives to include documentation of a student's social security
number. They reasoned that resolution of social security number
discrepancies is an important part of controlling fraud and abuse in
the Title IV, HEA programs and the ability of an institution to obtain
appropriate documentation to resolve such discrepancies should be
considered in determining administrative capability.
Discussion: The Secretary concurs with the commenters that
resolution of social security number discrepancies is essential and
should be expressly stated in this section.
Changes: Section 668.16(f)(3) is amended to include documentation
of a student's social security number in the information normally
available to an institution and for which the institution must have a
system to identify and resolve discrepancies.
Comments: About half the commenters expressed concern, to varying
degrees, that the proposed reporting requirement is too vague and broad
and would result in overreporting that would overwhelm the Office of
Inspector General. Some of these commenters recommended that the word
``evidence'' replace ``information.'' Other commenters suggested that
there be some kind of internal review or discussion. Several commenters
recommended that institutions continue to make referrals to local law
enforcement officials or at least consult with them. Two commenters
wanted assurance that the institution would be protected in the event
that it made a referral.
Discussion: The Secretary cannot accept the substitution of
``evidence'' for ``information'' because that the word ``evidence'' has
legal ramifications. Evidence is normally determined in a court of law
when the judge determines what permissible evidence is. Institutions
may contact the Office of Investigations within the Office of Inspector
General for advice before making a formal referral. The Secretary also
cannot accept the suggestion that institutions establish an internal
review mechanism prior to referral as such a mechanism may work to
block appropriate referrals. However, the Secretary believes that an
institution should only be required to refer to the Office of the
Inspector General of the Department of Education credible information
indicating fraud and abuse.
The Secretary sees no problem with institutions making concurrent
referrals to local law enforcement authorities, but cannot support the
referral to local authorities as an alternative to making referrals to
the Office of Inspector General. Concurrent referrals can be made with
the regulation as written; no change is necessary. The Secretary cannot
guaranty protection to institutions or individuals that make referrals.
Changes: Section 668.16(g) has been amended to clarify that an
institution must only refer to the Office of the Inspector General of
the Department of Education credible information indicating fraud and
abuse.
Comments: Almost two-thirds of the commenters supported the concept
of requiring institutions that serve significant numbers of students
with special needs to have and implement plans for providing students
with information about how to meet their needs, but half of these
commenters recommended that the requirement be imposed only on
institutions with high withdrawal rates. Two commenters recommended
that institutions be required actually to provide the necessary support
services.
Several commenters suggested that students with language barriers
be considered to have special needs. One commenter suggested that
students from low socio-economic background, as determined by using the
Expected Family Contribution (EFC) figures under the Federal Need
Analysis formula, be determined to have special needs. Those commenters
who responded to the Secretary's request for how to define significant
number suggested either that 66 percent of total enrollment be used, as
that would be consistent with the mitigating circumstances threshold
for appealing determinations of excessive cohort default rates, or that
percentages of enrollment, for example five percent, 10 percent, or 20
percent, be used as thresholds, depending on the number of students.
Of the commenters who opposed the proposed requirement, almost half
argued that there is no connection between the proposed regulation and
administrative capability and the Secretary therefore should not
regulate in this area. A half dozen commenters believed that students
were aware of their own special needs and it was their responsibility
to ensure that these needs were met. Several other commenters believed
the proposed requirement was unnecessary because either institutions
that had students with special needs were already attending to those
needs, or such students would already be getting help from appropriate
social service agencies. One commenter who objected strongly to the
proposal noted, among other concerns, that students need to learn to
become self reliant and that employers with whom the commenter's
institution deal say the institution is already coddling its students
too much.
Discussion: The Secretary is persuaded that regulation in this area
is unnecessary at this time.
Changes: The provision that provides that an institution that
serves significant numbers of students with special needs must have and
implement plans for providing students with information about how to
meet their needs has been removed from these regulations.
Comments: Two commenters supported the provision that would require
institutions to have procedures for receiving, investigating, and
resolving student complaints but requested that the Secretary clarify
the proposed language. One of these commenters asked that the Secretary
make it clear that institutions would be expected to handle only those
complaints related to the educational programs and support services
offered by the institution. The other commenter thought that
institutions should be required to publicize their system for handling
complaints and maintain a log of student complaints.
Discussion: The Secretary appreciates the commenters' support; it
is good administrative practice to have a mechanism to resolve student
complaints. However, the Secretary has decided the proposed requirement
is not an essential administrative standard as there will be other
means of addressing student complaints about an institution. Each SPRE
will be setting up a student complaint system to process student
complaints about the postsecondary institutions in its State. Further,
SPREs will be reviewing the handling of student complaints at
institutions they review. Accrediting agencies will also be required to
assess student complaints about institutions they consider.
Changes: Proposed Sec. 668.16(j) has been removed from these final
regulations.
Comments: The Secretary received many comments on the proposals
aimed at institutions with educational programs with the stated
objective of preparing a student for gainful employment in a recognized
occupation. Many of the commenters opposed the proposed requirements
that the institution: (1) demonstrate a reasonable relationship between
the length of the program and occupational entry level requirements and
(2) establish the need for the training. The commenters believe the
responsibility for evaluation of program length and the need for
training rests with the other members of the Triad, principally the
accrediting agencies. Some of these commenters argued that if the
Secretary were to regulate in this area, the Secretary would exceed his
statutory authority and be intervening inappropriately in academic
affairs. Other commenters asserted that need for or length of training
programs has nothing to do with ability of institutions to administer
Title IV, HEA programs. These commenters recommended the elimination of
this proposed standard.
While some commenters were concerned that the standard, as
proposed, is unreasonably vague, other commenters charged that the
Secretary would be micromanaging if it were implemented. A number of
these commenters noted that, for several reasons, it would be difficult
to determine whether program length really is appropriate. Many
commenters noted that their students are prepared and hired for
positions that are above entry level.
Many commenters saw the proposed standard as harmful or unworkable
because of the use of minimum State standards as a measure of
appropriate length. One commenter noted that there is no provision for
evaluation of the method by which a State determines the minimum hours.
Another commenter said State-mandated hours are too low. Other
commenters questioned what would happen if the State sets an
inappropriate length. One commenter represented an institution that
trains students from many States, each with different minimum
requirements, and argued that it would be entirely inappropriate to
limit the length of that institution's programs based on the minimum
standard of the State in which the institution is located. Many
commenters believed that the proposed regulation is unnecessary. One
commenter suggested that disclosures to prospective students are
mandated under the Student Right-to-Know Act and that SPRE standards
will be addressing the abuses of the type described in the preamble to
the February 28, 1994 NPRM and this provision would thus be
duplicative.
Discussion: The Secretary proposed this provision to curb existing
abuses in these areas. The Secretary questions the motives of any
institution that claims it is necessary to greatly exceed the minimum
number of clock hours required by the State in which the institution is
located for adequate training for a particular occupation. The
Secretary is also concerned with any institution that provides training
for occupations for which no training is necessary, or for which on-
the-job training is adequate. Although an institution's SPRE and
accrediting agency may regulate in these general areas, the Secretary
believes it is necessary to specifically target areas of past abuse.
Further, the Secretary believes it is consistent to require an
institution to demonstrate a reasonable relationship between the length
of the program and occupational entry level requirements established by
any Federal agency. See the discussion in the Analysis of Comments and
Changes section that addresses the definition of an eligible program
(Sec. 668.8).
However, the Secretary was persuaded by the commenters who asserted
that need for or length of training programs is not directly linked to
the ability of institutions to administer the Title IV, HEA programs.
The Secretary believes that this provision is more appropriate as a
requirement for participation in the Title IV, HEA programs under an
institution's program participation agreement.
Changes: This provision has been moved to Sec. 668.14(b)(26).
Further, the requirements of this provision have been amended to
require an institution to demonstrate a reasonable relationship between
the length of the program and occupational entry level requirements
established by any Federal agency.
Comments: Almost half the commenters supported the proposals for
requiring that information on job availability and the relevance of
courses to any specific State licensing standards be made available to
students. All of these commenters suggested new ideas to clarify and
expand the proposed requirements. Most of the other commenters asserted
that the proposed requirements did not pertain to the proper
administration of the Title IV, HEA programs and noted that accrediting
agency and SPRE standards will address these areas. These commenters
recommended that these proposed requirements be removed.
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: Proposed paragraph 668.16(l) is removed from these final
regulations.
Comments: Some commenters stated that the proposed requirement on
advertising and recruitment practices was an extremely important one
and recommended that it be strengthened by adding reference to oral as
well as written statements. The majority of commenters asserted that
the proposed requirements did not pertain to the proper administration
of the Title IV, HEA programs and noted that accrediting agency and
SPRE standards will address these areas. These commenters recommended
that these proposed requirements be removed.
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 that
recommended that these proposed requirements not be included in the
final regulations.
Changes: Proposed paragraph 668.16(m) is removed from these final
regulations.
Comments: One commenter suggested that there might be a timing
problem for an institution that is in the process of responding to an
audit report in which liabilities have been identified. The commenter
recommended that the Secretary expand the proposed language that would
require that an institution have no outstanding liabilities, unless it
has made satisfactory arrangements to repay them, to allow for
liabilities the institution is currently in the process of making
provisions to repay. Another commenter stated that this provision
duplicates the financial responsibility requirements proposed in
Sec. 668.15(b) (3) and (4) and recommended that it be removed from the
administrative capability requirements.
Discussion: The one commenter apparently believes that liabilities
are established at the time an audit report is issued. Contrary to the
commenter's perception, institutions are provided with the opportunity
to respond to an issued audit report before liabilities are
established. However, once the audit report and institutional response
have been reviewed and a final program determination letter
establishing liabilities has been issued, an institution must either
repay the liabilities or make satisfactory arrangements to repay.
Responding to audit reports, making any necessary corrections to
institutional procedures, and making satisfactory arrangements for the
repayment of any liabilities established are all fundamental
responsibilities of participating institutions. However, the Secretary
agrees that these responsibilities are adequately enumerated in the
general standards of financial responsibility in Sec. 668.15(b).
Changes: Proposed Sec. 668.16(o) is removed from these regulations.
Comments: The majority of commenters asserted that the proposed
requirement that an institution show no evidence of significant
problems identified in reviews of the institution was overly broad and
imprecise, giving the Secretary unlimited authority to deny
certification because of evidence of problems in a wide variety of
areas. They recommended that the proposed regulation be rewritten to
limit the scope. Many of these commenters were concerned that
institutions would be penalized even if there were a problem unrelated
to Title IV, HEA programs matters. One example given was that of a
university hospital that was found in violation of Medicare
reimbursement rules. Some commenters were concerned that the Secretary
would deny certification based on an audit finding or other citation
that had not yet been reviewed and upheld in a final audit
determination or similar action. They urged that only serious findings
upheld in final audit or program review determinations or legal
proceedings be considered.
Many commenters expressed concern that the Secretary would deny
certification to an institution on the basis of a SPRE review, even if
the SPRE itself thought the institution should still receive student
aid. Two commenters argued that the regulation, as proposed, would
affect the institutions involved in the Department of Justice
investigation of the Overlap Group, though they have signed a consent
decree. One commenter recommended that the provision be removed.
Discussion: The proposed regulation was intended to allow the
Secretary to consider evidence of problems in administering Title IV,
HEA programs, as documented not only in reports and determinations
issued by the Secretary but by other agencies, identified in proposed
Sec. 668.16(p)(1), in determining of administrative capability. The
Secretary understands the commenters' concern that this was not clearly
stated in the proposed regulation and agrees to clarify that the
Secretary intends to take into account evidence of significant problems
that have a bearing on the administration of the Title IV, HEA
programs.
As stated in the February 28, 1994 NPRM, the Secretary plans to use
problems identified in final reports and determinations in evaluating
an institution's administrative capability. However, the Secretary
cannot accede to commenters' urging that only findings for which
institutions have exhausted all appeal procedures be considered. If,
for example, the Office of Inspector General, a guarantee agency, and
an institution's accrediting agency all issued final reports
identifying major Title IV, HEA compliance problems, including failure
to make appropriate refunds, and a $1 million liability, it would be
unconscionable for the Secretary to fully certify the institution
because the institution had not had time to exhaust the appeal
opportunities of the various oversight agencies.
Changes: Section 668.16(j) has been amended to specify that the
significant problems identified must relate to problems that affect, as
determined by the Secretary, the institution's ability to administer a
Title IV, HEA program.
Comments: Some commenters supported the proposed requirement that
an institution comply with any standards established by the State in
which the institution is located or, if no such standards exist,
standards developed by the Secretary regarding completion rates,
placements rates and pass rates on required State examinations. Many
other commenters requested that the Secretary either clarify in final
regulations that institutions would be expected to comply with SPRE
standards or explain what other State standards should be adhered to.
Most of these commenters also asked the Secretary to clarify what
Federal standards institutions would be expected to comply with if
there were no State standards.
The majority of commenters were opposed to the proposed regulation
and recommended that it be removed from the final regulations. Most of
these commenters argued that assessment of completion, placement, and
licensure pass rates is within the purview of accrediting agencies and
States. Some of these commenters stated that review of such rates, as
proposed, has no bearing on the capability of an institution to
administer Title IV, HEA programs. Many commenters asserted that if the
Secretary were to promulgate this regulation, the Secretary would
violate the Department of Education Organization Act as implementation
of the regulation would involve the Secretary in assessing the
effectiveness of an institution's academic programs.
Discussion: The Secretary notes that in commenting on other
sections, such as proposed Sec. 668.16(s), which deals with default
rates, commenters urged the Secretary to pay more attention to results
indicators, such as completion rates, placement rates, and the pass
rate on State licensure examinations, and give relatively less credence
to input indicators. Further, both the HEA and the Student Right-to-
Know Act prescribe the development and use of completion and placement
rates under certain circumstances. Nevertheless, the Secretary believes
that at this juncture, it is important for the SPREs to develop
standards in these areas without reference to the establishment of
standards by the Secretary.
Changes: Proposed Sec. 668.16(r) has been removed from these final
regulations.
Comments: Many commenters argued that the proposal to use a one-
year Federal Stafford Loan and Federal SLS programs default rate of 20
percent as a criterion of administrative capability went beyond the
statute and Congressional intent. Other commenters asserted that use of
a single year's default rate would be unfair to institutions with small
numbers of students, and institutions with graduates who default in
unusually high numbers in any given year, and recommended use of two or
three consecutive year figures to obtain a more accurate picture of an
institution's loan program experience. Another group of commenters was
concerned that use of 20 percent, rather than 25 percent, as a
criterion was inconsistent not only with the statute, but at variance
with other provisions for addressing defaults under the Federal
Stafford Loan and Federal SLS programs. Of those individuals and
organizations that expressed concern with the use of a one-year, 20
percent figure, many recommended using 25 percent and three years of
default rate data instead.
A large number of commenters stated that an institution's default
rates are not indicative of an institution's administrative capability.
A majority of these commenters expressed their belief that default
rates are more reflective of the characteristics of the student body
served by the institution than of the institution's administrative
capability and recommended that, at the least, the final regulations
provide an exemption for institutions that serve a large number of low-
income students. Other commenters argued that default rates are
influenced by many factors beyond the control of institutions,
including: erroneous data, errors in calculating rates, collection
practices of lenders, inadequate servicing, regional differences, and
borrowers' failure to accept responsibility. Some commenters
recommended that the ratio of borrowers to total student enrollment be
taken into consideration. A few others expressed concern that there are
delays in resolution of challenges to default rates and wanted to have
it clear that only final default rates would be used.
A few commenters acknowledged that default rates may be one
indication of lack of administrative capability, but argued that many
other factors can and do affect administrative capability.
Some suggested that it would be more appropriate for the Secretary
to rely on information such as an institution's withdrawal, completion
or placement rates and pass rates on external testing and
certification, in combination with the default rate, rather than to
rely on the default rate alone. Another commenter recommended assessing
an institution's default management activities in conjunction with its
default rate.
A number of commenters expressed concern that many poor students
would be discriminated against if default rates were used as an
administrative capability criterion. Some commenters noted the default
rate exceptions for tribally controlled community colleges,
historically black colleges and universities (HBCUs), and Navajo
community colleges and questioned why institutions other than these
that serve just as many poor students should be considered poorly
operated institutions as a result of a high default rate.
Discussion: The Secretary would like to point out that the use of
default rates as a determining factor in the evaluation of an
institution's administrative capability is not new. Although some
commenters perceived the proposed use of a 20 percent default rate to
be at variance with current default practices, it should be noted that
the Secretary proposed use of a 20 percent rate because that rate is
currently considered as an indicator of impaired administrative
capability. Furthermore, institutions with default rates of 20 percent
or more are currently required to submit default management plans.
However the Secretary also sees merit in using 25 percent as the
criterion for addressing defaults under the FFEL programs, as an
institution that has a 25 percent rate for three consecutive years is
subject to termination from the FFEL programs and it is therefore
consistent for the Secretary to thus provisionally certify or otherwise
limit such an institution's participation in the Title IV, HEA
programs. Acceptance of a three year time period would also address the
concern of commenters that a one-year rate may not be an accurate
indicator of an institution's administrative capability.
Although the Secretary does not agree with those commenters who
assert that default rates are not indicative of administrative
capability, as stated in the February 28, 1994 NPRM, the Secretary does
agree that approval of an institution to participate, or to continue
participation in, Title IV, HEA programs should not rest solely on the
institution's having a default rate below 25 percent. Therefore, if the
Secretary identifies no other serious administrative capability
problems that would warrant denying participation approval to an
institution with a default rate of 25 percent or more, the Secretary
intends to provisionally certify the institution. As discussed above,
the limitations on full certification will include, at minimum, the
prohibition on participation in the FFEL programs.
The Secretary acknowledges that tribally controlled colleges,
HBCUs, and Navajo community colleges have been treated differently, but
notes that exceptions to default provisions for these institutions were
mandated by Congress. The Secretary notes that the exception for these
institutions will be extended to apply to this provision.
Changes: The Secretary accepts commenters views that it is more
logical to use a 25 percent default rate over a three year period and
has amended Sec. 668.16(m) of these final regulations accordingly. The
Secretary has amended Sec. 668.17(c)(6) to specify that this standard
will not apply to tribally controlled colleges HBCUs, and Navajo
community colleges.
Comments: Several commenters contended that the cohort default rate
used to determine an institution's administrative capability should be
the same for the Federal Perkins Loan Program as it is for the Federal
Stafford Loan and Federal SLS programs. Two commenters contended that
the cohort default rate should be set at 30 percent for the Federal
Perkins Loan Program to be consistent with implementation of the new
cohort default rate calculation for the Federal Perkins Loan Program.
One commenter suggested that there be a ``phase-in'' of this
requirement to allow institutions the opportunity to meet the lower
default rate. Two commenters recommended that the Secretary provide for
an appeal procedure for Federal Perkins Loan default rates.
Discussion: Different cohort default rates apply to determining
administrative capability with respect to the Federal Perkins Loan
Program than apply to the Federal Stafford Loan and Federal SLS
programs to conform to different standards for participation in those
programs and different sanctions applied for exceeding the rates in
those programs.
Changes: None.
Comments: In response to the Secretary's request for comment on the
development of an appropriate default rate for the FDSL Program, one
commenter contended that the rate should be no lower than the cohort
default rate for the Federal Stafford Loan and Federal SLS programs.
The commenter believed that if a student does not meet his or her
repayment arrangements, the student should be placed in default. A few
commenters believed that a student who is using income contingent
repayment should not be considered in default and should not be removed
from the cohort used to determine an institution's default rate.
Discussion: The Secretary is exploring the use of an appropriate
default rate for the FDSL Program through the negotiated rulemaking
process. A default rate for the FDSL Program will not be used for the
evaluation of an institution's administrative capability at this time.
Changes: None.
Comments: The Secretary received over eighty comments on the use
and computation of withdrawal rates in the determination of
administrative capability. The majority of commenters had concerns
about the calculation of withdrawal rates and the effect of this
standard on institutions serving high-risk populations.
The principal concern with the calculation was that a student who
merely completed registration procedures but never showed up for
classes would be treated as a withdrawal. The commenters believed that
this would result in artificially high withdrawal rates. One commenter
stated that it is not unusual to have 20 percent of the enrolled
students never start classes. These commenters recommended that only
students who actually begin classes be counted. Several other
commenters urged that the calculation of withdrawal rate take into
consideration the institution's refund policy. One of these commenters
said that the State of California requires a complete refund of the
registration fee up to one week after classes begin, allowing for a
``no obligation'' look. Another commenter stated that, at another
institution, students are allowed a three week ``look-see'' period
during which to make sure the students are satisfied with the training
they are receiving and to allow institution personnel to make sure the
student is motivated and capable of benefiting from the training.
Many commenters expressed concern that withdrawal rates may be more
indicative of the type of students being served rather than of an
institution's administrative capability. 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. One commenter noted that some institutions
serve vocational rehabilitation and JTPA students who are impaired to
some degree, and as a result, often drop out of the programs in which
they were enrolled. Most of these commenters recommended that there be
some appeal provision or mitigating circumstances exemption.
One commenter said that in addition to the student population
served, withdrawal rates were a function of overall institutional
performance and the support services that are provided to students. Two
commenters asked how institutions should determine which students will
succeed and which will fail.
Some commenters recommended that a rate other than 33 percent be
used as an administrative standard. Many commenters noted that the
proposed 33 percent rate was a stricter standard than that used by JTPA
or any State, but made no mention of what rates States are using. One
commenter suggested that if there were any withdrawal rate standard, it
should be set at 40 percent, not 33 percent, as that rate would be
consistent with JTPA standards. Other commenters said withdrawal rates
would be fair only if they were based on national averages, comparing
similar programs in like-type institutions or a study of some sort. Yet
another commenter said there should be State-established withdrawal
rates.
Some commenters argued that withdrawal rates are an academic matter
and should not be subject to Federal regulation. Other commenters
questioned the basis for the standard. Some stated their belief that an
institution's withdrawal rate has nothing to do with the administration
of the Title IV, HEA programs. A few commenters said review of
withdrawal rates fell within the purview of accrediting agencies;
others asserted it was no longer necessary for the Secretary to review
withdrawal rates as the SPREs and accrediting agencies will have
specific criteria relating to completion and placement rates. Others
simply said they could see no basis for using 33 percent as a standard.
Quite a few commenters supported the use of withdrawal rates in
assessing administrative capability, albeit as an indicator rather than
an absolute. One of the commenters believed the language in current
regulations was sufficient to allow the Secretary to make
administrative capability determinations. One commenter supported the
proposed regulation, as written. Others had no problem with the use of
a 33 percent rate as an absolute, provided that students who register,
but never show up, are not included in the calculation. One other
commenter said the proposed rate was too high.
Discussion: For many years, the administrative capability
regulations have provided for the use of withdrawal rates in excess of
33 percent as an indicator of impaired administrative capability. The
Secretary notes, therefore, that the use of withdrawal rates as a
determining factor in the evaluation of an institution's administrative
capability is not new.
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 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 not drop out of an
institution in great 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.
In sum, an institution that provides students with comprehensive,
accurate information on the institution and its programs, thereby
enabling prospective students to make informed decisions about applying
to the institution, screens students adequately from the outset to
determine that the student can benefit from the program selected, and
provides adequate counseling to students who apply for Title IV, HEA
program assistance is expected to have a withdrawal rate below 33
percent.
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. By questioning the administrative capability of an
institution with a high withdrawal rate, the Secretary can monitor
compliance 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. By dealing with institutions that have high withdrawal rates,
the Secretary hopes to reduce dollars lost due to default in the
future.
The Secretary agrees that the withdrawal rate calculation should
not include students that complete registration procedures but never
begin classes. Similarly, the Secretary agrees that a student who
receives a 100 percent refund (less any allowable administrative fee)
should not be counted for the purposes of this calculation.
The Secretary agrees with the commenter who wrote that withdrawal
rates are a function of overall institutional performance and the
support services that are provided to students. The Secretary believes
that transfer students, high- risk students, and students who withdraw
for other reasons are accounted for by allowing up to 33 percent of the
students to withdraw from the institution.
Changes: This provision is amended in Sec. 668.16(l) to provide for
use of net enrollment figures, after deduction of students who were
entitled to a 100 percent refund.
Comments: Several commenters objected to this proposed requirement
that an institution must not otherwise appear to lack the ability to
administer the Title IV, HEA programs competently on the grounds that
it is redundant and too open-ended. They recommended that it be
removed.
Discussion: This paragraph contains language that is in current
regulations. Obviously, should the Secretary find it necessary to
invoke this paragraph in support of an action, the Secretary would
provide the affected institution with detailed information that
supports the determination that the institution lacks the ability to
administer the Title IV, HEA programs competently.
Changes: None.
Section 668.17 Default Reduction Measures
Default rates. Comments: A number of commenters suggested that any
institution with a cohort default rate above 20 percent should be
allowed to appeal its cohort default rate because that is the minimum
standard for punitive action against an institution.
Discussion: There are varying types of appeals offered to
institutions depending on their cohort default rates. An institution
which has default rates above the thresholds for participation in the
FFEL programs may appeal on the grounds that: (1) The calculation of
the rate was erroneous; (2) it satisfies the criteria for exceptional
mitigating circumstances; or (3) the calculation included loans which
due to improper servicing or collection resulted in an inaccurate or
incomplete calculation of the cohort default rate. Institutions with
cohort defaults above 20 percent for the most recent year may challenge
the calculation of the rate based on allegations of improper loan
servicing. In addition, an institution which receives provisional
certification based on a default rate above 25 percent over a three
year period also can show that it meets the criteria for exceptional
mitigating circumstances and should receive full certification under
the appropriate regulatory standards. For further information on this
provision, see the section of the Analysis of Comments and Changes that
addresses standards of administrative capability (Sec. 668.16). Thus,
institutions with rates above 20 percent have a significant opportunity
to challenge their cohort default rate.
Changes: None.
Default management plan. Comments: Some commenters asked the
Secretary to reconsider the requirement that all institutions with
cohort default rates greater than 20 percent implement a default
management plan that includes the default reduction measures listed in
appendix D to the regulations. The commenters asked the Secretary to
allow institutions to request approval for alternative plans.
Discussion: The commenters misread the regulations. Section
668.17(b)(1) requires institutions with cohort default rates over 20
percent but less than or equal to 40 percent to submit and implement a
default management plan that implements the measures described in
appendix D, but allows the institution to submit an alternative plan
for the Secretary's consideration. Institutions with cohort default
rates above 40 percent must implement the measures listed in appendix
D. The Secretary believes that these latter institutions obviously have
failed to otherwise reduce their default rates and that their future
efforts need to meet certain standards.
Changes: None.
End of participation. Comments: One commenter asked the Secretary
to shorten the guaranty agencies time frame for responding to
institutional requests for confirmation of default rate information.
Discussion: The Secretary believes that the regulations must allow
the guaranty agencies' sufficient time to check their records in
response to questions raised by schools. The Secretary does not agree
that it would be appropriate to shorten the time frame.
Changes: None.
Comments: A number of commenters objected to the Secretary's
proposal to change the effective date of the institution's loss of
participation under Sec. 668.17(c)(3) to the date the institution
receives notice of the Secretary's determination that its default rates
exceed the statutory levels.
Discussion: Previous regulations allow an institution with
excessive cohort default rates to continue to participate until eight
calendar days after the institution receives the Secretary's
notification. The Secretary has determined that it is inappropriate to
allow an institution that has high default rates above the statutory
limits eight additional days to entice students to enroll and receive
loans under the FFEL programs. An institution which files a timely
appeal remains eligible to participate during the appeal process.
However, there is no reason to allow an institution that does not
appeal additional time to participate in the program.
Changes: None.
Comments: Some commenters asked the Secretary to clarify the status
of FFEL programs loan proceeds which are disbursed after the
institution learns that it is no longer eligible to participate in the
FFEL programs under Sec. 668.17, but before the lenders or guaranty
agencies learn of the loss of participation. These commenters also
urged the Secretary to provide simultaneous notice of the loss of
participation to guaranty agencies, lenders and other agencies.
Discussion: The rules governing the disbursement of funds after an
institution's loss of participation are set forth in detail in
Sec. 668.26 of the regulations. The Secretary already provides notice
of actions against high default rate institutions to guaranty agencies
simultaneously with or very soon after notification is sent to the
institution. The Secretary will also provide appropriate notification
to other interested parties.
Changes: None.
Comments: One commenter suggested that if the Secretary initiates a
limitation, suspension or termination action based on an institution's
default rate, the Secretary should notify the appropriate SPRE and the
institution's accrediting agency.
Discussion: Section 494C(h)(2) of the HEA requires the Secretary to
notify a SPRE of any limitation, suspension, termination, emergency
action, or other action that the Department takes against an
institution. In the regulations governing the designation of nationally
recognized accrediting agencies, the Secretary is including a similar
provision.
Changes: None.
Appeal procedures. Comments: Some commenters asked how the
Secretary planned to implement the amendments to sections 435(a) and
435(m) of the HEA, which allow certain institutions with high cohort
default rates to review certain loan servicing records and appeal the
calculation of that rate based on allegations of improper loan
servicing.
Discussion: As noted by the commenters, sections 435(a)(3) and
435(m)(1)(B) of the HEA were changed by the Technical Amendments of
1993. Under the amended law, institutions that are subject to the loss
of eligibility under the FFEL programs under section 435(a)(2)(A) of
the HEA, subject to loss of eligibility for the Federal SLS Program
under section 428A(a)(2), or whose cohort default rate for the most
recent year for which rates have been calculated equals or exceeds 20
percent may include in their appeal of such rate a defense based on
allegations of improper loan servicing. The Technical Amendments of
1993 also provide that these institutions will have an opportunity to
review certain loan servicing and collection records maintained by the
guaranty agencies. The Secretary published a Request for Comments in
the Federal Register on March 22, 1994 (59 FR 13606) and is reviewing
the comments issued in response to that notice. The Secretary intends
to issue separate regulations to implement these provisions shortly.
Changes: None.
Comments: Some commenters complained that the time deadlines for
cohort default rate appeals are too restrictive and do not provide
enough time to prepare an appeal.
Discussion: The Secretary believes that the regulations provide
adequate time for an institution to prepare and submit an appeal of the
calculation of the cohort default rate. The Secretary notes that
Congress has enacted strict time limits on the institution's appeal of
its cohort default rates under section 435(a) of the HEA and the
Secretary's regulations reflect these requirements.
Changes: None.
Comments: Many commenters argued that the standards for an appeal
of the loss of participation in the FFEL programs based on exceptional
mitigating circumstances in Sec. 668.17(d) are too tough. The
commenters suggested that the completion and placement rate
requirements should be reduced or that the standards should consider
the population or community served by the institution.
Discussion: The Secretary notes that section 435(a)(2)(ii) of the
HEA allows an institution to avoid the loss of participation in the
FFEL programs if it shows that exceptional mitigating circumstances
exist. The current regulations are tough but are also consistent with
this statutory requirement. The HEA clearly establishes a presumption
that an institution with excessive cohort default rates above the
statutory levels is not serving its students and that its continued
participation in the FFEL programs is not in the public interest. It is
appropriate that an institution must meet tough standards to overcome
this presumption. The Secretary notes that most of the commenters did
not provide any basis for changing the standard or adopting other
standards. Therefore, the Secretary will not make any changes to those
requirements. The Secretary will, however, continue to evaluate the
exceptional mitigating circumstances standards in the regulations and
determine whether future changes are appropriate.
Changes: None.
Comments: Some commenters asked the Secretary to change the
proposal that would limit the evidence institutions could use to show
that they serve students with a disadvantaged economic background. The
Secretary had proposed to limit institutions to showing that the
students' qualified for an expected family contribution of zero.
Discussion: The Secretary has found that an excepted family
contribution of zero is an appropriate standard for showing that an
institution serves students with a disadvantaged economic background.
Therefore, no change will be made.
Changes: None.
Comments: One commenter suggested that institutions which ask
guaranty agencies to verify data should be required to list the
guaranty date and type of loan as well as the information required by
Sec. 668.17(d)(7). Another commenter suggested that the institution
should request the information from the Secretary rather than from the
guaranty agencies.
Discussion: The Secretary believes that the guaranty agency will be
able to identify the loans in question with the name and social
security of the borrowers involved and that it is unnecessary to
provide the guaranty date and loan type. The Secretary notes that only
Federal Stafford and Federal SLS loans are currently included in the
calculation of the cohort default rate. The Secretary also believes
that it is appropriate for requests for confirmation of errors to be
sent to the guaranty agency rather than the Secretary. The guaranty
agencies have the data which the institution is challenging.
Changes: None.
Comments: One commenter argued that the Secretary should have a
time deadline for issuing decisions on appeals of cohort default rates
filed by institutions and that the institution should win the appeal if
the decision is not issued on time. Another commenter suggested that
the institution should not be subject to a sanction if a new reduced
cohort default rate is issued for the institution during the appeal
process.
Discussion: The Secretary is committed to issuing decisions on
appeals from institutions within a reasonable time. Many of the changes
made to these regulations will contribute to this effort. However, the
Secretary does not believe that it is appropriate to allow an
institution to avoid responsibility for its default rate because a
decision is not issued within a specified time. The Secretary also does
not believe that an institution should automatically be able to escape
responsibility for its high default rate one year by delaying the
completion of its appeal until the next year's lower rate is released.
Changes: None.
Comments: One commenter asked the Secretary to allow institutions
to submit cohort default rate appeals by facsimile rather than by mail.
Discussion: The Secretary has found that cohort default rate
appeals frequently involve numerous documents involving detailed
listings of information. Facsimile transmission may well result in
blurred documents. In these circumstances, the Secretary will continue
to require appeals to be submitted by mail.
Changes: None.
Definitions. Comments: Some commenters noted that the Secretary
proposed to eliminate the provision of the regulations that required
that, in calculating the cohort default rates, the Secretary would
exclude any loans which, due to improper servicing or collection would
result in an inaccurate calculation of the cohort default rate. The
commenters objected to this change on the grounds that they believe
that this change is contrary to Congressional intent in enacting the
new law.
Discussion: The Secretary believes that it is clear that Congress
intended to limit the issue of allegations of improper loan servicing
in regard to cohort default rates to appeals from the calculation of
such rates. The Secretary notes that the Technical Amendments of 1993
changed the language of sections 435(a) and 435(m)(1)(B) of the HEA to
limit consideration of improper loan servicing allegations to appeals.
Prior to the amendments, the HEA stated that improper servicing would
be considered in calculating the cohort default rate. The Technical
Amendments of 1993 eliminated this language and added a new subsection
435(a)(3) to specifically allow certain schools with high default rates
to appeal those rates based on allegations of improper loan servicing.
There is no support for the commenters claim that Congress intended the
Secretary to consider allegations of improper loan servicing before
rates are calculated and during the appeal process.
Changes: None.
Comments: Some commenters urged the Secretary to require guaranty
agencies to allow institutions to review the default rate data prior to
submittal of the data to the Secretary and to work with the
institutions to ensure correction of the data before the Secretary
publishes the list of institutional cohort default rates. Some
commenters argued that publication of rates without such a process
violated due process.
Discussion: The Secretary notes that a recent decision of the
United States District Court for the District of Columbia, Career
College Association v. U.S. Department of Education, C.A. No. 92-1345-
LFO (March 22, 1994) rejected the claim that pre-publication review of
cohort default rate information was required. However, the Technical
Amendments of 1993 amended the HEA to provide institutions an
opportunity to review and correct errors in the information provided by
the guaranty agency to the Secretary for calculating cohort default
rates. This amendment is not effective until October 1, 1994 and the
Department intends to issue regulations to provide this opportunity
shortly.
Changes: None.
Comments: Some commenters argued that a whole new structure for
cohort default rates should be developed. According to these
commenters, there are significant errors in the cohort default rate
information and the courts have found that the Secretary's calculation
of such rates is improper. Some commenters said that the Secretary
should make every effort to ensure that default rate information is
accurate.
Discussion: The Secretary has taken and will continue to take
appropriate actions to ensure that guaranty agencies provide correct
information for use in calculating cohort default rates. The Secretary
has found that, during the appeal process, institutions have not
generally proven significant errors in the calculation of their cohort
default rates. Thus, the Secretary rejects the commenters' claim that
the cohort default rate information is inaccurate. Moreover, the
Secretary does not agree that the courts have reached this conclusion.
The commenters are referring to certain preliminary decisions reached
by courts relying on the allegations raised by individual schools. The
Secretary strongly objects to the suggestion that the cohort default
rate information is inaccurate. The Secretary also does not believe
that the commenters have shown any facts that support creation of a new
appeal structure. However, the Secretary believes that the changes made
by the Technical Amendments of 1993 may resolve some of the commenters'
concerns.
Changes: None.
Comments: One commenter asked why a loan is still counted as in
default for purposes of the cohort default rate if the institution pays
off the loan.
Discussion: The Secretary does not believe that an institution
should be allowed to buy its way out of the sanctions related to high
defaults by its students. The law holds institutions responsible for
high default rates and wealthy institutions should not be able to avoid
their responsibility for these high rates by paying off loans.
Changes: None.
Comments: One commenter suggested that Federal PLUS loans should be
included in the calculation of the cohort default rate.
Discussion: The definition of ``cohort default rate'' is in section
435(m) of the HEA and includes only Federal Stafford Loans (both
subsidized and unsubsidized), Federal SLS loans and Federal
Consolidation Loans which are used to repay Federal Stafford and SLS
loans.
Changes: None.
Section 668.22 Institutional Refunds and Repayments.
General. Comments: Three commenters believed the specific pro rata
refund requirements should not be limited solely to first-time students
who received Title IV, HEA program assistance.
Discussion: The Secretary does not intend to extend this
requirement beyond the scope of the statute; however, an institution
would not be prohibited from extending the pro rata refund requirements
to other students.
Changes: None.
Comments: A few commenters contended that cost substantiation is
unduly burdensome. The commenters maintained that costs differ greatly
between programs, that indirect expenses such as storage, maintenance,
packaging, and shipping would be difficult to justify, and that cost
per student would be difficult to calculate if supplies were bought in
bulk. The commenters argued that for large schools with many programs,
the costs would change too frequently to accurately report and many
costs are determined by student choice. The commenters stated that only
estimates of costs are possible. These commenters believed that this
provision should apply only to institutions with compliance problems.
Two commenters contended that the free market will determine what costs
are reasonable and this provision is beyond the Secretary's authority.
Two commenters believed that this provision should be moved to
Sec. 668.44 (student consumer information). Two commenters fully
supported the Secretary's proposal, citing firsthand experience with
institutions that attempt to circumvent refund policies by inflating
supply costs. One commenter recommended that the Secretary limit this
provision to the substantiation of only books and supplies that are
required and that are institutional charges. One commenter recommended
that the provision be limited to requiring institutions to substantiate
only the cost of items that the institution supplies, not of those
provided by a third-party organization. One commenter asserted that
accrediting agencies should monitor these costs.
Discussion: The Secretary believes that cost substantiation is
appropriate if the institution wishes to exclude such costs from the
refund calculation. As noted by some commenters, the free market has
not worked to contain costs charged to students for supplies because
the students have little, if any, discretion on the supplies that they
are required to purchase for most programs. Furthermore, based upon the
Department's experience, some institutions have historically inflated
charges for supplies that students were required to purchase. This
predatory pricing for supplies has, in turn, inflated costs borne by
the Title IV, HEA programs and reduced or eliminated refunds that would
otherwise have been owed to the Title IV, HEA programs for students who
withdrew. The treatment of supply charges under these regulations will
help curb this abuse without significantly changing the supply charges
that can be excluded from the refund calculation by institutions that
fairly price supplies to their students.
As a result of limiting the required cost substantiation to student
charges for supplies sold by the institution or by an affiliated or
related entity, the institution is responsible for documenting the
costs where a business relationship exists between the seller and the
institution. Furthermore, even if an institution purchases supplies in
bulk and takes advantage of purchasing discounts that cause the costs
for such supplies to fluctuate over time, the Secretary does not
believe that it is unduly burdensome to require the institution to
document its per-unit cost for the supplies before it may exclude that
amount from the refund calculation. Furthermore, the Secretary does not
believe it is appropriate for the institution to increase the
documented supply costs by allocating any portion of the institution's
fixed charges to such calculation. Any such cost recovery for
institutional overhead would make the calculation overly complex,
difficult to monitor, and more subject to abuse by some institutions.
The procedures under the regulations permit the institution to recover
the actual cost of such supplies, but are not intended to recapture any
additional charges allocable to such items.
The Secretary also believes that the Department is the primary
member of the triad that is responsible for monitoring an institution's
ability to comply with the requirements for prompt and accurate refund
payments. Although an institution's accrediting body or cognizant SPRE
will have concerns about certain aspects of an institution's adoption
and implementation of its refund policy, HEA has given the Department
the primary responsibility for establishing the requirements for the
timing, calculation and procedures for paying refunds to the Title IV,
HEA programs.
Changes: None.
Comments: Six commenters supported the requirement for fair and
equitable refunds, but suggested that to be truly equitable, the
requirement should be in force for all students, not just those who
receive Title IV, HEA program assistance. Two commenters supported the
Secretary's proposal to limit these refund requirements to affect only
recipients of Title IV, HEA program assistance. Two commenters
suggested refund requirements should differ among students based on the
reason for the student's withdrawal. The commenters believed students
who officially withdraw for ``legitimate'' reasons, such as medical
leave or a family emergency, deserve the benefit of a liberal refund
policy. The commenters believed, however, that students who withdraw
without notification or whose reasons for withdrawal are
``irresponsible or immature'' should be subject to a more stringent,
less beneficial refund policy.
Discussion: As discussed in the preamble of the February 28, 1994
NPRM, several negotiators asserted that applying the refund
requirements to all students would be too costly for institutions. The
Secretary acknowledges that having different refund policies for
students who received Title IV, HEA program assistance could be
perceived as inequitable. However, no institution is prohibited from
adopting these refund requirements for all its students. The Secretary
believes Congress clearly intended to treat groups of students in a
like manner with regard to refunds, regardless of an individual
student's reason for withdrawal. The Secretary believes a refund policy
requiring the assessment of a student's valid cause for withdrawal
would be difficult to regulate and implement, and would require
extensive professional judgment on the part of the institution, thereby
excessively increasing the institution's burden.
Changes: None.
Comments: Six commenters stated that the requirement that an
institution provide examples of an institution's refund policy to
prospective students is burdensome and unnecessary. The commenters
asserted that most students would not understand such examples and that
the examples would inevitably be misleading because the many variables
that might apply to a real student's withdrawal situation would not be
represented. Three commenters shared the Secretary's view that
prospective and current students should receive a written statement
containing an institution's refund policy, but one commenter believed
providing such a statement would be burdensome and costly for
institutions.
Discussion: The Secretary believes that current and prospective
students have the right to be informed in writing of an institution's
refund policies and practices, and that the costs of providing such
information are part of the normal costs of doing business. A
particular student's ability to completely comprehend such information
does not impact that student's right to receive the information.
Further, the Secretary would expect that, in accordance with 34 CFR
668.45(a), an institution would have designated an employee or group of
employees who must be available on a full-time basis to assist students
or prospective students with any questions they might have in this
area. The Secretary wishes to clarify that, as discussed in the
February 28, 1994 NPRM, the requirement to provide examples would be
met if the institution informs students in the written refund policy
that examples are available and the institution makes the examples
readily available to current and prospective students on request. The
Secretary does not believe refund examples must include all possible
variables to be useful to students. An institution is expected to
provide reasonable examples of common refund situations applicable to
its average student population.
Changes: Section 668.22(a)(2) has been amended to clarify that the
institution must make available to students, upon request, examples of
the application of the refund policy and inform students of the
availability of these examples in the written statement.
Fair and equitable refund policy. Comments: Many commenters
believed the requirement for a fair and equitable refund, as
interpreted in the February 28, 1994 NPRM, is needlessly complex, is
intrusive upon the rights of institutions to determine policy, and
extends beyond the intent of the law. The commenters believed
institutions should not be forced to calculate up to three separate
refund amounts for each withdrawing student, as this would be
burdensome and confusing both to institution employees and to students,
resulting in withdrawing students inevitably receiving incorrect
information. The commenters asserted that an institution should be
allowed to determine which calculation generally provides the most
beneficial refund to its average student body population and use that
calculation consistently for Title IV, HEA program refunds. Four
commenters believed the Secretary should provide certified refund
calculation software for institutional use, rather than unfairly
expecting institutions to create or purchase from a private source
software that is potentially erroneous. Two commenters requested the
Secretary commit to providing clear notice of revisions and changes to
the refund requirements, to avoid the inevitable widespread confusion
and noncompliance that will otherwise result if the February 28, 1994
NPRM is published as a final rule. One commenter believed it is
inappropriate and inefficient to require institutions to implement a
policy which affects such a small number of individuals, and that
institutions are capable of developing workable refund policies that
are fair and reasonable. One commenter supported the Secretary's
interpretation of the statute and believed withdrawing students deserve
the benefit of the largest refund possible.
Discussion: The Amendments of 1992 define a fair and equitable
refund policy as one that provides for at least the largest of the
amounts provided under applicable State law, nationally recognized
accrediting agency requirements approved by the Secretary, or the pro
rata refund calculation for qualifying students, as described in the
statute. The Secretary asserts 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 the statute. The Secretary
is exploring the development by the Department of software for
institutional use. The Secretary believes the equity to the student
provided by the law and the proposed rule override the commenters'
concerns of burden and potential confusion, and will continue to
provide ample direction and guidance on refunds to institutions in the
form of examples, Dear Colleague Letters, and the Federal Student
Financial Aid Handbook.
Changes: None.
Comments: Four commenters believed the requirements of Appendix A
are too cumbersome and should be replaced with a more reasonable
policy. Three commenters believed the Appendix A requirements are
intrusive and extend beyond the scope of the statute, resulting in
excessive burden and cost for institutions. The commenters suggested
Appendix A should be a guideline for problem-free institutions,
required only of institutions with demonstrated compliance problems.
Two commenters suggested all institutions should be required to follow
the guidelines of Appendix A, thereby eliminating all the other
detailed and stringent refund requirements proposed in the February 28,
1994 NPRM. Four commenters asserted that institutions have already
adopted procedures in line with the Appendix A guidance and that
further intrusion on the part of the Secretary is unnecessary and
unjustifiable. The commenters believed institutions have the ethical
means to decide these issues among themselves and should be allowed to
do so.
Discussion: The Secretary believes the Amendments of 1992 clearly
give every student who receives Title IV, HEA program assistance--not
just those students who attend institutions with compliance problems--
the right to a fair and equitable refund as defined in the statute. The
Secretary is concerned, as discussed in the February 28, 1994 NPRM,
with 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, a loophole exists and
the law offers no alternative standard by which to ensure the student
receives a fair and equitable refund. Consistent with existing FFEL
programs regulations, the Secretary intends to provide Appendix A as an
acceptable refund standard in the absence of all other standards.
Changes: None.
Pro rata Refund. Comments: Many commenters believed the 60 percent
point in time (for the purposes of the pro rata refund requirement),
when measured in clock hours, should be calculated using the hours
scheduled instead of the proposed use of hours completed by the
student. Two commenters specifically referred to the statute's concept
of elapsed time, stating that the treatment proposed in the February
28, 1994 NPRM is in conflict with the Secretary's earlier guidance and
the intent of the law. All of these commenters believed the costs of
providing education are fixed for each day a class is offered,
regardless of an individual student's attendance. The commenters
further suggested the Secretary is openly discriminating against clock-
hour institutions by allowing credit-hour institutions to figure the 60
percent point in time using weeks, while insisting that clock-hour
institutions consider individual students' rates of progress. Two
commenters suggested the Secretary allow clock-hour institutions to
include excused absences and repeated hours in the total hours
completed by a student. One commenter noted that the determination of
the 60 percent point in time conflicts with the determination of the
portion of the enrollment period that remains for the purposes of
calculating a refund after an institution has determined that a pro
rata refund must be calculated. This commenter believed these two
determinations should be simple and consistent with one another.
Discussion: In the case of a program measured in clock hours, the
Secretary believes it is most reasonable to use the number of hours
completed by the student in determining what percentage of the
enrollment period has elapsed. To determine the 60 percent point by
using scheduled hours could unjustifiably punish a student whose
progress is slower than the average student, and could cause a first-
time student whose progress is above average to be entitled to a pro
rata refund past the point of 60 percent completion. The Secretary
acknowledges that this and other provisions of the Title IV, HEA
program rules 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 believes this
differentiation is justifiable and necessary, and is due to the
Department's extensive efforts to take into account the many variables
and circumstances found in the postsecondary educational community. 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, and if it is documented that the hours were
actually scheduled and missed by the student prior to the student's
withdrawal. The Secretary acknowledges that, as discussed in the
February 28, 1994 NPRM, the determination of the 60 percent point in
time is intentionally different from the determination of the portion
of the enrollment period that remains. The Secretary does not believe
consistency between these two determinations is necessary or
beneficial.
Changes: None.
Comments: Four commenters found the proposed definition of unpaid
charges for pro rata purposes to be in conflict with the statutory
definition. Two commenters believed the statute adequately defines
unpaid charges and it is unnecessary for the Secretary to propose a
different or expanded definition. One commenter supported the
Secretary's proposal to define unpaid charges for pro rata purposes as
it was defined for general refund purposes in the June 8, 1993 final
regulations. One commenter suggested that the treatment of unpaid
charges should be the same in all refund situations, instead of the
current proposal which differentiates between statutory pro rata refund
calculations and all other calculations. This commenter believed this
discriminates against certain groups of students and thus fails to
treat all students equitably.
Discussion: The Secretary does not believe the proposed definition
of unpaid charges is in conflict with the more general statutory
definition. The Secretary believes it is appropriate to make the
definition consistent with the regulatory definition already in place.
The treatment of unpaid charges for the purposes of the statutory pro
rata calculation is prescribed in the Amendments of 1992. The Secretary
has in the past sufficiently justified the treatment of unpaid charges
for refund calculations other than statutory pro rata refund
calculations. The commenter has submitted no evidence of
discrimination.
Changes: None.
Comments: Three commenters support the Secretary's proposal to
avoid double-counting certain charges (i.e., administrative fees) by
excluding them from the pro rata refund calculation instead of
subtracting them. Three commenters disagreed with the required
proration of all educational costs, given that some costs incurred by
the institution are fixed (i.e., teacher salaries, dormitory charges,
and physical plant costs) and do not decrease when a student withdraws.
The commenters asserted that institutions required to issue pro rata
refunds will lose money, and that the students who remain will
experience cost increases as a result. Four commenters believed an
application fee should not be subtracted from a pro rata refund,
because it is not really an education cost and because a portion of
administrative costs are already recouped through the pro rata refund
calculation. Two commenters asserted there is no statutory support for
the Secretary's proposal that an administrative fee must be a real and
documented charge. One commenter suggested the Secretary allow all
administrative fees to be subtracted from the pro rata refund
calculation. Three commenters believed it is intrusive and
inappropriate for the Secretary to regulate details such as irregularly
expended meal credits, passed-through room charges, and group health
insurance fees. The commenters stated that such details should be
handled in guidelines, not requirements, and should ultimately be left
to the discretion of individual institutions. One commenter suggested
that the costs of services voluntarily provided by an institution as a
courtesy to its students should be excluded from the pro rata refund
calculation. Two commenters suggested that the Secretary's proposed
treatment of group health insurance costs should be extended to include
other insurance, such as the liability and medical malpractice
insurance required for medical students or group health insurance that
is not required by the institution. One commenter stated that the
exclusion allowed for group health insurance fees should be extended to
all refund calculations, not just statutory pro rata refund
calculations.
Discussion: The Secretary agrees that it is more reasonable to
completely exclude certain costs from the pro rata refund calculation,
in effect allowing the institution to fully retain the money paid for
those charges, rather than include the costs and assess them at a
prorated percentage, only to then completely subtract them from the
refund, thereby double-counting them. The Secretary wishes to clarify
that the proration of educational costs under the pro rata refund
calculation is required by the Amendments of 1992 and it is not the
purpose or authority of these regulations to rescind that requirement.
The Secretary agrees that an application fee is not an educational cost
for Title IV, HEA program purposes and that it is therefore not
relevant in the calculation of a refund. The Secretary does not believe
that Congress intended to allow institutions to retain from a pro rata
refund amount administrative charges that do not actually exist. 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 in fact
charged or paid. The statutory pro rata calculation provides for the
maximum amount of administrative costs that may be retained by the
institution. The Secretary believes 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 proposed they be excluded 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. After further consideration, the Secretary
has found the provision treating irregularly expended meal credits to
be unnecessarily complex and not entirely effective in its intended
purpose. No commenters offered support for this provision or any
alternative suggestions. This issue will be reexamined in the future
and further input from the financial aid community will be sought. The
Secretary recognizes that some institutions may elect to provide
certain services, such as voluntary group health insurance, as a
courtesy to students. The Secretary believes it is necessary to exclude
from the pro rata refund calculation mandatory charges for group health
insurance to prevent students from an unavoidable loss of insurance
upon withdrawal. This situation could be avoided if the student had the
option of purchasing health insurance from a source other than the
institution. The Secretary does not believe the cost of specialized
insurance coverage such as medical malpractice coverage warrants the
same treatment as group health insurance costs, primarily because such
specialized insurance is no longer needed by the student after
withdrawal. The statute provides that all refunds other than pro rata
refunds are to be made in accordance with State or accrediting agency
standards. To extend the allowable exclusion for group health insurance
fees to all refund calculations would necessitate an amendment to the
law.
Changes: Section 668.22(c)(4) has been amended to reflect that
certain fees, listed as allowable subtractions in the February 28, 1994
NPRM, are to be excluded entirely from the pro rata refund calculation.
This section has also been amended to delete from that list of fees the
reference to an application fee.
Comments: Several commenters believed the cost of equipment, books
and supplies should not be prorated, because possession of an item
cannot be ``split'' between the institution and the student. The
commenters believed the proposed treatment of books and supply costs
will unjustifiably enable students to keep supplies they had not fully
paid for, and will force institutions to either function as ``pawn
shops'' for the return of such items or bear the costs of supplies they
do not own. The commenters believed such a policy will force
institutions to raise book and supply costs for students who remain or
to stop providing supplies altogether, to the obvious detriment of
continuing students. Two commenters believed institutions will be
forced to instruct students to obtain supplies from independent
vendors, resulting in great consumer risks for the student. One
commenter suggested that the refund amount for equipment, book, and
supply costs should be determined by the manufacturer of the individual
products and passed on from the institution to the student accordingly.
Several commenters asserted that equipment, books, and supplies become
the sole property of the student when issued, and suggested the
institution be allowed to withhold delivery and billing of such items
until they are needed. The commenters also suggested the Secretary
allow institutions to retain the full cost of unreturnable items issued
and of returnable items issued that are not returned, and require
institutions to refund in full the cost of any issued items that are
returned and of any items that were not issued but for which the
student was charged. Several commenters stated that the return of
certain supplies, books, or equipment is unrealistic and burdensome,
regardless of the condition in which it is returned, and that the
regulations should therefore not require institutions to accept
returned items. One commenter supported the Secretary's proposed
treatment of charges for returned equipment.
Discussion: The Amendments of 1992 require all institutions
participating in the Title IV, HEA programs to refund unearned tuition,
fees, room and board, and other charges to a student who received Title
IV, HEA program assistance and failed to complete the period of
enrollment for which the student was charged. The Secretary does not
believe Congress intended to exclude the unearned cost of books,
supplies, and equipment from the refund amount. However, the Secretary
agrees that institutions should not be expected to refund to the
student a portion of the cost of unreturnable items that were actually
issued to the student and kept by the student. The Secretary wishes to
clarify that the proposed requirements governing books, supplies, and
equipment will not force an institution to accept returned merchandise;
rather, the proposed provision allows an institution to state that an
item is returnable and to then retain in full the cost of that item if
it is not returned, provided the institution clearly disclosed in the
enrollment agreement any restrictions on the return of equipment,
including equipment that is unreturnable and deadlines for returns.
Changes: Section 668.22(c)(5) has been amended to allow an
institution to exclude from the pro rata refund calculation the
documented cost of any unreturnable equipment, books, and supplies
issued to the student, if the student was informed in the enrollment
agreement that the item is unreturnable and may keep the item, or under
what conditions normally returnable equipment is considered to be
unreturnable. A corresponding change has been made to appendix A.
Comments: Several commenters asserted that the definition of a
first-time student should be limited to a student attending any
postsecondary institution for the first time. Three commenters
disagreed with the Secretary's proposal to include in the first-time
student definition any student who previously enrolled at the
institution but received a 100 percent refund of tuition and fees. One
commenter asked the Secretary to amend the first-time student
definition to include students who previously enrolled only in
continuing education courses that do not lead to a degree. One
commenter requested the Secretary to issue one consistent definition of
a first-time student, instead of expecting institutions to use
different definitions for different Department requirements, such as
IPEDS, refund calculations, FFEL programs counseling, and student
consumerism.
Discussion: The Secretary believes it is the intent of Congress to
extend the benefit of a pro rata refund calculation to all students
attending a particular institution for the first time, not just to
those students who are attending any postsecondary institution for the
first time. The Secretary also believes that a student who enrolled at
an institution but received a full 100 percent refund has not had
sufficient educational experience at the institution to be considered
anything other than a first-time student. The Secretary does not
believe the issue of continuing education coursework poses a serious
problem with the definition of a first-time student for the purposes of
the pro rata refund calculation. The Secretary recognizes that the
definition of first-time student is different for certain purposes in
the administration of the Title IV, HEA programs, and will explore the
possibility of creating a single, consistent definition in the future.
Changes: None.
Comments: Three commenters believed the proposed definition of
``the portion of the enrollment period for which the student was
charged that remains'' is not consistent with the statutory definition
of an academic year. The commenters asked the Secretary to include in
the proposed definition an explanation of the term ``week'' and
describe the appropriate handling of a student who attends only a
portion of a week.
Discussion: The Secretary does not believe consistency with the
statutory definition of an academic year is relevant. The Secretary
does not believe further explanation is necessary, and intends to
entrust institutions with the responsibility for fairly and
consistently handling uncertain situations such as a partial week of
attendance.
Changes: None.
Period of Enrollment for Which the Student Has Been Charged.
Comments: Several commenters suggested alternatives to the Secretary's
definition of ``period of enrollment for which the student was
charged.'' Three commenters suggested using only the length of the
program, for institutions charging by the program, or the length of the
term, for institutions charging by the term. One commenter suggested
the Secretary require all institutions to use the academic year as the
enrollment period. Another commenter suggested the Secretary require
all institutions to use the lesser of a payment period, the program
length, or the academic year. Three commenters believed the proposed
definition does not address programs longer than an academic year.
Several commenters believed the Secretary's proposed definition is
unfair to institutions charging by the program, forcing them to use the
cost of the entire program in the refund calculation, while only a
portion of the financial aid awarded for the entire program can be
counted when calculating the unpaid charges. Such a formula results in
excessively high unpaid charges, which must be subtracted from the
amount the institution could otherwise retain. The commenters believed
this treatment is discriminatory against institutions that charge by
the program and suggested the Secretary retain the concept of payment
periods, both for assessing charges and considering aid disbursed, and
limit those payment periods to one-third an academic year (as in a
quarterly term system), or one-half an academic year (as in a semester
term system). Two commenters believed the determination of the
enrollment period for refund purposes should be left to the discretion
of the institution. Two commenters asked that clock-hour institutions
using standard terms be treated the same as credit-hour institutions
using standard terms.
Discussion: The Secretary believes the proposed definition of
``period of enrollment for which the student was charged'' is adequate
and applicable to the needs and circumstances of the various types of
institutions participating in the Title IV, HEA programs. The Secretary
wishes to clarify that the proposed definition establishes a minimum
period of enrollment (to prohibit institutions from creating
artificially short periods of enrollment simply for the purposes of
reducing a student's unpaid charges or eligibility for a pro rata
refund calculation) and does not impose a maximum limit to the period
of enrollment. The Secretary recognizes that institutions charging by
the program may have to pay pro rata refunds to a greater number of
students than institutions that charge by the term and may consistently
find their students have high amounts of unpaid charges under the
proposed refund calculation, resulting in a reduction in the amount the
institution can retain for non pro rata refund calculations. The
Secretary would like to point out, however, that such a situation
exists precisely because the institution charges the student for the
entire cost of the program up-front. It is true the same student could
attend an institution which charges by the term and would, under the
proposed refund calculation, owe a smaller amount of unpaid charges.
The term institution, however, does not contract with the student for
any amount in excess of the costs of the term. The adverse affects of
the Secretary's proposal, therefore, as claimed by some of the
commenters, are the result of an institution's own decision to contract
with the student for the costs of the entire program up-front, instead
of contracting for the costs of a smaller period of study, such as an
academic term; this is an institutional decision over which the
Secretary has no control. The Secretary believes the discontinuation of
the use of payment periods and the practice of attribution will greatly
simplify the refund requirements, and that this benefit overrides the
commenters' concerns. The Secretary believes it is necessary to define
and limit the definition of enrollment period to ensure equitable
refunds to Title IV, HEA program recipients. The Secretary wishes to
clarify that, under the proposed definition, all clock hour
institutions are treated the same, regardless of whether they use
standard terms or not, because it has been the experience of the
Secretary that these institutions all charge by the program.
Changes: None.
Repayments to Title IV, HEA Programs of Institutional Refunds and
Repayments. Comments: Three commenters believed the treatment of unpaid
charges for nonpro rata refunds, as prescribed in the June 8, 1993
final regulations, should be rescinded in compliance with the statutory
treatment for pro rata refund purposes. Two commenters believed the
requirement penalizes institutions by reducing the amount of
institutional charges they can retain. Three commenters asserted that
the requirement unfairly leaves students owing large balances to the
institution which would otherwise have been paid by Title IV, HEA
program assistance, and this result obviously is not fair and equitable
under the statute. Three commenters requested the Secretary include
late disbursements of State, private, and institutional aid as amounts
that can be used to reduce a student's unpaid charges, if these aid
sources have published late disbursement policies under which a
withdrawing student can be paid. Two commenters suggested the Secretary
include late disbursements of unsubsidized Stafford Loan program funds
and all Direct Loan program funds as amounts that can be used to reduce
a student's unpaid charges. Two commenters believed the consideration
of late disbursements when determining unpaid charges is inappropriate
and should not be allowed under the refund requirements. One commenter
suggested that, because the requirement to subtract unpaid charges from
the amount the institution can retain does not apply to statutory pro
rata refund calculations, the requirement should also not apply to
voluntarily pro rata refund calculations that are not required by the
Amendments of 1992.
Discussion: The public was previously invited to comment on
requirement to subtract unpaid charges from the amount the institution
can retain in response to the December 23, 1991 NPRM. The comments and
responses on this issue, including the decisions and rationale of the
Secretary, are included in the June 8, 1993 final regulations which
included the requirement. The required treatment of unpaid charges for
the purposes of this section, except for the calculation of a pro rata
refund under the statute, reaffirms the basic principle of student
financial aid: the family (or student) makes its contribution first
before financial aid is expended. Although some students may have to
pay more toward institutional charges than they originally expected,
due to the fact that they withdrew and became ineligible for a portion
of the aid they expected to receive, this is more equitable to those
students who have responsibly fulfilled their financial obligations to
the institution. The Secretary does not believe this issue warrants
reconsideration in the context of the February 28, 1994 NPRM. The
administration of private and institutional student aid funds is not
within the control of the Secretary. Therefore, the Secretary cannot
guarantee the availability or delivery of these funds and cannot allow
institutions to use late disbursements of these funds to reduce a
student's unpaid charges. The Secretary agrees, however, that
institutions should be allowed to use late disbursements of State
student aid to reduce a student's unpaid charges, provided the State in
question has a standard written late disbursement policy which the
institution follows in calculating unpaid charges and provided the
student is eligible to receive the late disbursement in spite of having
withdrawn. The Secretary wishes to clarify that an institution which
chooses to count a late disbursement of State student aid in this
manner will be liable for that amount if it is not disbursed to the
student within 60 days after the student's date of withdrawal, as
defined in Sec. 668.22(i)(1), and will be required to recalculate the
Title IV, HEA program refund and return any additional amounts required
to the appropriate Title IV, HEA program accounts or to the lender
within the deadlines specified in Sec. 688.22(g). The Secretary agrees
that institutions should be allowed to use allowable late disbursement
amounts from unsubsidized Federal Stafford loans and Direct Student
loans to reduce a student's unpaid charges. The Secretary does not
believe the treatment of unpaid charges for the purpose of statutory
pro rata refund calculations should be extended to voluntary pro rata
refund calculations.
Changes: Section 668.22(f)(2)(ii) has been amended to include
allowable late disbursements of State student financial assistance,
unsubsidized Federal Stafford loans and loans made under the Federal
Direct Student Loan Program. A corresponding change has been made to
Sec. 668.22(c)(2).
Comments: Many commenters disagreed with the Secretary's proposal
to remove the fraction that is currently used to determine what portion
of the refund must be returned to the Title IV, HEA programs. These
commenters believed this change is grossly unfair and negates the
concept of equal partnership between the Federal government, the
States, and the institution in providing student financial assistance.
Six commenters believed the proposed treatment will cause all parties
who contribute to a Title IV, HEA program recipient's educational
costs--States, institutions, private sources of aid--to lose their
contributed funds to the Title IV, HEA programs in the event of a
withdrawal. These commenters believed these other parties will
therefore be reluctant to pay any of their funds to recipients of Title
IV, HEA program assistance. These commenters asserted that such a
policy would unfairly penalize State, institutional, and private
sources of aid, and Title IV, HEA program recipients. One commenter
reported that State programs are already deciding to avoid the Title
IV, HEA program refund calculation by withholding their monies until
after the refund period has passed; such a practice will be detrimental
to Title IV, HEA program recipients who withdraw and owe large balances
that would have been paid by State assistance, had it been disbursed on
time. This commenter urged the Secretary to prevent the negative
effects of this policy by amending the definition of ``financial aid''
(for the purposes of calculating the student's unpaid charges) to
include State and private assistance that can reasonably be expected to
be awarded, even if it has not actually been received at the time of
withdrawal. One commenter supported the Secretary's rationale for
removing the fraction in relation to refunds, but did not support
extending that interpretation to repayments.
Discussion: The Secretary wishes to further clarify that the
Amendments of 1992 specify in section 485 that refunds must be returned
to the Title IV, HEA programs first. Further, 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 has no authority to alter this
requirement. 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.
The Secretary does not believe the definition of ``financial aid'' can
be amended in the manner suggested by one commenter, as such a change
would be difficult to regulate. The Secretary feels it is appropriate,
for consistency with the spirit of the law and to reduce administrative
burden, to extend the interpretation of the law to repayments as well
as refunds.
Changes: None.
Comments: Two commenters support the Secretary's proposal to set a
minimum dollar amount below which a refund or repayment does not have
to be made. One commenter suggested the Secretary set the same minimum
amount for both refunds and repayments.
Discussion: After further consideration, the Secretary believes
that this proposed provision is inconsistent with the amendment made to
section 490 of the HEA that established criminal penalties for failure
to pay refunds, specifically including refunds of less than two hundred
dollars. Further, the Secretary believes that by the time the
institution has determined the amount of the refund, most of the
administrative effort and cost has been expended. The Secretary
believes that neither the institution nor the student would benefit
from the proposal to allow institutions to forgo making refunds of $25
or less. Also, the Secretary believes that part of the institution's
administrative costs are recouped through the administrative fee that
is allowed to be excluded from the pro rata refund calculation.
Changes: Section 668.22(f)(3)(iii) has been amended to remove the
proposed minimum dollar amount below which a refund would not have to
be made.
Allocation of Refunds and Overpayments. Comments: Three commenters
support the Secretary's proposal to mandate the order of return of FFEL
programs refund amounts. One commenter supported the proposed
allocation of FFEL programs refunds and believed it will reduce student
indebtedness. Three commenters believed including PLUS and unsubsidized
Stafford loans in the refund allocation negates the basic principle of
financial aid, that the family (or student) makes its contribution
first before financial aid is expended. One commenter believed PLUS and
unsubsidized Stafford loans should be excluded from the refund
allocation, because grant money should not be used to pay back student
loans, especially loans that are not need-based.
Discussion: The Secretary wishes to clarify that section 485 of the
Amendments of 1992 specifies the order of return of refunds to the
various sources of aid and to the student. The statute does not exclude
the PLUS or unsubsidized Stafford loan programs from this order of
return. For consistency and reduced administrative burden, the
Secretary has proposed the same order of return for repayments as is
mandated in the law for refunds. The Secretary believes the return
order to be logical and appropriate.
Changes: None.
Comments: Three commenters disagreed with the Secretary's assertion
in the preamble of the February 28, 1994 NPRM that refunds should not
be used to eliminate outstanding balances on loans made for prior
years. These commenters believed it is in the best interest of the
student to allow a refund to be applied to outstanding loans.
Discussion: The Title IV, HEA programs award financial assistance
based on the costs of attendance and the student's need assessment for
a specific period of enrollment in a specific award year. The Secretary
believes it is inappropriate to use funds awarded for the current
enrollment period to cover costs from a prior enrollment period.
Changes: None.
Refund Dates. Comments: Four commenters believed the Secretary
should be more flexible in terms of how an institution determines and
documents a student's last day of attendance in the case of unofficial
withdrawal. These commenters asserted that it is unreasonable to expect
all institutions to maintain attendance records. Two commenters
suggested institutions be required to determine that a student has
unofficially withdrawn within a certain time frame, to avoid a
student's unofficial withdrawal going unnoticed for an unreasonably
long period of time. One commenter believed the proposed provisions
should address cases of institution-initiated retroactive withdrawals.
Discussion: The Secretary wishes to clarify that the concept of
using the student's last recorded date of attendance for refund
purposes is not ``new,'' but has been included in Sec. 668.22 of the
Student Assistance General Provisions regulations since 1988. All
institutions participating in the Title IV, HEA programs have long been
expected to have in place a system by which student attendance can be
documented for the purposes of determining the withdrawal date in cases
of unofficial withdrawal. The Secretary agrees that unofficial
withdrawals should be determined within a reasonable time frame, in
connection with the proposed definition of ``withdrawal date.'' The
Secretary believes cases of institution-initiated retroactive
withdrawals are uncommon and as such do not warrant regulatory
inclusion.
Changes: Section 668.22(i)(1)(ii) has been amended to limit an
institution's determination of a student's unofficial withdrawal to no
later than 30 days after the expiration of the enrollment period, the
academic year, or the program, whichever is earlier.
Comments: One commenter believed the Secretary should not impose a
deadline for refunds and repayments. Several commenters simply stated
the proposed 30-day deadline would be too difficult to meet, especially
for refunds made to lenders, and requested it be extended to 45 or 60
days. Many commenters stated that the proposal to require 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 leisurely 20-day period in
which to return equipment, only to force the institution to rush the
calculation and processing of a refund. Seven commenters stated that
the proposed 30-day refund deadline does not take into account the
unavoidable delay in determining unofficial withdrawals. These
commenters believed most unofficial withdrawals are not discovered
until the end of the subsequent enrollment periods add-drop period, and
that several institutions will therefore consistently be unable to meet
the 30-day requirement. Three commenters requested that all refund
deadlines--for refunds to the program accounts, to lenders, and to
students--be modified to be consistent, suggesting 60 days as a
reasonable length of time for a refund to be made.
Discussion: The Secretary wishes to reiterate that, as discussed in
the preamble of the February 28, 1994 NPRM, the refund deadline given
in Sec. 668.22(i)(3) applies only to refunds made directly to the
student. The Secretary believes refund deadlines are appropriate and
necessary. The Secretary would like to clarify that the deadlines for
the return of refunds to the Title IV, HEA programs are not ``new.''
These deadlines are not included in the current Student Assistance
General Provisions regulations, but in the FFEL programs regulations.
The Secretary wishes to clarify that Sec. 668.22(g)(2)(iv) clearly
states the 30-day refund requirement given in that paragraph applies to
all Title IV, HEA programs other than the Federal Work-Study and FFEL
programs. The deadline for refunds to lenders under the FFEL programs
is set forth not in this section of the student aid regulations, but in
34 CFR 682.607. The Secretary believes that a 30-day refund deadline,
in spite of the 20-day return period for equipment, is reasonable and
sound. The Secretary would like to clarify that Sec. 668.22(g)(2)(iv)
clearly states the refund deadline is determined according to either
the date the student officially withdraws or the date the institution
determines the student has unofficially withdrawn. The Secretary
believes this treatment sufficiently allows for the time needed to
determine unofficial withdrawals. The Secretary believes the refund
deadline for the purposes of the FFEL programs is appropriately longer
than the refund deadlines discussed in this section of the student aid
regulations and that this is necessary to account for the added
procedures of returning funds to the lender.
Changes: Section 668.22(i)(2) has been amended to clarify that the
deadline in that paragraph is applicable only to refunds made to
students.
Appendix A
Comments: A few commenters requested the Secretary more
specifically define several different terms used in appendix A.
Discussion: The Secretary believes the terms used in Appendix A are
standard terms of the educational community, having been in common use
for several years, and as such, necessitate no further definition.
Changes: None.
Comments: Three commenters believed that appendix A was originally
intended to address proprietary institutions and fails to recognize or
treat the specific circumstances of nonproprietary, term-based
institutions. Specifically, these commenters stated that mandatory
proration of all institutional costs disregards the fact that some
institutional costs (such as instructor salary and physical plant
costs) are fixed and unaffected by the withdrawal of a small number of
students. These commenters requested the Secretary drop appendix A and
replace it with requirements that more adequately apply to both
proprietary and nonproprietary institutions.
Discussion: The proration of educational costs is required for pro
rata refund calculations under the Amendments of 1992. The Secretary
feels it is reasonable to extend this concept to the Appendix A
requirements, in keeping with Congress' intent to provide a fair and
equitable refund to Title IV, HEA program recipients. The Secretary
notes that, in the past, the guidelines of appendix A were applicable
to any institution, not just proprietary institutions, if neither an
institution's accrediting agency nor its State had refund standards and
the institution did not choose to follow refund policies set by another
association of institutions and approved by the Secretary. Appendix A
is intended to provide a general and stringent refund standard; the
Secretary encourages institutions and accrediting agencies to work
together in developing accrediting agency refund standards which can be
used instead of appendix A standards and which can be better suited to
the particular needs and circumstances of individual institutions.
Changes: None.
Comments: A few commenters suggested various changes to the percent
of tuition charges that must be refunded for withdrawals which occur
during certain portions of the academic period.
Discussion: The Secretary believes the refund percentages provided
in appendix A are reasonable and appropriate. The commenters have not
given evidence or justification as to why these refund levels should be
altered.
Changes: None.
Comments: One commenter suggested that institutions should be
allowed to deduct a students unpaid charges from a refund due under
appendix A.
Discussion: The June 8, 1993 final regulations require that, for
all refund calculations other than a statutory pro rata refund
calculation, a students unpaid charges be subtracted from the amount an
institution could otherwise retain. The Secretary finds no
justification for exempting refund calculations under appendix A from
this requirement.
Changes: None.
Comments: One commenter believed board charges are adequately
treated under part VI of appendix A, and should not be discussed
separately in part VII.
Discussion: The Secretary believes housing charges are separate and
distinct costs from board charges, even though some institutions
voluntarily choose to link these two costs together. A housing contract
prescribes charges for a dormitory or housing space that presumably
cannot be refilled past a certain point; therefore, such charges are
expended at the point the space cannot be refilled. Part VI provides
for the refund and retention of such charges accordingly. Board
charges, however, are incrementally expended over the length of the
period for which the student has been charged; the cost of food the
student has not yet consumed cannot fairly be retained by the
institution. The contract concept applied to housing charges,
therefore, is inappropriate when determining the fair refund of board
costs. Part VII, therefore, provides separate and distinct guidance for
the refund of board charges. For the purposes of calculating a refund
under appendix A, institutions must treat these two charges separately,
in accordance with the appropriate guidelines.
Changes: None.
Comments: One commenter suggested adding specific language to
Section VIII A to clarify that an administrative fee (of the lesser of
$100 or 5 percent of tuition) cannot be retained in the case of a
student whose aid package consisted only of FFEL programs funds,
because FFEL programs funds must be returned in full to the lender if
the student withdraws before attending one class.
Discussion: The commenter is correct regarding the requirement that
FFEL programs funds be returned in full in the circumstance noted.
However, the Secretary does not believe this or other such requirements
should be reiterated in appendix A. The first paragraph of appendix A
clearly states that these requirements do not affect an institution's
obligation to comply with other Department of Education regulations.
Changes: None.
Comments: Five commenters requested the Secretary clarify the
treatment of unofficial withdrawals under appendix A. Specifically, two
of these commenters believed the language of Section X clearly implies
that a students failure to give withdrawal notice in writing would be
just cause to deny the student's refund.
Discussion: The Secretary considers an institution to have met the
fair and equitable refund requirement if it uses a policy that meets
the minimum requirements of appendix A. Although appendix A does not
recognize unofficial withdrawals and recommends against the
institution's acceptance of oral withdrawal notification, an
institution is not prohibited from adapting a more liberal
interpretation of this subject into its implementation of appendix A
requirements.
Changes: None.
Section 668.23 Audits, Records, and Examinations
Comments: Two commenters suggested including the nationally
recognized accrediting agencies among the list of agencies with which
institutions participating in the Title IV, HEA programs must cooperate
in the conduct of audits, investigations, and program reviews
authorized by law. A few commenters also suggested including the
nationally recognized accrediting agencies among the list of agencies
with which a third-party servicer must cooperate in the conduct of
audits, investigations, and program reviews authorized by law.
Discussion: The Secretary agrees with the commenters. Accrediting
agencies assist the Secretary in determining institutional
participation in the Title IV, HEA programs and should therefore be
included in the list of entities that an institution must cooperate
with. A third-party servicer, acting as an agent of the institution,
should be required to cooperate with any accrediting agency that
accredits an institution with which the servicer contracts to
administer any aspect of the institution's participation in the Title
IV, HEA programs.
Changes: This section is revised to include nationally recognized
accrediting agencies in the list of entities that an institution and a
third-party servicer must cooperate with in the conduct of audits,
investigations, or program reviews authorized by law.
Comments: One commenter was concerned that the requirement for a
third-party servicer to cooperate with a guaranty agency and other
entities in the conduct of audits, investigations, and program reviews,
would give the guaranty agency access to proprietary information of
that servicer. The commenter noted that guaranty agencies directly
compete for the services provided by other third-party servicers. The
commenter suggested limiting cooperation to only include information
that a holder of loans would be required to make available.
Discussion: The Secretary disagrees with the commenter. These
regulations only require access to a third-party servicer's records to
the extent necessary to monitor compliance with applicable statutes,
regulations, special arrangements, agreements, and limitation.
Changes: None.
Comments: Another commenter felt that a third-party servicer should
not be required to cooperate with these entities to the extent that
that cooperation includes the copying of computer programs that are the
sole property of the servicer. The commenter felt that any copying
would violate copyright laws included in the licensing agreement to the
software; the commenter recommended deleting this provision.
Discussion: These regulations require access to a third-party
servicer's records to the extent necessary to monitor compliance with
applicable statutes, regulations, special arrangements, agreements, and
limitations. These regulations do not require, nor does the Secretary
expect, a third-party servicer to violate any copyright laws governing
computer programs. Nevertheless, a third-party servicer, like an
institution, is expected to make available for examination and copying
all relevant information, including the computer program.
Changes: None.
Comments: Several commenters suggested amending the provisions of
Sec. 668.23(b)(3) governing reasonable access to an institution's
personnel to allow an institution the basic right to protect its
interest during a compliance review by having an attorney, a management
representative, or a tape recorder present when the Department of
Education conducts an interview with a person employed by the
institution. A few commenters suggested that these provisions violate
an employee's constitutional rights to counsel. One commenter stated
that as a minimum, an institution should have the opportunity to build
its own record and rebut inaccurate charges by having tape recordings
of interviews between its employees and the Department of Education's
representatives. Several commenters were against the provisions in this
section that require a third-party servicer, in the conduct of audits,
investigations, or program reviews, to allow its individual employees--
those employees connected with the servicer's administration of the
Title IV, HEA programs--to be questioned in private, without management
being present or without the questioning being tape recorded. Many of
these commenters contended that this requirement violated an
individual's right to due process. One commenter felt that the
Secretary was overstepping his statutory authority in this matter.
Discussion: The Secretary has already responded to similar comments
in the preamble to final regulations for parts 600 and 668 that was
published in the Federal Register on July 31, 1991 (56 FR 36682). The
Secretary continues to disagree with these views and in the three years
since these regulations have been in effect has received no evidence
that the claims of the commenters are justified. With respect to third-
party servicers, these provisions simply add requirements for third-
party servicers that parallel current requirements for institutions
participating in the Title IV, HEA programs.
Changes: None.
Comments: Many commenters recommended that an institution should be
able to use a third-party servicer's annual compliance audit report to
satisfy the portion of an institution's audit requirement for those
areas that the servicer has contracted to administer on behalf of the
institution. These commenters noted that this idea would eliminate
duplication of effort by independent auditors auditing a third-party
servicer's activities.
Discussion: The Secretary generally agrees with commenters that an
institution may use a third-party servicer's audit report to cover
those areas of an institution's participation in the Title IV, HEA
programs that the institution has contracted with the servicer to
administer. However, if an institution is required to have audited
additional areas of its administration or is required to use different
procedures in having the audit performed than the servicer then the
institution may not be able to use fully the results of the servicer's
audit. An institution is always responsible for ensuring that a
compliance audit of the institution's participation in the Title IV,
HEA programs includes all aspects of the institution's participation.
Changes: None.
Comments: Forty-three commenters suggested that an institution
ought to be permitted to remain under the biennial audit requirement if
that institution did not have deficiencies in the prior audit report of
more than five percent of the institution's total Title IV, HEA program
funds. Many of these commenters pointed out that this modification
would parallel a similar provision in the proposed Sec. 668.15
governing financial responsibility. At a minimum, the commenters
recommended that these provisions be modified to reflect that an
institution that had no deficiencies that required a monetary
adjustment be permitted to remain under the biennial audit requirement.
Several commenters asked the Secretary to clarify what are considered
to be no deficiencies and material exceptions. One commenter suggested
specifying certain amounts in the use of those terms. Three commenters
supported the Secretary's proposal to provide exceptions to the annual
audit requirement for third-party servicers that administer small
amounts of Title IV, HEA program funds. One commenter argued that
third-party servicers administering less than $250,000 in Title IV, HEA
program funds should not be excluded from having an annual audit
performed. One commenter recommended that instead of requiring third-
party servicers to have performed a compliance audit at least every two
years if the servicer administers less than $1,000,000 in Title IV, HEA
program funds, that that threshold should be increased to $5,000,000.
Three commenters urged the Secretary to require all third-party
servicers to have an annual audit performed. One commenter suggested
defining what is meant by a material exception.
Discussion: The Secretary has reevaluated his proposal in the
February 17 and 28, 1994, NPRMs and upon a further examination of
section 487(c) of the HEA and information surrounding the intent of the
statute, has determined that the proposals were inconsistent with the
requirement for an institution to have performed, without exception, 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, without exceptions, on an annual basis, a compliance audit
of the servicer's administration of any aspect of its administration of
an institution's participation in a Title IV, HEA program. The
Secretary appreciates the comments and suggestions provided with
respect to the basis for exempting institutions and third-party
servicers from the annual audit requirement. While the Secretary cannot
adopt these in the regulations, the Secretary is considering them in
the development of changes to the Department of Education's audit
guides. These changes are being designed to reduce administrative costs
by allowing institutions that meet certain performance-based or funding
criteria to have performed compliance audits under a reviewed or
compiled basis rather than fully audited.
Changes: The provisions that provided for exceptions to the annual
audit requirements for institutions and third-party servicers have been
deleted in these final regulations. The proposed audit exceptions in
this section have been removed. This section has been revised to
require that all institutions have performed an annual compliance audit
of the institution's administration of its Title IV, HEA programs; and
to require that all third-party servicers have an annual compliance
audit performed of every aspect of the servicer's administration of the
participation in the Title IV, HEA programs of each institution with
which the servicer has a contract.
Comments: Many commenters suggested amending Sec. 668.23(c)(8) to
establish deadlines for the submission of audit reports, rather than
allowing the Inspector General to specify these deadlines in the audit
guides. Several commenters questioned whether the Inspector General has
the authority to establish this requirement without regulations.
Another commenter suggested that the regulations contain a provision
that would require institutions to meet the deadlines specified in the
audit guide, but stipulate that under no circumstances would the
institution be required to submit its audit report earlier than four
months following the expiration of the audit period.
Discussion: Upon review of the commenters' concerns, the Secretary
agrees that because these regulations require that an audit report must
be submitted in a timely manner, the regulations should provide
institutions and third-party servicers with the specific dates for
submission of audit reports. The Secretary believes that a period of
120 days from the end of the institution's or servicer's fiscal year
provides an institution or servicer with a sufficient period of time to
have an audit performed and to submit the audit report to the
Department.
Changes: The regulations have been revised to state that an
institution or third-party servicer must submit its audit within 120
days of the end of its fiscal year. An institution or third-party
servicer that has an audit performed under the Single Audit Act must
submit the audit report in accordance with the deadlines specified in
that act.
Comments: Many commenters were opposed to the provision that the
Secretary could require a third-party servicer to release the results
of an audit to cognizant guaranty agencies, eligible lenders under the
FFEL programs, State agencies, nationally recognized accrediting
agencies, and State Postsecondary Review Entities on the grounds that
these entities are not affected by the servicer's actions and release
of information in the audit report could unnecessarily damage a third-
party servicer's reputation.
Discussion: The Secretary disagrees with the commenters that the
referenced entities are not affected by a third-party servicer's
actions. 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, that
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 requirements.
Changes: The Secretary is revising paragraph (c)(4) of this section
to include the Secretary of Veteran Affairs in the list of entities
that the Secretary may require an institution or third-party servicer
to provide the results of an audit to.
Comments: One commenter felt that an audit guide specifically
developed for third-party servicers was necessary to comply with the
requirements of this section. Another commenter was of the opinion that
the period covered by a third-party servicer's first audit should not
start until after audit guidance is available from the Department of
Education.
Discussion: The Department of Education's Office of Inspector
General is working on developing audit guides applicable for compliance
audits performed of institutions and third-party servicers. The
Secretary expects that these guides will be available before the
initial audit period covered by an audit performed of a third-party
servicer begins.
Changes: None.
Comments: Regarding the requirement for an institution to maintain
records on a student's placement if the institution has a placement
service used by the student, four commenters were concerned that
application of this requirement to all institutions for all types of
student employment placement might be overreaching and could result in
institutions electing to terminate their student employment service
rather than comply with burdensome recordkeeping requirements.
Commenters pointed out that at some large institutions, student
employment centers often act as clearinghouses for posting jobs and
professional career opportunities, but frequently lacked the resources
to track actual placement. Most often, employment information is made
available to students and that information is simply removed from
posting once the employer indicates the position has been filled.
Commenters maintained that a formal follow-up process on student
employment is not generally systematic and obtaining appropriate
documentation would discourage institutions from continuing to provide
this service to students. Two commenters recommended removing this
requirement from the regulations. Three other commenters suggested that
the Department of Education revise this provision of the regulations so
that it would apply only to institutions that are otherwise required to
track student employment as a condition of Title IV, HEA program
eligibility or pertains only to those students for which the
institution must otherwise maintain employment records.
Discussion: The Secretary does not intend for this requirement to
be burdensome to institutions. This provision merely requires an
institution with a placement service to document that the institution
does what it claims to do--namely, place students in jobs.
Changes: None.
Comments: Two commenters objected to the requirement that an
institution establish and maintain records that support the educational
qualifications of each regular student admitted to the institution
whether or not that student receives Title IV, HEA program assistance,
that are relevant to the institution's admission standards. Both
commenters believed that institutions should only be required to
establish and maintain summary or aggregate information on the
educational qualifications of students admitted to the institution.
This aggregate data would be available to the Secretary only if the
Secretary could demonstrate a compelling need to review the
information.
Discussion: The Secretary believes this provision is necessary to
establish whether an institution is in compliance with the statutory
admission requirements of sections 1201(a) and 481(b) and (c) of the
HEA for purposes of institutional eligibility and participation in the
Title IV, HEA programs.
Changes: None.
Comments: Two commenters urged the Secretary to include a
requirement that institutions retain records documenting whether and
when a student completes his or her educational program. This
information is needed to verify completion rates.
Discussion: The Secretary has taken these comments under
consideration, but concluded that other regulatory provisions governing
the completion rate calculations contain requirements to retain
documentation to support the computations.
Changes: None.
Section 668.24 Audit Exceptions and Repayments
Comments: Two commenters supported the Secretary's proposed
requirement for a third-party servicer to notify all institutions for
which the servicer provides the same service, in addition to those
institutions under whose contract the servicer incurred a liability for
a Title IV, HEA program violation. Other commenters felt that this
requirement was excessively broad. Several of these commenters argued
that this requirement would unnecessarily damage a third-party
servicer's reputation. Several commenters noted that the Secretary's
proposed notification requirements were not all that different from
full notification of all institutions with which the servicer
contracts. One commenter suggested that third-party servicers should be
required to notify institutions receiving the same service for which
the servicer owes a liability only if that liability is material. One
commenter recommended that a third-party servicer that is assessed a
liability should have a reasonable amount of time to provide the
notification to the servicer's clients. Another commenter was of the
opinion that the Secretary notify all of the institutions with which
the servicer contracts of the Secretary's determination at the same
time that the servicer is notified.
Discussion: The Secretary disagrees with the commenters that
objected to the notification requirements. If a third-party servicer is
assessed liability for a violation of a Title IV, HEA program
requirement, any institution for which the servicer provides the same
service in which the violation was found is potentially at risk as a
result of the servicer's actions. Obviously, each institution under
whose contract the servicer committed a violation should be notified
because the Secretary holds that institution responsible for the full
amount of the liability. In addition, each institution that contracts
with the servicer for the same service in which the violation was found
should also be informed of the servicer's violation. The Secretary
believes that an institution that receives the same service should be
informed of the servicer's violation of any Title IV, HEA program
requirement because the servicer may commit a similar violation at that
institution and the institution could be held liable for that
violation. This notice will also allow an institution to take
corrective action without waiting for formal action by the Secretary.
With respect to the commenter who was concerned that third-party
servicers should have a reasonable amount of time in which to notify
affected institutions of the Secretary's determination to assess a
liability against the servicer, the Secretary does not believe that
that time frame needs to be quantified. Servicers are expected promptly
to notify affected institutions of the Secretary's determination
because those institutions are also responsible for violations
committed by their servicers. Servicers that fail to notify
institutions may jeopardize an institution's ability to provide
information to show that questioned expenditures were proper or take
corrective action to mitigate violations caused by a third-party
servicer. In reviewing a third-party servicer's appeal of the
Secretary's determination, the Secretary will take into consideration
whether or not the servicer notified affected institutions promptly of
the Secretary's determination.
The Secretary does not agree that it is necessary for the
Department of Education to provide notice to all of the institutions
with which a third-party servicer contracts if that servicer is
assessed a liability. A third-party servicer, as a responsible agent of
an institution, has an obligation to keep that institution informed of
any developments that might possibility jeopardize the institution's
participation in the Title IV, HEA programs. If the Secretary seeks to
assess liability against an institution for a third-party servicer's
conduct, he will provide the appropriate notice to the affected
institution.
Changes: None.
Comments: Four commenters opposed the provision in this section
that required an institution to be responsible for payment of any
liability owed by the institution's third-party servicer for a
violation of the institution's participation until the amount is paid
in full. One of these commenters argued that the third-party servicer
should be held entirely accountable for payment of any liabilities
incurred for the servicer's violation of Title IV, HEA program
requirements.
Discussion: In the NPRM published on February 17, 1994, the
Secretary repeatedly stated that an institution is always responsible
for the actions of any of its third-party servicers. This
responsibility includes assuming payment of any liability incurred by
the servicer as a result of a violation of a Title IV, HEA program
requirement by the servicer while administering aspects of the
institution's participation in the Title IV, HEA programs. See
Sec. 668.25(c)(3). No institution will be required to answer for
servicer violations without the opportunity to have such determinations
reviewed under the procedures established in these regulations.
Changes: None.
Comments: Two commenters were concerned with the provision in this
section governing the ability of the Secretary to perform an
administrative offset to collect funds owed under the procedures of
this section. One of these commenters suggested that the Secretary only
use administrative offset to collect funds if a third-party servicer
has not entered into an agreement with the Secretary to repay those
funds. The other commenter thought that this provision amounted to the
equivalent of an emergency action without having to afford an
institution or third-party servicer a show-cause hearing. Several
commenters were opposed to the provision in this section governing the
ability of the Secretary to collect on a surety or third-party
guarantee before the conclusion of appeal proceedings. These commenters
contended that this provision assumes that the party is guilty before
it is proven. Two of the commenters were also opposed to this provision
on the grounds that audit findings of the Department of Education are
sometimes insupportable or in error and that to collect on a surety or
guarantee before those findings can be proven wrong is simply improper.
Discussion: The provisions in this section governing additional
steps that the Secretary may take to collect funds owed under the
procedures of this section are necessary to allow the Secretary to act
quickly to protect Federal funds and insure that funds are available
for collection. Institutions have a distinct financial incentive to
cause delay and prolong any appeal of audit determinations. Some
institutions use delays to either hide assets or drain assets so that
none remain for collection; others may attempt to draw increased
amounts of Title IV, HEA program funds prior to any final
determination. The commenters are incorrect in stating that
administrative offset denies procedural protection. Under the
Department's offset regulations in 34 CFR part 30, the Department
provides written notice and an opportunity to inspect records and
receive an oral hearing. The Department may offset prior to completing
the procedural requirements where failure to offset may substantially
prejudice its ability to collect. In such cases, the Secretary
completes the procedural requirements promptly thereafter and returns
any funds later found not to be owing.
With respect to comments about the Secretary's ability to collect a
surety or guarantee before final determinations are concluded or all
appeal procedures are exhausted, the Secretary does not agree with the
commenters. Financial surety is provided to the Department as a
condition of participation to insure that funds are available to
satisfy liabilities. The Secretary would only attempt recourse in cases
where there is a need to provide relief to students or borrowers
affected by the actions of the institution or third-party servicer, or
where the terms of the surety do not guarantee that funds will be
available after appeals are completed. For example, in the case of an
institution that has failed to pay refunds owed to students that
attended that institution, the Secretary believes that the need to
collect in advance to pay those refunds outweighs deferring collection
to final determinations or until the exhaustion of all appeal
procedures are completed.
Changes: The reference to 34 CFR 30.28 is revised to refer to 34
CFR part 30 to clarify that the procedural protections in that part
related to administrative offset apply.
Section 668.25 Contracts Between an Institution and a Third-Party
Servicer
Comments: Many commenters supported fully the Secretary's proposal
in this section that requires a third-party servicer to assume joint
and several liability with an institution for any violation by the
servicer of any statutory or regulatory provision relating to Title IV
of the HEA. One of these commenters noted that only the assumption of
full liability by a third-party servicer could ensure the protection of
public funds.
In addition, many commenters supported the application of some type
of liability on a third-party servicer for the servicer's violation of
a Title IV, HEA program requirement, although most of these commenters
recommended that the Secretary cap liability at the fees and
compensation received by the servicer from the institution. A few
commenters supported the Secretary's compromise to limit the liability
of a third-party servicer to the fees and compensation received from
the institution if the servicer was not an affiliate of the institution
and to assess full joint and several liability against the servicer if
the servicer was an affiliate of the institution. Other commenters
believed in the concept of joint and several liability for third-party
servicers only to the extent that it could be unequivocally proven that
the servicer is the one at fault, or that the violation of a Title IV,
HEA program requirement was more serious than simple human error.
Many commenters opposed requiring a third-party servicer to assume
joint and several liability with an institution for a violation by the
servicer of a Title IV, HEA program requirement. These commenters
argued that to impose joint and several liability on a third-party
servicer would (1) lead to increased servicing fees to compensate for
increased risk assumed by the servicer; (2) force out servicers not
willing to assume a level of risk in excess of the servicer's fees and
compensation; and (3) interfere in contractual matters that should be
left to the parties involved. These commenters recommended that instead
of imposing liability on a third-party servicer, to increase
accountability of the administration of the Title IV, HEA programs, the
Secretary should instead focus on an institution's administrative
capability and financial responsibility to achieve greater
accountability.
Several commenters questioned what happens to existing contracts
with institutions that were negotiated under a different assumption of
liability. A few of these commenters asked the Secretary not to impose
retroactive liability for contracts that did not incorporate or price
for such an event.
Discussion: The Secretary appreciates the support from the
commenters who agreed that third-party servicers should be jointly and
severally liable with an institution with which the servicer contracts
for any violation by the servicer of a Title IV, HEA program
requirement. The Secretary agrees with these commenters that third-
party servicer liability is necessary to insure compliance with Title
IV, HEA program requirements. Servicers who must stand behind their
work financially are more likely to use the high standard of care
expected of Title IV, HEA program participants.
The Secretary has reexamined his position with regard to adopting
the compromise in the NPRM to limit joint and several liability to the
fees and compensation that a third-party servicer has received from the
institution if the servicer was not an affiliate of the institution.
The Secretary does not believe that anything less than the full
assumption of liability can fully protect the interest of Federal tax
dollars in the form of Title IV, HEA program assistance. Otherwise,
servicers have no financial incentive to insure complete program
compliance. With respect to the comment that a third-party servicer
should not be assessed liability unless it can be proven that the
servicer is at fault, the Secretary does not consider a third-party
servicer to be jointly and severally liable with an institution unless
the servicer is the one that has violated a Title IV, HEA program
requirement. The Secretary believes that if a third-party servicer
violates a Title IV, HEA program requirement that the servicer should
be held liable, along with the institution with which the servicer
contracts, because a violation, even an error, impacts on the integrity
of the Federal student financial assistance programs, and should be
redressed.
The Secretary disagrees with the comments that requiring servicer
liability will necessarily increase fees so as to deny access to
servicing. Some of these commenters noted that some servicers may price
their service at a low-level to reflect the fact that they assume no
liability. The Secretary does not believe that institutions or federal
taxpayers are well served by servicers who are unwilling to stand
behind the quality of their work. As agents of institutions
participating in the Title IV, HEA programs, servicers are also subject
to an institution's fiduciary responsibility to use the highest
standard of care and diligence. By rejecting any responsibility for the
quality of its work, the Secretary believes any such servicer cannot be
expected to perform with the required concern for the proper
expenditure of federal funds. The Secretary notes that he received
favorable comments from organizations that are third-party servicers,
or institutions who utilize third-party servicers, who did not raise
any issue of adverse impact on fees. The Secretary has no doubt that
these and similar servicers will continue to compete effectively for
institutional clients at competitive prices. The Secretary notes that
the higher education servicing industry is highly competitive which
should restrain any excessive fee increases; in fact, by requiring all
servicers to assume liability, the Secretary believes that this
requirement should level the playing field by eliminating underbidding
by those servicers who assume no responsibility for the quality of
their work.
The Secretary notes that servicers are not being asked to serve as
guarantors for their client-institutions, but merely being required to
answer for the consequences of their own conduct. In this regard, if
the services they provide have no adverse financial impact, there is no
financial exposure for such a third-party servicer, or reason to
increase fees charged.
With respect to those commenters who contended that the liability
provision interfered in contractual matters that should be left up to
the parties involved, the Secretary disagrees. The Secretary strongly
believes that it is necessary to include this provision in the
regulations because a third-party servicer administers aspects of the
Title IV, HEA programs that are funded with Federal tax dollars.
Therefore, it is entirely appropriate to establish requirements to
safeguard such funds. Simply leaving this area to the parties, leaves
open that possibility that no minimal care will be exercised by the
servicer. An institution is free, however, under these regulations to
agree to indemnify a third-party servicer in the event a third-party
servicer must make any payment to the Secretary. The Secretary notes
that these regulations will have the salutary effect of requiring
institutions and servicers to exercise greater care in the selection of
their contractual partners.
The Secretary would like to make clear that a third-party servicer
and an institution are only jointly and severally liable for any
violations of any statutory or regulatory provision applicable to Title
IV of the HEA and not for other types of violations. The Secretary is
imposing requirements in contracts between third-party servicers and
institutions only to the extent that a third-party servicer or
institution administers any aspect of the Title IV, HEA programs.
With respect to the commenters who asked about the impact on
existing contracts, the Secretary states that third-party servicers
will have no joint and several liability for periods prior to the
effective date of these regulations. The Secretary expects that once
these regulations become effective, all contracts between third-party
servicers and institutions will have to include the requirements
provided in Sec. 668.25(c), including the requirement that a third-
party servicer is jointly and severally liable with the institution for
any violation by the servicer of any statutory provision of or
applicable to Title IV of the HEA, any regulatory prescribed under that
statutory authority, and any applicable special arrangements,
agreements, and limitations entered into under the authority of
statutes pertaining to Title IV of the HEA. This may require
modification of existing contracts.
Changes: None.
Comments: Some of the commenters questioned the provisions of this
section governing a third-party servicer's responsibility to report all
suspected instances of fraud to the Department of Education's Office of
Inspector General. Two of these commenters recommended that in order to
meet this requirement that third-party servicers be given an
unqualified privilege exempting the servicer from any liability in
connection with the referral of an institution to the Department of
Education's Office of the Inspector General. In addition, one of the
commenter questioned the Secretary's requirement to refer suspected
instances of fraud or other criminal misconduct in connection with the
Title IV, HEA programs. The commenter was concerned that if the
servicer was wrong that the servicer's reputation would be irrevocably
damaged. One commenter suggested that a third-party servicer should
only be required to report information indicating fraud only where
there is proof to substantiate the belief that an institution may have
engaged in fraud.
Discussion: The Secretary recognizes that third-party servicers
will not always be privy to sufficient information to identify possible
fraud or criminal misconduct on the part of an institution. However, if
there are identifiable circumstances in which a reasonable person would
believe that an institution has deliberately misreported information,
recklessly reported information without regard for its accuracy, or
altered official documents, then a third-party servicer should report
such information to the Office of Inspector General. The servicer is
not required to reach a firm conclusion as to the impropriety of the
institution's actions or provide evidence to substantiate possible
criminal charges, but is required to simply refer the matter to the
Department of Education's Office of Inspector General for appropriate
action. Since this referral requirement is a required part of any
contract between a third-party servicer and an institution, an
institution has no basis to object to any referral made pursuant to
this requirement. The Secretary thus believes that it is unnecessary to
provide an unqualified privilege as suggested by some commenters;
moreover, such a privilege would allow referrals even where there is no
reasonable basis to believe misconduct has occurred. The Secretary
assures third-party servicers that a third-party servicer will not be
held responsible for any violations that the servicer has not itself
perpetrated or aided and abetted. However, the Secretary will regard
failure to take appropriate action when there is reasonable cause to
believe that fraud or criminal misconduct has occurred to be a serious
violation of these regulations and of a participant's fiduciary
obligations.
Changes: None.
Comments: One commenter supported the concept of the provision in
this section governing the requirement that an institution must notify
the Secretary within 10 days of the date that a contract between an
institution or third-party servicer is modified or terminated or within
10 days of the date that a third-party servicer, under contract with
that institution, goes out of business, stops providing services, or
files a petition for bankruptcy. However, the commenter believed that
the burden of notifying the Secretary of any changes to the contract
should rest with the servicer. Many commenters opposed this provision
and argued that this requirement constituted needless paperwork on the
part of the institution. These commenters contended that any changes to
a contract between a third-party servicer would be examined in the
course of having performed an annual audit.
One commenter recommended that the notification time frame be
changed from 10 days to 30 days. Another commenter recommended that the
time frame either be revised to state that the institution must notify
the Secretary promptly of any changes or, barring that, within 90 days.
Discussion: Section 498(b)(3) of the HEA requires an institution to
submit to the Secretary with its application for participation a copy
of any contract between the institution and a third-party servicer and
a description of that servicer; section 487(a)(3) requires an
institution to submit information related to its administrative
capability and financial responsibility. The Secretary interprets these
statutory provisions to require institutions to keep the Secretary
apprised of any contracts between themselves and third-party servicers,
including, any significant modifications to those contracts, or any
terminations of those contracts. The Secretary need contract
information provided by institutions to monitor the responsibilities of
third-party servicers. For example, if a program review uncovers a
Title IV, HEA program violation at an institution in an area that a
third-party servicer has recently contracted to administer, the
Secretary must have current information to identify other institutions
where the same servicer may have committed the same violation. The
Secretary believes that 10 days constitutes a reasonable time period in
which an institution must inform the Secretary of any changes or
terminations of a contract while at the same time providing the
Secretary with current information on those contracts. This time frame
is consistent with the other reporting requirements concerning
institutional eligibility under 34 CFR 600.30, thereby facilitating
reporting as an institution will not have to track different reporting
deadlines.
Changes: None.
Comments: One commenter objected to the requirement that a third-
party servicer return all applicable records to the institution if the
contract between the servicer and institution is terminated, or if the
servicer stops providing services, or if the servicer files a petition
for bankruptcy. The commenter believed that these records were the
servicer's sole guarantee that the institution would pay the servicer
any fees or compensation still owed to the servicer by the institution.
The servicer also argued that the absence of these records would
adversely affect the ability of an independent auditor in the event the
servicer had a compliance audit performed of its administration of the
institution's participation in the Title IV, HEA programs.
Discussion: If a third-party servicer must return records to an
institution, these regulations do not prohibit a third-party servicer
from retaining copies of the original records in order to facilitate a
compliance audit. The Secretary notes that the expense of copying
should be unnecessary as an institution must provide a third-party
servicer's independent auditor with access to records pursuant to 34
CFR 668.23(b).
With respect to the comment specifying that record retention was a
third-party servicer's sole guarantee that an institution owing that
servicer unpaid fees or compensation would pay, the Secretary strongly
objects to any use of Title IV, HEA program records as bargaining chips
in a pay dispute. Access to those records is required for uninterrupted
administration of those programs. No servicer should hold these records
hostage.
Changes: None.
Comments: Several commenters were concerned with the provisions in
this section that limited a third-party servicer's ability to enter
into a written contract with an eligible institution if the servicer
had been limited, suspended, or terminated by the Secretary within the
past five years.
Discussion: The Secretary understands the commenters' concerns but
does not believe that those concerns are justified. As the Secretary
explained in the NPRM, if a third-party servicer is found to exhibit
indicators of a questionable past performance, the servicer would be
prohibited from entering into a written contract with an institution to
administer any aspect of the institution's participation in the Title
IV, HEA programs. However, notwithstanding this prohibition, the
Secretary would consider the servicer still eligible to contract with
an institution if persons or entities with substantial control over the
servicer agree to be responsible for any potential liability arising
from the servicer's administration of the Title IV, HEA programs.
Changes: None.
Section 668.26 End of an Institution's Participation
Comments: Several commenters believed that if an institution's
participation ends, it would be less disruptive to currently enrolled
students who are receiving Title IV, HEA program assistance to allow
the students to continue to be enrolled and receive Title IV, HEA
program assistance until they complete their educational program. The
commenters suggested that immediate termination of all funds under the
Title IV, HEA programs would likely cause closure of the institution
and costs to the government resulting from forgiveness of the students'
loans. A few commenters argued that if an institution's participation
has ended, it would be unrealistic to require the institution to inform
immediately the State in which the institution is located of its loss
of participation in the NEISP or SSIG Program, because there would be
no one to make the notification. The commenters suggested that it would
be more appropriate for the Secretary to make the notification in this
case.
Discussion: Commenters misunderstood that immediate termination of
Title IV, HEA program funds occurs for students at an institution whose
participation ends but that does not close. The availability of those
funds continues through the end of the payment period or period of
enrollment in which the participation ends for enrolled students who
have received a commitment for those funds. To provide funds beyond
that point, however, would oblige the Secretary in effect to continue
an institution's participation after the institution no longer
qualifies for that participation. With regard to the commenters'
objections to notifying a State upon the loss of an institution's
participation in the NEISP or SSIG Program, it is no more unreasonable
to expect an institution to notify the State than to expect the
institution to notify the Secretary of the loss of participation in any
other program. Institutions have been complying with this requirement
for 20 years.
Changes: None.
Comments: Many commenters contended that if the Secretary receives
a notice from a SPRE that the institution's participation should be
withdrawn, the institution's participation should not end until the
institution has had the opportunity to appeal to the Secretary or
appropriate authority. Many commenters believed that an institution's
participation should not end if the institution's program participation
agreement expires due to the Secretary's failure to approve the
application for a renewal of participation in a timely manner. One
commenter suggested that, if an institution's participation is
terminated as a result of misuse of funds under the Title IV, HEA
programs, the Secretary prohibit the institution from crediting to a
student's account or delivering to the student the proceeds of a second
or subsequent disbursement of a Federal Stafford or Federal SLS loan
after the institution's participation in the Title IV, HEA programs
ends. The commenter believes it would be inappropriate to allow an
institution that had previously misused funds under the Title IV, HEA
program to disburse additional funds.
One commenter disagreed with the requirement that, if an
institution's participation in a Title IV, HEA program ends, the
institution must submit a letter of engagement for an audit of all
funds received under that program within 45 days. The commenter stated
that engagement letters are not required under generally accepted
auditing standards or Government auditing standards.
Discussion: Under the State Postsecondary Review Program, a SPRE
does not inform the Secretary that an institution's participation
should be terminated until the SPRE has afforded the institution its
full appeal rights. A further discussion of this process is found in
the preamble to the regulations for the State Postsecondary Review
Program. The Secretary agrees with those commenters who were concerned
about the expiration of an institution's participation if the review of
a properly completed application, submitted in a timely manner, has not
been completed before the expiration of participation. An explanation
of the changes made to accommodate this circumstance is found in the
section of the Analysis of Comments and Changes that addresses
certification procedures (Sec. 668.13).
The Secretary appreciates the concern of the commenter that an
institution terminated for misuse of Title IV, HEA program funds ought
not be permitted to continue to handle those funds, even for a limited
period. The Secretary, however, considers that the honoring of
commitments made to students is equally important and, provided that
the institution continues to offer education, insists that those
commitments be honored. The Secretary can also take additional steps to
safeguard these remaining funds when appropriate. The institution
remains liable for the proper handling of Title IV, HEA program funds
even after its participation is terminated. Naturally, should the
institution reapply for participation in a Title IV, HEA program or
should a person with substantial control over the institution also have
substantial control over another institution, the way that the
terminated institution complied with the requirements of this section
will be a factor in determining the institution's readmission into the
programs or the person's continued role in the administration of the
programs.
The Secretary needs assurance that if an institution's
participation in a Title IV, HEA program ends, the institution will
make arrangements for a final audit of the institution's administration
of the program. A letter of engagement provides the Secretary
authoritative notification that the institution is carrying out its
responsibility to end its participation in a way that will allow the
Secretary to determine whether any further liabilities or corrective
action is required. Generally accepted auditing standards and the GAO's
Standards for Audit of Governmental Organizations, Programs,
Activities, and Functions do not prohibit this requirement.
Changes: None.
Comments: Two commenters recommended that the Secretary expand the
exception for institutions that close as a result of a natural
disaster. They suggested that the exemption apply to an institution
that closes as a result of fire, a weather emergency, or other causes
beyond the control of the institution. One commenter suggested that an
institution that is closed or stops providing educational programs for
fewer than seven instructional days should remain a participating
institution.
Discussion: The Secretary adopts the exception for closures as a
result of a natural disaster because this event is readily verifiable.
The Secretary acknowledges that other circumstances may require an
institution to close on a temporary basis, but does not consider these
other circumstances sufficient to establish additional exceptions to
the requirements of this section, because the period of closure will be
too short. In most such instances, the institution has recourse to
other remedies, such as the arrangement for the use of other
facilities. Indeed, the definition of academic year for most purposes
actually recognizes that a week of instructional time can include a
number of days in which instruction does not occur.
Changes: None.
Subpart G--Fine, Limitation, Suspension, and Termination Proceedings
Section 668.81 Scope and Special Definitions
Comments: Several commenters believed that the appeal procedures of
this section should apply to institutions that were provisionally
certified if the Secretary revokes the institution's provisional
certification. Many commenters believed that the appeal procedures of
this section should apply to institutions if the institution's period
of participation has expired. Several commenters suggested that the
Secretary limit, suspend, or terminate the eligibility of a third-party
servicer to contract with an institution only to those services and
Title IV, HEA programs for which the servicer has been found to be in
violation and only to those institutions on whose behalf the servicer
committed the violation. The commenters claimed that the servicer's
activities and the Secretary's sanctions might sometimes concern
violations would have no material relationship to the servicer's
ability to provide other servicing functions to institutions which it
serves and to other institutions unaffected by the original violations.
Discussion: See discussions under the section of the Analysis of
Comments and Changes that address certification procedures
(Sec. 668.13). The Secretary does not agree with the commenters'
suggestion that the Secretary should limit, suspend, or terminate the
eligibility of a third-party servicer to contract with an institution
only to those services and Title IV, HEA programs for which the
servicer has been found to be in violation and only to those
institutions on whose behalf the servicer committed the violation. The
Secretary imposes a sanction against a third-party servicer for a
violation of a Title IV, HEA program requirement for a specific reason,
to protect the integrity of the Title IV, HEA program. The Secretary,
if necessary, must reserve the right to limit, suspend, or terminate a
third-party servicer's eligibility to administer any aspect of the
Title IV, HEA programs for any institution to ensure that further harm
does not occur to one or all of those programs. However, where
appropriate, any limitation, suspension or termination action may be
limited in scope as suggested.
Changes: None.
Section 668.82 Standard of Conduct
Comments: One commenter believed that individual employees should
not be responsible for actions beyond their control; instead, they
should be held responsible for actions that are reasonable. For
example, to be held responsible for accounting errors of other
departments may be going beyond what is reasonable. Two commenters
argued that the servicer is merely under contract to provide particular
services, and is in no position to monitor the institution's compliance
with other fiduciary matters. They also claimed that establishing a
fiduciary standard also would establish enormous liability for areas
beyond the servicer's control. These commenters recommended that
clarification is needed in the regulations to ensure that a third-party
servicer could only be held to a fiduciary standard for funds under
that servicer's direct control.
Discussion: The Secretary holds a third-party servicer to a
fiduciary standard of care and diligence only in the exercise of the
servicer's Title IV, HEA program responsibilities that the servicer has
contracted with the institution to perform. The Secretary does not
expect a third-party servicer to be responsible for aspects of
administration of the Title IV, HEA programs or funds attributed to
those programs that the servicer has not contracted with an institution
to administer. With respect to the comment on the responsibility of
individual employees, the Secretary notes that these regulations apply
a standard of conduct only to the third-party servicer itself;
individual employees are not held accountable under this provision.
However, the Secretary expects a third-party servicer to train its
employees to perform their duties consistent with the servicer's
fiduciary obligations.
Changes: None.
Comments: One commenter was concerned that the provisions governing
a third-party servicer's fiduciary duty would limit the servicer's
ability to acquire its servicing fees from funds administered by the
servicer.
Discussion: A third-party servicer entrusted with Title IV, HEA
program funds may not use those funds to compensate itself for fees
owed to the servicer by an institution. As provided in Sec. 668.18,
federal funds may only be used for Title IV, HEA program purposes, and
may not be hypothecated or used for collateral. The only exception
would be where an institution has agreed to pay to the servicer all or
part of the administrative cost allowance payable to an institution
under the Title IV, HEA program regulations. Otherwise, the Secretary
will regard any effort to take servicing fees directly from federal
funds as a grave violation of a third-party servicer's fiduciary
obligation, for which its eligibility to contract with any institution
should be terminated.
Changes: None.
Comments: Several commenters believed that it is unreasonable to
expect a third-party servicer to be held to the same fiduciary
standards as the institution.
Many commenters stated that the proposed language could be read to
mean that if any employee of a third-party servicer (e.g., janitor or
painter) has been convicted of or has pled nolo contendere to any crime
involving government funds (not specifically Federal student aid), the
servicer is subject to termination. Four of these commenters voiced
concern about the issue of due process, because the ability to screen
all applicants is very limited due to laws regarding privacy and
nondiscrimination in hiring. One of the commenters stated that such
removal may be prevented by State or Federal laws and perhaps expose
the servicer to liability. One commenter believed that the provisions
should be effective only for new contracts, because many servicers
currently have contracts with subcontractors that do not contain the
restriction regarding removal of an affiliation, and the servicer could
be liable for breach of contract.
Discussion: The Secretary does not agree with the comment that a
third-party servicer should not be held to the same fiduciary standard
as an institution. As an agent of an institution, a third-party
servicer administers aspects of the institution's participation in the
Title IV, HEA programs. Therefore, it is necessary to hold a third-
party servicer to the same level of fiduciary responsibility as the
institution in handling or influencing the use of Title IV, HEA program
funds.
The Secretary agrees with those commenters who argued that a third-
party servicer should not be considered to have violated its fiduciary
duty with regard to the conduct of any person, entity, or officer or
employee of an entity with which the servicer contracts, if that person
or entity does not have Title IV-related responsibilities. For example,
the Secretary would not hold the conduct of a custodian employed by a
third-party servicer as an element in determining that the third-party
servicer has violated its fiduciary duty, if that custodian had no
responsibility for administering a Title IV, HEA program.
With respect to those commenters who were concerned that the
removal of an agent of a third-party may violate due process or may be
prohibited by Federal or State law or may be a breach of contract, the
Secretary does not believe that those prohibitions exist. However, the
Secretary recommends that third-party servicers modify their contract
terms to specify that the servicer is prohibited from engaging any
entity to administer any aspect of the Title IV, HEA programs that
meets the criteria in paragraph (d)(1)(i)(D) of this section.
The Secretary expects a third-party servicer to apply these
provisions to existing contracts as well as to any new contracts that
the servicer may enter. These provisions supersede provisions of
existing contracts that the servicer may have with outside entities.
Changes: Paragraph (d)(1)(i)(D) of this section is revised so that
a third-party servicer violates its fiduciary duty in instances where
the servicer uses or contracts with, in a capacity that involves the
administration of any aspect of the Title IV, HEA programs, any other
person, agency, or organization that has been or whose officers or
employees have been convicted of, or pled nolo contendere or guilty to,
a crime involving the acquisition, use, or expenditure of Federal,
State, or local government funds, or has been administratively or
judicially determined to have committed fraud or other material
violation of law with respect to those funds.
Comments: One commenter suggested that paragraph (d)(1)(i)(B) of
this section should be amended to exclude those instances in which the
funds that were fraudulently or criminally obtained or spent were
repaid. The same commenter believed that this provision is too broad in
scope, and should be restricted only to crime and fraud involving funds
covered by the contract between the institution and the servicer.
Discussion: The Secretary disagrees with the commenter. A person
that has been convicted of, pled guilty to, or has been determined to
have engaged in criminal misconduct or fraud with respect to government
funds poses a danger to the Title IV, HEA programs and the funds
appropriated for use by those programs. Such a person has violated the
public trust by misusing public funds. The Secretary does not believe
that payment of restitution by that person is sufficient to guarantee
that the person will not repeat the offense.
Changes: None.
Comments: Several commenters thought that the requirements in
paragraph (d)(2) of this section were unreasonable by specifying that
an institution or third-party servicer would violate its fiduciary
responsibility if the servicer or a principal or affiliate of the
servicer violated any Title IV, HEA program requirement. The commenters
thought that the cure--to sever all ties with that servicer, or a
principle or affiliate of that servicer, or to remove all
responsibilities of administration of the Title IV, HEA programs--was
too punitive in its scope.
Discussion: The Secretary agrees with those commenters. An
institution or third-party servicer should not be considered to have
automatically violated its fiduciary responsibility if the servicer or
a principal or affiliate of that servicer violates a Title IV, HEA
program requirement. The Secretary has recourse to apply the
appropriate sanctions in this subpart against an institution or third-
party servicer if the servicer or a principal or affiliate of the
servicer commits a violation of any Title IV, HEA program requirement.
Changes: The Secretary removes the provisions of paragraph (d)(2)
of this section.
Section 668.83 Emergency Action
Comments: Three commenters stated that no emergency action should
be taken until the servicer has been given the opportunity to defend
its actions. One of these commenters remarked that the Secretary could
be subject to lawsuit if the servicer were proved innocent. Two
commenters voiced concern that emergency actions could have a severe
impact on an institution or servicer without a promulgation of
evidence. One of these commenters suggested that the language be
revised to read, ``Receives verifiable information, determined by the
official to be reliable * * *.'' Four commenters felt that emergency
action should only be taken when the errors are intentional or the
servicer or institution refuses to take corrective action. One
commenter felt that due process mandates that the burden of proof be on
the Secretary to show cause why an emergency action is necessary, and
that the burden should shift only after the Secretary has made a prima
facie case. Several commenters stated that an emergency action against
a third-party servicer should not, as a matter of law, prohibit the
servicer from engaging in the administration of any aspect of an
institution's participation in the Title IV, HEA programs, but should
only be limited to that aspect where emergency action is absolutely
necessitated. The commenters felt this was necessary to provide a
smooth turnover of servicing responsibilities rather than a sudden halt
which could cause chaos, confusion and loss throughout the industry,
including the Department of Education, the institution, and the
borrower.
Discussion: The HEA specifies that the Secretary shall take an
emergency action against a third-party servicer if the Secretary
receives information, determined by the Secretary to be reliable, that
a third-party servicer under contract with an eligible institution is
violating any statutory or regulatory provision applicable to Title IV
of the HEA, or any applicable special arrangement, agreement, or
limitation and the Secretary determines that immediate action is
necessary to prevent the misuse of Federal funds and the likelihood of
loss outweighs the importance of waiting for the final outcome of a
limitation, suspension, or termination action against the servicer. An
emergency action is effective on the date that a notice and statement
of the basis of the emergency action is mailed to the third-party
servicer. If a third-party servicer does not think that such action is
warranted, the servicer may request a prompt show-cause hearing. As to
the concerns expressed over possible disruption, the Secretary will
tailor emergency actions as he determines necessary to protect federal
interests. The Secretary also refers the reader to the discussions of
emergency actions with respect to institutions in the regulations
published on March 10, 1993 (58 FR 13336).
Changes: None.
Sections 668.84 Fine Proceedings, 668.85 Suspension Proceedings, and
668.86 Limitation or Termination Proceedings
Comments: A few commenters felt that proposed Secs. 668.84
(governing fine proceedings), 668.85 (governing suspension
proceedings), and 668.86 (governing limitation and termination
proceedings) violate due process and privacy rights by requiring that a
third-party servicer apprise all clients of proposed actions. The
commenters thought that notification at that time is at a minimum
premature if not inappropriate and would serve to create adversarial
relations between parties that should have a cooperative working
relationship. Several commenters felt that fines should be imposed only
if the violation was ``willful'' or ``knowing.'' Another commenter felt
that notification of a fine proceeding against a third-party servicer
should not be sent until the appeal process is completed because it
could damage a third-party servicer's reputation among unaffected
parties and could unnecessarily alarm the servicer's client base. One
commenter recommended that the notice be limited to affected clients
and suggested that if the Secretary does not want to eliminate the
notice at the beginning of a fine proceeding, the Secretary should be
required to send a notice when the decision to fine has been reversed.
Discussion: Quite the contrary to the commenters' views that
notification to a third-party servicer's clients at the initiation of a
fine or other proceeding against the servicer violates due process,
this provision protects those rights. The potential consequences to an
institution if the institution's agent violates a Title IV, HEA
requirement can be severe, covering the full range of sanctions under
this subpart. Thus, notice to an institution allows the institution the
opportunity to participate in the process on behalf of its agent and in
its own defense.
In addition, a sanction imposed against the servicer could have an
adverse effect on the participation of an institution that contracts
with the servicer, including the severing or limiting of the
contractual relationship. Early notice to affected institutions permits
them to judge the potential effect of the action on their participation
and to prepare accordingly. As the Secretary noted in the NPRM, early
notice also allows an institution to take corrective action before the
conclusion of a proceeding under this subpart. The Secretary also
corrects here two misunderstandings of these commenters: it is the
designated department official, not the third-party servicer, who
provides notice under this subpart; and the designated department
official notifies only those institutions affected by the servicer's
violations, not all institutions that contract with the servicer.
The Secretary is sensitive to those who were concerned about how
notification in the initiation of a fine proceeding could affect a
third-party servicer's reputation, but notes that information about
actions the Secretary takes with regard to violations of Title IV, HEA
program requirements is publicly available and is required by section
494C of the HEA to be shared at least with SPREs and by 34 CFR part 603
with accrediting agencies. The Secretary has provided, in Sec. 668.90,
for notification to all affected institutions that contract with a
third-party servicer of the Secretary's final decision with regard to
appeals under this subpart.
In determining whether to impose a fine, the amount of a fine, or
whether to impose any other sanction for a violation of a Title IV, HEA
program requirement, the Secretary always considers the extent to which
the violation was deliberate. The Secretary does not consider it
necessary to specify that consideration in these regulations.
Changes: None.
Comments: Several commenters suggested that in the case of a
proceeding against an institution, the Secretary should notify the
third-party servicers that contract with that institution, because the
functions performed by certain third-party servicers could continue to
be performed inadvertently when, in fact, the Secretary has limited,
suspended, or terminated those activities. The commenters further
recommended that in the case of a suspension, limitation, or
termination against an institution the Secretary inform each third-
party servicer that contracts with the institution of the consequences
of the action to the servicer. The commenters also request parallel
notification provisions concerning hearings and the submission of
written material in the absence of a hearing.
Discussion: The Secretary expects an institution to provide
immediate notice as necessary to its employees, agents and third-party
servicers to comply with the terms of any action taken by the
Department. The Secretary notes that he does not hold a third-party
servicer responsible for violations of Title IV, HEA program
requirements committed solely by an institution. Therefore, the
Secretary does not consider it necessary to establish provisions for
the notification separately to third-party servicers in every case.
Changes: None.
Comments: Two commenters strongly objected to the proposal to
include, as a specific basis for any of these proceedings against an
institution or a third-party servicer, a substantial misrepresentation
of the institution's educational program, financial charges, or
employability of the institution's graduates by an institution or
servicer under contract with an institution, as applicable. The
commenters felt that this proposal would require a third-party servicer
to monitor a client institution's marketing of its educational program,
its admissions process and the appropriateness of the financial charges
as well as the statements made, verbal or written, regarding the
employability of the institution's graduates. One commenter suggested
that the application of this provision be limited to third-party
servicers that provide services such as marketing for institutions. One
commenter suggested that misrepresentation of eligibility of a location
be added to the violations subject to the imposition of a fine.
Discussion: These provisions, with respect to third-party
servicers, are aimed at just such servicers as those mentioned by one
of the commenters--those that provide marketing or other services
designed to represent an institution to prospective students and the
public. However, the provisions can apply equally to any other third-
party servicer that, in the conduct of its activities under a contract
with an institution, deliberately misrepresents the nature of the
institution's educational program or other relevant information. These
provisions do not require a third-party servicer to take any special
steps to monitor an institution's activities. The servicer being an
agent of the institution is expected simply to avoid misrepresenting
the institution. Subpart F of this part describes what constitutes
misrepresentation. Misrepresentation of the eligibility of an
institution's educational program clearly falls within the meaning of
the term under subpart F and further may constitute fraud under the
provisions of Sec. 668.83, providing a potential basis for an emergency
action. In the February 17, 1994, NPRM, the Secretary emphasized the
seriousness with which he regards misrepresentation and the potential
danger that misrepresentation poses to the Title IV, HEA programs.
Commenters have not persuaded the Secretary to modify that view.
Changes: None.
Comments: One commenter felt that the Secretary should not pursue
action against a contracting institution until the matter with the
third-party servicer is resolved and also requested that the Secretary
not fine both the servicer and the institution for the same occurrence.
The commenter recommended that the proposed effective date of the
suspension, limitation, or termination, which is at least 20 days after
the mailing of the notice of intent, be revised to either 30 calendar
days or 20 business days to allow sufficient time for preparation of a
response. A commenter suggested that a fine be imposed only for
material violations of Title IV, HEA program requirements.
Discussion: The Secretary reserves the right to initiate an action
against an institution at any point at which the Secretary determines
that the action is necessary. The protection of the Title IV, HEA
programs requires this flexibility. Whether to impose fines on both an
institution and a third-party servicer, and the amount of those fines,
for the same occurrence depends on the degree to which each party
caused or is otherwise responsible for the violation.
The Secretary considers 20 days generally to be sufficient time for
the notified party to prepare a response. The Secretary notes, however,
that this provision establishes a minimum time frame. The Secretary may
allow additional time if the Secretary determines that the
circumstances of the proceeding require more.
The Secretary does not consider it advisable to restrict the
imposition of fines to material violations of Title IV, HEA program
requirements. However, Sec. 668.92 describes generally the factors that
the Secretary may consider in determining the amount of a fine.
Changes: None.
Sections 668.87 Prehearing Conference, 668.88 Hearing, 668.89
Authority and Responsibilities of the Hearing Official, 668.90 Initial
and Final Decisions--Appeals, and 668.91 Filing of Requests for
Hearings and Appeals; Confirmation of Mailing and Receipt Dates
Comments: Several commenters questioned the absence of criteria in
the regulations for the qualification of the hearing officer. The
commenters also suggested that procedures should be established to
allow for the participants to inform the hearing officer of details of
the issues given the generally complex issues involved in most cases.
The commenters recommended that the Secretary be required to provide a
copy of the transcript described in Sec. 668.88(d) to all parties
within ten days of the hearing. Several commenters felt that any
decision should be governed by a ``reasonableness'' standard to limit
the liabilities of parties participating or providing servicing of the
Title IV, HEA programs in good faith. The commenters thought that the
process should allow for extenuating circumstances and that the hearing
official should have the authority to interpret regulations and to rule
them inapplicable. Another commenter believed that the hearing official
should be bound by not only all applicable statutes and regulations but
also other guidance deemed to be in effect by the Secretary to ensure
that ``Dear Colleague'' letters and other written guidance from the
Department of Education be included. One commenter believed that any
prehearing conference with a third-party servicer should include any
institution that has a contract with that servicer and who could
potentially be affected by the Secretary's action. One commenter
suggested that Sec. 668.89 be modified to require that the hearing
official be bound not only by ``all applicable statutes and
regulations'' but also by all applicable judicial precedent, the
Constitution, Federal statutes of general applicability, including the
United States Bankruptcy Code.
One commenter questioned the statement that if the hearing officer
finds that a termination is warranted, the Secretary affirms that
decision asking if the Secretary intends to automatically affirm the
hearing official's decision. A few commenters suggested that an
institution or third-party servicer should be able to introduce new
evidence on appeal noting that the Secretary should have the
opportunity to have complete information that may not have been
presented at the original fact-finding sessions. These commenters
thought that the emphasis in resolving the issue should be on arriving
at the most fair and most logical conclusion as opposed to conforming
to a stringent pattern or process. One commenter felt that the
Secretary should not have a special process for fraud investigations
and there should not be limitations placed on a hearing official's
ability to act. The commenter believed that the proposed procedures
would unfairly limit the due process procedures available to
participants in the system and that the current procedures do not
require further modification.
Discussion: The Secretary has considered the suggestions from the
commenters that some minimum standards be set out in the regulations to
establish qualifications for the hearing officer, but does not believe
that any such actions are appropriate. The hearing official is charged
with the responsibility of resolving the issues requested in the
appeal, and the parties bear the responsibility of presenting the
issues in controversy. The hearing official meets requirements for
experience and capability in accordance with internal Department
procedures, and no additional requirements are needed in these
regulations. Additionally, the hearing official's decisions involving
limitations, suspensions, terminations and fines may be appealed to the
Secretary under this subpart. This appeal to the Secretary provides an
additional procedural safeguard that the issue will be resolved fairly
in a manner that is consistent with other decisions issued by the
Secretary.
The Secretary does not agree with the suggestion that additional
regulations are necessary to permit the participants to inform the
hearing officer of details of the issues due to the generally complex
issues involved in some cases. Under the regulations, any party may
request a prehearing conference that would address how the parties
could present the relevant issues to the hearing official. In addition,
the parties have the opportunity to make their position known in the
pleadings required by the hearing official.
The Secretary agrees with the commenters that an institution or
third-party servicer who is the respondent in an administrative hearing
should be provided with a copy of a transcript when one is prepared by
the Department of Education. Under current procedures, a transcription
is routinely made of any adverse action initiated under this subpart,
and a copy of the transcript is provided to the respondent.
The Secretary disagrees with the suggestion that the regulations
establish a ``reasonableness'' standard to limit the liabilities of
parties participating or providing servicing of the Title IV, HEA
programs in good faith. Institutions and third-party servicers are
fiduciaries that are entrusted with properly administering the Title
IV, HEA programs. Establishing a lesser negligence is inappropriate,
particularly given the advance system of Title IV, HEA funding used by
the overwhelming majority of participating institutions. As
fiduciaries, these parties are held to one of the highest standards of
accountability, and it is inappropriate to excuse or reduce a liability
that is caused by a subjective good faith belief purportedly held by
the institution or third-party servicer. Business decisions that
concern the degree of care and oversight required by institutions and
third-party servicers must take into consideration their responsibility
for adhering to the applicable program requirements.
The Secretary also rejects any suggestion that the hearing official
be given discretion to refuse to apply applicable regulations to a
dispute. The regulations constitute final determinations by the
Secretary concerning the requirements that must be followed by
institutions and third-party servicers to participate in the HEA
programs. The hearing official must apply the regulations as written.
This process provides certainty to all parties, and enables the
development and enforcement of a consistent body of administrative
rulings.
The Secretary appreciates the suggestion of commenters who urged
that guidance issued by the Department in the form of manuals,
handbooks, other publications or Dear Colleague letters should be
binding the hearing official in the same manner as regulations.
However, such guidance does not have the same legal force as
regulations issued pursuant to formal rulemaking. The Secretary
believes that such guidance does provide a foundation against which the
reasonableness of the institution's or third-party servicer's conduct
may be judged. In the context of resolving whether the institution or
third-party servicer violated a regulation or statute, or breached its
fiduciary duties, the hearing official should evaluate the
institution's or third-party servicer's actions based upon whether it
made a good faith effort to apply and follow the guidance issued by the
Department. The Secretary believes that actions taken contrary to such
guidance would be presumptively improper and should be viewed as such
by a hearing official. The Secretary further believes it will be a rare
instance where a party can demonstrate that it fulfilled its fiduciary
obligation and complied with statutory or regulatory requirements while
failing to heed or apply guidance issued by the Department of Education
as to the proper application of statutory or regulatory provisions.
The Secretary does not agree that it is necessary to list all
possible authority binding on the hearing official. The parties are
free to cite any authority they feel may govern a particular case or
issue. Section 668.89(d) is included to preclude hearing official from
ignoring or refusing to apply departmental statutes and regulations. If
a hearing otherwise fails to apply applicable authority, a party may
appeal to the Secretary.
The Secretary does not agree that an adverse action initiated
against a third-party servicer must necessarily include any institution
that has a contract with that servicer who could potentially be
affected by the Secretary's action. The particular facts in each case
will determine the party or parties against whom an adverse action is
taken, and in some instances it may be appropriate for an institution
and its servicer to both be named as respondents. In some cases, a
third-party servicer against whom an adverse action is initiated may
ask the Department to expand the administrative action to encompass the
institutions that are relevant to the administrative action. Again, the
Secretary believes that the particular facts of each case will have to
be considered to determine the appropriate actions, rather than
expanding the scope of the regulations to require such participation by
other parties in every case.
The commenter also suggested that such participation by a third-
party servicer's customers should be considered because an adverse
ruling would have an impact on every other client for that servicer,
especially where a termination or debarment action were sought.
However, the resulting impact of a termination or a debarment of a
third-party servicer on the servicer's customers is not a sufficient
basis for these parties to be given a right to be represented in any
prehearing conference. To invite all potentially affected parties to
the hearing would complicate the proceedings. The proper focus of the
administrative proceeding is determining whether the limitation,
termination, or suspension should be imposed based upon the cited
program violations.
The Secretary has modified the proposed regulation to provide that
any initial decision by a hearing official that is appealed to the
Secretary may be affirmed, reversed, remanded to the hearing official,
or modified. The Secretary also notes that the regulations require a
hearing official to uphold certain adverse actions when specific
findings are made as set out in Sec. 668.90. Although the Secretary
reserves the discretion to review such rulings on appeal, these
administrative decisions already reflect the Secretary's judgment that
such action is appropriate under those facts, and modification of any
such ruling will be rare.
The Secretary disagrees with the suggestion that an institution or
third-party servicer should be able to introduce new evidence on
appeal. The administrative process requires that the relevant
information necessary for the decision will be presented to the hearing
official within the time limits set out in the regulations. Any appeal
to the Secretary must be based solely upon that information already in
the administrative record and upon items which may be judicially
noticed. Any subsequent opportunity to introduce new evidence on appeal
would deprive the hearing official of the opportunity to have issued a
decision based upon a complete record, and could discourage a
respondent from placing its complete case before the hearing official
at the appropriate time. This system of resolution is fairer and more
efficient because it provides each party with an opportunity to have
their complete case heard by a hearing official and then, where
appropriate, have the initial decision reviewed by the Secretary on
appeal.
The Secretary believes that it is appropriate to include fraud as a
finding in Sec. 668.90 for which an adverse action must be upheld where
the hearing official makes a determination that the underlying activity
has occurred. This addition to the regulation reelects the Secretary's
determination that any fraud committed by an institution or third-party
servicer is serious enough to warrant the imposition of the adverse
action sought. In such instances, and consistent with the other items
that have been placed into this category in the past such as missed
audit submissions, it is appropriate to limit the discretion of the
hearing official in accordance with the Secretary's determination that
this category of finding warrants the adverse action initiated by the
designated Department official. Furthermore, the regulation provides
certainty to all parties concerning the gravity of the underlying
violation, while providing an institution or third-party servicer an
opportunity to request an administrative appeal to a hearing official
concerning whether the respondent committed fraud.
Changes: The regulations have been changed to provide that the
Secretary may affirm, reverse, remand to the hearing official, or
modify any initial decision that is appealed to the Secretary. Section
668.88 has also been amended to specify that no charge is made to
provide one copy of the transcript to the hearing to an institution or
a third-party servicer.
Section 668.92 Fines
Comments: A number of commenters responded to the Secretary's
request for comment and agreed that repeated mechanical systemic
unintentional errors should be treated as a single violation for
purposes of assessing a fine against a third-party servicer. However,
one commenter argued that total compensation for the value of the error
should be expected. Another commenter suggested that the Secretary
should address cases in which the third-party servicer deliberately
failed to implement a regulation or failed to institute programming
corrections relating to previously cited findings identified by an
auditor, client, or the Secretary. The commenter believes that in these
situations the fines should be significant based upon the risk of loss
due to the servicer's negligence.
Several commenters felt that it would be inappropriate to adjust
the amount of a fine simply based upon the size of the institution or
servicer, claiming that a small organization should not benefit and a
large organization should not be penalized solely on their size. One
commenter suggested that the purpose of considering the size of the
servicer's business was to take into consideration the dollar value of
the violation in comparison to the overall value of the contracts being
serviced by the servicer and suggested that language be added
concerning the assessment of materiality of the violation. A few
commenters supported a position that the determination of the size of
any fine take into account the extensiveness and gravity of the
violation and should be assessed in direct correlation to any loss of
funds. The commenters also felt that the fines should only be assessed
against the party who was directly responsible for the violation and
supported the provision that the servicer may provide evidence that the
institution contributed to the violation.
One commenter felt that any references to special arrangements
should be deleted and noted that performing any statutory and
regulatory requirement should cover all applicable situations.
Discussion: The Secretary agrees with the commenter who suggested
that, in determining the amount of the fine to be assessed against a
third-party servicer for a violation of a Title IV, HEA program
requirement, a repeated mechanical systemic unintentional error need
not be counted as a single violation if the servicer had been
previously cited for this type of error and had failed to implement
corrections. With respect to the commenter who suggested that in
determining the amount of a fine with respect to a repeated mechanical
systemic unintentional error, that the amount of the fine should at
least be equal to the total value caused by the error, the Secretary
does not agree with that comment. However, the Secretary does agree
that the determination of the amount of the fine should take into
consideration the amount of Title IV, HEA program funds that were lost
due to the error.
With respect to the concerns expressed about the relationship of
the amount of a fine to the size of an institution or of a third-party
servicer's business, the Secretary points out that the size of an
institution or business has a bearing on whether the institution or
servicer has overextended its capability of properly administering the
Title IV, HEA programs and the extent to which harm has been done to
the programs.
With respect to the commenter who thought that the phrase special
arrangement should be deleted from this section, the Secretary does not
agree with that commenter. Special arrangements are based on individual
circumstance and therefore should be taken into consideration. However,
as noted elsewhere in the comments and discussion section, the
Secretary clarifies special arrangements to refer to those special
arrangements entered into under the authority of statutes applicable to
Title IV of the HEA.
Changes: Paragraph (a)(5) is revised to specify that as one of the
criteria in determining the extent to which violations are caused by a
repeated mechanical systemic unintentional error, the total number of
violations is considered to be a single violation, provided the third-
party servicer has not previously been cited for this type of error and
had failed to make the appropriate corrections to the system where the
violation originated. In determining the amount of a fine, the
Secretary also takes into consideration, as applicable, the financial
loss to the Title IV, HEA programs that was attributable to the
repeated mechanical systemic unintentional error.
Section 668.94 Termination
Comments: One commenter recommended that the regulations be amended
to terminate the eligibility to perform some but not all of the
services provided by the third-party servicer, claiming that some
functions provided by the servicer may continue to meet the applicable
requirements of the program. This change would recognize that a third-
party servicer may provide multiple and unrelated functions under the
Title IV, HEA programs. Many commenters expressed concern about the
provision in Sec. 668.94(c) requiring the servicer to return to each
institution that contracts with the servicer all records pertaining to
the servicer's administration of that program on behalf of that
institution. One commenter suggested that since the institution may
contract with another servicing entity, the records should be passed to
the new servicer as specified by the institution. Many commenters
pointed out that the records maintained by the third-party servicer
appear on microfiche, imaging disc, microfilm, or in paper form and the
servicer will be able to provide copies of such records but not the
original records. One commenter suggested an expansion to require the
servicer to return servicer notes, related documents, records or copies
of such notes, related documents and records that pertain to the
servicer's administration of the program on behalf of the institution.
The commenter further suggested that the servicer certify copies as
exact copies whenever required by law. The commenter also suggested
that a sentence be added to protect the proprietary rights of the
servicer to data base media, servicing procedures, computer programs,
software packages, servicer forms, and other proprietary information,
procedures and materials. Another commenter noted that copies of
records for a single institution's loans may be commingled with records
pertaining to other institutions and suggested that servicers should be
permitted to provide records upon request rather than all at once.
Discussion: The Secretary agrees with the commenters that it may be
appropriate to terminate the eligibility of a third-party servicer to
perform some but not all of the activities under certain circumstances.
In other situations, however, a violation may be so egregious that
complete termination from being able to administer any aspect of the
institution's participation is appropriate. The Secretary believes that
the regulations provide the needed flexibility to determine the correct
action to be taken.
Records relating to a third-party servicer's administration of any
aspect of an institution's participation in the Title IV, HEA programs
are the institution's property. A third-party servicer may make copies
of the original records that it provides to an institution if the
contract between the servicer and institution is terminated. See the
discussion in Sec. 668.25 on records.
The Secretary does not agree that the regulations need to be
expanded to cover servicer notes, related documents, records, or copies
of such notes; that is a matter between the institution and the
servicer. The Secretary does not believe that it is necessary to add
regulatory language to protect the proprietary rights of the servicer
since adequate protection already exists through copyright laws to
serve this purpose.
Changes: None.
Section 668.95 Reimbursements, Refunds, and Offsets
Comments: Several commenters recommended that the reference to
third-party servicer in Sec. 668.95(c) be removed because the servicer
generally makes no claims for benefits on its own behalf therefore
funds would not be available to be offset. Another commenter noted that
if the Secretary is transmitting funds directly to a third-party
servicer on behalf of institutions, the funds are for multiple
institutions and to offset an unaffected institution's funds would not
be reasonable or fair. One commenter requested that the provision in
paragraph (b)(1)(ii) of this section that would have the servicer or
institution repay any discounts, premiums, or excess interest paid
under 34 CFR part 682 be eliminated stating that the payment of
premiums and discounts are contract issues between two lenders in the
FFEL programs and should not be assessed to other parties or repaid to
the Secretary.
Discussion: The Secretary disagrees with those commenters who
recommended removing reference to a third-party servicer from the
provision governing the ability of the Secretary to offset any benefits
or claims due to an institution or third-party servicer against any
payment that an institution or third-party servicer may owe to the
Secretary. A situation may arise where a third-party servicer makes a
claim against the Department of Education for funds owed to the
servicer and the Secretary wants to offset that claim because the
servicer has not repaid a liability owed the Department of Education
for a violation of the Title IV, HEA program requirement.
The Secretary also does not accept the comment that paragraph
(b)(1)(ii) of this section should be removed. This provision is
particularly relevant to an institution's participation in the FFEL
programs.
Changes: None.
Subpart H--Appeal procedures for Audit Determinations and Program
Review Determinations
Section 668.114 Notification of Hearing
Comments: Several commenters suggested that with respect to a
third-party servicer's request for review, the hearing official only
notify the institutions to whom the findings were originally disclosed
since a third-party servicer may have added new clients during the
period between the publication of the findings and the announcement of
the hearing and the new clients would not be aware of the findings and
could be confused by the notice of the hearing. Another commenter felt
only institutions that contract with the servicer of the affected
functions should be notified.
Discussion: The Secretary agrees that subsequent notices from the
hearing official should be sent only to the actual parties to the
proceeding. In the cases of institutions receiving similar services to
those at issue in the proceeding, they need not be notified. As
discussed above, the need for notice to other affected institutions is
satisfied with notice of the final determination. Therefore, there is
no need to impose the burden on the hearing official of providing
notice to every institution with which a third-party servicer
contracts.
Changes: Section 668.114(b) is revised to require notice only to
the actual parties to the proceeding.
Section 668.116 Hearing
Comments: Several commenters recommended that an institution or
third-party servicer also have the burden of proving that the findings
are not substantial in nature. The commenters felt that some findings
or alleged violations may be irrefutable, but their effect may be
strictly limited, posing immaterial impact on the integrity of the
servicer's or lender's portfolio. One commenter felt that a third-party
servicer should only have the burden of proving that the ``expenditures
questioned or disallowed were proper'' to the extent that the servicer
contracts with the institution for cash management of Title IV, HEA
program funds and that the Secretary should not question servicing fee
income since it is not considered Title, IV HEA program funds. A few
commenters suggested deleting references to the time frames within
which an institution must have provided documentation previously
stating that any legitimate documentation regarding the subject at
issue should be admissible and the time frames within which it was
previously submitted are irrelevant to their authenticity or material
relationship to the case. Several commenters felt that the transcribed
records of the proceeding should only be made available to the hearing
participants and not to any institution that contracts with the
servicer.
Discussion: With respect to the suggestion that an institution or
third-party servicer need only prove that findings are ``not
substantial,'' the Secretary disagrees that the standard for
accountability for Federal funds should be relaxed. An institution, or
its third-party servicer, is a fiduciary and duty bound to use the
highest standard of care and diligence at all times in the
administration of the Title IV HEA programs. The suggested language
would weaken this standard. If, as suggested by the commenters, a
violation truly has an immaterial impact, then there will no
significant liabilities assessed.
The commenter who felt that a third-party servicer should not have
to justify expenditure of its fee income is correct. Section 668.116(d)
only requires proof that Title IV HEA program funds were properly
expended.
With respect to the comments on altering the time periods for
submission of documentation by institutions, the Secretary notes that
the purpose of this rulemaking it to make existing regulations
applicable to third-party servicers and not to extensively modify the
hearing procedures. The Secretary believes that the present procedures
are consistent with an institution's record-keeping and fiduciary
obligations; institution's complying with these obligations should
have, and have had, no difficulty in meeting established deadlines.
Further, requiring submission of documentation with a request for
review allows cases to be resolved without hearing.
With respect to the comment that hearing transcripts need only be
provided to the hearing participants, the Secretary agrees. Further
since the records of these proceedings are generally available under
the Freedom of Information Act, the Secretary agrees that reference to
availability under that act is unnecessary. Those who are not parties
to the proceedings can request the transcript pursuant to that act,
subject to any applicable exceptions to release of the requested
information.
Changes: Section 668.116(g)(2) is revise to require that the
hearing transcript be sent only to the parties to the proceeding and
eliminate the reference to the Freedom of Information Act.
Part 682--Federal Family Education Loan Programs
Subpart D--Guaranty Agency Programs
Section 682.401 Basic Program Agreement
Comments: Several commenters suggested that the provision in this
section relating to contract submissions be modified so that a third-
party servicer would not be required to submit a copy of its contract
to the Secretary unless so requested by the Secretary.
Discussion: The Secretary understands the commenters concerns that
the copy of a third-party servicer's contract with a guaranty agency
contains proprietary information that the servicer does not wish to be
made public. Many of the commenters were concerned that a copy of a
third-party servicer's contract would be released under the Freedom of
Information Act (FOIA). The Secretary wishes to assure third-party
servicers that trade secrets and confidential commercial or financial
information is not releasable under FOIA. Parties concerned over
possible release should, however, take appropriate precautions by
marking submitted contracts as confidential. This provision is intended
only to facilitate oversight and make the Secretary aware of all the
services the third-party servicer has contracted to provide. Although
many commenters believed that a third-party servicer could accomplish
this by summarizing the services it has contracted to provide. In order
to verify this information, the Secretary would need a copy of the
actual contract. Therefore, the Secretary has decided to retain this
requirement in the final rule.
Changes: None.
Section 682.413 Remedial Actions
Comments: Several commenters objected to a third-party servicer
being held jointly and severally liable for any interest benefits and
special allowance its client received on its FFELP loan portfolio when
the servicer may not have been responsible for billing the Department
for such monies. Some commenters believed that clarification to this
provision is necessary to ensure that a third-party servicer is not
held jointly or severally liable for any violations which it did not
commit.
Discussion: The Secretary agrees with the commenters that a third-
party servicer should not be held responsible for any program
violations it did not commit. The regulations do not hold a third-party
servicer jointly or severally liable for any interest benefits or
special allowance received by a lender for which the lender was not
eligible if that servicer complied with program regulations. However, a
third-party servicer that is not responsible for billing the Department
for interest benefits and special allowance may be responsible for the
lender receiving interest benefits and special allowance for which the
lender is not eligible because the servicer has violated other program
requirements. The Secretary believes that a third-party servicer should
be responsible for its actions and that holding a third-party servicer
potentially liable for Federal monies expended because it has committed
program violations helps accomplish this. The Secretary also believes
that holding lenders and servicers jointly and severally liable is the
best way to protect the Federal fiscal interest. See prior discussion
on this issue under Sec. 668.25 and in the February 17, 1994 NPRM.
The Secretary is sensitive that this provision makes a significant
change in how responsibility for liabilities may be covered in
contracts that servicers enter with lenders. Therefore, the Secretary
has established an order in which he will attempt to collect such
liabilities. The Secretary will first attempt to collect such
liabilities from the lender and, if necessary, offset the lender's
first future claim to the Secretary for interest benefits and special
allowance for the amount of the liability. The Secretary believes that
this is the most effective and efficient means to collect a liability
and that he will be successful in collecting from the lender in most
cases. However, the situation may arise when the Secretary is not able
to collect these monies from a lender because the lender chooses not to
submit further claims, discontinues its participation in the FFEL
programs, or becomes insolvent and is taken over by banking regulators.
Because such circumstances may arise, the Secretary retains the option
of holding a third-party servicer jointly and severally liable with a
lender for such liabilities. However, the Secretary intends to exercise
his authority to collect a liability from a third-party servicer under
this provision only when he is unable to collect such monies from the
lender.
Changes: The Secretary has revised this provision so that the
Secretary will not attempt to collect interest benefits or special
allowance from a third-party servicer unless the Secretary is unable to
collect from the lender with which the servicer has contracted.
Comments: Several commenters asked the Secretary to clarify this
section to specify when the 30-day period begins that determines when a
lender must repay or make satisfactory arrangements to repay a
liability resulting from a third-party servicer's action before the
Secretary will attempt to collect from the servicer. Several commenters
also suggested that the Secretary should attempt to collect such monies
by offsetting a lender's claim for interest benefits and special
allowance.
Discussion: The Secretary agrees with the commenters that
clarification is needed. The Secretary also agrees with the commenters
that offsetting a lender's bill for interest benefits and special
allowance for the amount of the liability may prove to be an effective
means to collect the liability from the lender. The Secretary will
exercise this option to collect such liabilities from a lender whenever
he believes this method is in the best interests of the FFEL programs
and the Federal fiscal interest.
Changes: The Secretary has amended this section to clarify that the
lender must repay or make satisfactory arrangements to repay a
liability within 30 days from the date the Secretary originally
requests such repayment from the lender before the Secretary will
attempt to collect from the third-party servicer.
Comments: Many commenters suggested that the liability of a third-
party servicer acting as an agent for a guaranty agency be removed
because the commenters believed that the servicer does not play a role
under this provision that would subject it a liability.
Discussion: The Secretary does not agree with the commenters. A
third-party servicer that is administering any aspect of a guaranty
agency's FFEL programs may be responsible for the guaranty agency
paying a claim that is not eligible for reinsurance. This situation may
occur when the servicer is negligent in reviewing the history of the
loans consolidated in a Federal Consolidation loan under 34 CFR
682.206(f) when a default claim is submitted that results in the agency
subsequently receiving reinsurance on such a claim. This would result
in a liability being created by the servicer's actions.
Changes: None.
Section 682.416 Requirements for Third-Party Servicers and Lenders
Contracting With Third-Party Servicers
Standards for administrative capability.
Comments: Many commenters suggested that the Secretary qualify the
term business systems so that it was clear that such systems included
combined automatic and manual systems. The commenters believed that
this term, without qualification, implied only computer-supported
systems.
Discussion: The Secretary agrees with the commenters that it is
appropriate to qualify the term ``business systems.''
Changes: The Secretary has amended this provision to clarify that
business systems include combined automated and manual systems.
Standards of financial responsibility. Comments: Many commenters
believed that the financial standards the Secretary was proposing for
an institution should not be used for third-party servicers because a
third-party servicer in the FFEL programs has different financial
obligations and responsibilities than an institution. Many commenters
believed that any requirements related exclusively to functions that
are not required by FFEL programs servicers should be deleted, such as
deferred tuition accounts.
Discussion: The Secretary agrees with the commenters in that a
third-party servicer should not be held responsible for meeting
financial standards that are unrelated to the functions which it is not
responsible to perform. The Secretary does not intend to require a
third-party servicer that is administering aspects of the FFEL programs
on behalf of a lender or guaranty agency to be required to meet
financial standards with respect to items that are unrelated its
contractual obligations with the lender or guaranty agency. The
Secretary does not agree with the commenters that a third-party
servicer should not otherwise meet financial standards that are similar
to those an institution is required to meet. The Secretary believes
that it was the intent of Congress to ensure that the FFEL programs are
protected from any risk that may involve the servicer's financial
status, persons responsible for administering or controlling the
servicer, or the servicer's performance. Therefore, the Secretary has
decided to require a third-party servicer to meet the standards for
financial responsibility similar to those required of institutions of
higher education.
Changes: The Secretary has clarified the regulations so that only
the provisions of 34 CFR 668.15(b) (1) through (4) and (6) through (9)
will apply to a third-party servicer under this part.
Past performance of third-party servicer or persons affiliated with
servicer. Comments: Many commenters believed that these provisions are
too inclusive and should only include corporate officers of only those
third-party servicers handling Federal funds. Other commenters believed
that the Secretary should qualify this restriction with respect to
entities with which a third-party servicer contracts. The commenters
suggested that only persons, entities, or officers or employees of an
entity with which a third-party servicer contracts that act in a
capacity that involves the administration of Title IV, HEA program
funds should cause the servicer to not be considered financially
responsible.
Discussion: The Secretary believes that a third-party servicer that
has persons affiliated with it that have been convicted of or pled nolo
contendere to the crimes described in these sections presents an
unreasonable risk to the integrity of the FFEL programs and places
Federal monies at risk. However, the Secretary believes that such risk
is evident only when a person or entity acts in a capacity that
involves the administration of Title IV, HEA program funds.
Changes: The Secretary has amended this provision to clarify that a
third-party servicer that contracts with an outside entity will not be
considered financially responsible if any person, entity, or officer or
employee of such entity acts in a capacity that involves the
administration of Title IV, HEA program funds.
Subpart G--Limitation, Suspension, or Termination of Lender Eligibility
Under the FFEL Program and the PLUS Program
Section 682.701 Definitions and Terms Used in This Subpart
Comments: Many commenters suggested that a suspension of a third-
party servicer should only apply to that servicer's ability to enter
into new contracts with Title IV, HEA program participants.
Discussion: The Secretary does not agree with the commenters. The
Secretary believes that when the servicer's actions are serious enough
to warrant suspending that servicer, it presents an unreasonable risk
to Federal monies to allow that servicer to continue to perform FFEL
programs functions for any Title IV, HEA program participant for the
duration of the suspension.
Changes: None.
Section 682.704 Emergency Action
Comments: Many commenters suggested that an emergency action should
become effective after a period of time has elapsed after the third-
party servicer receives notification from the Department that it
intends to take such action.
Discussion: The Secretary does not agree with the commenters. The
Secretary believes that an emergency action should be taken when
continued participation of an entity in the FFEL programs seriously
jeopardizes the integrity of the FFEL programs and puts Federal funds
at risk. The Secretary believes that such action should be taken
immediately when the behavior of the entity justifies taking such
action.
Changes: None.
PART 690--FEDERAL PELL GRANT PROGRAM
Section 690.83 Submission of Reports
Comments: Four commenters believed that Sec. 690.83(e) of the
proposed regulations does not comply with the statute because, in
implementing section 487(c)(7) of the HEA, it places undue restrictions
on an institution seeking additional funds which the institution would
have been eligible to receive if it had met Federal Pell Grant Program
reporting deadlines. One commenter stated that the Secretary had unduly
limited the scope of section 487(c)(7) of the HEA by making the
provision of this section applicable only to funds received under the
Federal Pell Grant Program.
Discussion: The Secretary believes that the proposed rule in
Sec. 690.83(e) is in accordance with the program statute. When an
institution's auditor identifies underreported Federal Pell Grant
expenditures beyond the normal reporting and reconciliation deadlines
for the Federal Pell Grant Program, Sec. 690.83(e) provides a mechanism
for an institution to receive credit for having properly expended those
funds. Congress intended that an institution have such a mechanism
available. However, the Secretary does not believe that Congress
intended for such accounting recaptures of properly expended funds to
continue in perpetuity. In order for the Department to complete its own
accounting for the Federal Pell Grant Program appropriations,
institutions are expected to timely reconcile the expenditures
throughout the award year, with a final accounting made on or before
September 30. The procedures in Sec. 690.83(e) will provide a further
opportunity for an institution to seek credit for having properly
expended these funds during a prior award year, but the Secretary
believes it is appropriate to limit the circumstances and timing for
receiving credit for such prior expenditures. Furthermore,
Sec. 690.83(e) is limited to the Federal Pell Grant Program because the
auditing procedure permitted under Sec. 690.83(e) results in an
adjustment to the institution's prior year funding authorization for
the Federal Pell Grant Program. There is no corresponding capability to
adjust prior year funding for the other Title IV, HEA programs.
Changes: None.
Paperwork Reduction Act of 1980
Comments: Several commenters disagreed with the Department's
computation of the annual public reporting and recordkeeping burden
contained in the regulations. Another commenter questioned whether the
Department had complied with the requirements of the Paperwork
Reduction Act and its implementing regulations in 5 CFR part 1320. This
commenter also believed that students should be considered in computing
the burden.
Discussion: The Department's computation of the annual public
reporting and recordkeeping burden in the regulations is an estimate
based on the best information available. The Department identified
sections of the regulations containing information collection
requirements in the preamble to the proposed regulations and complied
with all applicable requirements of the Paperwork Reduction Act and its
implementing regulations in 5 CFR part 1320. The Department appreciates
the additional information provided by commenters regarding the
estimated burden. To the extent that commenters identified specific
regulatory provisions as imposing burdens or provided estimates of the
amount of burden imposed, this information has been considered in
developing the final regulations. The Department did not consider
students in computing the estimated burden of the information
collection requirements in the regulations because the regulations
govern postsecondary institutions participating in the Title IV student
financial assistance programs. If any burden is imposed on students, it
is indirect and not subject to computation under the Paperwork
Reduction Act. As a result of the comments and revisions to the
regulations, the Department is modifying the burden estimates. The
total annual reporting and recordkeeping burden that would result from
the collection of the information is 123,485 burden hours for the
package.
Changes: None.
Regulatory Flexibility Act Certification
Comments: In the NPRMs, the Secretary certified that the proposed
regulations would not have a significant economic impact on a
substantial number of small entities. Several commenters suggested that
this statement was erroneous and that these rules will definitely have
a significant impact on institutions, especially the smaller ones that
are not computerized.
Discussion: The Secretary recognizes that the regulations will have
an impact on small institutions. However, based on Department estimates
of the impact, the Secretary does not believe that the impact will be
disproportionately or economically significant. The Secretary therefore
reaffirms his certification that the regulations would not have a
significant economic impact or a substantial significant economic
impact on a substantial number of small entities. To the extent that
commenters are able to provide additional information on the economic
impact of the regulations, the Secretary invites the commenters to
submit this information so that it may be considered in reviewing the
regulations to reduce regulatory burden.
Changes: None.
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 were identified and explained in
the NPRMs that were published on February 17 and February 28, 1994,
respectively.
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 government in the
exercise of their governmental functions.
Invitation To Comment
Interested persons are invited to submit comments and
recommendations regarding these regulations. The Secretary will
consider any comments received within the designated comment period in
determining whether to make any changes in these rules. After reviewing
any comments received during the comment period, the Secretary will
publish changes to the regulations or will publish a notice in the
Federal Register indicating that no further changes will be made.
Paperwork Reduction Act of 1980
Sections 668.3, 668.8, 668.12, 668.13, 668.14, 668.15, 668.16,
668.17, 668.22, 668.23, 668.25, 668.26, 668.90, 668.96, 668.113,
appendix A to 34 CFR part 668, 682.414, 682.416, 682.711, and 690.83
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 total 123,485 hours for
64,695 respondents, 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, DC 20503; Attention: Daniel J. Chenok.
Comments on this burden estimate should be submitted by May 31, 1994.
Assessment of Educational Impact
In the Notices of Proposes Rulemaking published on February 17 and
February 28, 1994, the Secretary requested comment on whether the
proposed regulations in this document would require transmission of
information that is being gathered by or is available from any other
agency or authority of the United States.
Based on the response to the proposed rules and on its own review,
the Department has determined that the regulations in this document do
not require transmission of information that is being gathered by or is
available from any other agency or authority of the United States.
List of Subjects
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.
34 CFR Part 690
Education of disadvantaged, Grant programs--education, Reporting
and recordkeeping requirements, Student Aid.
(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: April 20, 1994.
Richard W. Riley,
Secretary of Education.
The Secretary amends Parts 668, 682, and 690 of Title 34 of the
Code of Federal Regulations as follows:
PART 668--STUDENT ASSISTANCE GENERAL PROVISIONS
1. The authority citation for part 668 is revised to read as
follows:
Authority: 20 U.S.C. 1085, 1088, 1091, 1092, 1094, 1099c, and
1141, unless otherwise noted.
2. Section 668.1 is amended by revising paragraphs (a), (b)(2) and
(3); removing paragraph (b)(4); and revising paragraph (c) to read as
follows:
Sec. 668.1 Scope.
(a) This part establishes general rules that apply to an
institution that participates in any student financial assistance
program authorized by Title IV of the Higher Education Act of 1965, as
amended (Title IV, HEA program). To the extent that an institution
contracts with a third-party servicer to administer any aspect of the
institution's participation in any Title IV, HEA program, the
applicable rules in this part also apply to that servicer. An
institution's use of a third-party servicer does not alter the
institution's responsibility for compliance with the rules in this
part.
(b) * * *
(2) A proprietary institution of higher education as defined in 34
CFR 600.5; and
(3) A postsecondary vocational institution as defined in 34 CFR
600.6.
(c) The Title IV, HEA programs include--
(1) The Federal Pell Grant Program (20 U.S.C. 1070a et seq.; 34 CFR
part 690);
(2) The National Early Intervention Scholarship and Partnership
(NEISP) Program (20 U.S.C. 1070a-21 et seq.; 34 CFR part 693);
(3) The Presidential Access Scholarship (PAS) Program (20 U.S.C.
1070a-31 et seq.; 34 CFR part 691);
(4) The Federal Supplemental Educational Opportunity Grant (FSEOG)
Program (20 U.S.C. 1070b et seq.; 34 CFR part 676);
(5) The State Student Incentive Grant (SSIG) Program (20 U.S.C.
1070c et seq.; 34 CFR part 692);
(6) The Federal Stafford Loan Program (20 U.S.C. 1071 et seq.; 34
CFR part 682);
(7) The Federal Supplemental Loans for Students (Federal SLS)
Program (20 U.S.C. 1078-1; 34 CFR part 682);
(8) The Federal PLUS Program (20 U.S.C. 1078-2; 34 CFR part 682);
(9) The Federal Consolidation Loan Program (20 U.S.C. 1078-3; 34
CFR part 682);
(10) The Federal Work-Study (FWS) Program (42 U.S.C. 2751 et seq.;
34 CFR part 675);
(11) The Federal Direct Student Loan (FDSL) Program (20 U.S.C.
1087a et seq.; 34 CFR part 685); and
(12) The Federal Perkins Loan Program (20 U.S.C. 1087aa et seq.; 34
CFR part 674).
(Authority: 20 U.S.C. 1070 et seq.)
3. Section 668.2 is revised to read as follows:
Sec. 668.2 General definitions.
(a) The following definitions are contained in the regulations for
Institutional Eligibility under the Higher Education Act of 1965, as
Amended, 34 CFR part 600:
Accredited
Award year
Branch campus
Clock hour
Correspondence course
Educational program
Eligible institution
Federal Family Education Loan (FFEL) programs
Incarcerated student
Institution of higher education
Legally authorized
Nationally recognized accrediting agency
Nonprofit institution
One-year training program
Postsecondary vocational institution
Preaccredited
Proprietary institution of higher education
Recognized equivalent of a high school diploma
Recognized occupation
Regular student
Secretary
State
Telecommunications course
(b) The following definitions apply to all Title IV, HEA programs:
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 5 days 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)
Campus-based programs: (1) The Federal Perkins Loan Program (34 CFR
part 674);
(2) The Federal Work-Study (FWS) Program (34 CFR part 675); and
(3) The Federal Supplemental Educational Opportunity Grant (FSEOG)
Program (34 CFR part 676).
Defense loan: A loan made before July 1, 1972, under Title II of
the National Defense Education Act of 1958.
(Authority: 20 U.S.C. 421-429)
Dependent student: Any student who does not qualify as an
independent student (see Independent student).
Designated department official: An official of the Department of
Education to whom the Secretary has delegated responsibilities
indicated in this part.
Direct loan: A loan made under Title IV-E of the HEA after June 30,
1972, that does not satisfy the definition of ``Federal Perkins loan.''
(Authority: 20 U.S.C. 1087aa et seq.)
Enrolled: The status of a student who--
(1) Has completed the registration requirements (except for the
payment of tuition and fees) at the institution that he or she is
attending; or
(2) Has been admitted into an educational program offered
predominantly by correspondence and has submitted one lesson, completed
by him or her after acceptance for enrollment and without the help of a
representative of the institution.
Federal Consolidation Loan program: The loan program authorized by
Title IV-B, section 428C, of the HEA that encourages the making of
loans to borrowers for the purpose of consolidating their repayment
obligations, with respect to loans received by those borrowers while
they were students, under the Federal Insured Student Loan (FISL)
Program as defined in 34 CFR part 682, the Federal Stafford Loan,
Federal PLUS (as in effect before October 17, 1986), Federal SLS, ALAS
(as in effect before October 17, 1986), Federal Direct Student Loan,
and Federal Perkins Loan programs, and under the Health Professions
Student Loan (HPSL) Program authorized by subpart II of part C of Title
VII of the Public Health Service Act, for parent Federal PLUS borrowers
whose loans were made after October 17, 1986, and for Higher Education
Assistance Loans (HEAL) authorized by subpart I of part A of Title VII
of the Public Health Services Act.
(Authority: 20 U.S.C. 1078-3)
Federal Direct PLUS loan: A Federal PLUS loan made under the
Federal Direct Student Loan Program.
(Authority: 20 U.S.C. 1078-2 and 1087a et seq.)
Federal Direct Stafford loan: A Federal Stafford loan made under
the Federal Direct Student Loan Program.
(Authority: 20 U.S.C. 1071 et seq. and 1087a et seq.)
Federal Direct Student loan: A loan made under Title IV-D of the
HEA after August 10, 1993.
(Authority: 20 U.S.C. 1087a et seq.)
Federal Direct Student Loan (FDSL) program: The student loan
program authorized on July 23, 1992, by Title IV-D of the HEA.
(Authority: 20 U.S.C. 1087a et seq.)
Federal Pell Grant Program: The grant program authorized by Title
IV-A-1 of the HEA.
(Authority: 20 U.S.C. 1070a)
Federal Perkins loan: A loan made under Title IV-E of the HEA to
cover the cost of attendance for a period of enrollment beginning on or
after July 1, 1987, to an individual who on July 1, 1987, had no
outstanding balance of principal or interest owing on any loan
previously made under Title IV-E of the HEA.
(Authority: 20 U.S.C. 1087aa et seq.)
Federal Perkins Loan program: The student loan program authorized
by Title IV-E of the HEA after October 16, 1986.
(Authority: 20 U.S.C. 1087aa-1087ii)
Federal PLUS loan: A loan made under the Federal PLUS Program.
(Authority: 20 U.S.C. 1078-2)
Federal PLUS program: The loan program authorized by Title IV-B,
section 428B, of the HEA, that encourages the making of loans to
parents of dependent undergraduate students. Before October 17, 1986,
the PLUS Program also provided for making loans to graduate,
professional, and independent undergraduate students. Before July 1,
1993, the PLUS Program also provided for making loans to parents of
dependent graduate students.
(Authority: 20 U.S.C. 1078-2)
Federal SLS loan: A loan made under the Federal SLS Program.
(Authority: 20 U.S.C. 1078-1)
Federal Stafford loan: A loan made under the Federal Stafford Loan
Program.
(Authority: 20 U.S.C. 1071 et seq.)
Federal Stafford Loan program: The loan program authorized by Title
IV-B (exclusive of sections 428A, 428B, and 428C) that encourages the
making of subsidized Federal Stafford and unsubsidized Federal Stafford
loans as defined in 34 CFR part 682 to undergraduate, graduate, and
professional students.
(Authority: 20 U.S.C. 1071 et seq.)
Federal Supplemental Educational Opportunity Grant (FSEOG) program:
The grant program authorized by Title IV-A-2 of the HEA.
(Authority: 20 U.S.C. 1070b et seq.)
Federal Supplemental Loans for Students (Federal SLS) program: The
loan program (formerly called the ALAS Program) authorized by Title IV-
B, section 428A, of the HEA that encourages the making of loans to
graduate, professional, independent undergraduate, and certain
dependent undergraduate students.
(Authority: 20 U.S.C. 1078-1)
Federal Work Study (FWS) program: The part-time employment program
for students authorized by Title IV-C of the HEA.
(Authority: 42 U.S.C. 2751-2756b)
FFELP loan: A loan made under the FFEL programs.
(Authority: 20 U.S.C. 1071 et seq.)
Full-time student: An enrolled student who is carrying a full-time
academic workload (other than by correspondence) as determined by the
institution under a standard applicable to all students enrolled in a
particular educational program. The student's workload may include any
combination of courses, work, research, or special studies that the
institution considers sufficient to classify the student as a full-time
student. However, for an undergraduate student, an institution's
minimum standard must equal or exceed one of the following minimum
requirements:
(1) Twelve semester hours or 12 quarter hours per academic term in
an educational program using a semester, trimester, or quarter system.
(2) Twenty-four semester hours or 36 quarter hours per academic
year for an educational program using credit hours but not using a
semester, trimester, or quarter system, or the prorated equivalent for
a program of less than one academic year.
(3) Twenty-four clock hours per week for an educational program
using clock hours.
(4) In an educational program using both credit and clock hours,
any combination of credit and clock hours where the sum of the
following fractions is equal to or greater than one:
(i) For a program using a semester, trimester, or quarter system--
Number of credit hours per term
------------------------------------------------------------------------
12
+
Number of clock hours per week
------------------------------------------------------------------------
24
(ii) For a program not using a semester, trimester, or quarter
system--
Number of semester or trimester hours per academic year
------------------------------------------------------------------------
24
+
Number of quarter hours per academic year
------------------------------------------------------------------------
36
+
Number of clock hours per week
------------------------------------------------------------------------
24
(5) A series of courses or seminars that equals 12 semester hours
or 12 quarter hours in a maximum of 18 weeks.
(6) The work portion of a cooperative education program in which
the amount of work performed is equivalent to the academic workload of
a full-time student.
HEA: The Higher Education Act of 1965, as amended.
(Authority: 20 U.S.C. 1070 et seq.)
Income Contingent Loan (ICL) program: The student loan program
authorized by Title IV-D of the HEA prior to July 23, 1992.
(Authority: 20 U.S.C. 1087a et seq.)
Independent student: A student who qualifies as an independent
student under section 480(d) of the HEA.
(Authority: 20 U.S.C. 1087vv)
Initiating official: The designated department official authorized
to begin an emergency action under 34 CFR 668.83.
National Defense Student Loan program: The student loan program
authorized by Title II of the National Defense Education Act of 1958.
(Authority: 20 U.S.C. 421-429)
National Direct Student Loan (NDSL) program: The student loan
program authorized by Title IV-E of the HEA between July 1, 1972, and
October 16, 1986.
(Authority: 20 U.S.C. 1087aa-1087ii)
National Early Intervention Scholarship and Partnership (NEISP)
program: The scholarship program authorized by Chapter 2 of subpart 1
of Title IV-A of the HEA.
(Authority: 20 U.S.C. 1070a-21 et seq.)
One-third of an academic year: A period that is at least one-third
of an academic year as determined by an institution. At a minimum, one-
third of an academic year must be a period that begins on the first day
of classes and ends on the last day of classes or examinations and is a
minimum of 10 weeks of instructional time during which, for an
undergraduate educational program, a full-time student is expected to
complete at least 8 semester or trimester hours or 12 quarter hours in
an educational program whose length is measured in credit hours or 300
clock hours in an educational program whose length is measured in clock
hours. For an institution whose academic year has been reduced under
Sec. 668.3, one-third of an academic year is the pro-rated equivalent,
as measured in weeks and credit or clock hours, of at least one-third
of the institution's academic year.
(Authority: 20 U.S.C. 1088)
Output document: The Student Aid Report (SAR), Electronic Student
Aid Report (ESAR), or other document or automated data generated by the
Department of Education's central processing system or Multiple Data
Entry processing system as the result of the processing of data
provided in a Free Application for Federal Student Aid (FAFSA).
Parent: A student's natural or adoptive mother or father. A parent
also includes a student's legal guardian who has been appointed by a
court and who is specifically required by the court to use his or her
own resources to support the student.
Participating institution: An eligible institution that meets the
standards for participation in Title IV, HEA programs in subpart B and
has a current program participation agreement with the Secretary.
Payment period: (1) With respect to the Federal Pell Grant and PAS
programs, a payment period as defined in 34 CFR 690.2 and 691.2;
(2) With respect to the campus-based programs, a payment period as
defined in 34 CFR 674.2, 675.2, and 676.2.
Presidential Access Scholarship (PAS) program: The scholarship
program authorized by Chapter 3 of subpart 1 of Title IV-A of the HEA.
(Authority: 20 U.S.C. 1070a-31 et seq.)
Show-cause official: The designated department official authorized
to conduct a show-cause proceeding for an emergency action under 34 CFR
668.83.
State Student Incentive Grant (SSIG) program: The grant program
authorized by Title IV-A-3 of the HEA.
(Authority: 20 U.S.C. 1070c et seq.)
Third-party servicer: 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. The Secretary considers administration of
participation in a Title IV, HEA program to--
(1) 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--
(i) Processing student financial aid applications;
(ii) Performing need analysis;
(iii) Determining student eligibility and related activities;
(iv) Certifying loan applications;
(v) Processing output documents for payment to students;
(vi) Receiving, disbursing, or delivering Title IV, HEA program
funds, excluding lock-box processing of loan payments and normal bank
electronic fund transfers;
(vii) Conducting activities required by the provisions governing
student consumer information services in subpart D of this part;
(viii) Preparing and certifying requests for advance or
reimbursement funding;
(ix) Loan servicing and collection;
(x) Preparing and submitting notices and applications required
under 34 CFR part 600 and subpart B of this part; and
(xi) Preparing a Fiscal Operations Report and Application to
Participate--FISAP;
(2) Exclude the following functions--
(i) Publishing ability-to-benefit tests;
(ii) Performing functions as a Multiple Data Entry Processor (MDE);
(iii) Financial and compliance auditing;
(iv) Mailing of documents prepared by the institution; and
(v) Warehousing of records; and
(3) Notwithstanding the exclusions referred to in paragraph (2) of
this definition, include any activity comprised of any function
described in paragraph (1) of this definition.
(Authority: 20 U.S.C. 1088)
Two-thirds of an academic year: A period that is at least two-
thirds of an academic year as determined by an institution. At a
minimum, two-thirds of an academic year must be a period that begins on
the first day of classes and ends on the last day of classes or
examinations and is a minimum of 20 weeks of instructional time during
which, for an undergraduate educational program, a full-time student is
expected to complete at least 16 semester or trimester hours or 24
quarter hours in an educational program whose length is measured in
credit hours or 600 clock hours in an educational program whose length
is measured in clock hours. For an institution whose academic year has
been reduced under Sec. 668.3, two-thirds of an academic year is the
pro-rated equivalent, as measured in weeks and credit or clock hours,
of at least two-thirds of the institution's academic year.
(Authority: 20 U.S.C. 1088)
U.S. citizen or national: (1) A citizen of the United States; or
(2) A person defined in the Immigration and Nationality Act, 8
U.S.C. 1101(a)(22), who, though not a citizen of the United States,
owes permanent allegiance to the United States.
(Authority: 8 U.S.C. 1101)
Valid institutional student information report (valid ISIR): A
valid institutional student information report as defined in 34 CFR
690.2 for purposes of the Federal Pell Grant Program and in 34 CFR
691.2 for purposes of the PAS Program.
Valid student aid report (valid SAR): A valid student aid report
(valid SAR) as defined in 34 CFR 690.2 for purposes of the Federal Pell
Grant Program and in 34 CFR 691.2 for purposes of the PAS Program.
(Authority: 20 U.S.C. 1070 et seq., unless otherwise noted)
4. A new Sec. 668.3 is added to part 668 to read as follows:
Sec. 668.3 Reductions in the length of an academic year.
(a) General. (1) An institution that provides at least a 2-year or
4-year educational program for which the institution awards an
associate or baccalaureate degree, respectively, may request the
Secretary to reduce the minimum period of instructional time of the
academic year for any of the institution's educational programs to not
less than 26 weeks.
(2) The institution must submit its request to the Secretary in
writing and must include in the request--
(i) Identification of each educational program for which the
institution requests a reduction and the requested length of its
academic year, in weeks of instructional time, for that educational
program. The requested length for its academic year may not be less
than 26 weeks of instructional time;
(ii) Information demonstrating that the institution satisfies the
requirements of this section; and
(iii) Any other information that the Secretary may require to
determine whether to grant the request.
(b) Transition period for institutions participating in at least
one Title IV, HEA program on the effective date of this section. The
Secretary grants, for a period not to exceed 2 years from the effective
date of this section, the request of an institution participating in at
least one Title IV, HEA program on the effective date of this section
for a reduction in the minimum period of instructional time of the
academic year if the institution--
(1) Satisfies the requirements of paragraph (a) of this section;
(2) Has an academic year of less than 30 weeks of instructional
time on the effective date of these regulations;
(3) Demonstrates 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; and
(4) Demonstrates that the institution is in the process of changing
to a minimum of a 30-week academic year.
(c) Institutions in general. (1) The Secretary may grant the
request of any institution that satisfies the requirements of paragraph
(a) of this section. 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.
(Authority: 20 U.S.C. 1088)
5. Section 668.8 is revised to read as follows:
Sec. 668.8 Eligible program.
(a) General. An eligible program is an educational program that--
(1) Is provided by a participating institution; and
(2) Satisfies the other relevant requirements contained in this
section.
(b) Definitions. For purposes of this section--
(1) The Secretary considers the ``equivalent of an associate
degree'' to be--
(i) An associate degree; or
(ii) The successful completion of at least a two-year program that
is acceptable for full credit toward a bachelor's degree and qualifies
a student for admission into the third year of a bachelor's degree
program;
(2) A week is a consecutive seven-day period; and
(3)(i) For an educational program using a semester, trimester, or
quarter system or an educational program using clock hours, the
Secretary considers a week of instruction to be any week in which at
least one day of regularly scheduled instruction, examinations, or
preparation for examinations occurs; or
(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 5 days of regularly
scheduled instruction, examinations, or preparation for examinations
occurs; and
(4) Instruction does not include periods of orientation,
counseling, vacation, or other activity not related to class
preparation or examinations.
(c) Institution of higher education. An eligible program provided
by an institution of higher education must--
(1) Lead to an associate, bachelor's, professional, or graduate
degree;
(2) Be at least a two-academic-year program that is acceptable for
full credit toward a bachelor's degree; or
(3) Be at least a one-academic-year training program that leads to
a certificate, degree, or other recognized educational credential and
that prepares a student for gainful employment in a recognized
occupation.
(d) Proprietary institution of higher education and postsecondary
vocational institution. An eligible program provided by a proprietary
institution of higher education or postsecondary vocational
institution--
(1)(i) Must require a minimum of 15 weeks of instruction, beginning
on the first day of classes and ending on the last day of classes or
examinations;
(ii) Must be at least 600 clock hours, 16 semester or trimester
hours, or 24 quarter hours;
(iii) Must provide undergraduate training that prepares a student
for gainful employment in a recognized occupation; and
(iv) May admit as regular students persons who have not completed
the equivalent of an associate degree;
(2) Must--
(i) Require a minimum of 10 weeks of instruction, beginning on the
first day of classes and ending on the last day of classes or
examinations;
(ii) Be at least 300 clock hours, 8 semester or trimester hours, or
12 quarter hours;
(iii) Provide training that prepares a student for gainful
employment in a recognized occupation; and
(iv)(A) Be a graduate or professional program; or
(B) Admit as regular students only persons who have completed the
equivalent of an associate degree; or
(3) For purposes of the Federal Stafford Loan, Federal PLUS, and
Federal SLS programs only, must--
(i) Require a minimum of 10 weeks of instruction, beginning on the
first day of classes and ending on the last day of classes or
examinations;
(ii) Be at least 300 clock hours but less than 600 clock hours;
(iii) Provide undergraduate training that prepares a student for
gainful employment in a recognized occupation;
(iv) Admit as regular students some persons who have not completed
the equivalent of an associate degree; and
(v) Satisfy the requirements of paragraph (e) of this section.
(e) Qualitative factors. (1) An educational program that satisfies
the requirements of paragraphs (d)(3)(i) through (iv) of this section
qualifies as an eligible program only if--
(i) The program has a substantiated completion rate of at least 70
percent, as calculated under paragraph (f) of this section;
(ii) The program has a substantiated placement rate of at least 70
percent, as calculated under paragraph (g) of this section;
(iii) The number of clock hours provided in the program does not
exceed by more than 50 percent the minimum number of clock hours
required for training in the recognized occupation for which the
program prepares students, as established by the State in which the
program is offered, if the State has established such a requirement, or
as established by any Federal agency; and
(iv) The program has been in existence for at least one year. The
Secretary considers an educational program to have been in existence
for at least one year only if an institution has been legally
authorized to provide, and has continuously provided, the program
during the 12 months (except for normal vacation periods and, at the
discretion of the Secretary, periods when the institution closes due to
a natural disaster that directly affects the institution or the
institution's students) preceding the date on which the institution
applied for eligibility for that program.
(2) An institution shall substantiate the calculation of its
completion and placement rates by having the certified public
accountant who prepares its audit report required under Sec. 668.23
report on the institution's calculation based on performing an
attestation engagement in accordance with the Statements on Standards
for Attestation Engagements of the American Institute of Certified
Public Accountants (AICPA).
(f) Calculation of completion rate. An institution shall calculate
its completion rate for an educational program for any award year as
follows:
(1) Determine the number of regular students who were enrolled in
the program during the award year.
(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(i)(2), a refund of 100 percent of their
tuition and fees (less any permitted administrative fee) under the
institution's refund policy.
(3) Subtract from the total obtained under paragraph (f)(2) of this
section the number of students who were enrolled in the program at the
end of that award year.
(4) Determine the number of regular students who, during that award
year, received within 150 percent of the published length of the
educational program the degree, certificate, or other recognized
educational credential awarded for successfully completing the program.
(5) Divide the number determined under paragraph (f)(4) of this
section by the total obtained under paragraph (f)(3) of this section.
(g) Calculation of placement rate. (1) An institution shall
calculate its placement rate for an educational program for any award
year as follows:
(i) Determine the number of students who, during the award year,
received the degree, certificate, or other recognized educational
credential awarded for successfully completing the program.
(ii) Of the total obtained under paragraph (g)(1)(i) of this
section, determine the number of students who, within 180 days of the
day they received their degree, certificate, or other recognized
educational credential, obtained gainful employment in the recognized
occupation for which they were trained or in a related comparable
recognized occupation and, on the date of this calculation, are
employed, or have been employed, for at least 13 weeks following
receipt of the credential from the institution.
(iii) Divide the number of students determined under paragraph
(g)(1)(ii) of this section by the total obtained under paragraph
(g)(1)(i) of this section.
(2) An institution shall document that each student described in
paragraph (g)(1)(ii) of this section obtained gainful employment in the
recognized occupation for which he or she was trained or in a related
comparable recognized occupation. Examples of satisfactory
documentation of a student's gainful employment include, but are not
limited to--
(i) A written statement from the student's employer;
(ii) Signed copies of State or Federal income tax forms; and
(iii) Written evidence of payments of Social Security taxes.
(h) Eligibility for Federal Pell Grant and FSEOG programs. In
addition to satisfying other relevant provisions of this section, an
educational program qualifies as an eligible program for purposes of
the Federal Pell Grant or FSEOG Program only if the educational program
is an undergraduate program.
(i) Flight training. In addition to satisfying other relevant
provisions of this section, for a program of flight training to be an
eligible program, it must have a current valid certification from the
Federal Aviation Administration.
(j) English as a second language (ESL). (1) In addition to
satisfying the relevant provisions of this section, an educational
program that consists solely of instruction in ESL qualifies as an
eligible program if--
(i) The institution admits to the program only students who the
institution determines need the ESL instruction to use already existing
knowledge, training, or skills; and
(ii) The program leads to a degree, certificate, or other
recognized educational credential.
(2) An institution shall test each student at the end of the
educational program to substantiate that the student has attained
adequate proficiency in written and spoken English to use already
existing knowledge, training, or skills. The institution shall identify
the test or tests given to the students and the basis for the judgment
that the student has attained the adequate proficiency.
(3) An institution shall 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 with
regard to the students that it admits to its ESL program under
paragraph (j)(1)(i) of this section.
(4) An ESL program that qualifies as an eligible program under this
paragraph is eligible for purposes of the Federal Pell Grant Program
only.
(k) Undergraduate educational program in credit hours. If an
institution offers an undergraduate educational program in credit
hours, the institution must use the formula contained in paragraph (l)
of this section to determine whether that program satisfies the
requirements contained in paragraph (c)(3) or (d) of this section, and
the number of credit hours in that educational program for purposes of
the Title IV, HEA programs, unless--
(1) The program is at least two academic years in length and
provides an associate degree, a bachelor's degree, or a professional
degree; or
(2) Each course within the program is acceptable for full credit
toward that institution's associate degree, bachelor's degree, or
professional degree, provided that the institution's degree requires at
least two academic years of study.
(l) Formula. For purposes of determining whether a program
described in paragraph (k) of this section satisfies the requirements
contained in paragraph (c)(3) or (d) of this section, and the number of
credit hours in that educational program with regard to the Title IV,
HEA programs--
(1) A semester hour must include at least 30 clock hours of
instruction;
(2) A trimester hour must include at least 30 clock hours of
instruction; and
(3) A quarter hour must include at least 20 hours of instruction.
(Authority: 20 U.S.C. 1070a, 1070b, 1070c-1070c-2, 1085, 1087aa-
1087hh, 1088, 1091, and 1141; 42 U.S.C. 2753)
6. 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.
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.
(Authority: 20 U.S.C. 1082, 1085, 1088, 1091, 1141)
7. Section 668.11 is revised to read as follows:
Sec. 668.11 Scope.
(a) This subpart establishes standards that an institution must
meet in order to participate in any Title IV, HEA program.
(b) Noncompliance with these standards by an institution already
participating in any Title IV, HEA program or with applicable standards
in this subpart by a third-party servicer that contracts with the
institution may subject the institution or servicer, or both, to
proceedings under subpart G of this part. These proceedings may lead to
any of the following actions:
(1) An emergency action.
(2) The imposition of a fine.
(3) The limitation, suspension, or termination of the participation
of the institution in a Title IV, HEA program.
(4) The limitation, suspension, or termination of the eligibility
of the servicer to contract with any institution to administer any
aspect of the institution's participation in a Title IV, HEA program.
(Authority: 20 U.S.C. 1094)
Secs. 668.12-668.16 [Redesignated as Secs. 668.14-668.18]
8. Sections 668.12 through 668.16 are redesignated as Secs. 668.14
through 668.18, respectively.
9. A new Sec. 668.12 is added to read as follows:
Sec. 668.12 Application procedures.
(a) Applications for initial participation. An institution that
wishes to participate in a Title IV, HEA program must first apply to
the Secretary for a certification that the institution meets the
standards in this subpart.
(b) Applications for continued participation. A participating
institution must apply to the Secretary for a certification that the
institution continues to meet the standards in this subpart upon the
request of the Secretary or if the institution wishes to--
(1) Continue to participate in a Title IV, HEA program beyond the
scheduled expiration of the institution's current period of
participation in the program;
(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--
(A) That location offers 100 percent of an educational program; or
(B) The Secretary requires the institution to apply for
certification under paragraph (c) of this section;
(3) Reestablish participation in a Title IV, HEA program following
a change in ownership that results in a change in control according to
the provisions of 34 CFR part 600.
(c) Notification and application requirements for additional
locations. (1) A participating institution must notify the Secretary,
in writing, if the institution wishes to--
(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, but
less than 100 percent, of an educational program; or
(ii) Continue to include in its participation in a Title IV, HEA
program a location that--
(A) Offers at least 50 percent, but less than 100 percent, of an
educational program; and
(B) Has changed its name, location, or address.
(2) The Secretary considers the submission of the required
notification under 34 CFR 600.30 with respect to that location to
satisfy the notification requirement of this paragraph.
(3) The Secretary may require the institution to apply for a
certification that the institution continues to meet the requirements
of this subpart.
(d) Notification and application requirements for changes in name,
location, or address. (1) A participating institution must notify the
Secretary, in writing, if the institution wishes to continue to
participate in a Title IV, HEA program following a change in name,
location, or address of the institution or continue to include in the
institution's participation--
(i) A branch campus that has changed its name, location, or
address; or
(ii) Another location that has changed its name, location, or
address if that location offers 100 percent of an educational program.
(2) The Secretary considers the submission of the required
notification under 34 CFR 600.30 with respect to that location to
satisfy the notification requirement of this paragraph.
(e) Required forms and information. An institution that applies for
participation under paragraph (a) or (b) of this section must--
(1) Apply on the form prescribed by the Secretary; and
(2) Provide all the information and documentation requested by the
Secretary to certify that the institution meets the standards of this
subpart.
(Authority: 20 U.S.C. 1099c)
10. A new Sec. 668.13 is added to read as follows:
Sec. 668.13 Certification procedures.
(a) Requirements for certification. The Secretary certifies that an
institution meets the standards of this subpart only if--
(1) The institution is an eligible institution;
(2) The institution meets the standards of this subpart;
(3) Each branch campus to be included in the institution's
participation meets the applicable standards of this subpart; and
(4)(i) Except as provided in paragraph (a)(4)(ii) of this section,
in the case of an institution seeking to participate for the first time
in the Federal Pell Grant Program, the campus-based programs, the FDSL
Program, or the Federal Stafford Loan, Federal SLS, or Federal PLUS
Program, the institution requires the following individuals to complete
Title IV, HEA program training provided or approved by the Secretary:
(A) The individual designated by the institution under
Sec. 668.16(b)(1).
(B)(1) In the case of a for-profit institution, the chief
administrator of the institution; or
(2) In the case of an institution other than a for-profit
institution, the chief administrator of the institution, or another
administrative official of the institution designated by the chief
administrator.
(ii) If either one of the two individuals who is otherwise required
to complete training under paragraph (a)(4)(i) of this section has
previously completed Title IV, HEA program training provided or
approved by the Secretary, the institution may elect to request an on-
site Title IV, HEA program certification review by the Secretary
instead of requiring that individual to complete again the Title IV,
HEA program training provided or approved by the Secretary.
(iii) An institution may not begin participation in the applicable
Title IV, HEA program or programs--
(A) In the case of an institution that requires individuals to
complete training in accordance with paragraph (a)(4)(i) of this
section, until the individuals complete the required training; or
(B) In the case of an institution that requests an on-site review
in accordance with paragraph (a)(4)(ii) of this section, until the
Secretary conducts the review and notifies the institution that it is
in compliance with Title IV, HEA program requirements.
(b) Period of participation. (1) If the Secretary certifies that an
institution meets the standards of this subpart, the Secretary also
specifies the period for which the institution may participate in a
Title IV, HEA program. An institution's period of participation expires
four years after the date that the Secretary certifies that the
institution meets the standards of this subpart, except that the
Secretary may specify a shorter period.
(2) Provided that an institution has submitted an application for a
renewal of certification that is materially complete at least 90 days
prior to the expiration of its current period of participation, the
institution's existing certification will be extended on a month to
month basis following the expiration of the institution's period of
participation until the end of the month in which the Secretary issues
a decision on the application for recertification.
(c) Provisional certification. (1) The Secretary may provisionally
certify an institution if--
(i) The institution seeks initial participation in a Title IV, HEA
program;
(ii) The institution is an eligible institution that has undergone
a change in ownership that results in a change in control according to
the provisions of 34 CFR part 600;
(iii) The institution is a participating institution--
(A) That is applying for a certification that the institution meets
the standards of this subpart;
(B) That the Secretary determines has jeopardized its ability to
perform its financial responsibilities by not meeting the factors of
financial responsibility under Sec. 668.15 or the standards of
administrative capability under Sec. 668.16; and
(C) Whose participation has been limited or suspended under subpart
G of this part, or voluntarily enters into provisional certification;
(iv) The institution seeks a renewal of participation in a Title
IV, HEA program after the expiration of a prior period of participation
in that program; or
(v) The institution is a participating institution that was
accredited or preaccredited by a nationally recognized accrediting
agency on the day before the Secretary withdrew the Secretary's
recognition of that agency according to the provisions contained in 34
CFR part 603.
(2) If the Secretary provisionally certifies an institution, the
Secretary also specifies the period for which the institution may
participate in a Title IV, HEA program. Except as provided in
paragraphs (c) (3) and (4) of this section, a provisionally certified
institution's period of participation expires--
(i) Not later than the end of the first complete award year
following the date on which the Secretary provisionally certified the
institution under paragraph (c)(1)(i) of this section;
(ii) Not later than the end of the third complete award year
following the date on which the Secretary provisionally certified the
institution under paragraph (c)(1)(ii), (iii), (iv), or (v) or (e)(2)
of this section; and
(iii) If the Secretary provisionally certified the institution
under paragraph (c)(1)(vi) of this section, not later than 18 months
after the date that the Secretary withdrew recognition from the
institution's nationally recognized accrediting agency.
(3) Notwithstanding the maximum periods of participation provided
for in paragraph (c)(2) of this section, if the Secretary provisionally
certifies an institution, the Secretary may specify a shorter period of
participation for that institution.
(4) For the purposes of this section, ``provisional certification''
means that the Secretary certifies that an institution has demonstrated
to the Secretary's satisfaction that the institution--
(i) Is capable of meeting the standards of this subpart within a
specified period; and
(ii) Is able to meet the institution's responsibilities under its
program participation agreement, including compliance with any
additional conditions specified in the institution's program
participation agreement that the Secretary requires the institution to
meet in order for the institution to participate under provisional
certification.
(d) Requirements for provisional certification to participate on a
limited basis for institutions that are not financially responsible.
Notwithstanding paragraph (c)(1) of this section, the Secretary does
not provisionally certify an institution that--
(1) Fails to meet the general standards of financial responsibility
in Sec. 668.15(b) or the exceptions to the general standards of
financial responsibility in Sec. 668.15(d), unless the institution--
(i) Demonstrates to the satisfaction of the Secretary that it has
sufficient financial and administrative resources to participate in the
Title IV, HEA programs under a funding arrangement other than the
Department of Education's standard advance funding arrangement;
(ii) Submits to the Secretary a letter of credit in an amount and
form acceptable to the Secretary equal to not less than 10 percent of
the Title IV, HEA program funds received by the institution during the
last complete award year for which figures are available; and
(iii) Demonstrates that, during the preceding two award years, it
has met all of its financial obligations and was current on its debt
payments in accordance with the provisions in Sec. 668.15(b) (3) and
(4); or
(2) Is not financially responsible under Sec. 668.15(c)(2), or is
required, and has been required at least one other time during the
five-year period preceding the Secretary's decision, to certify the
institution provisionally, to comply with paragraph (d)(1) of this
section, unless--
(i) The institution, or one or more persons or entities that the
Secretary determines under the provisions of Sec. 668.15 exercise
substantial control over the institution, or both, submit to the
Secretary financial guarantees in an amount determined by the Secretary
to be sufficient to satisfy the institution's potential liabilities
arising from the institution's participation in the Title IV, HEA
programs; and
(ii) One or more persons or entities that the Secretary determines
under the provisions of Sec. 668.15 exercise substantial control over
the institution agree to be jointly or severally liable for any
liabilities arising from the institution's participation in the Title
IV, HEA programs and civil and criminal monetary penalties authorized
under Title IV of the HEA.
(e) Consequences for an institution whose State does not
participate in the State Postsecondary Review program. Notwithstanding
any other provision of this section, if an institution or branch campus
of the institution is in a State that does not participate in the State
Postsecondary Review Program (34 CFR part 667), the Secretary, with
regard to any particular Title IV, HEA program--
(1) Does not certify that the institution or branch campus, as
applicable meets the standards of this subpart; and
(2) May provisionally certify the institution or branch campus, as
applicable, unless--
(i) The institution or branch campus, as applicable, seeks initial
participation in that program; or
(ii) The institution has undergone a change of ownership that
results in a change of control, as determined under 34 CFR 600.31.
(f) Revocation of provisional certification. (1) If, before the
expiration of a provisionally certified institution's period of
participation in a Title IV, HEA program, the Secretary determines that
the institution is unable to meet its responsibilities under its
program participation agreement, the Secretary may revoke the
institution's provisional certification for participation in that
program.
(2)(i) If the Secretary revokes the provisional certification of an
institution under paragraph (f)(1) of this section, the Secretary sends
the institution a notice by certified mail, return receipt requested.
The Secretary also may transmit the notice by other, more expeditious
means, if practical.
(ii) The revocation takes effect on the date that the Secretary
mails the notice to the institution.
(iii) The notice states the basis for the revocation, the
consequences of the revocation to the institution, and that the
institution may request the Secretary to reconsider the revocation. The
consequences of a revocation are described in Sec. 668.26.
(3)(i) An institution may request reconsideration of a revocation
under this section by submitting to the Secretary, within 20 days of
the institution's receipt of the Secretary's notice, written evidence
that the revocation is unwarranted. The institution must file the
request with the Secretary by hand-delivery, mail, or facsimile
transmission.
(ii) The filing date of the request is the date on which the
request is--
(A) Hand-delivered;
(B) Mailed; or
(C) Sent by facsimile transmission.
(iii) Documents filed by facsimile transmission must be transmitted
to the Secretary in accordance with instructions provided by the
Secretary in the notice of revocation. An institution filing by
facsimile transmission is responsible for confirming that a complete
and legible copy of the document was received by the Secretary.
(iv) The Secretary discourages the use of facsimile transmission
for documents longer than five pages.
(4)(i) The designated department official making the decision
concerning an institution's request for reconsideration of a revocation
is different from, and not subject to supervision by, the official who
initiated the revocation of the institution's provisional
certification. The deciding official promptly considers an
institution's request for reconsideration of a revocation and notifies
the institution, by certified mail, return receipt requested, of the
final decision. The Secretary also may transmit the notice by other,
more expeditious means, if practical.
(ii) If the Secretary determines that the revocation is warranted,
the Secretary's notice informs the institution that the institution may
apply for reinstatement of participation only after the later of the
expiration of--
(A) Eighteen months after the effective date of the revocation; or
(B) A debarment or suspension of the institution under Executive
Order (E.O.) 12549 (3 CFR, 1986 comp., p. 189) or the Federal
Acquisition Regulations, 48 CFR part 9, subpart 9.4.
(iii) If the Secretary determines that the revocation of the
institution's provisional certification is unwarranted, the Secretary's
notice informs the institution that the institution's provisional
certification is reinstated, effective on the date that the Secretary's
original revocation notice was mailed, for a specified period of time.
(5)(i) The mailing date of a notice of revocation or a request for
reconsideration of a revocation is the date evidenced on the original
receipt of mailing from the U.S. Postal Service.
(ii) The date on which a request for reconsideration of a
revocation is submitted is--
(A) If the request was sent by a delivery service other than the
U.S. Postal Service, the date evidenced on the original receipt by that
service; and
(B) If the request was sent by facsimile transmission, the date
that the document is recorded as received by facsimile equipment that
receives the transmission.
(Authority: 20 U.S.C. 1099c and E.O. 12549 (3 CFR, 1989 Comp., p.
189) and E.O. 12689 (3 CFR, 1989 Comp., p. 235))
11. Newly redesignated Sec. 668.14 is revised to read as follows:
Sec. 668.14 Program participation agreement.
(a)(1) An institution may participate in any Title IV, HEA program,
other than the SSIG and NEISP programs, only if the institution enters
into a written program participation agreement with the Secretary, on a
form approved by the Secretary. A program participation agreement
conditions the initial and continued participation of an eligible
institution in any Title IV, HEA program upon compliance with the
provisions of this part, the individual program regulations, and any
additional conditions specified in the program participation agreement
that the Secretary requires the institution to meet.
(2) An institution's program participation agreement applies to
each branch campus and other location of the institution that meets the
applicable requirements of this part unless otherwise specified by the
Secretary.
(b) By entering into a program participation agreement, an
institution agrees that--
(1) It will comply with all statutory provisions of or applicable
to Title IV of the HEA, all applicable regulatory provisions prescribed
under that statutory authority, and all applicable special
arrangements, agreements, and limitations entered into under the
authority of statutes applicable to Title IV of the HEA, including the
requirement that the institution will use funds it receives under any
Title IV, HEA program and any interest or other earnings thereon,
solely for the purposes specified in and in accordance with that
program;
(2) As a fiduciary responsible for administering Federal funds, if
the institution is permitted to request funds under a Title IV, HEA
program advance payment method, the institution will time its requests
for funds under the program to meet the institution's immediate Title
IV, HEA program needs;
(3) It will not request from or charge any student a fee for
processing or handling any application, form, or data required to
determine a student's eligibility for, and amount of, Title IV, HEA
program assistance;
(4) It will establish and maintain such administrative and fiscal
procedures and records as may be necessary to ensure proper and
efficient administration of funds received from the Secretary or from
students under the Title IV, HEA programs, together with assurances
that the institution will provide, upon request and in a timely manner,
information relating to the administrative capability and financial
responsibility of the institution to--
(i) The Secretary;
(ii) The State postsecondary review entity designated under 34 CFR
part 667 for the State or States in which the institution or any of the
institution's branch campuses or other locations are located if the
institution was referred by the Secretary under 34 CFR 667.5;
(iii) A guaranty agency, as defined in 34 CFR part 682, that
guarantees loans made under the Federal Stafford Loan, Federal PLUS,
and Federal SLS programs for attendance at the institution or any of
the institution's branch campuses or other locations;
(iv) The nationally recognized accrediting agency that accredits or
preaccredits the institution or any of the institution's branch
campuses, other locations, or educational programs;
(v) The State agency that legally authorizes the institution and
any branch campus or other location of the institution to provide
postsecondary education; and
(vi) In the case of a public postsecondary vocational educational
institution that is approved by a State agency recognized for the
approval of public postsecondary vocational education, that State
agency;
(5) It will comply with the provisions of Sec. 668.15 relating to
factors of financial responsibility;
(6) It will comply with the provisions of Sec. 668.16 relating to
standards of administrative capability;
(7) It will submit reports to the Secretary and, in the case of an
institution participating in the Federal Stafford Loan, Federal PLUS,
Federal SLS, or the Federal Perkins Loan Program, to holders of loans
made to the institution's students under that program at such times and
containing such information as the Secretary may reasonably require to
carry out the purpose of the Title IV, HEA programs;
(8) It will not provide any statement to any student or
certification to any lender under the Federal Stafford Loan, Federal
PLUS, or Federal SLS Program that qualifies the student for a loan or
loans in excess of the amount that the student is eligible to borrow in
accordance with sections 425(a), 428(a)(2), 428(b)(1) (A) and (B), and
428H of the HEA;
(9) It will comply with the requirements of subpart D of this part
concerning institutional and financial assistance information for
students and prospective students;
(10) In the case of an institution that advertises job placement
rates as a means of attracting students to enroll in the institution,
it will make available to prospective students, at or before the time
that those students apply for enrollment--
(i) The most recent available data concerning employment
statistics, graduation statistics, and any other information necessary
to substantiate the truthfulness of the advertisements; and
(ii) Relevant State licensing requirements of the State in which
the institution is located for any job for which an educational program
offered by the institution is designed to prepare those prospective
students;
(11) In the case of an institution participating in the Federal
Stafford Loan, Federal PLUS, or Federal SLS Program, the institution
will inform all eligible borrowers, as defined in 34 CFR part 682,
enrolled in the institution about the availability and eligibility of
those borrowers for State grant assistance from the State in which the
institution is located, and will inform borrowers from another State of
the source for further information concerning State grant assistance
from that State;
(12) It will provide the certifications described in paragraph (c)
of this section;
(13) In the case of an institution whose students receive financial
assistance pursuant to section 484(d) of the HEA, the institution will
make available to those students a program proven successful in
assisting students in obtaining the recognized equivalent of a high
school diploma;
(14) It will not deny any form of Federal financial aid to any
eligible student solely on the grounds that the student is
participating in a program of study abroad approved for credit by the
institution;
(15) In the case of an institution seeking to participate for the
first time in the Federal Stafford Loan, Federal PLUS, and Federal SLS
programs, the institution has included a default management plan as
part of its application under Sec. 668.12 for participation in those
programs and will use the plan for at least two years from the date of
that application. The Secretary considers the requirements of this
paragraph to be satisfied by a default management plan developed in
accordance with the default reduction measures described in appendix D
to this part;
(16) In the case of an institution that changes ownership that
results in a change of control, or that changes its status as a main
campus, branch campus, or an additional location, the institution will,
to participate in the Federal Stafford Loan, Federal PLUS, and Federal
SLS programs, develop a default management plan for approval by the
Secretary and implement the plan for at least two years after the
change in control or status. The Secretary considers the requirements
of this paragraph to be satisfied by a default management plan
developed in accordance with the default reduction measures described
in appendix D to this part;
(17) The Secretary, guaranty agencies and lenders as defined in 34
CFR part 682, nationally recognized accrediting agencies, the Secretary
of Veterans Affairs, State postsecondary review entities designated
under 34 CFR part 667, State agencies recognized under 34 CFR part 603
for the approval of public postsecondary vocational education, and
State agencies that legally authorize institutions and branch campuses
or other locations of institutions to provide postsecondary education,
have the authority to share with each other any information pertaining
to the institution's eligibility for or participation in the Title IV,
HEA programs or any information on fraud and abuse;
(18) It will not knowingly--
(i) Employ in a capacity that involves the administration of the
Title IV, HEA programs or the receipt of funds under those programs, an
individual who has been convicted of, or has pled nolo contendere or
guilty to, a crime involving the acquisition, use, or expenditure of
Federal, State, or local government funds, or has been administratively
or judicially determined to have committed fraud or any other material
violation of law involving Federal, State, or local government funds;
(ii) Contract with an institution or third-party servicer that has
been terminated under section 432 of the HEA for a reason involving the
acquisition, use, or expenditure of Federal, State, or local government
funds, or that has been administratively or judicially determined to
have committed fraud or any other material violation of law involving
Federal, State, or local government funds; or
(iii) Contract with or employ any individual, agency, or
organization that has been, or whose officers or employees have been--
(A) Convicted of, or pled nolo contendere or guilty to, a crime
involving the acquisition, use, or expenditure of Federal, State, or
local government funds; or
(B) Administratively or judicially determined to have committed
fraud or any other material violation of law involving Federal, State,
or local government funds;
(19) It will complete, in a timely manner and to the satisfaction
of the Secretary, surveys conducted as a part of the Integrated
Postsecondary Education Data System (IPEDS) or any other Federal
collection effort, as designated by the Secretary, regarding data on
postsecondary institutions;
(20) In the case of an institution that offers athletically related
student aid, it will comply with the provisions of paragraph (d) of
this section;
(21) It will not impose any penalty, including, but not limited to,
the assessment of late fees, the denial of access to classes,
libraries, or other institutional facilities, or the requirement that
the student borrow additional funds for which interest or other charges
are assessed, on any student because of the student's inability to meet
his or her financial obligations to the institution as a result of the
delayed disbursement of the proceeds of a Title IV, HEA program loan
due to compliance with statutory and regulatory requirements of or
applicable to the Title IV, HEA programs, or delays attributable to the
institution;
(22) It will not provide, nor contract with any entity that
provides, any commission, bonus, or other incentive payment based
directly or indirectly on success in securing enrollments or financial
aid to any persons or entities engaged in any student recruiting or
admission activities or in making decisions regarding the awarding of
student financial assistance, except that this requirement shall not
apply to the recruitment of foreign students residing in foreign
countries who are not eligible to receive Federal student assistance.
This provision does not apply to the giving of token gifts to students
or alumni for referring students for admission to the institution as
long as: The gift is not in the form of money, check, or money order;
no more than one such gift is given to any student or alumnus; and the
gift has a value of not more than $25;
(23) It will meet the requirements established pursuant to part H
of Title IV of the HEA by the Secretary, State postsecondary review
entities designated under 34 CFR part 667, and nationally recognized
accrediting agencies;
(24) It will comply with the institutional refund policy
established in Sec. 668.22;
(25) It is liable for all--
(i) Improperly spent or unspent funds received under the Title IV,
HEA programs, including any funds administered by a third-party
servicer; and
(ii) Refunds that the institution or its servicer may be required
to make; and
(26) If the stated objectives of an educational program of the
institution are to prepare a student for gainful employment in a
recognized occupation, the institution will--
(i) Demonstrate a reasonable relationship between the length of the
program and entry level requirements for the recognized occupation for
which the program prepares the student. The Secretary considers the
relationship to be reasonable if the number of clock hours provided in
the program does not exceed by more than 50 percent the minimum number
of clock hours required for training in the recognized occupation for
which the program prepares the student, as established by the State in
which the program is offered, if the State has established such a
requirement, or as established by any Federal agency; and
(ii) Establish the need for the training for the student to obtain
employment in the recognized occupation for which the program prepares
the student.
(c) In order to participate in any Title IV, HEA program (other
than the SSIG and NEISP programs), the institution must certify that
it--
(1) Has in operation a drug abuse prevention program that the
institution has determined to be accessible to any officer, employee,
or student at the institution; and
(2)(i) Has established a campus security policy in accordance with
section 485(f) of the HEA; and
(ii) Has complied with the disclosure requirements of Sec. 668.47
as required by section 485(f) of the HEA.
(d) In order to participate in any Title IV, HEA program (other
than the SSIG and NEISP programs), an institution that offers
athletically related student aid must--
(1) Cause an annual compilation, independently audited not less
often than every 3 years, to be prepared within 6 months after the end
of the institution's fiscal year, of--
(i) The revenues derived by the institution from the institution's
intercollegiate athletics activities, according to the following
categories:
(A) Total revenues.
(B) Revenues from football.
(C) Revenues from men's basketball.
(D) Revenues from women's basketball.
(E) Revenues from all other men's sports combined.
(F) Revenues from all other women's sports combined;
(ii) Expenses made by the institution for the institution's
intercollegiate athletics activities, according to the following
categories:
(A) Total expenses.
(B) Expenses attributable to football.
(C) Expenses attributable to men's basketball.
(D) Expenses attributable to women's basketball.
(E) Expenses attributable to all other men's sports combined.
(F) Expenses attributable to all other women's sports combined; and
(iii) The total revenues and operating expenses of the institution;
and
(2) Make the compilation and, where allowable by State law, the
results of the audits required by paragraph (d)(1) of this section
available for inspection by the Secretary and the public.
(e) For the purposes of paragraph (d) of this section--
(1) Revenues from intercollegiate athletics activities allocable to
a sport shall include without limitation gate receipts, broadcast
revenues and other conference distributions, appearance guarantees and
options, concessions, and advertising;
(2) Revenues such as student activities fees, alumni contributions,
and investment interest income that are not allocable to a sport shall
be included in the calculation of total revenues only;
(3) Expenses for intercollegiate athletics activities allocable to
a sport shall include without limitation grants-in-aid, salaries,
travel, equipment, and supplies; and
(4) Expenses such as general and administrative overhead that are
not allocable to a sport shall be included in the calculation of total
expenses only.
(f)(1) A program participation agreement becomes effective on the
date that the Secretary signs the agreement.
(2) A new program participation agreement supersedes any prior
program participation agreement between the Secretary and the
institution.
(g)(1) Except as provided in paragraphs (h) and (i) of this
section, the Secretary terminates a program participation agreement
through the proceedings in subpart G of this part.
(2) An institution may terminate a program participation agreement.
(3) If the Secretary or the institution terminates a program
participation agreement under paragraph (g) of this section, the
Secretary establishes the termination date.
(h) An institution's program participation agreement automatically
expires on the date that--
(1) The institution changes ownership that results in a change in
control as determined by the Secretary under 34 CFR part 600; or
(2) The institution's participation ends under the provisions of
Sec. 668.26(a) (1), (2), (4), or (7).
(i) An institution's program participation agreement no longer
applies to or covers a location of the institution as of the date on
which that location ceases to be a part of the participating
institution.
(Authority: 20 U.S.C. 1085, 1088, 1091, 1092, 1094, 1099a-3, 1099c,
and 1141)
12. Newly redesignated Sec. 668.15 is revised to read as follows:
Sec. 668.15 Factors of financial responsibility.
(a) General. To begin and to continue to participate in any Title
IV, HEA program, an institution must demonstrate to the Secretary that
the institution is financially responsible under the requirements
established in this section.
(b) General standards of financial responsibility. In general, the
Secretary considers an institution to be financially responsible only
if it--
(1) Is providing the services described in its official
publications and statements;
(2) Is providing the administrative resources necessary to comply
with the requirements of this subpart;
(3) Is meeting all of its financial obligations, including but not
limited to--
(i) Refunds that it is required to make; and
(ii) Repayments to the Secretary for liabilities and debts incurred
in programs administered by the Secretary;
(4) Is current in its debt payments. The institution is not
considered current in its debt payments if--
(i) The institution is in violation of any existing loan agreement
at its fiscal year end, as disclosed in a note to its audited financial
statement; or
(ii) the institution fails to make a payment in accordance with
existing debt obligations for more than 120 days, and at least one
creditor has filed suit to recover those funds;
(5)(i) Maintains, at all times, a minimum cash reserve for the
repayment of refunds equal to at least one quarter of the total dollar
amount of refunds paid by the institution in the previous fiscal year.
The cash reserve must be maintained in a cash reserve fund, consisting
of--
(A) A cash deposit in a federally insured bank account; or
(B) U.S. Treasury securities backed by the full faith and credit of
the United States of America, having an original maturity date of three
months or less; and
(ii) Provides, in notes to its audited financial statement,
information showing the balance maintained in the fund for the
institution's two most recently completed fiscal years, the
institution's refund expenditures for it's previous completed fiscal
year, and any accrued refunds at each fiscal year end;
(6) Has not had, as part of the audit report for the institution's
most recently completed fiscal year--
(i) A statement by the accountant expressing substantial doubt
about the institution's ability to continue as a going concern; or
(ii) A disclaimed or adverse opinion by the accountant;
(7) For a for-profit institution--
(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. Should
application of paragraph (b)(5) of this section cause a portion of the
institution's cash reserves to be classified as a noncurrent asset,
those cash reserves may be included in cash equivalents in calculating
the institution's acid test ratio;
(B) Has not had operating losses over both of its 2 latest fiscal
years that 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 2-year period. The Secretary may calculate any
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
(C) Had, for its latest fiscal year, a positive tangible net worth.
In applying this standard, a positive tangible net worth occurs when
the institution's tangible assets exceed its liabilities. The
calculation of tangible net worth shall exclude all assets classified
as intangible in accordance with generally accepted accounting
principles; or
(ii) Demonstrates to the satisfaction of the Secretary that it has
currently issued and outstanding debt obligations that are (without
insurance, guarantee, or credit enhancement) listed at or above the
second highest rating level of credit quality given by a nationally
recognized statistical rating organization;
(8) For a nonprofit institution--
(i)(A) Prepares a classified statement of financial position in
accordance with generally accepted accounting principles or provides
the required information in notes to the audited financial statements;
(B) Demonstrates at the end of its latest fiscal year, an acid test
ratio of at least 1:1. 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. Should application of paragraph (b)(5) of this
section cause a portion of the institution's cash reserves to be
classified as a non-current asset, those cash reserves may be included
in cash equivalents in calculating the institution's acid test ratio;
(C)(1) Has, at the end of its latest fiscal year, a positive
unrestricted current fund balance or positive unrestricted net assets.
In calculating the unrestricted current fund balance or the
unrestricted net assets for an institution, the Secretary may include
funds that are temporarily restricted in use by the institution's
governing body that can be transferred to the current unrestricted fund
or added to net unrestricted assets at the discretion of the governing
body; or
(2) Has not had, an excess of current fund expenditures over
current fund revenues over both of its 2 latest fiscal years that
results in a decrease exceeding 10 percent in either the unrestricted
current fund balance or the unrestricted net assets at the beginning of
the first year of the 2-year period. The Secretary may exclude from net
changes in fund balances for the operating loss calculation:
Extraordinary gains or losses; income or losses from discontinued
operations; prior period adjustment; and the cumulative effect of
changes in accounting principle. In calculating the institution's
unrestricted current fund balance or the unrestricted net assets, the
Secretary may include funds that are temporarily restricted in use by
the institution's governing body that can be transferred to the current
unrestricted fund or added to net unrestricted assets at the discretion
of the governing body; or
(ii) Demonstrates to the satisfaction of the Secretary that it has
currently issued and outstanding debt obligations which are (without
insurance, guarantee, or credit enhancement) listed at or above the
second highest rating level of credit quality given by a nationally
recognized statistical rating organization.
(9) For a public institution--
(i) Has its liabilities backed by the full faith and credit of a
State, or by an equivalent governmental entity;
(ii) Has a positive current unrestricted fund balance if reporting
under the Single Audit Act;
(iii) Has a positive unrestricted current fund in the State's
Higher Education Fund, as presented in the general purpose financial
statements;
(iv) Submits to the Secretary, a statement from the State Auditor
General that the institution has, during the past year, met all of its
financial obligations, and that the institution continues to have
sufficient resources to meet all of its financial obligations; or
(v) Demonstrates to the satisfaction of the Secretary that it has
currently issued and outstanding debt obligations which are (without
insurance, guarantee, or credit enhancement) listed at or above the
second highest rating level of credit quality given by a nationally
recognized statistical rating organization.
(c) Past performance of an institution or persons affiliated with
an institution. An institution is not financially responsible if--
(1) A person who exercises substantial control over the institution
or any member or members of the person's family alone or together--
(i)(A) Exercises or exercised substantial control over another
institution or a third-party servicer that owes a liability for a
violation of a Title IV, HEA program requirement; or
(B) Owes a liability for a violation of a Title IV, HEA program
requirement; and
(ii) That person, family member, institution, or servicer is not
making payments in accordance with an agreement to repay that
liability; or
(2) The institution has--
(i) Been limited, suspended, terminated, or entered into a
settlement agreement to resolve a limitation, suspension, or
termination action initiated by the Secretary or a guaranty agency (as
defined in 34 CFR part 682) within the preceding five years;
(ii) Had--
(A) An audit finding, during its two most recent audits of its
conduct of the Title IV, HEA programs, that resulted in the
institution's being required to repay an amount greater than five
percent of the funds that the institution received under the Title IV,
HEA programs for any award year covered by the audit; or
(B) A program review finding, during its two most recent program
reviews, of its conduct of the Title IV, HEA programs that resulted in
the institution's being required to repay an amount greater than five
percent of the funds that the institution received under the Title IV,
HEA programs for any award year covered by the program review;
(iii) Been cited during the preceding five years for failure to
submit acceptable audit reports required under this part or individual
Title IV, HEA program regulations in a timely fashion; or
(iv) Failed to resolve satisfactorily any compliance problems
identified in program review or audit reports based upon a final
decision of the Secretary issued pursuant to subpart G or subpart H of
this part.
(d) Exceptions to the general standards of financial
responsibility. (1) An institution is not required to meet the standard
in paragraph (b)(5) of this section if the Secretary determines that
the institution--
(i) 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
(ii) Contributes to that tuition recovery fund.
(2) The Secretary considers an institution to be financially
responsible, even if the institution is not otherwise financially
responsible under paragraphs (b)(1) through (4) and (b)(6) through (9)
of this section, if the institution--
(i) Submits to the Secretary an irrevocable letter of credit that
is acceptable and payable to the Secretary equal to not less than one-
half of the Title IV, HEA program funds received by the institution
during the last complete award year for which figures are available; or
(ii) Establishes to the satisfaction of the Secretary, with the
support of a financial statement submitted in accordance with paragraph
(e) of this section, that the institution has sufficient resources to
ensure against its precipitous closure, including the ability to meet
all of its financial obligations (including refunds of institutional
charges and repayments to the Secretary for liabilities and debts
incurred in programs administered by the Secretary). The Secretary
considers the institution to have sufficient resources to ensure
against precipitous closure only if--
(A) The institution formerly demonstrated financial responsibility
under the standards of financial responsibility in its preceding
audited financial statement (or, if no prior audited financial
statement was requested by the Secretary, demonstrates in conjunction
with its current audit that it would have satisfied this requirement),
and that its most recent audited financial statement indicates that--
(1) All taxes owed by the institution are current;
(2) The institution's net income, or a change in total net assets,
before extraordinary items and discontinued operations, has not
decreased by more than 10 percent from the prior fiscal year, unless
the institution demonstrates that the decreased net income shown on the
current financial statement is a result of downsizing pursuant to a
management-approved business plan;
(3) Loans and other advances to related parties have not increased
from the prior fiscal year unless such increases were secured and
collateralized, and do not exceed 10 percent of the prior fiscal year's
working capital of the institution;
(4) The equity of a for-profit institution, or the total net assets
of a non-profit institution, have not decreased by more than 10 percent
of the prior year's total equity;
(5) Compensation for owners or other related parties (including
bonuses, fringe benefits, employee stock option allowances, 401k
contributions, deferred compensation allowances) has not increased from
the prior year at a rate higher than for all other employees;
(6) The institution has not materially leveraged its assets or
income by becoming a guarantor on any new loan or obligation on behalf
of any related party;
(7) All obligations owed to the institution by related parties are
current, and that the institution has demanded and is receiving payment
of all funds owed from related parties that are payable upon demand.
For purposes of this section, a person does not become a related party
by attending an institution as a student;
(B) There have been no material findings in the institution's
latest compliance audit of its administration of the Title IV HEA
programs; and
(C) There are no pending administrative or legal actions being
taken against the institution by the Secretary, any other Federal
agency, the institution's nationally recognized accrediting agency, or
any State entity.
(3) An institution is not required to meet the acid test ratio in
paragraph (b)(7)(i)(A) or (b)(8)(i)(B) of this section if the
institution is an institution that provides a 2-year or 4-year
educational program for which the institution awards an associate or
baccalaureate degree that demonstrates to the satisfaction of the
Secretary that--
(i) There is no reasonable doubt as to its continued solvency and
ability to deliver quality educational services;
(ii) It is current in its payment of all current liabilities,
including student refunds, repayments to the Secretary, payroll, and
payment of trade creditors and withholding taxes; and
(iii) It has substantial equity in institution-occupied facilities,
the acquisition of which was the direct cause of its failure to meet
the acid test ratio requirement.
(4) The Secretary may determine an institution to be financially
responsible even if the institution is not otherwise financially
responsible under paragraph (c)(1) of this section if--
(i) The institution notifies the Secretary, in accordance with 34
CFR 600.30, that the person referenced in paragraph (c)(1) of this
section exercises substantial control over the institution; and
(ii)(A) The person repaid to the Secretary a portion of the
applicable liability, and the portion repaid equals or exceeds the
greater of--
(1) The total percentage of the ownership interest held in the
institution or third-party servicer that owes the liability by that
person or any member or members of that person's family, either alone
or in combination with one another;
(2) The total percentage of the ownership interest held in the
institution or servicer that owes the liability that the person or any
member or members of the person's family, either alone or in
combination with one another, represents or represented under a voting
trust, power of attorney, proxy, or similar agreement; or
(3) Twenty-five percent, if the person or any member of the
person's family is or was a member of the board of directors, chief
executive officer, or other executive officer of the institution or
servicer that owes the liability, or of an entity holding at least a 25
percent ownership interest in the institution that owes the liability;
(B) The applicable liability described in paragraph (c)(1) of this
section is currently being repaid in accordance with a written
agreement with the Secretary; or
(C) The institution demonstrates why--
(1) The person who exercises substantial control over the
institution should nevertheless be considered to lack that control; or
(2) The person who exercises substantial control over the
institution and each member of that person's family nevertheless does
not or did not exercise substantial control over the institution or
servicer that owes the liability.
(e) Documentation of financial responsibility. (1) The Secretary
determines whether an institution is financially responsible under this
section by evaluating documents submitted by the institution and
information obtained from other sources, including outside sources of
credit information. To enable the Secretary to make this determination,
the institution shall submit to the Secretary for its two latest
complete fiscal years, a set of financial statements of the
institution, prepared on an accrual basis in accordance with generally
accepted accounting principles and audited by an independent certified
public accountant in accordance with generally accepted auditing
standards. The Secretary may also require the institution to submit or
otherwise make available, the accountant's work papers. If an
institution submits audited consolidated financial statements of its
parent corporation for the Secretary to use in determining the
institution's level of financial responsibility, the consolidated
financial statements must be supplemented with consolidating schedules
showing the consolidation of each of the parent corporation's
subsidiaries and divisions (each separate institution participating in
the Title IV, HEA programs must be shown separately), intercompany
eliminating entries, and derived consolidated totals. The Secretary may
also require the institution to submit additional substantive
information.
(2) An institution shall submit the documents required in paragraph
(e)(1) of this section annually within four months after the end of the
institution's fiscal year, unless the Secretary requests a more
frequent submission. Upon a showing of good cause, the Secretary may
grant a filing extension to an institution.
(3) The Secretary considers the audit submission requirement of
this section to be satisfied by an audit conducted in accordance with--
(i) The Single Audit Act (Chapter 75 of title 31, United States
Code); or
(ii) Office of Management and Budget Circular A-133, ``Audits of
Institutions of Higher Education and Other Nonprofit Organizations.''
(f) Definitions and terms. For the purposes of this section--
(1)(i) An ``ownership interest'' is a share of the legal or
beneficial ownership or control of, or a right to share in the proceeds
of the operation of, an institution, institution's parent corporation,
a third-party servicer, or a third-party servicer's parent corporation.
(ii) The term ``ownership interest'' includes, but is not limited
to--
(A) An interest as tenant in common, joint tenant, or tenant by the
entireties;
(B) A partnership; and
(C) An interest in a trust.
(iii) The term ``ownership interest'' does not include any share of
the ownership or control of, or any right to share in the proceeds of
the operation of--
(A) A mutual fund that is regularly and publicly traded;
(B) An institutional investor; or
(C) A profit-sharing plan, provided that all employees are covered
by the plan;
(2) The Secretary generally considers a person to exercise
substantial control over an institution or third-party servicer, if the
person--
(i) Directly or indirectly holds at least a 25 percent ownership
interest in the institution or servicer;
(ii) Holds, together with other members of his or her family, at
least a 25 percent ownership interest in the institution or servicer;
(iii) Represents, either alone or together with other persons,
under a voting trust, power of attorney, proxy, or similar agreement
one or more persons who hold, either individually or in combination
with the other persons represented or the person representing them, at
least a 25 percent ownership in the institution or servicer; or
(iv) Is a member of the board of directors, the chief executive
officer, or other executive officer of--
(A) The institution or servicer; or
(B) An entity that holds at least a 25 percent ownership interest
in the institution or servicer; and
(3) The Secretary considers a member of a person's family to be a
parent, sibling, spouse, child, spouse's parent or sibling, or
sibling's or child's spouse.
(Authority: 20 U.S.C. 1094 and 1099c and Section 4 of Pub. L. 95-
452, 92 Stat. 1101-1109)
13. Newly redesignated Sec. 668.16 is revised to read as follows:
Sec. 668.16 Standards of administrative capability.
To begin and to continue to participate in any Title IV, HEA
program, an institution shall demonstrate to the Secretary that the
institution is capable of adequately administering that program under
each of the standards established in this section. The Secretary
considers an institution to have that administrative capability if the
institution--
(a) Administers the Title IV, HEA programs in accordance with all
statutory provisions of or applicable to Title IV of the HEA, all
applicable regulatory provisions prescribed under that statutory
authority, and all applicable special arrangements, agreements, and
limitations entered into under the authority of statutes applicable to
Title IV of the HEA;
(b)(1) Designates a capable individual to be responsible for
administering all the Title IV, HEA programs in which it participates
and for coordinating those programs with the institution's other
Federal and non-Federal programs of student financial assistance. The
Secretary considers an individual to be ``capable'' under this
paragraph if the individual is certified by the State in which the
institution is located, if the State requires certification of
financial aid administrators. The Secretary may consider other factors
in determining whether an individual is capable, including, but not
limited to, the individual's successful completion of Title IV, HEA
program training provided or approved by the Secretary, and previous
experience and documented success in administering the Title IV, HEA
programs properly;
(2) Uses an adequate number of qualified persons to administer the
Title IV, HEA programs in which the institution participates. The
Secretary considers the following factors to determine whether an
institution uses an adequate number of qualified persons--
(i) The number and types of programs in which the institution
participates;
(ii) The number of applications evaluated;
(iii) The number of students who receive any student financial
assistance at the institution and the amount of funds administered;
(iv) The financial aid delivery system used by the institution;
(v) The degree of office automation used by the institution in the
administration of the Title IV, HEA programs;
(vi) The number and distribution of financial aid staff; and
(vii) The use of third-party servicers to aid in the administration
of the Title IV, HEA programs;
(3) Communicates to the individual designated to be responsible for
administering Title IV, HEA programs, all the information received by
any institutional office that bears on a student's eligibility for
Title IV, HEA program assistance; and
(4) Has written procedures for or written information indicating
the responsibilities of the various offices with respect to the
approval, disbursement, and delivery of Title IV, HEA program
assistance and the preparation and submission of reports to the
Secretary;
(c)(1) Administers Title IV, HEA programs with adequate checks and
balances in its system of internal controls; and
(2) Divides the functions of authorizing payments and disbursing or
delivering funds so that no office has responsibility for both
functions with respect to any particular student aided under the
programs. For example, the functions of authorizing payments and
disbursing or delivering funds must be divided so that for any
particular student aided under the programs, the two functions are
carried out by at least two organizationally independent individuals
who are not members of the same family, as defined in Sec. 668.15, or
who do not together exercise substantial control, as defined in
Sec. 668.15, over the institution;
(d) Establishes and maintains records required under this part and
the individual Title IV, HEA program regulations;
(e) 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) Conform with the standards of satisfactory progress of the
nationally recognized accrediting agency that accredits or preaccredits
the institution, if the institution is accredited or preaccredited, and
if the agency has those standards;
(2) For a student enrolled in an eligible program who is to receive
assistance under a Title IV, HEA program, 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;
(3) Include the following elements:
(i) Grades, work projects completed, or comparable factors that are
measurable against a norm.
(ii) A maximum time frame in which a student must complete his or
her educational program. The time frame must be--
(A) Based on the student's enrollment status;
(B) For an undergraduate program, no longer than 150 percent of the
published length of the educational program for a full-time student;
and
(C) Divided into increments of equal size, not to exceed the lesser
of one academic year or one-half the published length of the
educational program.
(iii) 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 time frame.
(iv) A determination at the end of each increment by the
institution whether the student has successfully completed the
appropriate percentage or amount of work according to the established
schedule.
(v) 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.
(vi) Specific policies defining the effect of course incompletes,
withdrawals, repetitions, and noncredit remedial courses on
satisfactory progress.
(vii) Specific procedures under which a student may appeal a
determination that the student is not making satisfactory progress.
(viii) Specific procedures for reinstatement of aid; and
(4) Meet or exceed the requirements of Sec. 668.7(c);
(f) Develops and applies an adequate system to identify and resolve
discrepancies in the information that the institution receives from
different sources with respect to a student's application for financial
aid under Title IV, HEA programs. In determining whether the
institution's system is adequate, the Secretary considers whether the
institution obtains and reviews--
(1) All student aid applications, need analysis documents,
Statements of Educational Purpose, Statements of Registration Status,
and eligibility notification documents presented by or on behalf of
each applicant;
(2) Any documents, including any copies of State and Federal income
tax returns, that are normally collected by the institution to verify
information received from the student or other sources; and
(3) Any other information normally available to the institution
regarding a student's citizenship, previous educational experience,
documentation of the student's social security number, or other factors
relating to the student's eligibility for funds under the Title IV, HEA
programs;
(g) Refers to the Office of Inspector General of the Department of
Education for investigation--
(1) After conducting the review of an application provided for
under paragraph (f) of this section, any credible information
indicating that an applicant for Title IV, HEA program assistance may
have engaged in fraud or other criminal misconduct in connection with
his or her application. The type of information that an institution
must refer is that which is relevant to the eligibility of the
applicant for Title IV, HEA program assistance, or the amount of the
assistance. Examples of this type of information are--
(i) False claims of independent student status;
(ii) False claims of citizenship;
(iii) Use of false identities;
(iv) Forgery of signatures or certifications; and
(v) False statements of income; and
(2) Any credible information indicating that any employee, third-
party servicer, or other agent of the institution that acts in a
capacity that involves the administration of the Title IV, HEA
programs, or the receipt of funds under those programs, may have
engaged in fraud, misrepresentation, conversion or breach of fiduciary
responsibility, or other illegal conduct involving the Title IV, HEA
programs. The type of information that an institution must refer is
that which is relevant to the eligibility and funding of the
institution and its students through the Title IV, HEA programs;
(h) Provides adequate financial aid counseling to eligible students
who apply for Title IV, HEA program assistance. In determining whether
an institution provides adequate counseling, the Secretary considers
whether its counseling includes information regarding--
(1) The source and amount of each type of aid offered;
(2) The method by which aid is determined and disbursed, delivered,
or applied to a student's account; and
(3) The rights and responsibilities of the student with respect to
enrollment at the institution and receipt of financial aid. This
information includes the institution's refund policy, its standards of
satisfactory progress, and other conditions that may alter the
student's aid package;
(i) Has provided all program and fiscal reports and financial
statements required for compliance with the provisions of this part and
the individual program regulations in a timely manner;
(j) Shows no evidence of significant problems that affect, as
determined by the Secretary, the institution's ability to administer a
Title IV, HEA program and that are identified in--
(1) Reviews of the institution conducted by the Secretary, the
Department of Education's Office of Inspector General, nationally
recognized accrediting agencies, guaranty agencies as defined in 34 CFR
part 682, State postsecondary review entities designated under 34 CFR
part 667, the State agency or official by whose authority the
institution is legally authorized to provide postsecondary education,
or any other law enforcement agency; or
(2) Any findings made in any criminal, civil, or administrative
proceeding;
(k) Is not, and does not have any principal or affiliate of the
institution (as those terms are defined in 34 CFR part 85) that is--
(1) Debarred or suspended under Executive Order (E.O.) 12549 (3
CFR, 1986 Comp., p. 189) or the Federal Acquisition Regulations (FAR),
48 CFR part 9, subpart 9.4; or
(2) Engaging in any activity that is a cause under 34 CFR 85.305 or
85.405 for debarment or suspension under E.O. 12549 (3 CFR, 1986 Comp.,
p. 189) or the FAR, 48 CFR part 9, subpart 9.4;
(l) Does not have more than 33 percent of its undergraduate regular
students withdraw from the institution during the period specified in
paragraph (l)(1) of this section. The institution must calculate this
withdrawal rate according to the following procedure:
(1)(i) For an institution at which the majority of regular students
begin and end the academic year on the same date, the institution must
calculate the rate for that academic year.
(ii) For an institution at which the majority of regular students
do not begin and end the academic year on the same date, the
institution must calculate the rate for any eight-month period.
(2) The institution must count all regular students who are
enrolled on the first day of classes of the period specified in
paragraph (l)(1) of this section, except those students who, during
that period--
(i) Withdrew from, dropped out of, or were expelled from the
institution; and
(ii) Were entitled to and actually received in a timely manner, in
accordance with Sec. 668.22(i)(2), a refund of 100 percent of their
tuition and fees (less any permitted administrative fee) under the
institution's refund policy;
(m)(1) Has a cohort default rate--
(i) As defined in Sec. 668.17, on loans made under the Federal
Stafford Loan and Federal SLS programs to students for attendance at
that institution of less than 25 percent for each of the three most
recent fiscal years for which the Secretary has determined the
institution's rate; and
(ii) As defined in 34 CFR 674.5, on loans made under the Federal
Perkins Loan Program to students for attendance at that institution
that does not exceed 15 percent;
(2)(i) Except that, if the Secretary determines that the
institution is not administratively capable solely because the
institution fails to comply with paragraph (m)(1) of this section, the
Secretary will provisionally certify the institution in accordance with
Sec. 668.13(c); and
(ii) The institution may appeal the loss of full participation in a
Title IV, HEA program under paragraph (m)(1) of this section by
submitting an appeal in writing to the Secretary in accordance with and
on the grounds specified in Sec. 668.17(d); and
(n) Does not otherwise appear to lack the ability to administer the
Title IV, HEA programs competently.
(Authority: 20 U.S.C. 1082, 1085, 1094, 1099c; Section 4 of Pub. L.
95-452, 92 Stat. 1101-1109; E.O. 12549 (3 CFR, 1986 Comp., p. 189),
12689 (3 CFR, 1989 Comp., p. 235))
14. Newly redesignated Sec. 668.17 is revised to read as follows:
Sec. 668.17 Default reduction measures.
(a) Default rates. If the Federal Stafford loan and Federal SLS
cohort default rate for an institution exceeds 20 percent for any
fiscal year, the Secretary notifies the institution of that rate and
may, after consultation as the Secretary deems appropriate with
cognizant guaranty agencies take one or more of the following actions:
(1) Initiate a proceeding under subpart G of this part to limit,
suspend, or terminate the participation of the institution in the Title
IV, HEA programs, if--
(i) The institution's Federal Stafford loan and Federal SLS cohort
default rate exceeds 40 percent for any fiscal year after 1989 and has
not been reduced by an increment of at least 5 percent from its rate
for the previous fiscal year (e.g., a 50-percent rate was not reduced
to 45 percent or below); or
(ii) The institution's Federal Stafford loan and Federal SLS cohort
default rate exceeds--
(A) 60 percent for fiscal year 1989;
(B) 55 percent for fiscal year 1990;
(C) 50 percent for fiscal year 1991;
(D) 45 percent for fiscal year 1992; or
(E) 40 percent for any fiscal year after fiscal year 1992.
(2) To help the Secretary make a preliminary determination as to
the appropriate action to be taken by the Secretary regarding the
institution, require the institution to submit to the Secretary and one
or more guaranty agencies, as defined in 34 CFR part 682, any
information relating to that determination, as reasonably required by
the Secretary, within a time frame specified by the Secretary.
(b) Default management plan. If the Federal Stafford loan and
Federal SLS cohort default rate for an institution--
(1) Is greater than 20 percent but less than or equal to 40
percent, the institution must submit a default management plan that
implements the measures described in appendix D to this part. An
institution that wishes to submit a default management plan that
deviates from the measures described in appendix D must submit a
justification for the deviation that includes a rationale explaining
why the measures from which the plan deviates are not appropriate for
the institution's specific situation. The institution must implement
the default management plan upon notification from the Secretary that
the plan has been approved; or
(2) Exceeds 40 percent for any fiscal year, the institution must
implement all of the default management reduction measures described in
appendix D to this part no later than 60 days after the institution
receives the Secretary's notification of the institution's cohort
default rate. An institution is not required to submit any written
plans to the Secretary or a guaranty agency unless the Secretary or
guaranty agency specifically requests the institution to do so.
(c) End of participation. (1) Except as provided in paragraph
(c)(6) of this section, an institution's participation in the FFEL
programs ends if the Secretary determines that the institution's cohort
default rate, for each of the three most recent fiscal years for which
the Secretary has determined the institution's rate, is equal to or
greater than the applicable threshold rates.
(2) For purposes of the determinations made under paragraph (c)(1)
of this section, the threshold rates are--
(i) 35 percent for each of fiscal years 1991 and 1992;
(ii) 30 percent for fiscal year 1993; and
(iii) 25 percent for fiscal year 1994 and all subsequent fiscal
years.
(3) Except as provided in paragraph (c)(7) of this section, an
institution whose participation ends under paragraph (c)(1) of this
section may not participate in the FFEL programs beginning with the
date that the institution receives notification from the Secretary that
its cohort default rate exceeds the thresholds specified in paragraph
(c)(2) of this section and continuing--
(i) For the remainder of the fiscal year in which the Secretary
determines that the institution's participation has ended under
paragraph (c)(1) of this section; and
(ii) For the two subsequent fiscal years.
(4) An institution whose participation in the FFEL programs ends
under paragraph (c)(1) of this section may not participate in the FFEL
programs until the institution--
(i) Receives notification from the Secretary that the notice ending
the institution's participation is withdrawn pursuant to paragraph
(d)(6) of this section; or
(ii) Following the period described in paragraph (c)(3) of this
section, satisfies the Secretary that the institution meets all
requirements for participation in the FFEL programs and executes a new
agreement with the Secretary for participation in the FFEL programs.
(5) If the Secretary withdraws the notification of an institution's
loss of participation pursuant to paragraph (d)(6) of this section, the
participation of the institution is restored effective as of the date
that the institution received notification from the Secretary of the
loss of participation.
(6) Until July 1, 1998, the provisions of paragraph (c)(1) of this
section and the provisions of Sec. 668.16(m) do not apply to a
historically black college or university within the meaning of section
322(2) of the HEA, a tribally controlled community college within the
meaning of section 2(a)(4) of the Tribally Controlled Community College
Assistance Act of 1978, or a Navajo community college under the Navajo
Community College Act.
(7)(i) If the Secretary's designated department official receives
written notice from an institution whose participation ends under
paragraph (c)(1) of this section, within seven calendar days from the
date on which the institution receives notification from the Secretary
that its cohort default rate exceeds the thresholds specified in
paragraph (c)(2) of this section, that the institution intends to
appeal the end of participation under paragraph (d) of this section,
the institution may, notwithstanding Sec. 668.26(d) continue to
participate in the FFEL programs until no later than the 30th calendar
day following the date on which the institution receives notification
from the Secretary that its cohort default rate exceeds the thresholds
specified in paragraph (c)(2) of this section, except as provided in
paragraph (c)(7)(ii) of this section.
(ii) If an institution satisfies the conditions in paragraph
(c)(7)(i) of this section for participating in the FFEL programs until
the 30th calendar day following the date on which the institution
receives notification from the Secretary that its cohort default rate
exceeds the thresholds specified in paragraph (c)(2) of this section,
the institution may, notwithstanding Sec. 668.26(d), continue to
participate in the FFEL programs after that date, until the Secretary
issues a decision on the institution's appeal, if the institution, by
the 30th calendar day following the date on which the institution
receives notification from the Secretary that its cohort default rate
exceeds the thresholds specified in paragraph (c)(2) of this section,
files an appeal that is complete in all respects in accordance with
paragraph (d) of this section. However, the appeal of an institution
relying on paragraph (d)(1)(i) of this section is not considered
incomplete by virtue of a guaranty agency's not having yet complied
with--or having failed to comply with--34 CFR 682.401(b)(14), which
requires the agency to respond to an institution's request for
verification of data within 15 working days, if the institution
submitted that request within 10 working days from the date on which
the institution received notification from the Secretary that its
cohort default rate exceeds the thresholds specified in paragraph
(c)(2) of this section, and the institution simultaneously submitted a
copy of that request to the Secretary's designated department official.
When the institution receives the guaranty agency's response, to
complete its appeal, the institution must submit the verified data to
the Secretary's designated department official within five working days
in order to continue participating in the FFEL programs until the
Secretary issues a decision on the institution's appeal.
(d) Appeal procedures. (1) An institution may appeal the loss of
participation in the FFEL programs under paragraph (c)(1) of this
section by submitting an appeal in writing to the Secretary's
designated department official that is postmarked no later than 30 days
after it receives notification of its loss of participation. The
institution may appeal on the grounds that--
(i)(A) The calculation of the institution's cohort default rate for
any of the three fiscal years relevant to the end of participation is
not accurate; and
(B) A recalculation with corrected data verified by the cognizant
guaranty agency or agencies would produce a cohort default rate for any
of those fiscal years that is below the threshold percentage specified
in paragraph (c)(2) of this section; or
(ii) The institution meets the following criteria:
(A)(1) Fifteen percent or fewer of the institution's students who
are enrolled on at least a half-time basis receive Federal Stafford or
Federal SLS loans for any twenty-four month period ending not more than
six months prior to the date the institution submits its appeal; or
(2) For any twenty-four month period ending not more than six
months prior to the date the institution submits its appeal, two-thirds
or more of the institution's students who are enrolled on at least a
half-time basis are individuals from disadvantaged economic
backgrounds, as established by documentary evidence submitted by the
institution. Such evidence must relate to qualification by those
students for an Expected Family Contribution (EFC) (formerly
institutions were required to use the Pell Grant index), as defined in
34 CFR 690.2, of zero for the applicable award year or attribution to
those students of an adjusted gross income of the student and his or
her parents or spouse, if applicable, reported for the applicable award
year of less than the poverty level, as determined under criteria
established by the Department of Health and Human Services.
(B)(1) Two-thirds or more of the institution's students who were
enrolled on a full-time basis in any twenty-four month period ending
not more than six months prior to the date the institution submits its
appeal completed the educational programs in which they were enrolled.
This rate is calculated by comparing the number of students who were
classified as full-time at their initial enrollment in the institution,
and were originally scheduled, at the time of enrollment, to complete
their programs within the relevant twenty-four month period, with the
number of these students who received a degree, certificate, or other
recognized educational credential from the institution; transferred
from the institution to a higher level educational program at another
institution for which the prior program provided substantial
preparation; or, at the end of the twenty- four month period, remained
enrolled and were making satisfactory academic progress toward
completion of their educational programs. The calculation does not
include students who did not complete their programs because they left
the institution to serve in the armed forces; and
(2) The institution had a placement rate of two-thirds or more with
respect to its former students who received a degree, certificate, or
other recognized educational credential from the institution in any
twenty-four month period ending not more than six months prior to the
date the institution submits its appeal. This rate is calculated by
determining the percentage of all those students who, based on evidence
submitted by the institution, are on that date employed, or had been
employed for at least 13 weeks following receipt of the credential from
the institution, in the occupation for which the institution provided
training, or are enrolled or had been enrolled for at least 13 weeks
following receipt of the credential from the institution, in a higher
level educational program at another institution for which the prior
educational program provided substantial preparation.
(2) For purposes of paragraph (d)(1)(ii)(A) of this section, a
student is originally scheduled, at the time of enrollment, to complete
the educational program on the date when the student will have been
enrolled in the program for the amount of time normally required to
complete the program. The ``amount of time normally required to
complete the program'' is the period of time specified in the
institution's enrollment contract, catalog, or other materials, for
completion of the program by a full-time student, or the period of time
between the date of enrollment and the anticipated graduation date
appearing on the student's loan application, if any, whichever is less.
(3) An appeal submitted under paragraph (d)(1)(i) of this section
is considered to be filed in a timely manner if the institution submits
a letter of appeal by the 30-day deadline notifying the Secretary's
designated department official that it is appealing on this basis,
including with that letter a copy of the institution's request to each
cognizant guaranty agency for verification of the cohort default rate
data, and submits the verified data to the Secretary's designated
department official within five working days of its receipt from the
guaranty agency. For purposes of paragraph (d)(4) of this section, the
institution's appeal is not considered complete until the institution
submits the verified data to the Secretary's designated department
official.
(4) The Secretary issues a decision on the institution's appeal
within 45 days after the institution submits a complete appeal that
addresses the applicable criteria in paragraphs (d)(1) (i) through
(iii) of this section to the Secretary's designated department
official.
(5) The Secretary's decision is based on the consideration of
written material submitted by the institution. No oral hearing is
provided.
(6) The Secretary withdraws the notification of loss of
participation in the FFEL programs sent to an institution under
paragraph (c)(1) of this section, if the Secretary determines that the
institution's appeal satisfies one of the grounds specified in
paragraphs (d)(1) (i) through (iii) of this section.
(7)(i) An institution that appeals under paragraph (d)(1)(i) of
this section must submit a written request to the guaranty agency or
agencies that guaranteed the loans used in the calculation of its
cohort default rate to verify the data used to calculate its cohort
default rate and simultaneously provide a copy of that request to the
Secretary's designated department official.
(ii) The written request must include the names and social security
numbers of the borrowers the institution wishes the agency to verify
and detailed information on the nature of the suspected inaccuracy in
the data the institution is requesting the agency to verify.
(8) An institution must include in its appeal a certification by
the institution's chief executive officer that all information provided
by the institution in support of its appeal is true and correct.
(9) An institution that appeals on the ground that it meets the
criteria contained in paragraph (d)(1)(ii) of this section must include
in its appeal the following information:
(i) For purposes of paragraph (d)(1)(ii)(A)(1) of this section--
(A) The number of students who were enrolled on at least a half-
time basis at the institution in the relevant twenty-four month period;
and
(B) The name, address, and social security number of each of the
institution's current and former students who received Federal Stafford
or Federal SLS loans during that twenty-four month period.
(ii) For purposes of paragraph (d)(1)(ii)(A)(2) of this section:
(A) The number of students who were enrolled on at least a half-
time basis at the institution in the relevant twenty-four month period;
and
(B) The name, address, social security number, and Expected Family
Contribution (EFC) (formerly institutions were required to use the Pell
Grant index), if applicable, of each student from a disadvantaged
economic background who was enrolled on at least a half-time basis at
the institution in the relevant twenty-four month period and the
measure and data used to determine that the student is from a
disadvantaged economic background.
(iii) For purposes of paragraph (d)(1)(ii)(B)(1) of this section--
(A) The number of students who were enrolled on a full-time basis
at the institution in the relevant twenty-four month period;
(B) For each of those former students who received a degree,
certificate, or other recognized educational credential from the
institution, the student's name, address, and social security number;
(C) For each of those former students who transferred to a higher
level educational program at another institution, the name, address,
social security number of the student, and the name and address of the
institution to which the student transferred and the name of the higher
level program; and
(D) For each of those students who remained enrolled and was making
satisfactory academic progress toward completion of the educational
program, the student's name, address, and social security number.
(iv) For purposes of paragraph (d)(1)(ii)(B)(2) of this section--
(A) The number of students who received a degree, certificate, or
other recognized educational credential at the institution in the
relevant twenty-four month period;
(B) For each of those former students who is employed or had been
employed for at least 13 weeks following receipt of a degree,
certificate or other credential from the institution, the student's
name, address, and social security number, the employer's name and
address, the student's job title, and the dates the student was so
employed; and
(C) For each of those former students who enrolled in a higher
level educational program at another institution for which the
appealing institution's educational program provided substantial
preparation, the former student's name, address, and social security
number, the subsequent institution's name and address, the name of the
educational program, and the dates the former student was so enrolled.
(e) Definitions. The following definitions apply to this section
and Sec. 668.90:
(1)(i)(A) For purposes of the Federal Stafford loan and Federal SLS
cohort default rate, except as provided in paragraph (e)(1)(ii) of this
section, the term cohort default rate means--
(1) For any fiscal year in which 30 or more current and former
students at the institution enter repayment on Federal Stafford loans
or Federal SLS loans (or on the portion of a loan made under the
Federal Consolidation Loan Program that is used to repay such loans)
received for attendance at the institution, the percentage of those
current and former students who enter repayment in that fiscal year on
such loans who default before the end of the following fiscal year; and
(2) For any fiscal year in which fewer than 30 of the institution's
current and former students enter repayment on Federal Stafford loans
or Federal SLS loans (or on the portion of a loan made under the
Federal Consolidation Loan Program that is used to repay such loans)
received for attendance at the institution, the percentage of those
current and former students who entered repayment on Federal Stafford
loans or Federal SLS loans in any of the three most recent fiscal
years, who default before the end of the fiscal year immediately
following the year in which they entered repayment.
(B) In determining the number of students who default before the
end of that following fiscal year, the Secretary includes only loans
for which the Secretary or a guaranty agency has paid claims for
insurance.
(ii)(A) In the case of a student who has attended and borrowed at
more than one institution, the student (and his or her subsequent
repayment or default) is attributed to each institution for attendance
at which the student received a loan that entered repayment in the
fiscal year.
(B) A loan on which a payment is made by the institution, its
owner, agent, contractor, employee, or any other affiliated entity or
individual, in order to avoid default by the borrower, is considered as
in default for purposes of this definition.
(C) Any loan that has been rehabilitated under section 428F of the
HEA before the end of that following fiscal year is not considered as
in default for purposes of this definition.
(D) For the purposes of this definition, a loan made in accordance
with section 428A of the HEA (or a loan made under the Federal
Consolidation Loan Program a portion of which is used to repay a
Federal SLS loan) shall not be considered to enter repayment until
after the borrower has ceased to be enrolled in an educational program
leading to a degree, certificate, or other recognized educational
credential at the participating institution on at least a half-time
basis (as determined by the institution) and ceased to be in a period
of forbearance based on such enrollment. Each eligible lender of a loan
made under section 428A (or a loan made under the Federal Consolidation
Loan Program a portion of which is used to repay a Federal SLS loan) of
the HEA shall provide the guaranty agency with the information
necessary to determine when the loan entered repayment for purposes of
this definition, and the guaranty agency shall provide that information
to the Secretary.
(iii)(A) A cohort default rate of an institution applies to all
locations of the institution as the institution exists on the first day
of the fiscal year for which the rate is calculated.
(B) A cohort default rate of an institution applies to all
locations of the institution from the date the institution is notified
of that rate until the institution is notified by the Secretary that
the rate no longer applies.
(iv)(A) For an institution that changes its status from that of a
location of one institution to that of a free-standing institution, the
Secretary determines the cohort default rate based on the institution's
status as of October 1 of the fiscal year for which a cohort default
rate is being calculated.
(B) For an institution that changes its status from that of a free-
standing institution to that of a location of another institution, the
Secretary determines the cohort default rate based on the combined
number of students who enter repayment during the applicable fiscal
year and the combined number of students who default during the
applicable fiscal years from both the former free-standing institution
and the other institution. This cohort default rate applies to the new,
consolidated institution and all of its current locations.
(C) For free-standing institutions that merge to form a new,
consolidated institution, the Secretary determines the cohort default
rate based on the combined number of students who enter repayment
during the applicable fiscal year and the combined number of students
who default during the applicable fiscal years from all of the
institutions that are merging. This cohort default rate applies to the
new consolidated institution.
(D) For a location of one institution that becomes a location of
another institution, the Secretary determines the cohort default rate
based on the combined number of students who enter repayment during the
applicable fiscal year and the number of students who default during
the applicable fiscal years from both of the institutions in their
entirety, not limited solely to the respective locations.
(2) Fiscal year means the period from and including October 1 of a
calendar year through and including September 30 of the following
calendar year.
(Authority: 20 U.S.C. 1082, 1085, 1094, 1099c)
15. 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 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, takes an approved leave of absence, 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 refund calculations exist under paragraph
(b)(1)(i) and (ii) of this section, the larger of--
(A) The specific refund standards contained in Appendix A to this
part; or
(B) The institution's refund policy.
(2) For purposes of 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 (d) 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 (d) 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.
(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; 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 (i)(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 late disbursement
amount; and
(B) Return any additional refund amounts due as a result of the
recalculation in accordance with paragraph (g) 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) 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 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 and does not use semesters, trimesters, quarters, or other
academic terms, or an educational program that is measured in clock
hours, the lesser of the length of the educational program or an
academic year.
(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.
(e) 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, is expelled, or
takes an approved leave of absence 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, or Federal SLS
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, or Federal SLS
Program) 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.
(f) 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, except for the calculation of a
pro rata refund 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 (f)(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; 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 (i)(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 (g) 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 (e) 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, or Federal SLS Program for the period of
enrollment for which the student has been charged.
(iii) Unless otherwise provided for in applicable program
regulations, 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.
(g) Allocation of refunds and overpayments. (1) Except as provided
in paragraph (g)(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, or Federal SLS Program) must repay an overpayment
calculated in accordance with paragraph (e) 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 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 Federal Direct PLUS loans
received on behalf of the student for the period of enrollment for
which he or she was charged.
(vii) To eliminate outstanding balances on Federal Perkins loans
received by the student for the period of enrollment for which he or
she was charged.
(viii) To eliminate any amount of Federal Pell Grants awarded to
the student for the period of enrollment for which he or she was
charged.
(ix) 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.
(x) 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.
(xi) To repay required refunds of other Federal, State, private, or
institutional student financial assistance received by the student.
(xii) To the student.
(2) The institution must apply the allocation policy described in
paragraph (g)(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, or Federal SLS Program.
(iii) The amount of the Title IV, HEA program portion of the refund
allocated to the Federal Stafford Loan, Federal PLUS, and 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, takes an approved leave of absence, 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, and Federal SLS programs must be
returned to the appropriate program account or accounts within 30 days
of the date that the student repays the overpayment.
(h) Financial aid. For purposes of this section ``financial aid''
is assistance that a student has been or will be awarded (including
Federal PLUS loans received on the student's behalf) from Federal;
State; institutional; or other scholarship, grant, or loan programs.
(i) Refund dates--(1) Withdrawal date. (i)(A) Except as provided in
paragraph (i)(1)(i)(B) and (C) of this section, a student's withdrawal
date is the earlier of--
(1) 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
(2) 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.
(B) If the student takes an approved leave of absence, the
student's withdrawal date is the last recorded date of class attendance
by the student, as documented by the institution.
(C) 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.
(ii) An institution must determine the student's withdrawal date
within 30 days after the expiration of the earlier of the--
(A) Period of enrollment for which the student has been charged;
(B) Academic year in which the student withdrew; or
(C) Educational program from which the student withdrew.
(2) 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; or
(iii) If a student takes an approved leave of absence, 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)
16. Section 668.23 is revised to read as follows:
Sec. 668.23 Audits, records, and examinations.
(a) An institution or a foreign institution as defined in 34 CFR
600.52 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 or a foreign institution as defined in 34 CFR
600.52 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 or a foreign institution as defined in 34
CFR 600.52 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 of every aspect 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 covers every aspect of the servicer's administration of the
participation in the Title IV, HEA programs for 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) Standards for Audit of
Governmental Organizations, Programs, Activities, and Functions. (This
publication is available from the Superintendent of Documents, U.S.
Government Printing Office, Washington, DC 20402.)
(2)(i) 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 program for which the audit is
performed. Each subsequent audit must cover the institution's
activities for the entire period of time since the preceding audit.
(ii) The servicer's first audit must cover the servicer's
activities for its first full fiscal year beginning on or after July 1,
1994, and include any period from the effective date to the beginning
of the first full fiscal year. 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's Inspector General within
120 days of the end of the institution's or servicer's fiscal year or,
if applicable, in accordance with deadlines established in the Single
Audit Act.
(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 Standards for Audit of Governmental Organizations, Programs,
Activities, and Functions. (This publication is available from the
Superintendent of Documents, U.S. Government Printing Office,
Washington, DC 20402.)
(e)(1) An institution, a foreign institution as defined 34 CFR
600.52, 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); or
(2) Office of Management and Budget Circular A-133, ``Audits of
Institutions of Higher Education and Other Nonprofit Organizations.''
(g) Upon written request, an institution, a foreign institution as
defined in 34 CFR 600.52, 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 or foreign institution as defined
in 34 CFR 600.52 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 placement by the institution in a job if the
institution provides a placement service and the student uses that
service;
(vi) The student's prior receipt of financial aid (see
Sec. 668.19);
(vii) The verification of student aid application data.
(viii) Financial and other institutional records necessary to
determine the institutional eligibility, financial responsibility, and
administrative capability of the institution; and
(2)(i) An institution or a foreign institution as defined in 34 CFR
600.52 shall establish and maintain records regarding the educational
qualifications of each regular student it admits, whether or not the
student receives Title IV, HEA program assistance, that are relevant to
the institution's admission standards.
(ii) An institution or a foreign institution as defined in 34 CFR
600.52 at which only certain educational programs have been determined
eligible shall establish and maintain records regarding the admission
requirements and educational qualifications of each regular student
enrolled in the eligible program or programs, 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)
17. Section 668.24 is revised to read as follows:
Sec. 668.24 Audit exceptions and repayments.
(a)(1) If, as a result of a Federal audit or an audit performed at
the direction of an institution or third-party servicer, an expenditure
made by the institution or servicer or the institution's or servicer's
compliance with an applicable requirement (including the lack of proper
documentation), is questioned, the Secretary notifies the institution
or servicer of the questioned expenditure or compliance.
(2) If the institution or servicer believes that the questioned
expenditure or compliance was proper, the institution or servicer shall
notify the Secretary in writing of the institution's or servicer's
position and the reasons for that position.
(3) The institution's or servicer's response must be based on
performing an attestation engagement in accordance with the Standards
for Attestation Engagements of the American Institute of Certified
Public Accountants and must be received by the Secretary within 45 days
of the date of the Secretary's notification to the institution or
servicer.
(b)(1) Based on the audit finding and the institution's or third-
party servicer's response, the Secretary determines the amount of
liability, if any, owed by the institution or servicer and instructs
the institution or servicer as to the manner of repayment.
(2) If the Secretary determines that a third-party servicer owes a
liability for its administration of an institution's Title IV, HEA
programs, the servicer shall notify each institution under whose
contract the servicer owes a liability of the determination. The
servicer shall also notify every institution that contracts with the
servicer for the same service that the Secretary determined that a
liability was owed.
(c)(1) An institution or third-party servicer that must repay funds
under the procedures in this section shall repay those funds at the
direction of the Secretary within 45 days of the date of the
Secretary's notification, unless--
(i) The institution or servicer files an appeal under the
procedures established in subpart H of this part; or
(ii) The Secretary permits a longer repayment period.
(2) Notwithstanding paragraphs (b) and (c)(1) of this section--
(i) If an institution or third-party servicer has posted surety or
has provided a third-party guarantee and the Secretary questions
expenditures or compliance with applicable requirements and identifies
liabilities, then the Secretary may determine that deferring recourse
to the surety or guarantee is not appropriate because--
(A) The need to provide relief to students or borrowers affected by
the act or omission giving rise to the liability outweighs the
importance of deferring collection action until completion of available
appeal proceedings; or
(B) The terms of the surety or guarantee do not provide complete
assurance that recourse to that protection will be fully available
through the completion of available appeal proceedings; or
(ii) The Secretary may use administrative offset pursuant to 34 CFR
part 30 to collect the funds owed under the procedures of this section.
(3) If, under the proceedings in subpart H, liabilities asserted in
the Secretary's notification, under paragraph (a)(1) of this section,
to the institution or third-party servicer are upheld, the institution
or third-party servicer shall repay those funds at the direction of the
Secretary within 30 days of the final decision under subpart H of this
part unless--
(i) The Secretary permits a longer repayment period; or
(ii) The Secretary determines that earlier collection action is
appropriate pursuant to paragraph (c)(2) of this section.
(d) An institution is held responsible for any liability owed by
the institution's third-party servicer for a violation incurred in
servicing any aspect of that institution's participation in the Title
IV, HEA programs and remains responsible for that amount until that
amount is repaid in full.
(Authority: 20 U.S.C. 1094)
18. Section 668.25 is redesignated as Sec. 668.26 and a new
Sec. 668.25 is added to read as follows:
Sec. 668.25 Contracts between an institution and a third-party
servicer.
(a) An institution may enter into a written contract with a third-
party servicer for the administration of any aspect of the
institution's participation in any Title IV, HEA program only to the
extent that the servicer's eligibility to contract with the institution
has not been limited, suspended, or terminated under the proceedings of
subpart G of this part.
(b) Subject to the provisions of paragraph (d) of this section, a
third-party servicer is eligible to enter into a written contract with
an institution for the administration of any aspect of the
institution's participation in any Title IV, HEA program only to the
extent that the servicer's eligibility to contract with the institution
has not been limited, suspended, or terminated under the proceedings of
subpart G of this part.
(c) In a contract with an institution, a third-party servicer shall
agree to--
(1) Comply with all statutory provisions of or applicable to Title
IV of the HEA, all regulatory provisions prescribed under that
statutory authority, and all special arrangements, agreements,
limitations, suspensions, and terminations entered into under the
authority of statutes applicable to Title IV of the HEA, including the
requirement to use any funds that the servicer administers under any
Title IV, HEA program and any interest or other earnings thereon solely
for the purposes specified in and in accordance with that program;
(2) Refer to the Office of Inspector General of the Department of
Education for investigation any information indicating there is
reasonable cause to believe that the institution might have engaged in
fraud or other criminal misconduct in connection with the institution's
administration of any Title IV, HEA program or an applicant for Title
IV, HEA program assistance might have engaged in fraud or other
criminal misconduct in connection with his or her application. Examples
of the type of information that must be referred are--
(i) False claims by the institution for Title IV, HEA program
assistance;
(ii) False claims of independent student status;
(iii) False claims of citizenship;
(iv) Use of false identities;
(v) Forgery of signatures or certifications; and
(vi) False statements of income;
(3) Be jointly and severally liable with the institution to the
Secretary for any violation by the servicer of any statutory provision
of or applicable to Title IV of the HEA, any regulatory provision
prescribed under that statutory authority, and any applicable special
arrangement, agreement, or limitation entered into under the authority
of statutes applicable to Title IV of the HEA;
(4) In the case of a third-party servicer that disburses funds
(including funds received under the Title IV, HEA programs) or delivers
Federal Stafford Loan or Federal SLS Program proceeds to a student--
(i) Confirm the eligibility of the student before making that
disbursement or delivering those proceeds. This confirmation must
include, but is not limited to, any applicable information contained in
the records required under Sec. 668.23(h); and
(ii) Calculate and pay refunds and repayments due a student, the
Title IV, HEA program accounts, and the student's lender under the
Federal Stafford Loan, Federal PLUS, and Federal SLS programs in
accordance with the institution's refund policy, the provisions of
Secs. 668.21 and 668.22, and applicable program regulations; and
(5) If the servicer or institution terminates the contract, or if
the servicer stops providing services for the administration of a Title
IV, HEA program, goes out of business, or files a petition under the
Bankruptcy Code, return to the institution all--
(i) Records in the servicer's possession pertaining to the
institution's participation in the program or programs for which
services are no longer provided; and
(ii) Funds, including Title IV, HEA program funds, received from or
on behalf of the institution or the institution's students, for the
purposes of the program or programs for which services are no longer
provided.
(d) A third-party servicer may not enter into a written contract
with an institution for the administration of any aspect of the
institution's participation in any Title IV, HEA program, if--
(1)(i) The servicer has been limited, suspended, or terminated by
the Secretary within the preceding five years;
(ii) The servicer has had, during the servicer's two most recent
audits of the servicer's administration of the Title IV, HEA programs,
an audit finding that resulted in the servicer's being required to
repay an amount greater than five percent of the funds that the
servicer administered under the Title IV, HEA programs for any award
year; or
(iii) The servicer has been cited during the preceding five years
for failure to submit audit reports required under Title IV of the HEA
in a timely fashion; and
(2)(i) In the case of a third-party servicer that has been
subjected to a termination action by the Secretary, either the
servicer, or one or more persons or entities that the Secretary
determines (under the provisions of Sec. 668.15) exercise substantial
control over the servicer, or both, have not submitted to the Secretary
financial guarantees in an amount determined by the Secretary to be
sufficient to satisfy the servicer's potential liabilities arising from
the servicer's administration of the Title IV, HEA programs; and
(ii) One or more persons or entities that the Secretary determines
(under the provisions of Sec. 668.15) exercise substantial control over
the servicer have not agreed to be jointly or severally liable for any
liabilities arising from the servicer's administration of the Title IV,
HEA programs and civil and criminal monetary penalties authorized under
Title IV of the HEA.
(e)(1)(i) An institution that participates in a Title IV, HEA
program shall notify the Secretary within 10 days of the date that--
(A) The institution enters into a new contract or significantly
modifies an existing contract with a third-party servicer to administer
any aspect of that program;
(B) The institution or a third-party servicer terminates a contract
for the servicer to administer any aspect of that program; or
(C) A third-party servicer that administers any aspect of the
institution's participation in that program stops providing services
for the administration of that program, goes out of business, or files
a petition under the Bankruptcy Code.
(ii) The institution's notification must include the name and
address of the servicer.
(2) An institution that contracts with a third-party servicer to
administer any aspect of the institution's participation in a Title IV,
HEA program shall provide to the Secretary, upon request, a copy of the
contract, including any modifications, and provide information
pertaining to the contract or to the servicer's administration of the
institution's participation in any Title IV, HEA program.
(Authority: 20 U.S.C. 1094)
19. Newly redesignated Sec. 668.26 is revised to read as follows:
Sec. 668.26 End of an institution's participation in the Title IV, HEA
programs.
(a) An institution's participation in a Title IV, HEA program ends
on the date that--
(1) The institution closes or stops providing educational programs
for a reason other than a normal vacation period or a natural disaster
that directly affects the institution or the institution's students;
(2) The institution loses its institutional eligibility under 34
CFR part 600;
(3) The institution's participation is terminated under the
proceedings in subpart G of this part;
(4) The institution's period of participation, as specified under
Sec. 668.13, expires, or the institution's provisional certification is
revoked under Sec. 668.13;
(5) The institution's program participation agreement is terminated
or expires under Sec. 668.14;
(6) The institution's participation ends under Sec. 668.17(c); or
(7) The Secretary receives a notice from the appropriate State
postsecondary review entity designated under 34 CFR part 667 that the
institution's participation should be withdrawn.
(b) If an institution's participation in a Title IV, HEA program
ends, the institution shall--
(1) Immediately notify the Secretary of that fact;
(2) Submit to the Secretary within 45 days after the date that the
participation ends--
(i) All financial, performance, and other reports required by
appropriate Title IV, HEA program regulations; and
(ii) A letter of engagement for an independent audit of all funds
that the institution received under that program, the report of which
shall be submitted to the Secretary within 45 days after the date of
the engagement letter;
(3) Inform the Secretary of the arrangements that the institution
has made for the proper retention and storage for a minimum of five
years of all records concerning the administration of that program;
(4) If the institution's participation in the Federal Perkins Loan
or FDSL Program ended, inform the Secretary of how the institution will
provide for the collection of any outstanding loans made under that
program;
(5) If the institution's participation in the NEISP or SSIG Program
ended--
(i) Inform immediately the State in which the institution is
located of that fact; and
(ii) Notwithstanding paragraphs (c) through (e) of this section,
follow the instructions of that State concerning the end of that
participation;
(6) If the institution's participation in all the Title IV, HEA
programs ended, inform the Secretary of how the institution will
provide for the collection of any outstanding loans made under the
National Defense/Direct Student Loan and ICL programs; and
(7) Continue to distribute refunds according to Sec. 668.22.
(c) If an institution closes or stops providing educational
programs for a reason other than a normal vacation period or a natural
disaster that directly affects the institution or the institution's
students, the institution shall--
(1) Return to the Secretary, or otherwise dispose of under
instructions from the Secretary, any unexpended funds that the
institution has received under the Title IV, HEA programs for
attendance at the institution, less the institution's administrative
allowance, if applicable; and
(2) Return to the appropriate lenders any Federal Stafford Loan and
Federal SLS program proceeds that the institution has received but not
delivered to, or credited to the accounts of, students attending the
institution.
(d)(1) An institution may use funds that it has received under the
Federal Pell Grant or PAS Program or a campus-based program or request
additional funds from the Secretary, under conditions specified by the
Secretary, if the institution does not possess sufficient funds, to
satisfy any unpaid commitment made to a student under that Title IV,
HEA program only if--
(i) The institution's participation in that Title IV, HEA program
ends during a payment period;
(ii) The institution continues to provide, from the date that the
participation ends until the scheduled completion date of that payment
period, educational programs to otherwise eligible students enrolled in
the formerly eligible programs of the institution;
(iii) The commitment was made prior to the end of the
participation; and
(iv) The commitment was made for attendance during that payment
period or a previously completed payment period.
(2) An institution may credit to a student's account or deliver to
the student the proceeds of a disbursement of a Federal Stafford or
Federal SLS loan to satisfy any unpaid commitment made to the student
under the Federal Stafford Loan or Federal SLS Program only if--
(i) The institution's participation in that Title IV, HEA program
ends during a period of enrollment;
(ii) The institution continues to provide, from the date that the
participation ends until the scheduled completion date of that period
of enrollment, educational programs to otherwise eligible students
enrolled in the formerly eligible programs of the institution;
(iii) The commitment was made prior to the end of the
participation;
(iv) The commitment was made for attendance during that period of
enrollment; and
(v) The proceeds of the first disbursement of the loan were
delivered to the student or credited to the student's account prior to
the end of the participation.
(3) An institution may use funds that it has received under the
FDSL Program or request additional funds from the Secretary, under
conditions specified by the Secretary, if the institution does not
possess sufficient funds, to credit to a student's account or deliver
to the student the proceeds of a disbursement of a Federal Direct
Student loan only if--
(i) The institution's participation in the FDSL Program ends during
a period of enrollment;
(ii) The institution continues to provide, from the date that the
participation ends until the scheduled completion date of that period
of enrollment, educational programs to otherwise eligible students
enrolled in the formerly eligible programs of the institution;
(iii) The loan was made for attendance during that period of
enrollment; and
(iv) The proceeds of the first disbursement of the loan were
delivered to the student or credited to the student's account prior to
the end of the participation.
(e) For the purposes of this section--
(1) A commitment under the Federal Pell Grant and PAS programs
occurs when a student is enrolled and attending the institution and has
submitted a valid Student Aid Report to the institution or when an
institution has received a valid institutional student information
report;
(2) A commitment under the campus-based programs occurs when a
student is enrolled and attending the institution and has received a
notice from the institution of the amount that he or she can expect to
receive and how and when that amount will be paid; and
(3) A commitment under the Federal Stafford and Federal SLS
programs occurs when the Secretary or a guaranty agency notifies the
lender that the loan is guaranteed.
(Authority: 20 U.S.C. 1094, 1099a-3)
20. Section 668.81 is amended by redesignating paragraph (a)(1)
introductory text as paragraph (a) introductory text; revising newly
redesignated paragraph (a) introductory text; removing paragraph
(a)(2); redesignating paragraph (a)(1)(i) through (a)(1)(iii) as
paragraph (a)(1) through (3), respectively; adding a new paragraph
(a)(4); revising paragraphs (b), (c), and (d); and removing paragraph
(f) to read as follows:
Sec. 668.81 Scope and special definitions.
(a) This subpart establishes regulations for the following actions
with respect to a participating institution or third-party servicer:
* * * * *
(4) The limitation, suspension, or termination of the eligibility
of the servicer to contract with any institution to administer any
aspect of the institution's participation in a Title IV, HEA program.
(b) This subpart applies to an institution or a third-party
servicer that violates 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.
(c) This subpart does not apply to a determination that--
(1) An institution or any of its locations or educational programs
fails to qualify for initial designation as an eligible institution,
location, or educational program because the institution, location, or
educational program fails to satisfy the statutory and regulatory
provisions that define an eligible institution or educational program
with respect to the Title IV, HEA program for which a designation of
eligibility is sought;
(2) An institution fails to qualify for initial certification or
provisional certification to participate in any Title IV, HEA program
because the institution does not meet the factors of financial
responsibility and standards of administrative capability contained in
subpart B of this part;
(3) A participating institution's or a provisionally certified
participating institution's period of participation, as specified under
Sec. 668.13, has expired; or
(4) A participating institution's provisional certification is
revoked under the procedures in Sec. 668.13.
(d) This subpart does not apply to a determination by the Secretary
of the system to be used to disburse Title IV, HEA program funds to a
participating institution (i.e., advance payments and payments by way
of reimbursements).
* * * * *
21. Section 668.82 is revised to read as follows:
Sec. 668.82 Standard of conduct.
(a) A participating institution or a third-party servicer that
contracts with that institution acts in the nature of a fiduciary in
the administration of the Title IV, HEA programs. To participate in any
Title IV, HEA program, the institution or servicer must at all times
act with the competency and integrity necessary to qualify as a
fiduciary.
(b) In the capacity of a fiduciary--
(1) A participating institution is subject to the highest standard
of care and diligence in administering the programs and in accounting
to the Secretary for the funds received under those programs; and
(2) A third-party servicer is subject to the highest standard of
care and diligence in administering any aspect of the programs on
behalf of the institutions with which the servicer contracts and in
accounting to the Secretary and those institutions for any funds
administered by the servicer under those programs.
(c) The failure of a participating institution or any of the
institution's third-party servicers to administer a Title IV, HEA
program, or to account for the funds that the institution or servicer
receives under that program, in accordance with the highest standard of
care and diligence required of a fiduciary, constitutes grounds for--
(1) An emergency action against the institution, a fine on the
institution, or the limitation, suspension, or termination of the
institution's participation in that program; or
(2) An emergency action against the servicer, a fine on the
servicer, or the limitation, suspension, or termination of the
servicer's eligibility to contract with any institution to administer
any aspect of the institution's participation in that program.
(d)(1) A participating institution or a third-party servicer with
which the institution contracts violates its fiduciary duty if--
(i)(A) The servicer has been convicted of, or has pled nolo
contendere or guilty to, a crime involving the acquisition, use, or
expenditure of Federal, State, or local government funds, or has been
administratively or judicially determined to have committed fraud or
any other material violation of law involving those funds;
(B) A person who exercises substantial control over the servicer,
as determined according to Sec. 668.15, has been convicted of, or has
pled nolo contendere or guilty to, a crime involving the acquisition,
use, or expenditure of Federal, State, or local government funds, or
has been administratively or judicially determined to have committed
fraud or any other material violation of law involving those funds;
(C) The servicer employs a person in a capacity that involves the
administration of Title IV, HEA programs or the receipt of Title IV,
HEA program funds who has been convicted of, or has pled nolo
contendere or guilty to, a crime involving the acquisition, use, or
expenditure of Federal, State, or local government funds, or who has
been administratively or judicially determined to have committed fraud
or any other material violation of law involving those funds; or
(D) The servicer uses or contracts in a capacity that involves any
aspect of the administration of the Title IV, HEA programs with any
other person, agency, or organization that has been or whose officers
or employees have been--
(1) Convicted of, or pled nolo contendere or guilty to, a crime
involving the acquisition, use, or expenditure of Federal, State, or
local government funds; or
(2) Administratively or judicially determined to have committed
fraud or any other material violation of law involving Federal, State,
or local government funds; and
(ii) Upon learning of a conviction, plea, or administrative or
judicial determination described in paragraph (d)(1)(i) of this
section, the institution or servicer, as applicable, does not promptly
remove the person, agency, or organization from any involvement in the
administration of the institution's participation in Title IV, HEA
programs, or, as applicable, the removal or elimination of any
substantial control, as determined according to Sec. 668.15, over the
servicer.
(2) A violation for a reason contained in paragraph (d)(1) of this
section is grounds for terminating--
(i) The servicer's eligibility to contract with any institution to
administer any aspect of the institution's participation in a Title IV,
HEA program; and
(ii) The participation in any Title IV, HEA program of any
institution under whose contract the servicer committed the violation,
if that institution had been aware of the violation and had failed to
take the appropriate action described in paragraph (d)(1)(ii) of this
section.
(e)(1) A participating institution or third-party servicer, as
applicable, violates its fiduciary duty if--
(i)(A) The institution or servicer, as applicable, is debarred or
suspended under Executive Order (E.O.) 12549 (3 CFR, 1986 Comp., p.
189) or the Federal Acquisition Regulations (FAR), 48 CFR part 9,
subpart 9.4; or
(B) Cause exists under 34 CFR 85.305 or 85.405 for debarring or
suspending the institution, servicer, or any principal or affiliate of
the institution or servicer under E.O. 12549 (3 CFR, 1986 Comp., p.
189) or the FAR, 48 CFR part 9, subpart 9.4; and
(ii) Upon learning of the debarment, suspension, or cause for
debarment or suspension, the institution or servicer, as applicable,
does not promptly--
(A) Discontinue the affiliation; or
(B) Remove the principal from responsibility for any aspect of the
administration of an institution's or servicer's participation in the
Title IV, HEA programs.
(2) A violation for a reason contained in paragraph (e)(1) of this
section is grounds for terminating--
(i) The institution's participation in any Title IV, HEA program;
and
(ii) The servicer's eligibility to contract with any institution to
administer any aspect of the institution's participation in any Title
IV, HEA program. The violation is also grounds for terminating, under
this subpart, the participation in any Title IV, HEA program of any
institution under whose contract the servicer committed the violation,
if that institution knew or should have known of the violation.
(f)(1) The debarment of a participating institution or third-party
servicer, as applicable, under E.O. 12549 (3 CFR, 1986 Comp., p. 189)
or the FAR, 48 CFR part 9, subpart 9.4, by the Secretary or another
Federal agency from participation in Federal programs, under procedures
that comply with 5 U.S.C. 554-557 (formal adjudication requirements
under the Administrative Procedure Act), terminates, for the duration
of the debarment--
(i) The institution's participation in any Title IV, HEA program;
and
(ii) The servicer's eligibility to contract with any institution to
administer any aspect of the institution's participation in any Title
IV, HEA program.
(2)(i) The suspension of a participating institution or third-party
servicer, as applicable, under E.O. 12549 (3 CFR, 1986 Comp., p. 189)
or the FAR, 48 CFR part 9, subpart 9.4, by the Secretary or another
Federal agency from participation in Federal programs, under procedures
that comply with 5 U.S.C. 554-557, suspends--
(A) The institution's participation in any Title IV, HEA program;
and
(B) The servicer's eligibility to contract with any institution to
administer any aspect of the institution's participation in any Title
IV, HEA program.
(ii) A suspension under this paragraph lasts for a period of 60
days, beginning on the date of the suspending official's decision,
except that the suspension may last longer if--
(A) The institution or servicer, as applicable, and the Secretary,
agree to an extension of the suspension; or
(B) The Secretary begins a limitation or termination proceeding
against the institution or servicer, as applicable, under this subpart
before the 60th day of the suspension.
(Authority: E.O. 12549 (3 CFR, 1986 Comp., p. 189), E.O. 12689 (3
CFR, 1989 Comp., p. 235); 20 U.S.C. 1070, et seq., 1082(a)(1) and
(h)(1), 1094(c)(1)(D) and (H), and 3474)
22. Section 668.83 is revised to read as follows:
Sec. 668.83 Emergency action.
(a) Under an emergency action, the Secretary may--
(1) Withhold Title IV, HEA program funds from a participating
institution or its students, or from a third-party servicer, as
applicable;
(2)(i) Withdraw the authority of the institution or servicer, as
applicable, to commit, disburse, deliver, or cause the commitment,
disbursement, or delivery of Title IV, HEA program funds; or
(ii) Withdraw the authority of the institution or servicer, as
applicable, to commit, disburse, deliver, or cause the commitment,
disbursement, or delivery of Title IV, HEA program funds except in
accordance with a particular procedure; and
(3)(i) Withdraw the authority of the servicer to administer any
aspect of any institution's participation in any Title IV, HEA program;
or
(ii) Withdraw the authority of the servicer to administer any
aspect of any institution's participation in any Title IV, HEA program
except in accordance with a particular procedure.
(b)(1) An initiating official begins an emergency action against an
institution or third-party servicer by sending the institution or
servicer a notice by registered mail, return receipt requested. In an
emergency action against a third-party servicer, the official also
sends the notice to each institution that contracts with the servicer.
The official also may transmit the notice by other, more expeditious
means if practical.
(2) The emergency action takes effect on the date the initiating
official mails the notice to the institution or servicer, as
applicable.
(3) The notice states the grounds on which the emergency action is
based, the consequences of the emergency action, and that the
institution or servicer, as applicable, may request an opportunity to
show cause why the emergency action is unwarranted.
(c)(1) An initiating official takes emergency action against an
institution or third-party servicer only if that official--
(i) Receives information, determined by the official to be
reliable, that the institution or servicer, as applicable, is violating
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;
(ii) Determines that immediate action is necessary to prevent
misuse of Title IV, HEA program funds; and
(iii) Determines that the likelihood of loss from that misuse
outweighs the importance of awaiting completion of any proceeding that
may be initiated to limit, suspend, or terminate, as applicable--
(A) The participation of the institution in one or more Title IV,
HEA programs; or
(B) The eligibility of the servicer to contract with any
institution to administer any aspect of the institution's participation
in a Title IV, HEA program.
(2) Examples of violations of a Title IV, HEA program requirement
that cause misuse and the likely loss of Title IV, HEA program funds
include--
(i) Causing the commitment, disbursement, or delivery by any party
of Title IV, HEA program funds in an amount that exceeds--
(A) The amount for which students are eligible; or
(B) The amount of principal, interest, or special allowance
payments that would have been payable to the holder of a Federal
Stafford, Federal PLUS, or Federal SLS loan if a refund allocable to
that loan had been made in the amount and at the time required;
(ii) Using, offering to make available, or causing the use or
availability of Title IV, HEA program funds for educational services
if--
(A) The institution, servicer, or agents of the institution or
servicer have made a substantial misrepresentation as described in
Secs. 668.72, 668.73, or 668.74 related to those services;
(B) The institution lacks the administrative or financial ability
to provide those services in full; or
(C) The institution, or servicer, as applicable, lacks the
administrative or financial ability to compensate by appropriate refund
for any portion of an educational program not completed by a student;
and
(iii) Engaging in fraud involving the administration of a Title IV,
HEA program. Examples of fraud include--
(A) Falsification of any document received from a student or
pertaining to a student's eligibility for assistance under a Title IV,
HEA program;
(B) Falsification, including false certifications, of any document
submitted by the institution or servicer to the Secretary;
(C) Falsification, including false certifications, of any document
used for or pertaining to--
(1) The legal authority of an institution to provide postsecondary
education in the State in which the institution is located; or
(2) The accreditation or preaccreditation of an institution or any
of the institution's educational programs or locations;
(D) Falsification, including false certifications, of any document
submitted to a guaranty agency under the Federal Stafford Loan, Federal
PLUS, and Federal SLS programs or an independent auditor;
(E) Falsification of any document submitted to a third-party
servicer by an institution or to an institution by a third-party
servicer pertaining to the institution's participation in a Title IV,
HEA program; and
(F) Falsification, including false certifications, of any document
pertaining to the performance of any loan collection activity,
including activity that is not required by the HEA or applicable
program regulations.
(3) If the Secretary begins an emergency action against a third-
party servicer, the Secretary may also begin an emergency action
against any institution under whose contract a third-party servicer
commits the violation.
(d)(1) Except as provided in paragraph (d)(2) of this section,
after an emergency action becomes effective, an institution or third-
party servicer, as applicable, may not--
(i) Make or increase awards or make other commitments of aid to a
student under the applicable Title IV, HEA program;
(ii) Disburse either program funds, institutional funds, or other
funds as assistance to a student under that Title IV, HEA program;
(iii) In the case of an emergency action pertaining to
participation in the Federal Stafford Loan, Federal PLUS, or Federal
SLS Program--
(A) Certify an application for a loan under that program;
(B) Deliver loan proceeds to a student under that program; or
(C) Retain the proceeds of a loan made under that program that are
received after the emergency action takes effect; or
(iv) In the case of an emergency action against a third-party
servicer, administer any aspect of any institution's participation in
any Title IV, HEA program.
(2) If the initiating official withdraws, by an emergency action,
the authority of the institution or servicer to commit, disburse,
deliver, or cause the commitment, disbursement, or delivery of Title
IV, HEA program funds, or the authority of the servicer to administer
any aspect of any institution's participation in any Title IV, HEA
program, except in accordance with a particular procedure specified in
the notice of emergency action, the institution or servicer, as
applicable, may not take any action described in paragraph (d)(1) of
this section except in accordance with the procedure specified in the
notice.
(e)(1) Upon request by the institution or servicer, as applicable,
the Secretary provides the institution or servicer, as soon as
practicable, with an opportunity to show cause that the emergency
action is unwarranted or should be modified.
(2) An opportunity to show cause consists of an opportunity to
present evidence and argument to a show-cause official. The initiating
official does not act as the show-cause official for any emergency
action that the initiating official has begun. The show-cause official
is authorized to grant relief from the emergency action. The
institution or servicer may make its presentation in writing or, upon
its request, at an informal meeting with the show-cause official.
(3) The show-cause official may limit the time and manner in which
argument and evidence may be presented in order to avoid unnecessary
delay or the presentation of immaterial, irrelevant, or repetitious
matter.
(4) The institution or servicer, as applicable, has the burden of
persuading the show-cause official that the emergency action imposed by
the notice is unwarranted or should be modified because--
(i) The grounds stated in the notice did not, or no longer, exist;
(ii) The grounds stated in the notice will not cause loss or misuse
of Title IV, HEA program funds; or
(iii) The institution or servicer, as applicable, will use
procedures that will reliably eliminate the risk of loss from the
misuse described in the notice.
(5) The show-cause official continues, modifies, or revokes the
emergency action promptly after consideration of any argument and
evidence presented by the institution or servicer, as applicable, and
the initiating official.
(6) The show-cause official notifies the institution or servicer,
as applicable, of that official's determination promptly after the
completion of the show-cause meeting or, if no meeting is requested,
after the official receives all the material submitted by the
institution in opposition to the emergency action. In the case of a
notice to a third-party servicer, the official also notifies each
institution that contracts with the servicer of that determination. The
show-cause official may explain that determination by adopting or
modifying the statement of reasons provided in the notice of emergency
action.
(f)(1) An emergency action does not extend more than 30 days after
initiated unless the Secretary initiates a limitation, suspension, or
termination proceeding under this part or under 34 CFR part 600 against
the institution or servicer, as applicable, within that 30-day period,
in which case the emergency action continues until a final decision is
issued in that proceeding, as provided in Sec. 668.90(c), as
applicable.
(2) Until a final decision is issued by the Secretary in a
proceeding described in paragraph (f)(1) of this section, the
continuation, modification, or revocation of the emergency action is at
the sole discretion of the initiating official, or, if a show-cause
proceeding is conducted, the show-cause official.
(3) If an emergency action extends beyond 180 days by virtue of
paragraph (f)(1) of this section, the institution or servicer, as
applicable, may then submit written material to the show-cause official
to demonstrate that because of facts occurring after the later of the
notice by the initiating official or the show-cause meeting,
continuation of the emergency action is unwarranted and the emergency
action should be modified or ended. The show-cause official considers
any written material submitted and issues a determination that
continues, modifies, or revokes the emergency action.
(g) The expiration, modification, or revocation of an emergency
action against an institution or third-party servicer does not bar
subsequent emergency action against that institution on grounds other
than those specifically identified in the notice imposing the prior
emergency action. Separate grounds may include violation by an
institution or third-party servicer of an agreement or limitation
imposed or resulting from the prior emergency action.
(Authority: 20 U.S.C. 1094)
23. Section 668.84 is revised to read as follows:
Sec. 668.84 Fine proceedings.
(a) Scope and consequences. (1) The Secretary may impose a fine of
up to $25,000 per violation on a participating institution or third-
party servicer that--
(i) Violates 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; or
(ii) Substantially misrepresents the nature of--
(A) In the case of an institution, its educational program, its
financial charges, or the employability of its graduates; or
(B) In the case of a third-party servicer, as applicable, the
educational program, financial charges, or employability of the
graduates of any institution that contracts with the servicer.
(2) If the Secretary begins a fine proceeding against a third-party
servicer, the Secretary also may begin a fine, limitation, suspension,
or termination proceeding against any institution under whose contract
a third-party servicer commits the violation.
(b) Procedures. (1) A designated department official begins a fine
proceeding by sending the institution or servicer, as applicable, a
notice by certified mail, return receipt requested. In the case of a
fine proceeding against a third-party servicer, the official also sends
the notice to each institution that is affected by the alleged
violations identified as the basis for the fine action, and, to the
extent possible, to each institution that contracts with the servicer
for the same service affected by the violation. This notice--
(i) Informs the institution or servicer of the Secretary's intent
to fine the institution or servicer, as applicable, and the amount of
the fine and identifies the alleged violations that constitute the
basis for the action;
(ii) Specifies the proposed effective date of the fine, which is at
least 20 days from mailing of the notice of intent;
(iii) Informs the institution or servicer that the fine will not be
effective on the date specified in the notice if the designated
department official receives from the institution or servicer, as
applicable, by that date a written request for a hearing or written
material indicating why the fine should not be imposed; and
(iv) In the case of a fine proceeding against a third-party
servicer, informs each institution that is affected by the alleged
violations of the consequences of the action to the institution.
(2) If the institution or servicer does not request a hearing but
submits written material, the designated department official, after
considering that material, notifies the institution or, in the case of
a third-party servicer, the servicer and each institution affected by
the alleged violations that--
(i) The fine will not be imposed; or
(ii) The fine is imposed as of a specified date, and in a specified
amount.
(3) If the institution or servicer requests a hearing by the time
specified in paragraph (b)(1)(iii) of this section, the designated
department official sets the date and the place. The date is at least
15 days after the designated department official receives the request.
(4) A hearing official conducts a hearing in accordance with
Sec. 668.88.
(c) Expedited proceedings. With the approval of the hearing
official and the consent of the designated department official and the
institution or servicer, any time schedule specified in this section
may be shortened.
(Authority: 20 U.S.C. 1094)
24. Section 668.85 is revised to read as follows:
Sec. 668.85 Suspension proceedings.
(a) Scope and consequences. (1) The Secretary may suspend an
institution's participation in a Title IV, HEA program or the
eligibility of a third-party servicer to contract with any institution
to administer any aspect of the institution's participation in any
Title IV, HEA program, if the institution or servicer--
(i) Violates 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; or
(ii) Substantially misrepresents the nature of--
(A) In the case of an institution, its educational program, its
financial charges, or the employability of its graduates; or
(B) In the case of a third-party servicer, as applicable, the
educational program, financial charges, or employability of the
graduates of any institution that contracts with the servicer.
(2) If the Secretary begins a suspension proceeding against a
third-party servicer, the Secretary also may begin a fine, limitation,
suspension, or termination proceeding against any institution under
whose contract a third-party servicer commits the violation.
(3) The suspension may not exceed 60 days unless--
(i) The institution or servicer and the Secretary agree to an
extension if the institution or servicer, as applicable, has not
requested a hearing; or
(ii) The designated department official begins a limitation or
termination proceeding under Sec. 668.86.
(b) Procedures. (1) A designated department official begins a
suspension proceeding by sending a notice to an institution or third-
party servicer by certified mail, return receipt requested. In the case
of a suspension proceeding against a third-party servicer, the official
also sends the notice to each institution that contracts with the
servicer. The designated department official may also transmit the
notice by other, more expeditious means if practical. The notice--
(i) Informs the institution or servicer of the intent of the
Secretary to suspend the institution's participation or the servicer's
eligibility, as applicable, cites the consequences of that action, and
identifies the alleged violations that constitute the basis for the
action;
(ii) Specifies the proposed effective date of the suspension, which
is at least 20 days after the date of mailing of the notice of intent;
(iii) Informs the institution or servicer that the suspension will
not be effective on the date specified in the notice, except as
provided in Sec. 668.90(b)(2), if the designated department official
receives from the institution or servicer, as applicable, by that date
a request for a hearing or written material indicating why the
suspension should not take place; and
(iv) In the case of a suspension proceeding against a third-party
servicer, informs each institution that contracts with the servicer of
the consequences of the action to the institution.
(2) If the institution or servicer does not request a hearing, but
submits written material, the designated department official, after
considering that material, notifies the institution or, in the case of
a third-party servicer, the servicer and each institution that
contracts with the servicer that--
(i) The proposed suspension is dismissed; or
(ii) The suspension is effective as of a specified date.
(3) If the institution or servicer requests a hearing by the time
specified in paragraph (b)(1)(iii) of this section, the designated
department official sets the date and the place. The date is at least
15 days after the designated department official receives the request.
The suspension does not take place until after the requested hearing is
held.
(4) A hearing official conducts a hearing in accordance with
Sec. 668.88.
(c) Expedited proceedings. With the approval of the hearing
official and the consent of the designated department official and the
institution or servicer, as applicable, any time period specified in
this section may be shortened.
(Authority: 20 U.S.C. 1094)
25. Section 668.86 is revised to read as follows:
Sec. 668.86 Limitation or termination proceedings.
(a) Scope and consequences. (1) The Secretary may limit or
terminate an institution's participation in a Title IV, HEA program or
the eligibility of a third-party servicer to contract with any
institution to administer any aspect of the institution's participation
in any Title IV, HEA program, if the institution or servicer--
(i) Violates 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; or
(ii) Substantially misrepresents the nature of--
(A) In the case of an institution, its educational program, its
financial charges, or the employability of its graduates; or
(B) In the case of a third-party servicer, as applicable, the
educational program, financial charges, or employability of the
graduates of any institution that contracts with the servicer.
(2) If the Secretary begins a limitation or termination proceeding
against a third-party servicer, the Secretary also may begin a fine,
limitation, suspension, or termination proceeding against any
institution under whose contract a third-party servicer commits the
violation.
(3) The consequences of the limitation or termination of the
institution's participation or the servicer's eligibility are described
in Secs. 668.93 and 668.94, respectively.
(b) Procedures. (1) A designated department official begins a
limitation or termination proceeding by sending an institution or
third-party servicer a notice by certified mail, return receipt
requested. In the case of a limitation or termination proceeding
against a third-party servicer, the official also sends the notice to
each institution that contracts with the servicer. The designated
department official may also transmit the notice by other, more
expeditious means if practical. This notice--
(i) Informs the institution or servicer of the intent of the
Secretary to limit or terminate the institution's participation or
servicer's eligibility, as applicable, cites the consequences of that
action, and identifies the alleged violations that constitute the basis
for the action, and, in the case of a limitation proceeding, states the
limits to be imposed;
(ii) Specifies the proposed effective date of the limitation or
termination, which is at least 20 days after the date of mailing of the
notice of intent;
(iii) Informs the institution or servicer that the limitation or
termination will not be effective on the date specified in the notice
if the designated department official receives from the institution or
servicer, as applicable, by that date a request for a hearing or
written material indicating why the limitation or termination should
not take place; and
(iv) In the case of a limitation or termination proceeding against
a third-party servicer, informs each institution that contracts with
the servicer of the consequences of the action to the institution.
(2) If the institution or servicer does not request a hearing but
submits written material, the designated department official, after
considering that material, notifies the institution or, in the case of
a third-party servicer, the servicer and each institution that
contracts with the servicer that--
(i) The proposed action is dismissed;
(ii) Limitations are effective as of a specified date; or
(iii) The termination is effective as of a specified date.
(3) If the institution or servicer requests a hearing by the time
specified in paragraph (b)(1)(iii) of this section, the designated
department official sets the date and the place. The date is at least
15 days after the designated department official receives the request.
The limitation or termination does not take place until after the
requested hearing is held.
(4) A hearing official conducts a hearing in accordance with
Sec. 668.88.
(c) Expedited proceeding. With the approval of the hearing official
and the consent of the designated department official and the
institution or servicer, as applicable, any time schedule specified in
this section may be shortened.
(Authority: 20 U.S.C. 1094)
26. Section 668.87 is revised to read as follows:
Sec. 668.87 Prehearing conference.
(a) A hearing official may convene a prehearing conference if he or
she thinks that the conference would be useful, or if the conference is
requested by--
(1) The designated department official who brought a proceeding
against an institution or third-party servicer under this subpart; or
(2) The institution or servicer, as applicable.
(b) The purpose of a prehearing conference is to allow the parties
to settle or narrow the dispute.
(c) If the hearing official, the designated department official,
and the institution, or servicer, as applicable, agree, a prehearing
conference may consist of--
(1) A conference telephone call;
(2) An informal meeting; or
(3) The submission and exchange of written material.
(Authority: 20 U.S.C. 1094)
27. Section 668.88 is amended by revising paragraph (b)
introductory text and paragraph (d) to read as follows:
Sec. 668.88 Hearing.
* * * * *
(b) If the hearing official, the designated department official who
brought a proceeding against an institution or third-party servicer
under this subpart, and the institution or servicer, as applicable,
agree, the hearing process may be expedited. Procedures to expedite the
hearing process may include, but are not limited to, the following--
* * * * *
(d) The designated department official makes a transcribed record
of the proceeding and makes one copy of the record available to the
institution or servicer.
(Authority: 20 U.S.C. 1094)
28. Section 668.89 is amended by revising paragraphs (a), (b)(2),
and (c) introductory text, and adding a new paragraph (d) to read as
follows:
Sec. 668.89 Authority and responsibilities of the hearing official.
(a) The hearing official regulates the course of a hearing and the
conduct of the parties during the hearing. The hearing official takes
all necessary steps to conduct a fair and impartial hearing.
(b) * * *
(2) If requested by the hearing official, the parties to a hearing
shall provide available personnel who have knowledge about the matter
under review for oral or written examination.
(c) The hearing official takes whatever measures are appropriate to
expedite a hearing. These measures may include, but are not limited to,
the following--
* * * * *
(d) The hearing official is bound by all applicable statutes and
regulations. The hearing official may not--
(1) Waive applicable statutes and regulations; or
(2) Rule them invalid.
(Authority: 20 U.S.C. 1094)
29. Section 668.90 is revised to read as follows:
Sec. 668.90 Initial and final decisions--Appeals.
(a)(1)(i) A hearing official issues a written initial decision in a
hearing by certified mail, return receipt requested to--
(A) The designated department official who began a proceeding
against an institution or third-party servicer;
(B) The institution or servicer, as applicable; and
(C) In the case of a proceeding against a third-party servicer,
each institution that contracts with the servicer.
(ii) The hearing official may also transmit the notice by other,
more expeditious means if practical.
(iii) The hearing official issues the decision within the latest of
the following dates:
(A) The 30th day after the last submission is filed with the
hearing official.
(B) The 60th day after the last submission is filed with the
hearing official if the Secretary, upon request of the hearing
official, determines that the unusual complexity of the case requires
additional time for preparation of the decision.
(C) The 50th day after the last day of the hearing, if the hearing
official does not request the parties to make any posthearing
submission.
(2) The hearing official's initial decision states whether the
imposition of the fine, limitation, suspension, or termination sought
by the designated department official is warranted, in whole or in
part. If the designated department official brought a termination
action against the institution or servicer, the hearing official may,
if appropriate, issue an initial decision to fine the institution or
servicer, as applicable, or, rather than terminating the institution's
participation or servicer's eligibility, as applicable, impose one or
more limitations on the institution's participation or servicer's
eligibility.
(3) Notwithstanding the provisions of paragraph (a)(2) of this
section--
(i) If, in a termination action against an institution, the hearing
official finds that the institution has violated the provisions of
Sec. 668.14(b)(18), the hearing official also finds that termination of
the institution's participation is warranted;
(ii) If, in a termination action against a third-party servicer,
the hearing official finds that the servicer has violated the
provisions of Sec. 668.82(d)(1), the hearing official also finds that
termination of the institution's participation or servicer's
eligibility, as applicable, is warranted;
(iii) If an action brought against an institution or third-party
servicer involves its failure to provide surety in the amount specified
by the Secretary under Sec. 668.15, the hearing official finds that the
amount of the surety established by the Secretary was appropriate,
unless the institution can demonstrate that the amount was
unreasonable;
(iv) In a limitation, suspension, or termination proceeding
commenced on the grounds described in Sec. 668.17(a)(1), if the hearing
official finds that an institution's Federal Stafford loan and Federal
SLS cohort default rate, as defined in Sec. 668.17(e), meets the
conditions specified in Sec. 668.17(a)(1) for initiation of limitation,
suspension, or termination proceedings, the hearing official also finds
that the sanction sought by the designated department official is
warranted, except that the hearing official finds that no sanction is
warranted if the institution demonstrates that it has implemented the
default reduction measures described in Appendix D to this part;
(v) In a termination action taken against an institution or third-
party servicer based on the grounds that the institution or servicer
failed to comply with the requirements of Sec. 668.23(c)(3), if the
hearing official finds that the institution or servicer failed to meet
those requirements, the hearing official finds that the termination is
warranted;
(vi) In a termination action against an institution based on the
grounds that the institution is not financially responsible under
Sec. 668.15(c)(1), the hearing official finds that the termination is
warranted unless the institution demonstrates that all applicable
conditions described in Sec. 668.15(d)(4) have been met; and
(vii) In a termination action against an institution or third-party
servicer on the grounds that the institution or servicer, as
applicable, engaged in fraud involving the administration of any Title
IV, HEA program, the hearing official finds that the termination action
is warranted if the hearing official finds that the institution or
servicer, as applicable, engaged in that fraud. Examples of fraud
include--
(A) Falsification of any document received from a student or
pertaining to a student's eligibility for assistance under a Title IV,
HEA program;
(B) Falsification, including false certifications, of any document
submitted by the institution or servicer to the Department of
Education;
(C) Falsification, including false certifications, of any document
used for or pertaining to--
(1) The legal authority of an institution to provide postsecondary
education in the State in which the institution is located; or
(2) The accreditation or preaccreditation of an institution or any
of the institution's educational programs or locations;
(D) Falsification, including false certifications, of any document
submitted to a guaranty agency under the Federal Stafford Loan, Federal
PLUS, and Federal SLS programs, an independent auditor, an eligible
institution, or a third-party servicer;
(E) Falsification of any document submitted to a third-party
servicer by an institution or to an institution by a third-party
servicer pertaining to the institution's participation in a Title IV,
HEA program; and
(F) Falsification, including false certifications, of any document
pertaining to the performance of any loan collection activity,
including activity that is not required by the HEA or applicable
program regulations.
(4) The hearing official bases findings of fact only on evidence
considered at the hearing and on matters given judicial notice. If a
hearing is conducted solely through written submissions, the parties
must agree to findings of fact.
(b) (1) In a suspension proceeding, the Secretary reviews the
hearing official's initial decision and issues a final decision within
20 days after the initial decision. The Secretary adopts the initial
decision unless it is clearly unsupported by the evidence presented at
the hearing.
(2) The Secretary notifies the institution or servicer and, in the
case of a suspension proceeding against a third-party servicer, each
institution that contracts with the servicer of the final decision. If
the Secretary suspends the institution's participation or servicer's
eligibility, the suspension takes effect on the later of--
(i) The day that the institution or servicer receives the notice;
or
(ii) The date specified in the designated department official's
original notice of intent to suspend the institution's participation or
servicer's eligibility.
(3) A suspension may not exceed 60 days unless a designated
department official begins a limitation or termination proceeding under
this subpart before the expiration of that period. In that case, the
period may be extended until a final decision is issued in that
proceeding according to paragraph (c) of this section.
(c) (1) In a fine, limitation, or termination proceeding, the
hearing official's initial decision automatically becomes the
Secretary's final decision 30 days after the initial decision is issued
and received by both parties unless, within that 30-day period, the
institution or servicer, as applicable, or the designated department
official appeals the initial decision to the Secretary.
(2) (i) A party may appeal the hearing official's initial decision
by submitting to the Secretary, within 30 days after the party receives
the initial decision, a brief or other written statement that explains
why the party believes that the Secretary should reverse or modify the
decision of the hearing official.
(ii) At the time the party files its appeal submission, the party
shall provide a copy of that submission to the opposing party.
(iii) The opposing party shall submit its brief or other responsive
statement to the Secretary, with a copy to the appellant, within 30
days after the opposing party receives the appellant's brief or written
statement.
(iv) The appealing party may submit proposed findings of fact or
conclusions of law. However, the proposed findings of fact must be
supported by--
(A) The evidence introduced into the record at the hearing;
(B) Stipulations of the parties if the hearing consisted of written
submissions; or
(C) Matters that may be judicially noticed.
(v) Neither party may introduce new evidence on appeal.
(vi) The initial decision of the hearing official imposing a fine
or limiting or terminating the institution's participation or
servicer's eligibility does not take effect pending the appeal.
(vii) The Secretary renders a final decision. The Secretary may
delegate to a designated department official the functions described in
paragraph (c)(2) (vii) through (ix) of this section.
(viii) In rendering a final decision, the Secretary considers only
evidence introduced into the record at the hearing and facts agreed to
by the parties if the hearing consisted only of written submissions and
matters that may be judicially noticed.
(ix) If the hearing official finds that a termination is warranted
pursuant to paragraph (a)(3) of this section, the Secretary may affirm,
modify, or reverse the initial decision, or may remand the case to the
hearing official for further proceedings consistent with the
Secretary's decision. If the Secretary affirms the initial decision
without issuing a statement of reasons, the Secretary adopts the
opinion of the hearing official as the decision of the Secretary. If
the Secretary modifies, remands, or reverses the initial decision, in
whole or in part, the Secretary's decision states the reasons for the
action taken.
(Authority: 20 U.S.C. 1082, 1094)
30. Section 668.91 is amended by revising the heading; and revising
paragraphs (a)(1), (a)(2), (b) heading, (b)(1), (b)(2) introductory
text, and (c) to read as follows:
Sec. 668.91 Filing of requests for hearings and appeals; confirmation
of mailing and receipt dates.
(a) * * *
(1) A request by an institution or third-party servicer for a
hearing or show-cause opportunity, other material submitted by an
institution or third-party servicer in response to a notice of proposed
action under this subpart, or an appeal to the Secretary under this
subpart must be filed with the designated department official by hand-
delivery, mail, or facsimile transmission.
(2) Documents filed by facsimile transmission must be transmitted
to the designated department official identified, either in the notice
initiating the action, or, for an appeal, in instructions provided by
the hearing official, as the individual responsible to receive them. A
party filing a document by facsimile transmission must confirm that a
complete and legible copy of the document was received by the
Department of Education, and may be required by the designated
department official to provide a hard copy of the document.
* * * * *
(b) Confirmation of mailing and receipt dates. (1) The mailing date
of a notice from a designated department official initiating an action
under this subpart is the date evidenced on the original receipt of
mailing from the U.S. Postal Service.
(2) The date on which a request for a show-cause opportunity, a
request for a hearing, other material submitted in response to a notice
of action under this subpart, a decision by a hearing official, or a
notice of appeal is received is, as applicable--
* * * * *
(c) Refusals. If an institution or third-party servicer refuses to
accept a notice mailed under this subpart, the Secretary considers the
notice as being received on the date that the institution or servicer
refuses to accept the notice.
(Authority: 20 U.S.C. 1094)
31. Section 668.92 is revised to read as follows:
Sec. 668.92 Fines.
(a) In determining the amount of a fine, the designated department
official, hearing official, and Secretary take into account--
(1) (i) The gravity of an institution's or third-party servicer's
violation or failure to carry out the relevant statutory provision,
regulatory provision, special arrangement, agreement, or limitation
entered into under the authority of statutes applicable to Title IV of
the HEA; or
(ii) The gravity of the institution's or servicer's
misrepresentation;
(2) The size of the institution;
(3) The size of the servicer's business, including the number of
institutions and students served by the servicer;
(4) In the case of a violation by a third-party servicer, the
extent to which the servicer can document that the institution
contributed to that violation; and
(5) For purposes of assessing a fine on a third-party servicer, the
extent to which--
(i) Violations are caused by repeated mechanical systemic
unintentional errors. The Secretary counts the total of violations
caused by a repeated mechanical systemic unintentional error as a
single violation, unless the servicer has been cited for a similar
violation previously and had failed to make the appropriate corrections
to the system; and
(ii) The financial loss of Title IV, HEA program funds was
attributable to a repeated mechanical systemic unintentional error.
(b) In determining the gravity of the institution's or servicer's
violation, failure, or misrepresentation under paragraph (a) of this
section, the designated department official, hearing official, and
Secretary take into account the amount of any liability owed by the
institution and any third-party servicer that contracts with the
institution, and the number of students affected as a result of that
violation, failure, or misrepresentation on--
(1) Improperly expended or unspent Title IV, HEA program funds
received by the institution or servicer, as applicable; or
(2) Required refunds.
(c) Upon the request of the institution or third-party servicer,
the Secretary may compromise the fine.
(Authority: 20 U.S.C. 1094)
32. Section 668.93 is revised to read as follows:
Sec. 668.93 Limitation.
A limitation may include, as appropriate to the Title IV, HEA
program in question--
(a) A limit on the number or percentage of students enrolled in an
institution who may receive Title IV, HEA program funds;
(b) A limit, for a stated period of time, on the percentage of an
institution's total receipts from tuition and fees derived from Title
IV, HEA program funds;
(c) A limit on the number or size of institutions with which a
third-party servicer may contract;
(d) A limit on the number of borrower or loan accounts that a
third-party servicer may service under a contract with an institution;
(e) A limit on the responsibilities that a third-party servicer may
perform under a contract with an institution;
(f) A requirement for a third-party servicer to perform additional
responsibilities under a contract with an institution;
(g) A requirement that an institution obtain surety, in a specified
amount, to assure its ability to meet its financial obligations to
students who receive Title IV, HEA program funds;
(h) A requirement that a third-party servicer obtain surety, in a
specified amount, to assure the servicer's ability to meet the
servicer's financial obligations under a contract; or
(i) Other conditions as may be determined by the Secretary to be
reasonable and appropriate.
(Authority: 20 U.S.C. 1094)
33. Section 668.94 is revised to read as follows:
Sec. 668.94 Termination.
(a) A termination.
(1) Ends an institution's participation in a Title IV, HEA program
or ends a third-party servicer's eligibility to contract with any
institution to administer any aspect of the institution's participation
in a Title IV, HEA program;
(2) Ends the authority of a third-party servicer to administer any
aspect of any institution's participation in that program;
(3) Prohibits an institution or third-party servicer, as
applicable, or the Secretary from making or increasing awards under
that program;
(4) Prohibits an institution or third-party servicer, as
applicable, from making any other new commitments of funds under that
program; and
(5) If an institution's participation in the Federal Stafford Loan,
Federal PLUS, or Federal SLS Program has been terminated, prohibits
further guarantee commitments by the Secretary for loans under that
program to students to attend that institution, and, if the institution
is a lender under that program, prohibits further disbursements by the
institution (whether or not guarantee commitments have been issued by
the Secretary or a guaranty agency for those disbursements).
(b) After its participation in a Title IV, HEA program has been
terminated, an institution may disburse or deliver funds under that
Title IV, HEA program to students enrolled at the institution only in
accordance with Sec. 668.26 and with any additional requirements
imposed under this part.
(c) If a third-party servicer's eligibility is terminated, the
servicer must return to each institution that contracts with the
servicer any funds received by the servicer under the applicable Title
IV, HEA program on behalf of the institution or the institution's
students or otherwise dispose of those funds under instructions from
the Secretary. The servicer also must return to each institution that
contracts with the servicer all records pertaining to the servicer's
administration of that program on behalf of that institution.
(Authority: 20 U.S.C. 1094)
34. Section 668.95 is revised to read as follows:
Sec. 668.95 Reimbursements, refunds, and offsets.
(a) The designated department official, hearing official, or
Secretary may require an institution or third-party servicer to take
reasonable and appropriate corrective action to remedy the
institution's or servicer's violation, as applicable, of 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.
(b) The corrective action may include payment of any funds to the
Secretary, or to designated recipients, that the institution or
servicer, as applicable, improperly received, withheld, disbursed, or
caused to be disbursed. Corrective action may, for example, relate to--
(1) With respect to the Federal Stafford Loan, Federal PLUS, and
Federal SLS programs--
(i) Ineligible interest benefits, special allowances, or other
claims paid by the Secretary; and
(ii) Discounts, premiums, or excess interest paid in violation of
34 CFR part 682; and
(2) With respect to all Title IV, HEA programs--
(i) Refunds required under program regulations; and
(ii) Any grants, work-study assistance, or loans made in violation
of program regulations.
(c) If any final decision requires an institution or third-party
servicer to reimburse or make any other payment to the Secretary, the
Secretary may offset these claims against any benefits or claims due to
the institution or servicer.
(Authority: 20 U.S.C. 1094)
35. Section 668.96 is revised to read as follows:
Sec. 668.96 Reinstatement after termination.
(a) (1) An institution whose participation in a Title IV, HEA
program has been terminated may file a request for reinstatement of
that participation.
(2) A third-party servicer whose eligibility to contract with any
institution to administer any aspect of the institution's participation
in a Title IV, HEA program has been terminated may file a request for
reinstatement of that eligibility.
(b) An institution whose participation has been terminated or a
third-party servicer whose eligibility has been terminated may request
reinstatement only after the later of the expiration of--
(1) Eighteen months from the effective date of the termination; or
(2) A debarment or suspension under Executive Order 12549 (3 CFR,
1986 Comp., p. 189) or the Federal Acquisition Regulations, 48 CFR part
9, subpart 9.4.
(c) To be reinstated, an institution or third-party servicer must
submit its request for reinstatement in writing to the Secretary and
must--
(1) Demonstrate to the Secretary's satisfaction that it has
corrected the violation or violations on which its termination was
based, including payment in full to the Secretary or to other
recipients of funds that the institution or servicer, as applicable,
has improperly received, withheld, disbursed, or caused to be
disbursed;
(2) Meet all applicable requirements of this part; and
(3) In the case of an institution, enter into a new program
participation agreement with the Secretary.
(d) The Secretary, within 60 days of receiving the reinstatement
request--
(1) Grants the request;
(2) Denies the request; or
(3) Grants the request subject to a limitation or limitations.
(Authority: 20 U.S.C. 1094; E.O. 12549 (3 CFR, 1986 Comp., p. 189),
12689 (3 CFR, 1989 Comp., p. 235))
36. Section 668.97 is revised to read as follows:
Sec. 668.97 Removal of limitation.
(a) An institution whose participation in a Title IV, HEA program
has been limited may not apply for removal of the limitation before the
expiration of 12 months from the effective date of the limitation.
(b) A third-party servicer whose eligibility to contract with any
institution to administer any aspect of the institution's participation
in a Title IV, HEA program has been limited may request removal of the
limitation.
(c) The institution or servicer may not apply for removal of the
limitation before the later of the expiration of--
(1) Twelve months from the effective date of the limitation; or
(2) A debarment or suspension under Executive Order 12549 (3 CFR,
1986 Comp., p. 189) or the Federal Acquisition Regulations, 48 CFR part
9, subpart 9.4.
(d) If the institution or servicer requests removal of the
limitation, the request must be in writing and show that the
institution or servicer, as applicable, has corrected the violation or
violations on which the limitation was based.
(e) No later than 60 days after the Secretary receives the request,
the Secretary responds to the institution or servicer--
(1) Granting its request;
(2) Denying its request; or
(3) Granting the request subject to other limitation or
limitations.
(f) If the Secretary denies the request or establishes other
limitations, the Secretary grants the institution or servicer, upon the
institution's or servicer's request, an opportunity to show cause why
the participation or eligibility, as applicable, should be fully
reinstated.
(g) The institution's or servicer's request for an opportunity to
show cause does not waive--
(1) The institution's right to participate in any or all Title IV,
HEA programs if it complies with the continuing limitation or
limitations pending the outcome of the opportunity to show cause; and
(2) The servicer's right to contract with any institution to
administer any aspect of the institution's participation in any Title
IV, HEA program, if the servicer complies with the continuing
limitation pending the outcome of the opportunity to show cause.
(Authority: 20 U.S.C. 1094; E.O. 12549 (3 CFR, 1986 Comp., p. 189),
12689 (3 CFR, 1989 Comp., p. 235))
37. Section 668.111 is amended by revising paragraphs (a) and (b)
to read as follows:
Sec. 668.111 Scope and purpose.
(a) This subpart establishes rules governing the appeal by an
institution or third-party servicer from a final audit determination or
a final program review determination arising from an audit or program
review of the institution's participation in any Title IV, HEA program
or of the servicer's administration of any aspect of an institution's
participation in any Title IV, HEA program.
(b) This subpart applies to any participating institution or third-
party servicer that appeals a final audit determination or final
program review determination.
* * * * *
38. Section 668.112 is revised to read as follows:
Sec. 668.112 Definitions.
The following definitions apply to this subpart:
(a) Final audit determination means the written notice of a
determination issued by a designated department official based on an
audit of--
(1) An institution's participation in any or all of the Title IV,
HEA programs; or
(2) A third-party servicer's administration of any aspect of an
institution's participation in any or all of the Title IV, HEA
programs.
(b) Final program review determination means the written notice of
a determination issued by a designated department official and
resulting from a program compliance review of--
(1) An institution's participation in any or all of the Title IV,
HEA programs; or
(2) A third-party servicer's administration of any aspect of an
institution's participation in any Title IV, HEA program.
(Authority: 20 U.S.C. 1094)
39. Section 668.113 is revised to read as follows:
Sec. 668.113 Request for review.
(a) An institution or third-party servicer seeking the Secretary's
review of a final audit determination or a final program review
determination shall file a written request for review with the
designated department official.
(b) The institution or servicer shall file its request for review
and any records or materials admissible under the terms of
Sec. 668.116(e) and (f), no later than 45 days from the date that the
institution or servicer receives the final audit determination or final
program review determination.
(c) The institution or servicer shall attach to the request for
review a copy of the final audit determination or final program review
determination, and shall--
(1) Identify the issues and facts in dispute; and
(2) State the institution's or servicer's position, as applicable,
together with the pertinent facts and reasons supporting that position.
(Authority: 20 U.S.C. 1094)
40. Section 668.114 is revised to read as follows:
Sec. 668.114 Notification of hearing.
(a) Upon receipt of an institution's or third-party servicer's
request for review, the designated department official arranges for a
hearing before a hearing official.
(b) Within 30 days of the designated department official's receipt
of an institution's or third-party servicer's request for review, the
hearing official notifies the designated department official and the
parties to the proceeding of the schedule for the submission of briefs
by both the designated department official and, as applicable, the
institution or servicer.
(c) The hearing official schedules the submission of briefs and of
accompanying evidence admissible under the terms of Sec. 668.116 (e)
and (f) to occur no later than 120 days from the date that the hearing
official notifies the institution or servicer.
(Authority: 20 U.S.C. 1094)
41. Section 668.116 is amended by revising paragraphs (b), (d),
(e)(1), (f), and (g) to read as follows:
Sec. 668.116 Hearing.
* * * * *
(b) The hearing process consists of the submission of written
briefs to the hearing official by the institution or third-party
servicer, as applicable, and by the designated department official,
unless the hearing official determines, under paragraph (g) of this
section, that an oral hearing is also necessary.
* * * * *
(d) An institution or third-party servicer requesting review of the
final audit determination or final program review determination issued
by the designated department official shall have the burden of proving
the following matters, as applicable:
(1) That expenditures questioned or disallowed were proper.
(2) That the institution or servicer complied with program
requirements.
(e) (1) A party may submit as evidence to the hearing official only
materials within one or more of the following categories:
(i) Department of Education audit reports and audit work papers for
audits performed by the department's Office of Inspector General.
(ii) In the case of an institution, institutional audit work
papers, records, and other materials, if the institution provided those
work papers, records, or materials to the Department of Education no
later than the date by which the institution was required to file its
request for review in accordance with Sec. 668.113.
(iii) In the case of a third-party servicer, the servicer's audit
work papers and the records and other materials of the servicer or any
institution that contracts with the servicer, if the servicer provided
those work papers, records, or materials to the Department of Education
no later than the date that the servicer was required to file the
request for review under Sec. 668.113.
(iv) Department of Education program review reports and work papers
for program reviews.
(v) Institutional or servicer records and other materials
(including records and other materials of any institution that
contracts with the servicer) provided to the Department of Education in
response to a program review, if the records or materials were provided
to the Department of Education by the institution or servicer no later
than the date by which the institution or servicer was required to file
its request for review in accordance with Sec. 668.113.
(vi) Other Department of Education records and materials if the
records and materials were provided to the hearing official no later
than 3 days after the institution's or servicer's filing of its request
for review.
* * * * *
(f) The hearing official accepts only evidence that is both
admissible and timely under the terms of paragraph (e) of this section,
and relevant and material to the appeal. Examples of evidence that
shall be deemed irrelevant and immaterial except upon a clear showing
of probative value respecting the matters described in paragraph (d) of
this section include--
(1) Evidence relating to a period of time other than the period of
time covered by the audit or program review;
(2) Evidence relating to an audit or program review of an
institution or third-party servicer other than the institution or
servicer bringing the appeal, or the resolution thereof; and
(3) Evidence relating to the current practice of the institution or
servicer bringing the appeal in the program areas at issue in the
appeal.
(g) (1) The hearing official may schedule an oral argument if he or
she determines that an oral argument is necessary to clarify the issues
and the positions of the parties as presented in the parties' written
submissions.
(2) In the event that an oral argument is conducted, the designated
department official makes a transcribed record of the proceedings and
makes one copy of that record available to each of the parties to the
proceeding.
* * * * *
42. Section 668.123 is revised to read as follows:
Sec. 668.123 Collection.
To the extent that the decision of the Secretary sustains the final
audit determination or program review determination, subject to the
provisions of Sec. 668.24(c)(3), the Department of Education will take
steps to collect the debt at issue or otherwise effect the
determination that was subject to the request for review.
(Authority: 20 U.S.C. 1094)
43. A new Appendix A to part 668 is added to read as follows:
Appendix A to Part 668--Standards for Acceptable Refund Policies by
Participating Institutions
For purposes of Sec. 668.22(b)(1)(iv)(A), the Secretary
considers an institution to have a fair and equitable refund policy
if the institution uses a policy that meets the minimum requirements
of this appendix. These requirements do not affect an institution's
obligation to comply with other Department of Education regulations.
(I) The governing board of the institution must review and
approve the schedule of all institutional charges and refund
policies applicable to students. The pricing of services and refund
policies have important consequences to students, parents, the
institution, and society; as such, pricing and refund policies must
receive board attention and approval.
(II) The institution must seek consumer views in the process of
establishing and amending charge and refund structures. Decisions
regarding institutional funds are ultimately the sole responsibility
of the institution's legally designated fund custodians. However,
consumer concerns do affect decision making, and involving consumers
in decision making related to charges and refunds is an essential
approach for assessing student needs and creating public awareness
of institutional requirements.
(III) The institution must publish a current schedule of all
student charges (including the costs of required supplies and
equipment), publish a statement of the purpose for such charges and
related refund policies, have those statements readily available
free of charge to current and prospective students, and substantiate
that the costs of required supplies and equipment are reasonably
related to the cost of providing the supplies and equipment to the
students. Students and parents have a right to know what charges
they will be expected to pay and what will or will not be refunded.
They also have a right to know what services accompany payment of
the charges. Informational materials published free for students and
prospective students are ideal for this purpose.
(IV) The institution must clearly designate all optional charges
as ``optional'' in all published schedules and related materials.
Charges that are mandatory and charges that are optional must be
plainly differentiated in all printed materials. Statements
accompanying the schedule may include institutional endorsements of
the optional program or service. The institution must state clearly
in its schedule if a charge is optional for some students but
required for others.
(V) The institution must clearly identify charges and deposits
that are nonrefundable as ``nonrefundable'' on all published
schedules. Institutions determine on an individual basis which of
their charges are refundable or nonrefundable. In general, admission
fees, application fees, laboratory fees, facility and student
activity fees, and other similar charges are not refundable. These
fees are generally charged to cover the cost of activities such as
processing applications and other student information, reserving
academic positions and establishing the limits of institutional
programs and services, reserving housing space, and otherwise
setting the fixed costs of the institution for the coming academic
periods.
Institutions determine on an individual basis which of their
deposits are refundable or nonrefundable. Some deposits will be
nonrefundable or will be credited to a student's account (e.g.,
tuition deposits). Others are refundable according to the terms of
the deposit agreement (e.g., deposits for breakage).
(VI) The institution must refund housing rental charges, less a
deposit, as long as written notification of cancellation is made
prior to a well-publicized date that provides reasonable opportunity
to make the space available to other students. Written notification
on or before the beginning of the term of the contract is necessary
to ensure utilization of housing units. During the term of the
contract, room charges are generally not refundable. However, based
on the program offered, space availability, debt service
requirements, State and local laws, and other individual
circumstances, institutions may provide for some more flexible
refund guideline for housing.
(VII) The institution must refund board charges in full, less a
deposit, if written notification of cancellation is made prior to a
well-publicized date that falls on or before the beginning of the
term of the contract. Subsequent board charges should be refunded on
a pro rata basis. It is reasonable to make a refund for those goods
and services not consumed. The deposit should reflect that portion
of an institution's costs that are fixed for the term of the
contract.
(VIII) The institutional refund policy must include the
following requirements:
A. 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 the student submits written
notice of cancellation on or before one week preceding the first day
of classes for the period of enrollment for which the student was
charged.
B. The institution must refund at least 90 percent of the
tuition charges if the student submits written notice of
cancellation between the end of the period of time specified in
(VIII) A. and the end of the first 10 percent (in time) of the
period of enrollment for which the student was charged.
C. The institution must refund at least 50 percent of the
tuition charges if the student submits written notice of
cancellation 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.
D. The institution must refund at least 25 percent of the
tuition charges if the student submits written notice of
cancellation 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.
E. For purposes of this policy, ``tuition charges'' include, but
are not limited to, charges for any equipment (including books and
supplies) issued by an institution to a 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.
(F) The institution may exclude from the calculation of a refund
owed under this paragraph the documented cost to the institution of
unreturnable equipment issued to the student in accordance with
paragraph (VIII)E of this appendix or of returnable equipment issued
to the student in accordance with paragraph (VIII)E of this appendix
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.
(IX) The institution must assess no penalty charges where the
institution, as opposed to the student, is in error. Penalty
charges, such as those involving late registration fees, change-of-
schedule fees, and late payment fees, must not be assessed if it is
determined that the student is not responsible for the action
causing the charges to be levied.
(X) The institution must advise students that any notifications
of withdrawal or cancellation and requests for refund must be in
writing and addressed to the designated institution officer. A
student's written notification of withdrawal or cancellation and
request for a refund provides an accurate record of transactions and
also ensures that the request will be processed on a timely basis.
Acceptance of oral requests is an undesirable practice.
(XI) The institution must pay or credit refunds due in
accordance with Sec. 668.22(i)(2).
(XII) The institution must publicize, as a part of its
dissemination of information on charges and refunds, that an appeals
process exists for students or parents who believe that individual
circumstances warrant exceptions from published policy. The
informational materials must include the name, title, and address of
the official responsible for handling appeals. Although charges and
refund policies should reflect extensive consideration of student
and institutional needs, it will not be possible to encompass in
these structures the variety of personal circumstances that may
exist or develop. Institutions are required to provide a system of
due process to their students, and charges and refund policies are
legitimately a part of that process. Students and parents should be
informed regularly of procedures for requesting information
concerning exceptions to published policies.
44. Appendix D to part 668 is amended by revising the
introductory paragraphs to read as follows:
Appendix D to Part 668--Default Reduction Measures
This appendix describes measures that an institution with a high
default rate under the Federal Stafford Loan and Federal SLS
programs should find helpful in reducing defaults. An institution
with a fiscal year default rate that exceeds the threshold rate for
a limitation, suspension, or termination action under Sec. 668.17
may avoid that sanction by demonstrating that the institution has
implemented the measures included in this appendix. Other
institutions should strongly consider taking these steps as well.
To reduce defaults, the Secretary recommends that the
institution take the following measures:
* * * * *
PART 682--FEDERAL FAMILY EDUCATION LOAN (FFEL) PROGRAMS
45. The authority citation for part 682 continues to read as
follows:
Authority: 20 U.S.C 1071 to 1087-2, unless otherwise noted.
46. In Sec. 682.200 paragraph (b) is amended by revising paragraph
(1) and adding a new paragraph (5) in the definition of ``Lender'' and
adding a new definition of ``Third-party servicer'' in alphabetical
order, and by revising the authority citation to read as follows:
Sec. 682.200 Definitions.
* * * * *
(b) * * *
Lender. (1) The term ``eligible lender'' is defined in section
435(d) of the Act, and in paragraphs (2)-(5) of this definition.
* * * * *
(5) The term eligible lender does not include any lender that--
(i) Is debarred or suspended, or any of whose principals or
affiliates (as those terms are defined in 34 CFR part 85) is debarred
or suspended under Executive Order (E.O.) 12549 (3 CFR, 1986 Comp., p.
189) or the Federal Acquisition Regulation (FAR), 48 CFR part 9,
subpart 9.4;
(ii) Is an affiliate, as defined in 34 CFR part 85, of any person
who is debarred or suspended under E.O. 12549 (3 CFR, 1986 Comp., p.
189) or the FAR, 48 CFR part 9, subpart 9.4; or
(iii) Employs a person who is debarred or suspended under E.O.
12549 (3 CFR, 1986 Comp., p. 189) or the FAR, 48 CFR part 9, subpart
9.4, in a capacity that involves the administration or receipt of FFEL
Program funds.
* * * * *
Third-party servicer. Any State or private, profit or nonprofit
organization or any individual that enters into a contract with a
lender or guaranty agency to administer, through either manual or
automated processing, any aspect of the lender's or guaranty agency's
FFEL programs 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 that governs the FFEL programs, including, any
applicable function described in the definition of third-party servicer
in 34 CFR part 668; originating, guaranteeing, monitoring, processing,
servicing, or collecting loans; claims submission; or billing for
interest benefits and special allowance.
* * * * *
(Authority: 8 U.S.C. 1101; 20 U.S.C. 1070 to 1087-2, 1088-1098,
1141; E.O. 12549 (3 CFR, 1986 Comp., p. 189), E.O. 12689 (3 CFR,
1989 Comp., p. 235))
47. Section 682.401 is amended by adding a new paragraph (b)(23) to
read as follows:
Sec. 682.401 Basic program agreement.
* * * * *
(b) * * *
(23) Third-party servicers. The guaranty agency may not enter into
a contract with a third-party servicer that the Secretary has
determined does not meet the financial and compliance standards under
Sec. 682.416. The guaranty agency shall provide the Secretary with the
name and address of any third-party servicer with which the agency
enters into a contract and, upon request by the Secretary, a copy of
that contract.
* * * * *
48. Section 682.413 is amended by revising paragraphs (a), (b),
(c), and (d) to read as follows:
Sec. 682.413 Remedial actions.
(a) (1) The Secretary requires a lender and its third-party
servicer administering any aspect of the FFEL programs under a contract
with the lender to repay interest benefits and special allowance or
other compensation received on a loan guaranteed by a guaranty agency,
pursuant to paragraph (a)(2) of this section--
(i) For any period beginning on the date of a failure by the lender
or servicer, with respect to the loan, to comply with any of the
requirements set forth in Sec. 682.406(a)(1)-(a)(6), (a)(9), and
(a)(12);
(ii) For any period beginning on the date of a failure by the
lender or servicer, with respect to the loan, to meet a condition of
guarantee coverage established by the guaranty agency, to the date, if
any, on which the guaranty agency reinstated the guarantee coverage
pursuant to policies and procedures established by the agency;
(iii) For any period in which the lender or servicer, with respect
to the loan, violates the requirements of subpart C of this part; and
(iv) For any period beginning on the day after the Secretary's
obligation to pay special allowance on the loan terminates under
Sec. 682.302(d).
(2) For purposes of this section, a lender and any applicable
third-party servicer shall be considered jointly and severally liable
for the repayment of any interest benefits and special allowance paid
as a result of a violation of applicable requirements by the servicer
in administering the lender's FFEL programs.
(3) For purposes of paragraph (a)(2) of this section, the relevant
third-party servicer shall repay any outstanding liabilities under
paragraph (a)(2) of this section only if--
(i) The Secretary has determined that the servicer is jointly and
severally liable for the liabilities; and
(ii) (A) The lender has not repaid in full the amount of the
liability within 30 days from the date the lender receives notice from
the Secretary of the liability;
(B) The lender has not made other satisfactory arrangements to pay
the amount of the liability within 30 days from the date the lender
receives notice from the Secretary of the liability; or
(C) The Secretary is unable to collect the liability from the
lender by offsetting the lender's bill to the Secretary for interest
benefits or special allowance, if--
(1) The bill is submitted after the 30 day period specified in
paragraph (a)(3)(ii)(A) of this section has passed; and
(2) The lender has not paid, or made satisfactory arrangements to
pay, the liability.
(b) The Secretary requires a guaranty agency to repay reinsurance
payments received on a loan if the lender, third-party servicer, if
applicable, or the agency failed to meet the requirements of
Sec. 682.406(a).
(c) (1) In addition to requiring repayment of reinsurance payments
pursuant to paragraph (b) of this section, the Secretary may take one
or more of the following remedial actions against a guaranty agency or
third-party servicer administering any aspect of the FFEL programs
under a contract with the guaranty agency, that makes an incomplete or
incorrect statement in connection with any agreement entered into under
this part or violates any applicable Federal requirement:
(i) Require the agency to return payments made by the Secretary to
the agency.
(ii) Withhold payments to the agency.
(iii) Limit the terms and conditions of the agency's continued
participation in the FFEL programs.
(iv) Suspend or terminate agreements with the agency.
(v) Impose a fine on the agency or servicer. For purposes of
assessing a fine on a third-party servicer, a repeated mechanical
systemic unintentional error shall be counted as one violation, unless
the servicer has been cited for a similar violation previously and had
failed to make the appropriate corrections to the system.
(vi) Require repayment from the agency and servicer pursuant to
paragraph (c)(2) of this section, of interest, special allowance, and
reinsurance paid on Consolidation loan amounts attributed to
Consolidation loans that violate Sec. 682.206(f)(1).
(vii) Require repayment from the agency or servicer, pursuant to
paragraph (c)(2) of this section, of any related payments that the
Secretary became obligated to make to others as a result of an
incomplete or incorrect statement or a violation of an applicable
Federal requirement.
(2) For purposes of this section, a guaranty agency and any
applicable third-party servicer shall be considered jointly and
severally liable for the repayment of any interest benefits, special
allowance, reinsurance paid, or other compensation on Consolidation
loan amounts attributed to Consolidation loans that violate
Sec. 682.206(f)(1) as a result of a violation by the servicer
administering any aspect of the FFEL programs under a contract with
that guaranty agency.
(3) For purposes of paragraph (c)(2) of this section, the relevant
third-party servicer shall repay any outstanding liabilities under
paragraph (c)(2) of this section only if--
(i) The Secretary has determined that the servicer is jointly and
severally liable for the liabilities; and
(ii) (A) The guaranty agency has not repaid in full the amount of
the liability within 30 days from the date the guaranty agency receives
notice from the Secretary of the liability;
(B) The guaranty agency has not made other satisfactory
arrangements to pay the amount of the liability within 30 days from the
date the guaranty agency receives notice from the Secretary of the
liability; or
(C) The Secretary is unable to collect the liability from the
guaranty agency by offsetting the guaranty agency's first reinsurance
claim to the Secretary, if--
(1) The claim is submitted after the 30-day period specified in
paragraph (c)(3)(ii)(A) of this section has passed; and
(2) The guaranty agency has not paid, or made satisfactory
arrangements to pay, the liability.
(d) (1) The Secretary follows the procedures described in 34 CFR
part 668, subpart G, applicable to fine proceedings against schools, in
imposing a fine against a lender, guaranty agency, or third-party
servicer. References to ``the institution'' in those regulations shall
be understood to mean the lender, guaranty agency, or third-party
servicer, as applicable, for this purpose.
(2) The Secretary also follows the provisions of section 432(g) of
the Act in imposing a fine against a guaranty agency or lender.
* * * * *
49. Section 682.414 is amended by revising paragraph (a)(1)(i) to
read as follows:
Sec. 682.414 Records, reports, and inspection requirements for
guaranty agency programs.
(a) Records. (1)(i) The guaranty agency shall maintain current,
complete, and accurate records of each loan that it holds, including,
but not limited to, the records described in paragraph (a)(1)(ii) of
this section. The records must be maintained in a system that allows
ready identification of each loan's current status, updated at least
once every 10 business days. Any reference to a guaranty agency under
this section includes a third-party servicer that administers any
aspect of the FFEL programs under a contract with the guaranty agency,
if applicable.
* * * * *
50. A new Sec. 682.416 is added to subpart D to read as follows:
Sec. 682.416 Requirements for third-party servicers and lenders
contracting with third-party servicers.
(a) Standards for administrative capability. A third-party servicer
is considered administratively responsible if it--
(1) Provides the services and administrative resources necessary to
fulfill its contract with a lender or guaranty agency, and conducts all
of its contractual obligations that apply to the FFEL programs in
accordance with FFEL programs regulations;
(2) Has business systems including combined automated and manual
systems, that are capable of meeting the requirements of part B of
Title IV of the Act and with the FFEL programs regulations; and
(3) Has adequate personnel who are knowledgeable about the FFEL
programs.
(b) Standards of financial responsibility. The Secretary applies
the provisions of 34 CFR 668.15(b) (1)-(4) and (6)-(9) to determine
that a third-party servicer is financially responsible under this part.
References to ``the institution'' in those provisions shall be
understood to mean the third-party servicer, for this purpose.
(c) Special review of third-party servicer. (1) The Secretary may
review a third-party servicer to determine that it meets the
administrative capability and financial responsibility standards in
this section.
(2) In response to a request from the Secretary, the servicer shall
provide evidence to demonstrate that it meets the administrative
capability and financial responsibility standards in this section.
(3) The servicer may also provide evidence of why administrative
action is unwarranted if it is unable to demonstrate that it meets the
standards of this section.
(4) Based on the review of the materials provided by the servicer,
the Secretary determines if the servicer meets the standards in this
part. If the servicer does not, the Secretary may initiate an
administrative proceeding under subpart G.
(d) Past performance of third-party servicer or persons affiliated
with servicer. Notwithstanding paragraphs (b) and (c) of this section,
a third-party servicer is not financially responsible if--
(1) (i) The servicer; its owner, majority shareholder, or chief
executive officer; any person employed by the servicer in a capacity
that involves the administration of a Title IV, HEA program or the
receipt of Title IV, HEA program funds; any person, entity, or officer
or employee of an entity with which the servicer contracts where that
person, entity, or officer or employee of the entity acts in a capacity
that involves the administration of a Title IV, HEA program or the
receipt of Title IV, HEA program funds has been convicted of, or has
pled nolo contendere or guilty to, a crime involving the acquisition,
use, or expenditure of Federal, State, or local government funds, or
has been administratively or judicially determined to have committed
fraud or any other material violation of law involving such funds,
unless--
(A) The funds that were fraudulently obtained, or criminally
acquired, used, or expended have been repaid to the United States, and
any related financial penalty has been paid;
(B) The persons who were convicted of, or pled nolo contendere or
guilty to, a crime involving the acquisition, use, or expenditure of
the funds are no longer incarcerated for that crime; and
(C) At least five years have elapsed from the date of the
conviction, nolo contendere plea, guilty plea, or administrative or
judicial determination; or
(ii) The servicer, or any principal or affiliate of the servicer
(as those terms are defined in 34 CFR part 85), is--
(A) Debarred or suspended under Executive Order (E.O.) 12549 (3
CFR, 1986 Comp., p. 189) or the Federal Acquisition Regulations (FAR),
48 CFR part 9, subpart 9.4; or
(B) Engaging in any activity that is a cause under 34 CFR 85.305 or
85.405 for debarment or suspension under E.O. 12549 (3 CFR, 1986 Comp.,
p. 189) or the FAR, 48 CFR part 9, subpart 9.4; and
(2) Upon learning of a conviction, plea, or administrative or
judicial determination described in paragraph (d)(1) of this section,
the servicer does not promptly remove the person, agency, or
organization from any involvement in the administration of the
servicer's participation in Title IV, HEA programs, including, as
applicable, the removal or elimination of any substantial control, as
determined under 34 CFR 668.15, over the servicer.
(e) Independent audits. (1) A third-party servicer shall arrange
for an independent audit of its administration of the FFELP loan
portfolio unless--
(i) The servicer contracts with only one lender or guaranty agency;
and
(ii) The audit of that lender's or guaranty agency's FFEL programs
involves every aspect of the servicer's administration of those FFEL
programs.
(2) The audit must--
(i) Examine the servicer's compliance with the Act and applicable
regulations;
(ii) Examine the servicer's financial management of its FFEL
program activities;
(iii) Be conducted in accordance with the standards for audits
issued by the United States General Accounting Office's (GAO's)
Standards for Audit of Governmental Organizations, Programs,
Activities, and Functions. (This publication is available from the
Superintendent of Documents, U.S. Government Printing Office,
Washington, DC 20402.) Procedures for audits are contained in an audit
guide developed by and available from the Office of Inspector General
of the Department of Education; and
(iv) Except for the initial audit, be conducted at least annually
and be submitted to the Secretary within six months of the end of the
audit period. The initial audit must be an annual audit of the
servicer's first full fiscal year beginning on or after July 1, 1994,
and include any period from the beginning of the first full fiscal
year. The audit report must be submitted to the Secretary within six
months of the end of the audit period. Each subsequent audit must cover
the servicer's activities for the one-year period beginning no later
than the end of the period covered by the preceding audit.
(3) With regard to a third-party servicer that is a governmental
entity, the audit required by this paragraph must be conducted in
accordance with 31 U.S.C. 7502 and 34 CFR part 80, Appendix G.
(4) With regard to a third-party servicer that is a nonprofit
organization, the audit required by this paragraph must be conducted in
accordance with Office of Management and Budget (OMB) Circular A-133,
``Audit of Institutions of Higher Education and Other Nonprofit
Institutions,'' as incorporated in 34 CFR 74.61(h)(3).
(f) Contract responsibilities. A lender that participates in the
FFEL programs may not enter into a contract with a third-party servicer
that the Secretary has determined does not meet the requirements of
this section. The lender must provide the Secretary with the name and
address of any third-party servicer with which the lender enters into a
contract and, upon request by the Secretary, a copy of that contract. A
third-party servicer that is under contract with a lender to perform
any activity for which the records in Sec. 682.414(a)(3)(ii) are
relevant to perform the services for which the servicer has contracted
shall maintain current, complete, and accurate records pertaining to
each loan that the servicer is under contract to administer on behalf
of the lender. The records must be maintained in a system that allows
ready identification of each loan's current status.
(Authority: 20 U.S.C. 1078, 1078-1, 1078-2, 1078-3, 1082; E.O. 12549
(3 CFR, 1986 Comp., p. 189), 12689 (3 CFR, 1989 Comp., p. 235))
Subpart G--Limitation, Suspension, or Termination of Lender or
Third-party Servicer Eligibility and Disqualification of Lenders
and Schools
51. The title of subpart G is revised to read as set forth above.
52. Section 682.700 is amended by revising paragraphs (a) and
(b)(1) to read as follows:
Sec. 682.700 Purpose and scope.
(a) This subpart governs the limitation, suspension, or termination
by the Secretary of the eligibility of an otherwise eligible lender to
participate in the FFEL programs or the eligibility of a third-party
servicer to enter into a contract with an eligible lender to administer
any aspect of the lender's FFEL programs. The regulations in this
subpart apply to a lender or third-party servicer that violates any
statutory provision governing the FFEL programs or any regulations,
special arrangements, agreements, or limitations entered into under the
authority of statutes applicable to Title IV of the HEA prescribed
under the FFEL programs. These regulations apply to lenders that
participate only in a guaranty agency program, lenders that participate
in the FFEL programs, and third-party servicers that administer aspects
of a lender's FFELP portfolio. These regulations also govern the
Secretary's disqualification of a lender or school from participation
in the FFEL programs under section 432(h)(2) and (h)(3) of the Act.
(b) * * *
(1) (i) To a determination that an organization fails to meet the
definition of ``eligible lender'' in section 435(d)(1) of the Act or
the definition of ``lender'' in Sec. 682.200, for any reason other than
a violation of the prohibitions in section 435(d)(5) of the Act; or
(ii) To a determination that an organization fails to meet the
standards in Sec. 682.416;
* * * * *
53. Section 682.701 is amended by revising the definitions of
Limitation, Suspension, and Termination to read as follows:
Sec. 682.701 Definitions of terms used in this subpart.
* * * * *
Limitation. The continuation of a lender's or third-party
servicer's eligibility subject to compliance with special conditions
established by agreement with the Secretary or a guaranty agency, as
applicable, or imposed as the result of a limitation or termination
proceeding.
Suspension. The removal of a lender's eligibility, or a third-party
servicer's eligibility to contract with a lender or guaranty agency,
for a specified period of time or until the lender or servicer fulfills
certain requirements.
Termination. (1) The removal of a lender's eligibility for an
indefinite period of time--
(i) By a guaranty agency; or
(ii) By the Secretary, based on an action taken by the Secretary,
or a designated Departmental official under Sec. 682.706; or
(2) The removal of a third-party servicer's eligibility to contract
with a lender or guaranty agency for an indefinite period of time by
the Secretary based on an action taken by the Secretary, or a
designated Departmental official under Sec. 682.706.
(Authority: 20 U.S.C. 1080, 1082, 1085, 1094)
54. Section 682.702 is amended by redesignating paragraph (c) as
paragraph (d); adding a new paragraph (c); and removing ``(c)'' in
paragraph (a) and adding, in its place ``(d)'' to read as follows:
Sec. 682.702 Effect on participation.
* * * * *
(c) A limitation imposes on a third-party servicer--
(1) A limit on the number of loans or accounts or total amount of
loans that the servicer may service;
(2) A limit on the number of loans or accounts or total amount of
loans that the servicer is administering under its contract with a
lender or guaranty agency; or
(3) Other reasonable requirements or conditions, including those
described in Sec. 682.709.
* * * * *
55. Section 682.703 is amended by revising paragraph (a) and
paragraph (b) introductory text to read as follows:
Sec. 682.703 Informal compliance procedure.
(a) The Secretary may use the informal compliance procedure in
paragraph (b) of this section if the Secretary receives a complaint or
other reliable information indicating that a lender or third-party
servicer may be in violation of applicable laws, regulations, special
arrangements, agreements, or limitations entered into under the
authority of statutes applicable to Title IV of the HEA.
(b) Under the informal compliance procedure, the Secretary gives
the lender or servicer a reasonable opportunity to--
* * * * *
56. Section 682.704 is amended by revising paragraphs (a)(1), (b),
(c), and (d)(2)(ii) to read as follows:
Sec. 682.704 Emergency action.
(a) * * *
(1) Receives reliable information that the lender or a third-party
servicer with which the lender contracts is in violation of applicable
laws, regulations, special arrangements, agreements, or limitations
entered into under the authority of statutes applicable to Title IV of
the HEA pertaining to the lender's portfolio of loans;
* * * * *
(b) The Secretary begins an emergency action by notifying the
lender or third-party servicer, by certified mail, return receipt
requested, of the action and the basis for the action.
(c) The action becomes effective on the date the notice is mailed
to the lender or third-party servicer.
(d) * * *
(2) * * *
(ii) Upon the written request of the lender or third-party
servicer, the Secretary may provide the lender or servicer with an
opportunity to demonstrate that the emergency action is unwarranted.
(Authority: 20 U.S.C. 1080, 1082, 1085, 1094)
57. Section 682.705 is revised to read as follows:
Sec. 682.705 Suspension proceedings.
(a) Scope. (1) A suspension by the Secretary removes a lender's
eligibility under the FFEL programs or a third-party servicer's ability
to enter into contracts with eligible lenders, and the Secretary does
not guarantee or reinsure a new loan made by the lender or new loan
serviced by the servicer during a period not to exceed 60 days from the
date the suspension becomes effective, unless--
(i) The lender or servicer and the Secretary agree to an extension
of the suspension period, if the lender or third-party servicer has not
requested a hearing; or
(ii) The Secretary begins a limitation or a termination proceeding.
(2) If the Secretary begins a limitation or a termination
proceeding before the suspension period ends, the Secretary may extend
the suspension period until the completion of that proceeding,
including any appeal to the Secretary.
(b) Notice. (1) The Secretary, or a designated Departmental
official, begins a suspension proceeding by sending the lender or
servicer a notice by certified mail with return receipt requested.
(2) The notice--
(i) Informs the lender or servicer of the Secretary's intent to
suspend the lender's or servicer's eligibility for a period not to
exceed 60 days;
(ii) Describes the consequences of a suspension;
(iii) Identifies the alleged violations on which the proposed
suspension is based;
(iv) States the proposed date the suspension becomes effective,
which is at least 20 days after the date of mailing of the notice;
(v) Informs the lender or servicer that the suspension will not
take effect on the proposed date, except as provided in paragraph
(c)(8) of this section, if the Secretary receives at least five days
prior to that date a request for an oral hearing or written material
showing why the suspension should not take effect; and
(vi) Asks the lender or servicer to correct voluntarily any alleged
violations.
(c) Hearing. (1) If the lender or servicer does not request an oral
hearing but submits written material, the Secretary, or a designated
Departmental official, considers the material and--
(i) Dismisses the proposed suspension; or
(ii) Determines that the proposed suspension should be implemented
and notifies the lender or servicer of the effective date of the
suspension.
(2) If the lender or servicer requests an oral hearing within the
time specified in paragraph (b)(2)(v) of this section, the Secretary
schedules the date and place of the hearing. The date is at least 15
days after receipt of the request from the lender or servicer. No
proposed suspension takes effect until a hearing is held.
(3) The oral hearing is conducted by a presiding officer who--
(i) Ensures that a written record of the hearing is made;
(ii) Considers relevant written material presented before the
hearing and other relevant evidence presented during the hearing; and
(iii) Issues a decision based on findings of fact and conclusions
of law that may suspend the lender's or servicer's eligibility only if
the presiding officer is persuaded that the suspension is warranted by
the evidence.
(4) The formal rules of evidence do not apply, and no discovery, as
provided in the Federal Rules of Civil Procedure, (28 U.S.C. Appendix)
is required.
(5) The presiding officer shall base findings of fact only on
evidence considered at or before the hearing and matters given official
notice.
(6) The initial decision of the presiding officer is mailed to the
lender or servicer.
(7) The Secretary automatically reviews the initial decision of the
presiding officer. The Secretary notifies the lender or servicer of the
Secretary's decision by mail.
(8) A suspension takes effect on either a date that is at least 20
days after the date the notice of a decision imposing the suspension is
mailed to the lender or servicer, or on the proposed effective date
stated in the notice sent under paragraph (b) of this section,
whichever is later.
(Authority: 20 U.S.C. 1080, 1082, 1085, 1094)
58. Section 682.706 is revised to read as follows:
Sec. 682.706 Limitation or termination proceedings.
(a) Notice. (1) The Secretary, or a designated Departmental
official, begins a limitation or termination proceeding, whether a
suspension proceeding has begun, by sending the lender or third-party
servicer a notice by certified mail with return receipt requested.
(2) The notice--
(i) Informs the lender or servicer of the Secretary's intent to
limit or terminate the lender's or servicer's eligibility;
(ii) Describes the consequences of a limitation or termination;
(iii) Identifies the alleged violations on which the proposed
limitation or termination is based;
(iv) States the limits which may be imposed, in the case of a
limitation proceeding;
(v) States the proposed date the limitation or termination becomes
effective, which is at least 20 days after the date of mailing of the
notice;
(vi) Informs the lender or servicer that the limitation or
termination will not take effect on the proposed date if the Secretary
receives, at least five days prior to that date, a request for an oral
hearing or written material showing why the limitation or termination
should not take effect;
(vii) Asks the lender or servicer to correct voluntarily any
alleged violations; and
(viii) Notifies the lender or servicer that the Secretary may
collect any amount owed by means of offset against amounts owed to the
lender by the Department and other Federal agencies.
(b) Hearing. (1) If the lender or servicer does not request an oral
hearing but submits written material, the Secretary, or a designated
Departmental official, considers the material and--
(i) Dismisses the proposed limitation or termination; or
(ii) Notifies the lender or servicer of the date the limitation or
termination becomes effective.
(2) If the lender or servicer requests a hearing within the time
specified in paragraph (a)(2)(vi) of this section, the Secretary
schedules the date and place of the hearing. The date is at least 15
days after receipt of the request from the lender or servicer. No
proposed limitation or termination takes effect until a hearing is
held.
(3) The hearing is conducted by a presiding officer who--
(i) Ensures that a written record of the hearing is made;
(ii) Considers relevant written material presented before the
hearing and other relevant evidence presented during the hearing; and
(iii) Issues an initial decision, based on findings of fact and
conclusions of law, that may limit or terminate the lender's or
servicer's eligibility if the presiding officer is persuaded that the
limitation or termination is warranted by the evidence.
(4) The formal rules of evidence do not apply, and no discovery, as
provided in the Federal Rules of Civil Procedure (28 U.S.C. appendix),
is required.
(5) The presiding officer shall base findings of fact only on
evidence presented at or before the hearing and matters given official
notice.
(6) If a termination action is brought against a lender or third-
party servicer and the presiding officer concludes that a limitation is
more appropriate, the presiding officer may issue a decision imposing
one or more limitations on a lender or third-party servicer rather than
terminating the lender's or servicer's eligibility.
(7) The initial decision of the presiding officer is mailed to the
lender or servicer.
(8) Any time schedule specified in this section may be shortened
with the approval of the presiding officer and the consent of the
lender or servicer and the Secretary or designated Departmental
official.
(9) The presiding officer's initial decision automatically becomes
the Secretary's final decision 20 days after it is issued and received
by both parties unless the lender, servicer, or designated Departmental
official appeals the decision to the Secretary within this period.
(c) Notwithstanding the other provisions of this section, if a
lender or a lender's owner or officer or third-party servicer or
servicer's owner or officer, respectively, is convicted of or pled nolo
contendere or guilty to a crime involving the unlawful acquisition,
use, or expenditure of FFEL program funds, that conviction or guilty
plea is grounds for terminating the lender's or servicer's eligibility,
respectively, to participate in the FFEL programs.
(Authority: 20 U.S.C. 1080, 1082, 1085, 1094)
59. Section 682.707 is amended by revising paragraphs (a)
introductory text and (d) to read as follows:
Sec. 682.707 Appeals in a limitation or termination proceeding.
(a) If the lender, third-party servicer, or designated Departmental
official appeals the initial decision of the presiding officer in
accordance with Sec. 682.706(b)(9)--
* * * * *
(d) If the presiding officer's initial decision would limit or
terminate the lender's or servicer's eligibility, it does not take
effect pending the appeal unless the Secretary determines that a stay
of the date it becomes effective would seriously and adversely affect
the FFEL programs or student or parent borrowers.
(Authority: 20 U.S.C. 1080, 1082, 1085, 1094)
60. Section 682.708 is amended by revising paragraph (b) to read as
follows:
Sec. 682.708 Evidence of mailing and receipt dates.
* * * * *
(b) If a lender or third-party servicer refuses to accept a notice
mailed under this subpart, the Secretary considers the notice as being
received on the date that the lender or servicer refuses to accept the
notice.
(Authority: 20 U.S.C. 1080, 1082, 1085, 1094)
61. Section 682.709 is revised to read as follows:
Sec. 682.709 Reimbursements, refunds, and offsets.
(a) As part of a limitation or termination proceeding, the
Secretary, or a designated Departmental official, may require a lender
or third-party servicer to take reasonable corrective action to remedy
a violation of applicable laws, regulations, special arrangements,
agreements, or limitations entered into under the authority of statutes
applicable to Title IV of the HEA.
(b) The corrective action may include payment to the Secretary or
recipients designated by the Secretary of any funds, and any interest
thereon, that the lender, or, in the case of a third-party servicer,
the servicer or the lender that has a contract with a third-party
servicer, improperly received, withheld, disbursed, or caused to be
disbursed. A third-party servicer may be held liable up to the amounts
specified in Sec. 682.413(a)(2).
(c) If a final decision requires a lender, a lender that has a
contract with a third-party servicer, or a third-party servicer to
reimburse or make any payment to the Secretary, the Secretary may,
without further notice or opportunity for a hearing, proceed to offset
or arrange for another Federal agency to offset the amount due against
any interest benefits, special allowance, or other payments due to the
lender, the lender that has a contract with the third-party servicer,
or the third-party servicer. A third-party servicer may be held liable
up to the amounts specified in Sec. 682.413(a)(2).
(Authority: 20 U.S.C. 1080, 1082, 1094)
62. Section 682.710 is amended by revising paragraphs (a), (b), and
(d) to read as follows:
Sec. 682.710 Removal of limitation.
(a) A lender or third-party servicer may request removal of a
limitation imposed by the Secretary in accordance with the regulations
in this subpart at any time more than 12 months after the date the
limitation becomes effective.
(b) The request must be in writing and must show that the lender or
servicer has corrected any violations on which the limitation was
based.
* * * * *
(d)(1) If the Secretary denies the request or establishes other
limitations, the lender or servicer, upon request, is given an
opportunity to show why all limitations should be removed.
(2) A lender or third-party servicer may continue to participate in
the FFEL programs, subject to any limitation imposed by the Secretary
under paragraph (c)(3) of this section, pending a decision by the
Secretary on a request under paragraph (d)(1) of this section.
(Authority: 20 U.S.C. 1080, 1082, 1085, 1094)
63. Section 682.711 is amended by revising paragraphs (a), (b)(1),
(b)(2), (e), and the authority citation following the section to read
as follows:
Sec. 682.711 Reinstatement after termination.
(a) A lender or third-party servicer whose eligibility has been
terminated by the Secretary in accordance with the regulations in this
subpart may request reinstatement of its eligibility at any time more
than 18 months after the date the termination becomes effective.
(b) * * *
(1) The lender or servicer has corrected any violations on which
the termination was based; and
(2) The lender or servicer meets all requirements for eligibility.
* * * * *
(e) (1) If the Secretary denies the lender's or servicer's request
or allows reinstatement subject to limitations, the lender or servicer,
upon request, is given an opportunity to show why its eligibility
should be reinstated and all limitations removed.
(2) A lender or third-party servicer whose eligibility to
participate in the FFEL programs is reinstated subject to limitations
imposed by the Secretary pursuant to paragraph (d)(3) of this section,
may participate in those programs, subject to those limitations,
pending a decision by the Secretary on a request under paragraph (e)(1)
of this section.
(Authority: 20 U.S.C. 1080, 1082, 1085, 1094)
* * * * *
PART 690--FEDERAL PELL GRANT PROGRAM
64. The heading for part 690 is revised to read as set forth above.
65. The authority citation for part 690 continues to read as
follows:
Authority: 20 U.S.C. 1070a through 1070a-6, unless otherwise
noted.
66. Section 690.83 is amended by adding a new paragraph (e) to read
as follows:
Sec. 690.83 Submission of reports.
* * * * *
(e) (1) Notwithstanding paragraph (a), (b), (c) (1) or (2), or (d)
of this section, if an institution demonstrates to the satisfaction of
the Secretary that the institution has provided Federal Pell Grants in
accordance with this part but has not received credit or payment for
those grants, the institution may receive payment or a reduction in
accountability for those grants in accordance with paragraph (e) of
this section.
(2) The institution must demonstrate that it qualifies for a credit
or payment by means of a finding contained in an audit report as
initially submitted to the Department that was conducted after December
31, 1988 and timely submitted in accordance with 34 CFR 668.23(c), with
respect to grants made during the period of that audit.
(3) In determining whether the institution qualifies for a payment
or reduction in accountability, the Secretary takes into account any
liabilities of the institution arising from that audit or any other
source. The Secretary collects those liabilities by offset in
accordance with 34 CFR part 30.
(Authority: 20 U.S.C. 1070a, 1094, 1226a-1)
[FR Doc. 94-10140 Filed 4-28-94; 8:45 am]
BILLING CODE 4000-01-P
