# Federal Student Aid Programs > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A02-27627 ## Record - **Collection:** Federal Register - **Document type:** Rule - **Published:** November 1, 2002 - **Citation:** 67 FR 67048 ## Text DEPARTMENT OF EDUCATION 34 CFR Parts 600, 668, 673, 674, 675, 682, 685, 690, and 694 RIN 1845-AA23 Federal Student Aid Programs AGENCY: Office of Postsecondary Education, Department of Education. ACTION: Final regulations. SUMMARY: The Secretary amends the Institutional Eligibility Under the Higher Education Act of 1965, as Amended; Student Assistance General Provisions; General Provisions for the Federal Perkins Loan Program, Federal Work-Study Program, and Federal Supplemental Educational Opportunity Grant Program; Federal Perkins Loan (Perkins Loan) Program; Federal Work-Study (FWS) Programs; Federal Family Education Loan (FFEL) Program; William D. Ford Federal Direct Loan (Direct Loan) Program; Federal Pell Grant Program; and Gaining Early Awareness and Readiness for Undergraduate Programs (GEAR UP) regulations. The Secretary is amending these regulations to reduce administrative burden for program participants, and to provide them with greater flexibility to serve students and borrowers. DATES: Effective Date: Except for the amendment to section 694.10, these regulations are effective July 1, 2003. The amendment to section 694.10 becomes effective December 2, 2002. Implementation Date: The Secretary has determined, in accordance with section 482(c)(2)(A) of the Higher Education Act of 1965, as amended (HEA) (20 U.S.C. 1089(c)(2)(A)), that institutions, lenders, guaranty agencies, and state grant agencies that administer Title IV, HEA programs may, at their discretion, choose to implement all of the provisions of these final rules on or after November 1, 2002. For further information, see “Implementation Date of These Regulations” under the SUPPLEMENTARY INFORMATION section of this preamble. FOR FURTHER INFORMATION CONTACT: For provisions related to the Title IV loan programs (Perkins Loan Program, FFEL Program, and Direct Loan Program): Ms. Gail McLarnon, U.S. Department of Education, 1990 K Street, NW, (8th Floor) Washington, DC 20006, Telephone: (202) 219-7048 or via the Internet: Gail.McLarnon@ed.gov. For other provisions: Ms. Wendy Macias, U.S. Department of Education, 1990 K Street, NW, (8th Floor), Washington, DC, 20006, Telephone: (202) 502-7526 or via the Internet: Wendy.Macias@ed.gov. If you use a telecommunications device for the deaf (TDD), you may call the Federal Information Relay Service (FIRS) at 1-800-877-8339. Individuals with disabilities may obtain this document in an alternative format ( e.g. , Braille, large print, audiotape, or computer diskette) on request to the contact person listed under FOR FURTHER INFORMATION CONTACT. SUPPLEMENTARY INFORMATION: On August 6, 2002, and August 8, 2002, the Secretary published in the Federal Register two separate notices of proposed rulemaking (NPRMs) (67 FR 51036 and 67 FR 51718, respectively) for the Federal student assistance programs authorized by Title IV of the HEA. This document contains the final regulations for the rules that were proposed in both of these NPRMs. The August 6, 2002 NPRM included proposed rules for the Student Assistance General Provisions, Perkins Loan Program, FFEL Program, and Direct Loan Program regulations. In the preamble to the August 6, 2002 NPRM, the Secretary discussed on pages 51037 through 51046 the major changes proposed to improve the Federal student assistance programs. These included the following: • Amending § 668.35 to state the conditions under which a borrower who is subject to a judgment obtained on a Title IV loan may regain eligibility for additional Title IV student financial assistance. [page 51037] • Amending §§ 674.39, 682.405, and 685.211 to exclude from rehabilitation defaulted Perkins Loan, FFEL, and Direct Loan program loans on which a judgment has been obtained. [page 51037] • Amending §§ 674.19, 682.402, and 682.414 to clarify the record retention requirements for promissory notes under the Perkins Loan and FFEL programs. [page 51038] • Amending §§ 674.34, 682.210, and, by reference, 685.204, to modify the way loan holders in the Perkins Loan, FFEL, and Direct Loan programs calculate Federal postsecondary educational loan debt for purposes of determining a borrower's eligibility for an economic hardship deferment. [page 51039] • Amending §§ 674.42, 682.604, and 685.304 to clarify that entities other than the institution may provide initial and exit loan counseling on the institution's behalf and to provide consistency in the information that must be disclosed to borrowers. [page 51039] • Amending §§ 682.204 and 685.203 to clarify loan limits for separate stand-alone programs in the FFEL and Direct Loan programs. [page 51039] • Amending § 682.210 and, by reference, § 685.204 to make it easier for borrowers in the FFEL and Direct Loan programs to certify eligibility for an unemployment deferment. [page 51040] • Amending §§ 682.402, 685.212, and 685.220 to expand the instances where FFEL and Direct Loan program borrowers can have a portion of a consolidation loan discharged. [page 51040] • Amending §§ 674.2 and 674.16 to provide for the use of a Master Promissory Note (MPN) in the Perkins Loan Program. [page 51041] • Amending §§ 674.9 and 674.47 to modify the low-balance write-off options for institutions that participate in the Perkins Loan Program. [page 51042] • Amending § 674.17 to clarify that when an institution participating in the Perkins Loan Program closes, or otherwise leaves the program, that institution must assign its outstanding loans to the Secretary and liquidate its Perkins Loan fund according to the Secretary's instructions. [page 51042] • Amending §§ 674.33 and 674.42 to clarify the conditions under which an institution must coordinate minimum repayment options when a Perkins Loan borrower has received loans from more than one institution. [page 51042] • Amending § 674.42 to provide flexibility to institutions that participate in the Perkins Loan Program in providing copies of promissory notes to borrowers. [page 51042] • Amending § 674.43 to provide institutions increased flexibility in assessing late fees in the Perkins Loan Program. [page 51043] • Amending § 674.45 to clarify when an institution that participates in the Perkins Loan Program must report a defaulted account to a national credit bureau. [page 51043] • Amending § 674.46 to simplify the requirements for an institution that participates in the Perkins Loan Program to determine if it should initiate litigation against a defaulted borrower. [page 51043] • Amending § 674.50 to provide consistency within the regulations for the assignment to the Secretary of Perkins loans. [page 51043] • Amending § 682.200 to revise the definition of lender to clarify the treatment of loans held by trustee lenders. [page 51044] • Amending § 682.209 to allow an FFEL lender to establish a borrower's first payment due date up to 60 days after the borrower enters repayment, to provide increased flexibility to FFEL lenders when they receive updates to a borrower's enrollment status from an institution, and to provide a simplified method for a borrower in the FFEL Program to ask a lender to increase the length of the repayment period. [page 51044] • Amending § 682.211 to simplify the process by which a lender and a borrower in the FFEL Program may agree to a discretionary forbearance. [page 51044] • Amending § 682.402 to clarify that a State guaranty agency is not required to file a proof of claim in a bankruptcy filing and may instruct lenders not to file a proof of claim if filing a proof of claim would waive the State's sovereign immunity. [page 51045] • Amending § 682.402 to provide that a guaranty agency may take up to 90 days to review a total and permanent disability discharge claim under the FFEL Program. [page 51045] • Amending §§ 668.183 and 668.193 to revise, for purposes of calculating an institution's cohort default rate, the definition of a defaulted loan. [page 51045] • Amending § 685.102 to modify the provisions governing the expiration of a Master Promissory Note in the Direct Loan Program. [page 51046] The August 8, 2002 NPRM included proposed rules for the Institutional Eligibility Under the Higher Education Act of 1965, as Amended; Student Assistance General Provisions; General Provisions for the Federal Perkins Loan Program, Federal Work-Study Program, and Federal Supplemental Educational Opportunity Grant Program; FWS Programs; FFEL Program; Direct Loan Program; Federal Pell Grant Program; and GEAR UP regulations. In the preamble to the August 8, 2002 NPRM, the Secretary discussed on pages 51720 through 51733 the major changes proposed to improve the Federal student assistance programs. These included the following: • Amending § 600.8 to reflect that the statutory provision that a branch campus must be in existence for two years before seeking to be designated as a main campus applies only to proprietary institutions of higher education and postsecondary vocational institutions. [page 51720] • Amending §§ 600.21, 600.31, and 668.174 to provide clarification and additional flexibility to the change of ownership provisions by expanding the definition of family members and broadening the transactions that are not considered to be a change of ownership. [page 51720] • Amending §§ 668.2, 668.3, and 668.8 to remove the so-called “12-hour” rule that defined a week of instructional time for credit hour nonterm and nonstandard term educational programs. [page 51720] • Amending §§ 668.4, 682.603, 685.301, and 690.75 to revise the definition of payment period for credit hour nonterm educational programs and to clarify the definition of a payment period when a student withdraws and then returns to school. [page 51721] • Amending § 668.14 to clarify the statutory program participation agreement provision concerning incentive payment restrictions. [page 51722] • Amending § 668.22 to clarify when an institution is considered to be one that is required to take attendance for purposes of determining a student's last date of attendance. [page 51725] • Amending § 668.22 to simplify the definition of a leave of absence and to allow for multiple leaves of absence not to exceed 180 days in any 12-month period. [page 51726] • Amending §§ 668.35, 673.5, and 690.79 to provide consistent requirements for handling Title IV overpayments, including a provision under which, in most cases, a student who owes an overpayment of a Title IV grant or loan of less than $25 does not lose eligibility for additional Title IV aid. [page 51726] • Amending §§ 668.32 and 668.151 to eliminate the provision that limits the duration of a passing score on an approved ability-to-benefit (ATB) test to 12 months before a student initially receives Title IV aid. [page 51728] • Amending § 668.164 to clarify when an institution is required to make a late disbursement and to provide increased flexibility for an institution to make a late disbursement to a student. [page 51728] • Amending § 668.165 to eliminate the requirement that an institution must confirm the receipt of a notice sent electronically to a student or parent. [page 51730] • Amending §§ 668.171 and 668.173 to establish clear requirements for returning unearned Title IV program funds and the conditions under which an institution must submit a letter of credit if it does not return those funds in a timely manner. [page 51730] • Amending §§ 675.2 and 675.21 to provide greater flexibility for the employment of FWS students by proprietary institutions. [page 51731] • Amending § 694.10 to remove language in the GEAR UP regulations related to the packaging of GEAR UP scholarships by institutions. [page 51732] We strongly encourage the reader to refer to the preambles of both the August 6, 2002, and August 8, 2002, NPRMs for a full discussion of the topics proposed in those NPRMs and finalized in this document. These final regulations contain a few changes from the NPRMs. We fully explain these changes in the Analysis of Comments and Changes elsewhere in this preamble. Implementation Date of These Regulations Section 482(c) of the HEA requires that regulations affecting programs under Title IV of the HEA be published in final form by November 1 prior to the start of the award year (July 1) to which they apply. However, that section also permits the Secretary to designate any regulation as one that an entity subject to the regulation may choose to implement earlier and the conditions under which the entity may implement the provisions early. Note: Section 482 does not apply to the GEAR UP program (34 CFR part 694). In response to our request in the NPRMs for suggestions on which provisions the Secretary should designate for early implementation, most of the commenters supported making all of the provisions available for early implementation at the discretion of the regulated entity. Therefore, consistent with the intent of this regulatory effort to reduce burden and to provide greater flexibility, the Secretary is using the authority granted him under section 482(c) to designate all of the regulations subject to that section included in this document for early implementation at the discretion of each institution, lender, guaranty agency, or state agency, as appropriate. In accordance with the authority provided by section 482(c) of the HEA, the Secretary has determined that for some provisions, there are conditions that must be met in order for an institution, lender, guaranty agency, or state agency, as appropriate, to implement those provisions early. The conditions are— Provision: Sections 674.34 and 682.210 that modify the formula used by Title IV loan holders when calculating a borrower's eligibility for an economic hardship deferment. Condition: Until the Secretary has announced the approval of revised deferment forms, loan holders must provide alternative methods by which borrowers provide them with the loan detail information needed to perform the calculation using the modified formula. Provision: Section 682.210 that modifies the information that a borrower must provide to a loan holder when requesting an unemployment deferment. Condition: Until the Secretary has announced the approval of a revised deferment form, loan holders must provide alternative methods by which borrowers certify their eligibility for an unemployment deferment under the revised rules. Provision: Sections 674.2 and 674.16 that provide for a Master Promissory Note (MPN) in the Federal Perkins Loan Program. Condition: Implementation cannot occur until the Secretary has announced the approval of the Perkins MPN. Provision: Section 668.22 that clarifies when an institution is considered to be one that is required to take attendance. Condition: An institution must apply these provisions to all students who withdraw on or after the institution's implementation of these regulations. Provision: Section 668.22 that provides increased flexibility in the granting of leaves of absence under the Return of Title IV Funds regulations. Condition: An institution must apply these provisions to all students who are granted a leave of absence on or after the institution's implementation of these regulations. Analysis of Comments and Changes The regulations in this document were developed through the use of negotiated rulemaking. Section 492 of the HEA requires that, before publishing any proposed regulations to implement programs under Title IV of the HEA, the Secretary obtain public involvement in the development of the proposed regulations. After obtaining advice and recommendations, the Secretary must conduct a negotiated rulemaking process to develop the proposed regulations. All proposed regulations must conform to agreements resulting from the negotiated rulemaking process unless the Secretary reopens that process or explains any departure from the agreements to the negotiated rulemaking participants. These regulations were published in proposed form on August 6, 2002, and on August 8, 2002, following the completion of the negotiated rulemaking process. The Secretary invited comments on the proposed regulations by October 7 for both NPRMs. We received 32 comments on the August 6, 2002 NPRM and 55 comments on the August 8, 2002 NPRM. In addition to their general support of our efforts to simplify the regulations and to reduce regulatory burden on students, borrowers, institutions, lenders, and guaranty agencies, the overwhelming majority of the commenters on both NPRMs also expressed support for the individual proposals included in the NPRMs. We also received several comments on changes in the negotiated rulemaking process. Most of the commenters expressed appreciation to the Department of Education (Department) for the new scope and structure of the negotiated rulemaking process. Some commenters, however, felt that the Department should have included representatives of certain other organizations in the negotiations, but did not question the constituencies identified. Other commenters expressed the view that the Department should have excluded—and should exclude from future negotiations—individuals or groups that failed to negotiate in good faith and blocked consensus. We note that all organizations had an opportunity to submit institutional nominees and to form coalitions within the constituency groups identified and all nominations were carefully considered to achieve a balanced product. In creating the negotiating committees, the Department encouraged nominations of individuals from coalitions of individuals and organizations representing the constituencies. Moreover, the Department encouraged nominations of individuals who are actively involved in administering the Federal student financial assistance programs or whose interests are significantly affected by the regulations. We, and most of the commenters, believe that the Department was successful in assuring that individuals directly involved in administering the Federal student financial assistance programs appropriately represented the constituencies. In structuring future negotiations, however, the Department will take the comments received into consideration. An analysis of the comments and of the changes in the regulations since publication of the NPRMs follows. We group major issues according to subject, with appropriate sections of the regulations referenced in parentheses. Generally, we do not address technical and other minor changes—and suggested changes the law does not authorize the Secretary to make. Change of Ownership (Sections 600.21, 600.31, and 668.174) Comments: One commenter requested that the preamble discussion clarify that a transfer by an owner to a family member does not require the family member acquiring the institution to have previously worked there. Discussion: The commenter is correct that the exception does not require a family member of the owner to have worked at the institution. Changes: None. Definition of Academic Year—“12-Hour Rule” (Sections 668.2, 668.3, and 668.8) Comments: Most of the comments we received supported the proposed change that would eliminate the so-called “12-hour” rule for determining a week of instructional time for credit hour nonterm and nonstandard term educational programs. Most commenters were very supportive of the proposal to use a single standard for all educational programs by extending the current “one-day” rule used for term-based and clock hour programs to credit hour nonterm and nonstandard term programs. One commenter specifically noted that the 12-hour rule acted as an impediment to increasing access to higher education. Others noted that the 12-hour rule was at odds with the educational advantages that flexible program calendars and formats, including web-based programs, provide to working adults. Two commenters noted that the Web-based Education Commission, chartered by the Higher Education Amendments of 1998, called for the elimination of the 12-hour rule. Another commenter noted that the House of Representatives' Committee on Education and the Workforce called the 12-hour rule “outdated and obsolete.” Finally, a commenter, in support of the proposed change, agreed that the 12-hour rule sometimes results in disparities in the amount of Title IV, HEA program funding that students receive for the same amount of academic credit. Discussion: We appreciate the commenters' support. Changes: None. Comments: A number of commenters expressed concern with the proposal or requested that we not proceed with this change to the regulations. None of these commenters suggested alternatives or modifications to the proposal that was included in the NPRM. Several commenters suggested that the issue should await the reauthorization of the HEA, so that Congress could consider it in conjunction with other issues related to distance and other nontraditional modes of instruction. One commenter noted that an independent study of the use of the credit hour in postsecondary education was being undertaken and that the results of that study could help inform Congress on this and related issues. One commenter specifically stated that Congress should address issues of cost of attendance and disbursement schedules for students enrolled in nontraditional programs. Discussion: We created the one-day rule and the 12-hour rule to implement the statutory condition that an academic year consist of at least 30 weeks of instructional time. We believe that the 12-hour rule had many unintended consequences and believe that one single standard is preferable for the reasons we stated in the preamble to the August 8, 2002 NPRM. Since the original establishment of the rule was a regulatory action, we believe that it does not require any legislative action. Therefore, we see no need to wait for Congress to deal with this issue in the next reauthorization of the HEA. This change will allow Title IV, HEA program eligibility to be determined on the same basis regardless of how a student's academic program is structured. Thus it provides for consistent and equitable treatment for individuals seeking a postsecondary education. We note that nothing prevents Congress from taking further action on this or any other issue. Finally, we do not see the change to the one-day rule from the 12-hour rule as having any effect on how Congress should address issues of cost of attendance and disbursements in nontraditional programs. Changes: None. Comments: One commenter suggested that changing from the 12-hour rule to the one-day rule would add a new category of eligible programs, and therefore a new group of eligible students who would compete with students in more traditional programs for scarce Title IV grant funding. Discussion: We disagree with the commenter. Programs that previously were covered by the 12-hour rule were eligible to participate in the Title IV, HEA programs. Therefore, we do not believe that this change will result in an increased number of students receiving Title IV assistance. Under the one-day rule, students enrolled in those programs would be able to receive the same amount of assistance that students in term-based programs currently do. Changes: None. Comments: A few commenters disagreed with the proposal to eliminate the 12-hour rule, based upon their view that, while not perfect, the requirement that a nonterm or nonstandard term academic program include at least 12 hours of instruction per week provides some assurance that the program provides sufficient educational content to make the student's and taxpayer's investment worthwhile. One commenter questioned whether educational quality can be measured by time, particularly given new technological delivery systems. However, the commenter felt that it would be inappropriate to eliminate the 12-hour rule at this time because matters of educational quantity/quality need further study. One commenter, representing several consumer law advocacy organizations, opposed the elimination of the 12-hour rule, suggesting that it currently provides a quantitative method to measure the quality of an academic program. The commenter also stated that the proposed change would encourage some institutions to reduce program content without a commensurate reduction in tuition and other charges. Discussion: We disagree with the commenter that the 12-hour rule provided any assurance that institutions would provide a minimum quantity of education to warrant support under the Title IV, HEA programs. Hours of regularly scheduled instruction are not the exclusive measure of the quantity of education provided in a postsecondary educational program. For example, in certain educational programs, research papers and projects may make up a considerable portion of that program, and the work associated with carrying out those papers and projects would not be considered as instructional hours under the 12-hour rule or the one-day rule. We believe that the one-day rule is adequate for programs offered in traditional terms and have no evidence to suggest that it is inadequate for programs offered in nonstandard terms and nonterms. The 12-hour rule was established to measure educational quantity, not educational quality. It was established to implement the statutory requirement that an academic year for Title IV, HEA program purposes had to contain at least 30 weeks of instructional time, which in turn was enacted for the purpose of determining how much Title IV, HEA program funds a student could receive. As we noted in the preamble to the August 8, 2002 NPRM, we believe that there are adequate safeguards in place to ensure program integrity, such as the changes to the definition of a payment period made by this final rule, the clock-hour/credit-hour conversion regulations, and program monitoring by accrediting agencies. Finally, we are aware of no evidence that the proposed change would encourage some institutions to reduce program content. Changes: None. Comments: One commenter suggested that our statement in the preamble to the August 8, 2002 NPRM that the clock-hour/credit-hour conversion regulations provide adequate safeguards is questionable since those requirements do not apply to programs that are two years or longer in length and lead to a degree. The commenter stated the belief that the existence of what was perceived to be “low-content degree programs” offered by for-profit institutions demonstrates that the clock-hour/credit-hour conversion is not as valuable as we had stated. Discussion: We disagree with the commenter because, based upon our experience with the clock/credit hour conversion controversy, the problems that needed to be addressed were found in short-term vocational programs, not in associate and higher degree programs. Moreover, we have no evidence that any institutions have reduced educational content in educational programs that lead to associate and higher degrees. Changes: None. Comments: A commenter representing accrediting agencies asked for clarification as to whether the change from the 12-hour rule to the one-day rule will impose any additional responsibilities on those agencies or on the process by which the Secretary recognizes accrediting agencies. Discussion: No additional regulatory requirements are being placed on accrediting agencies as a result of this change. Changes: None. Comments: Two commenters requested specific clarification as to what exactly constituted a day of instruction. One of those commenters asked how much time during each day must actually be spent on instruction. The other commenter asked specifically how one day would be counted for a program offered on-line. That same commenter suggested that we make it clear that the one-day rule did not have to be met on a week-by-week basis, but could be met on average. That is, the requisite number of days must be met over the course of the program. Discussion: We do not believe it is appropriate for the Department to limit institutional flexibility by establishing a rigid definition of how many hours of instructional time must be included in order for a day to be considered a day of instruction. We agree with the commenter who suggested that the measure should be whether the institution can demonstrate that the activities that make up a day of instruction are reasonable in both content and time. We also will rely upon the determination of the relevant accrediting agency in this regard. We disagree with the commenter who suggested that the one-day rule did not require one day each week but could be met by the program having an average of one day per week over the course of the program. The basis for the one-day rule is the requirement contained in section 481 of the HEA that states that an academic year must contain at least 30 weeks of instructional time. The one-day rule simply defines a week of instructional time as one that includes at least one day of instruction or examinations. The regulations make it clear that a week is a consecutive seven-day period. Therefore, a week in which there is not at least one day of instruction or examination cannot be counted as one of the 30 weeks of instructional time required by the statute. In order for a program to meet the 30 weeks of instructional time requirement, it must include at least 30 separate weeks in which at least one day of instruction or examination occurs. Changes: None. Payment Periods (Sections 668.4, 682.603, 685.301, and 690.75) Comments: One commenter was uncertain whether the proposal to require a payment period to be made up of both the requisite number (usually half) of credit hours in an academic year or program, and the requisite number (usually half) of weeks in the academic year or program was to be applied to both credit-hour programs with terms and credit-hour programs without terms. Discussion: The proposal applies only to credit-hour programs without terms. Changes: None. Comments: A number of commenters supported the Department's proposal that students who withdraw from an institution during a payment period and then return within 180 days to the same program remain in the same payment period. But one commenter wondered what would happen when the student returns, and thus the resumption of the payment period, was in a different award year. The commenter suggested that, if some of the funds for the payment period were to be paid from a different (new) award year, they should be a percentage of the aid that would have been scheduled for that payment period in the new award year, equal to the percentage of the original payment period amount that was not disbursed or returned from the initial period of attendance. Discussion: A student who was originally enrolled in a payment period that began, and was scheduled to end, in one award year could return after the end of that award year (June 30). However, the intent of these regulations is that such a student is considered, upon his or her return, to be in the same payment period. Therefore, any Title IV program funds that will be disbursed to the student should be paid from the original award year regardless of whether the resumption of the payment period is in a new award year. Generally, the original payment for the payment period would have come from the earlier award year and any new disbursements would be from that same year. Of course, if the original payment period had been a crossover payment period (one that was originally scheduled to begin in one award year and end in the following award year) and the institution had paid (or planned to pay) the student from the second award year, then the resumption of the payment period and any required disbursements would remain in the second award year. Finally, even if the student's absence and subsequent return causes more than six months of the recalculated payment period to fall into the second award year, we will still consider that the institution's original decision to place the payment period in the first award year remains valid based on the fact that, at the time of that original choice, less than six months of the payment period was scheduled to fall into the second award year. Changes: None. Comments: With regard to the student's withdrawal and subsequent return (within 180 days) to the same program, one commenter asked whether, if aid had not been disbursed during the original enrollment, credits earned for the entire payment period, both those enrolled in before the withdrawal and those enrolled in after the return, could be included in determining payment eligibility. Discussion: The regulation addressing the situation in which a student withdraws from a program and then returns to that program within 180 days applies only to clock-hour programs and credit-hour programs without terms. For those programs, the regulations define a payment period in a way that generally requires the clock-hours or credit-hours in one payment period to be completed before the next payment period begins. Further, students in those payment periods are generally paid for one-half of the program or academic year, as appropriate, at a time. Thus, regardless of whether the student had already been paid for a certain number of clock- or credit-hours before the student's withdrawal, upon the student's subsequent return to the same program within 180 days, the institution would not be adding hours to the payment period, but would simply be keeping the student in the same payment period (consisting of the same number of clock- or credit-hours) he or she was in before withdrawing. Then, upon completion of the hours (and weeks for a credit-hour without terms program) in that payment period, the student would advance to the next payment period. Changes: None. Comments: A number of commenters asked how a Return of Title IV Funds calculation would be performed if a student withdrew from a program during a payment period and returned to that program within 180 days, and then withdrew a second time during that same payment period. Discussion: When a student withdraws (the first time) without completing the payment period, a Return of Title IV Funds calculation is performed. If the student returns to the program within 180 days of his or her initial withdrawal, the student is put back into the same payment period he or she withdrew from, and any Title IV funds that the student or institution returned to the Title IV programs or to a lender for that payment period as a result of the earlier withdrawal are restored to the student. If the student then withdraws from the institution again during that same payment period, a new Return of Title IV Funds calculation, based on the second withdrawal date, would be performed using the full payment period and the full amount of Title IV aid for the payment period. Changes: None. Comments: One commenter raised general questions about the way payment periods are determined for programs that measure progress in credit hours but do not use terms. The commenter suggested that there should not be any rigid rules for such programs, but that the institution should have flexibility in determining the length and timing of a student's payment period based upon the program length and a student's enrollment pattern. Discussion: The changes proposed in the August 8, 2002 NPRM and finalized in this document do not address the entire concept of payment periods, but instead only relate to two issues: (1) For nonterm credit hour programs, requiring a payment period to include, in addition to half the number of credits in the academic year, program, or remainder of the program, also half the number of weeks in that period, and (2) guidance on the treatment for a student who withdraws from a clock-hour or credit-hour nonterm program, and then returns to school. Therefore, since a more comprehensive review of payment periods was not included in either the negotiated rulemaking process that led to the August 8, 2002 NPRM or in the proposal presented in the NPRM, we do not believe that it would be appropriate to make additional changes to the payment period regulations at this time. Changes: None. Comments: One commenter asked whether an institution should remove costs for the period that the student was out of school in those cases where the student withdrew from an institution and returned within 180 days, and was worried that if that were done the student might not qualify for the original loan amount once he returned to the institution. Discussion: The cost of attendance would be the costs associated with the original period before the student withdrew. Once the student has withdrawn and then returned to the same program within a 180-day period, the regulation states that the student remains in the same payment period. The cost of attendance for such a student returning to the same program within 180 days must reflect the original educational costs associated with the payment period from which the student withdrew. Changes: None. Comments: One commenter suggested that if a student withdraws but returns to the institution during the period in which the institution is required to return funds under the Return of Title IV Funds calculation, the institution would not have to return any funds or notify the lender of the enrollment change. In essence, the student would be retroactively granted a leave of absence. Discussion: If a student returns to the institution before the Title IV funds are returned, the institution is not required to return the funds. However, § 668.22(j) requires an institution to return unearned funds for which it is responsible as soon as possible, but no later than 30 days after the date of the institution's determination that the student withdrew. Therefore, an institution is expected to begin the Return of Title IV Funds process immediately upon its determination that a student has withdrawn. Changes: None. Comments: One commenter stated that it was his understanding that students who withdraw and return after 180 days, or transfer to new programs within any timeframe, have their payment periods restarted, and that this meant that these students would not have to complete the credits that they were already paid for before they could receive additional student aid payments. Discussion: The regulation addresses the determination of payment periods for students who have withdrawn and either returned to the same program after 180 days, or returned to another program within any timeframe. The regulation specifies that students who have withdrawn and either returned to the same program after 180 days, or returned to another program within any timeframe start a new payment period. However, a student's eligibility for additional Title IV funds may be subject to a variety of limitations associated with the aid the student received during the most recent period of attendance. For example, in the Federal Pell Grant Program, a student may never receive more than the student's scheduled annual award. In the FFEL Program, there are limitations imposed by annual loan limits, the existence of crossover loan periods, and overlapping award years. Changes: None. Comments: A couple of commenters asked for further clarification of the payment period provisions as they relate to the Return of Title IV Funds provisions and various Title IV program provisions. Discussion: We will provide additional clarification on the applicability of these changes through appropriate Department publications after publication of these final regulations. Changes: None. Program Participation Agreement (Section 668.14) Comments: The vast majority of commenters supported the proposal that came out of the negotiated rulemaking sessions to establish safe harbors that institutions could use to avoid the statutory prohibition against making incentive payments to recruiters and other covered personnel. Discussion: None. Changes: None. Comments: Some commenters opposed any change to the current regulations dealing with incentive compensation. They believed that the proposed regulations were not authorized under section 487(a)(20) of the HEA, were ambiguous, and were burdensome to institutions. Discussion: We disagree with the commenters. With regard to the first point, we believe that the regulations lawfully implement section 487(a)(20) of the HEA. As indicated in the preamble to the proposed regulations, the Congress recognized that if given a strictly literal interpretation, section 487(a)(20) of the HEA could be interpreted to cover almost every compensation arrangement involving a student's ultimate admission to a postsecondary institution. As a result, when enacting section 487(a)(20) of the HEA in 1992, the conference report resolving the different House and Senate versions of the Higher Education Amendments of 1992 indicated that the statutory words “directly” and “indirectly” in section 487(a)(20) of the HEA did not imply that institutions could not base salaries or salary increases on merit. Thus, Congress recognized that the scope of section 487(a)(20) of the HEA had limits, even though that section precluded incentive payments based directly or indirectly on success in securing enrollments. Consistent with this clarification of legislative intent, we based the proposed safe harbors on a “purposive reading” of section 487(a)(20) of the HEA. This purposive reading is based upon our view that Congress enacted this provision with the purpose of preventing an institution from providing incentives to its staff to enroll unqualified students. In viewing the scope of section 487(a)(20) of the HEA through this purposive reading, we determined that various payment arrangements constituted legitimate business practices that did not support the enrollment of unqualified students and therefore did not fall within the scope of section 487(a)(20) of the HEA. Making these determinations is within the scope of the Secretary's authority of interpreting the statutory provisions he is charged with administering. With regard to the commenters' other two points, we agree with the vast majority of commenters that, rather than being ambiguous, the safe harbors clarify the current law for most institutions by setting forth specific payment arrangements that an institution may carry out that have been determined not to violate the incentive compensation prohibition in section 487(a)(20) of the HEA. Moreover, no burden is placed upon an institution that uses a payment arrangement set forth in one of the safe harbors. Changes: None. Comments: The commenters who felt that the regulations were not authorized under section 487(a)(20) of the HEA also felt that any change to the current regulations would allow unscrupulous institutions to engage in the kinds of improper recruiting activities that gave rise to section 487(a)(20) of the HEA. They also felt that there was no demonstrated need for any change to the current regulations covering the incentive compensation prohibition, and that any change should be made through legislation during the next HEA reauthorization. Discussion: We believe that the primary purpose of the regulatory safe harbors is to provide guidance to institutions so they may adopt compensation arrangements that do not run afoul of the incentive compensation prohibition contained in section 487(a)(20) of the HEA. The safe harbors are based on comments we received from institutions during the FED UP initiative that requested that we provide clearer and more detailed guidance regarding this topic, suggestions by negotiators, and numerous questions we have received from institutions during the last eight years. We believe that institutions need this guidance now, and therefore it is neither necessary nor desirable to wait to make changes legislatively during the next HEA reauthorization. Finally, we do not agree with the commenters that the safe harbors will allow unscrupulous institutions to engage in the kinds of improper recruiting activities that took place during the 1980s and early 1990s. As the commenters noted, during that period, institutions would recruit ability-to-benefit students who were not qualified to enroll in their institutions and keep the Title IV, HEA program funds those students received. That result is no longer possible today. The incentive compensation prohibition is only one of the remedies that Congress has enacted to preclude such results. First, most of those unscrupulous institutions were terminated from participating in the Title IV, HEA programs because of their high cohort default rates. Second, there is a strengthened ability-to-benefit process that walls off institutions from the process and has higher standards of judging a student's ability-to-benefit. Third, if an institution enrolls unqualified students who then drop out, the institution may only keep Title IV, HEA program funds that the student has earned and must return unearned funds under the Return of Title IV Funds rules set forth in § 668.22. Fourth, under the default rate termination provisions, the institution would put its continuing eligibility to participate in the Title IV loan programs in jeopardy if their unqualified students fail to repay their loans. Finally, an institution could have its eligibility terminated if it misrepresents its programs to students. Changes: None. Comments: A commenter asked about the interrelationship between the various safe harbors. Discussion: The 12 safe harbors are divided into two categories. The first category relates to whether a particular compensation payment is an incentive payment. The first safe harbor addresses this category by describing the conditions under which an institution may pay compensation without that compensation being considered an incentive payment. The second category relates to the conditions under which an institution may make an incentive payment to an individual or entity that could be construed as based upon securing enrollments. The remaining 11 safe harbors address this category by describing the conditions under which such a payment may be made. These 11 safe harbors reflect our view that the individuals and activities described in a safe harbor are not covered by the statutory prohibition. With regard to the latter 11 safe harbors, if an incentive payment arrangement falls within any one safe harbor, that payment arrangement is not covered by the statutory prohibition. Changes: None. Comments: Several commenters suggested that the Secretary include additional safe harbors in the final regulations and provided examples of safe harbors that they would like to see added. Discussion: We proposed 12 safe harbors based upon the suggestions of the negotiators and questions we received regarding the incentive compensation prohibition. We intended that these safe harbors be clear and uncomplicated. As a result, we believe that institutions can use these safe harbors as a workable framework to determine if their payment arrangements violate the incentive compensation prohibition. Changes: None. Comments: A commenter suggested that we discuss the penalties that apply if an institution violates the incentive compensation prohibition. Discussion: We believe that a discussion of the penalties for violating the incentive compensation prohibition are outside the scope of this exercise in developing final regulations for the provision. Changes: None. Comments: A commenter indicated that the safe harbors should specifically indicate that an institution could pay an incentive payment to a person or entity that was in the safe harbor. Discussion: The last 11 safe harbors describe situations under which an institution can make an incentive payment to an individual or entity based upon success in securing enrollments. Therefore, it is not necessary to include that statement in each safe harbor. For this very reason, as noted below, we will eliminate the restriction in the last sentence in the “clerical pre-enrollment” safe harbor, § 668.14(b)(22)(ii)(F). Changes: See discussion under Pre-Enrollment Activities. Adjustments to Employee Compensation (Section 668.14(b)(22)(ii)(A)) Comments: Many commenters approved of our determination set forth in the first safe harbor that fixed compensation could include up to two adjustments in a twelve-month period as long as no adjustment is based solely on success in securing enrollments. Some commenters believed that two adjustments were too many; that two adjustments during a 12-month period was a loophole that institutions could use to bundle their bonuses and pay them as a salary adjustment. Discussion: We believe that defining fixed compensation to include up to two pay adjustments during a 12-month period is not inconsistent with standard business practice, particularly as this safe harbor includes pay adjustments to an individual for any reason, including promotions. Changes: None. Comments: Almost all commenters approved our determination that one cost of living increase that is paid to all or substantially all employees would not count as one of the two allowable adjustments. One commenter asked the effect of an employer policy that withheld cost-of-living increases to poorly performing employees. Another pointed out that employers treat full-time employees differently from part-time employees, and suggested that cost of living increases that are paid to all or substantially all full-time employees not count as an adjustment in the safe harbor. Discussion: We believe that if an employer has a written policy that indicates that cost of living increases are denied to poorly performing employees, that policy would not disqualify cost of living increases from being treated in the manner described in this safe harbor unless such a written policy has the effect of no longer applying the cost of living increase to “all or substantially all” employees, and other relevant factors reveal the increase to be tied to student recruitment and not within any of the prescribed safe harbors. We agree with the commenters that employers often treat full-time employees differently from part-time employees, and therefore agree with the commenters' suggestion that cost-of-living increases that are given to all or substantially all of an institution's full-time employees would not be considered a compensation adjustment. Changes: Section 668.14(b)(22)(ii)(A) is changed to reflect that cost of living increases that are given to all or substantially all of an institution's full-time employees will not be considered a compensation adjustment. Comments: Many commenters noted that salary adjustments could not be based solely on the number of students recruited, admitted, enrolled, or awarded financial aid, and asked whether the term “solely” was being used in its dictionary definition. If it was not, the commenters suggested a definition. Discussion: In this safe harbor, the word “solely” is being used in its dictionary definition. Changes: None. Comments: Commenters raised a series of questions concerning various aspects of fixed compensation, including how overtime should be treated, how employee benefits should be treated, and the effect under this safe harbor if some of an institution's employees are unionized and others are not. Discussion: With regard to overtime and benefits, if the basic compensation of an employee would not be an incentive payment, neither would overtime pay required under the Federal Labor Standards Act. Generally, the fact that some of an institution's employees are unionized and others are not should have no bearing on this safe harbor. Changes: None. Comments: One commenter asked about activities that recruiters could perform that would not be considered recruitment. Discussion: There are a myriad of non-recruitment activities that a recruiter may engage in on a day-to-day basis, but we do not believe that it is practical nor necessary to provide an exhaustive list for purposes of this discussion. Changes: None. Enrollment in Programs That Are Not Eligible for Title IV, HEA Assistance (Section 668.14(b)(22)(ii)(B)) Comments: Some commenters objected to this safe harbor, because they believed that the Secretary had no authority to establish it because section 487(a)(20) of the HEA does not cover incentive payments to enroll students in educational programs that are not eligible programs under the Title IV, HEA programs. Another commenter objected to the safe harbor because it would encourage institutions to promote private loans. Discussion: We disagree with the commenters. The safe harbor is authorized, as well as appropriate, because it informs institutions of the scope of the coverage of the incentive compensation prohibition of section 487(a)(20) of the HEA. Moreover, we believe that this safe harbor will have no bearing on whether institutions promote private loan programs to students attending ineligible programs. Changes: None. Contracts With Employers (Section 668.14(b)(22)(ii)(C)) Comments: Most commenters supported this safe harbor. The commenters recognized that the underlying rationale for the safe harbor was that an employer should have a significant stake in the education being offered its employees under a contract with an institution that uses a recruiter who receives an incentive payment. However, several commenters objected to the conditions that employers under this safe harbor had to satisfy. In particular, they objected to the conditions that an employer had to pay at least 50 percent of the tuition and fees charged its employees, and that recruiters have no contact with the employees. Some commenters recommended that these conditions be eliminated; that the employer/employee relationship itself provided a sufficient stake in the education being offered. Some commenters indicated that the percentage of tuition and fees that an employer had to pay should be a smaller percentage, while others indicated that the employer's stake in the education being offered could be demonstrated by other criteria. One commenter noted that literally no one could satisfy this safe harbor because a recruiter had to contact an employee in order to negotiate the contract. Another commenter recommended that Title IV, HEA program funds could not be used to pay the portion of the tuition and fees not paid by the employer. Discussion: This safe harbor represents that, in general, business-to-business marketing of employer-provided education is not covered by the incentive compensation prohibition. However, not all business-to-business transactions are paid in the same manner, such as the straightforward payment by a company to an institution to educate its employees. This safe harbor deals with an iteration of that scheme; the payment of employees' tuition and fee charges by the employer under a contract arranged by an institution's recruiter who is paid an incentive. In this safe harbor, the Secretary believes that the 50 percent requirement is a simple, straightforward standard to assure that an employer has a significant financial stake in the outcome of the education provided to its employees. This standard was supported by a majority of the negotiators. Therefore, we disagree with the commenters who suggested that this safe harbor be changed to allow an employer to pay less than 50 percent of its employees' tuition and fee charges. With regard to the alternatives suggested by commenters, we believe that they are too complicated for a safe harbor. With regard to recruiter contact with employees, the contact that is prohibited does not include the contact necessary to obtain the contract. Changes: None. Profit-Sharing or Bonus Payments (Section 668.14(b)(22)(ii)(D)) Comments: Most commenters supported this safe harbor. However, one commenter objected to it because the commenter considered that the safe harbor could be manipulated. Several commenters pointed out that the safe harbor allowed a profit sharing plan to be limited to employees in an “organizational level” at an institution rather than the institution as a whole, and asked whether an organizational level in a multi-school institution could be one of the institutions. Other commenters suggested that the definition of “profit” be defined as “total profit resulting when total costs are subtracted from total revenue at the institution.” One commenter noted that while the regulatory safe harbor required that profit sharing or bonus payments be provided to all or substantially all of an institution's full-time employees, the preamble indicated that such payments had to be substantially the same amount, or based upon the same percentage of salary. The commenter recommended that the preamble requirement be eliminated as unnecessary. Moreover, if this condition is to be retained, the commenter proposed that percentage increases, like dollar increases, should also be substantially the same to all covered employees. Discussion: We do not agree with the commenter who indicated that this safe harbor could be manipulated to provide incentive payments to recruiters under the guise of profit sharing because the payments must be made to all or substantially all of the full-time employees at one or more organizational level at the institution. In response to comments relating to organizational level, we believe an “organizational level” at a multi-school institution would be one of the institutions. We do not believe that it is necessary to define the term “profit” in this safe harbor as it is a commonly used business term that needs no explanation. With regard to the last comment, we agree that a safe harbor should be in the regulation itself rather than in the preamble. Contrary to the commenter's suggestion, we believe that the safe harbor for bonuses and profit sharing should require that the payments to employees be substantially the same amount or the same percentage of salary. We do not, however, see the need to allow percentage increases to be substantially the same. We believe that this safe harbor already provides significant flexibility particularly since institutions can provide different percentages of compensation based on employees' organizational levels. Changes: Section 668.14(b)(22)(ii)(D) is changed to reflect that the safe harbor only applies if the profit sharing or bonus payment is substantially the same amount or the same percentage of salary or wages. Compensation Based Upon Completion of Program (Section 668.14(b)(22)(ii)(E)) Comments: Most commenters supported this safe harbor. However, several objected to it on the grounds that completion of an educational program is not a valid measure when the quality of an institution's programs is poor. One commenter, quoting from our preamble statement of April 24, 1994, when the current regulation was published, objected to the use of retention as a safe harbor, and also objected to the one-year retention period as too short. Discussion: As previously indicated, we believe that the purpose of the incentive compensation prohibition is to prevent institutions from enrolling unqualified students. We note that other legislative and regulatory requirements are designed to weed out institutions with poor quality programs. We agree with most of the commenters that a student who successfully completes an educational program in which he or she was enrolled means, for this purpose, that the student was qualified to attend the institution. With regard to retention, we believe that the successful completion of 24 semester or trimester credit hours, 36 quarter credit hours, or 900 clock hours of instruction also means that the student was qualified to enroll at the institution. Moreover, as a general matter, retention and completion of programs by students is a positive result that should be encouraged. Changes: None. Comments: Several commenters requested that the measure of whether a student completes one year of a program should be time rather than credits earned. One commenter asked whether all the required credits or hours had to be earned at the institution, or could they include transfer credits, life experience credit, or credits earned through tests. Another commenter asked whether the student had to earn one academic year of credit within the institution's satisfactory progress standard, and another asked whether the 30 weeks of instructional time element of the definition of an “academic year” was included in this safe harbor. A commenter indicated that the safe harbor should indicate that retention for one year is a minimum requirement and institutions are free to establish longer periods. Finally, one commenter asked whether a recruiter could get paid a bonus for each year the student successfully completes, so that the recruiter can theoretically receive four years of bonuses for a student enrolled in a four-year program. Discussion: We believe that the appropriate method of measuring whether a student completes one academic year is by determining that the student has earned one academic year of credit rather than by not dropping out during a 12-month period. Therefore, we do not agree with the commenters' suggestions to substitute time for credits earned. To answer the questions raised by the other commenters: All the credits have to be earned at the institution as a result of taking courses at that institution; we have not applied the 30 weeks of instructional time element of the definition of an “academic year” to this safe harbor. Thus, this safe harbor applies when a student earns, for example, 24 semester credits no matter how short or long a time that takes. We agree with the commenter that the one-year retention condition requirement is a minimum. Finally, if an institution so chooses, it may pay a recruiter a bonus for each academic year a student completes and not be in violation. Changes: Section 668.14(b)(22)(ii)(E) is changed to reflect that the one academic year's worth of credit or hours must be earned at the institution. Pre-Enrollment Activities (Section 668.14(b)(22)(ii)(F)) Comments: Most commenters supported this safe harbor. Some commenters objected to the requirement that the pre-enrollment activity had to be clerical in nature, with some noting that the clerical requirement was not in the proposed safe harbor itself, but was in the preamble discussion of the safe harbor. Some commenters concluded that the safe harbor described an individual rather than an activity, and based upon that interpretation, the commenters were concerned that recruiters could not be paid a bonus based upon their performance of pre-enrollment activities. Some commenters requested that the list of pre-enrollment activities be expanded, and other commenters objected to the characterization that soliciting students for interviews is a recruitment activity rather than a pre-enrollment activity. Other commenters asked whether institutions could purchase leads to potential students for a flat fee from a third party under this safe harbor. Discussion: We believe that one of the most important criterion for inclusion in this safe harbor is the clerical nature of the pre-enrollment activities that are being performed. Limiting pre-enrollment activities to rote clerical activities helps to draw the line between recruiting and pre-enrollment activity. Therefore, we will incorporate this requirement into the regulations. We disagree with the characterization that this safe harbor describes an individual rather than an activity. However, by the very job description, a recruiter's job is to recruit. Therefore, as a practical matter, it would be very difficult for an institution to document that it was paying a bonus based upon enrollments to a recruiter solely for clerical pre-enrollment activities. We are not going to expand the list of acceptable clerical pre-enrollment activities because no list will be all-inclusive, and we believe that institutions can determine whether activities qualify as clerical pre-enrollment activities based upon the current examples. Contrary to the commenter's conclusion, we believe that soliciting students for interviews is a core recruiting activity. Finally, although we believe that buying leads from third parties for a flat fee is not a clerical pre-enrollment activity under this safe harbor, we believe that the activity is not covered under the incentive compensation prohibition. Buying leads from third parties for a flat fee is not providing a commission, bonus, or other incentive payment based directly or indirectly on success in securing enrollments. Changes: Section 668.14(b)(22)(ii)(F) is changed to add the requirement that pre-enrollment activities must be clerical in nature, and, for the reasons stated earlier in connection with the general comments, we are deleting the requirement that compensation is not based upon the number of people actually enrolled. Managerial and Supervisory Employees (Section 668.14(b)(22)(ii)(G)) Comments: One commenter objected to this safe harbor because the commenter believed that managers of recruiters and other covered persons should not be covered by the incentive compensation prohibition, and therefore should be included in this safe harbor. Other commenters objected to the preamble discussion of this safe harbor, where we indicated that an individual's occasional direct contact with students in the recruiting process would not turn that individual into a recruiter, because it would not necessarily be easy to determine whether an individual's involvement was occasional. Discussion: As indicated in the preamble to the proposed regulations, we believe that direct supervisors of recruiters and other covered persons should be excluded from this safe harbor because their actions have a direct and immediate effect on the recruiters and other covered persons. Changes: None. Token Gifts (Section 668.14(b)(22)(ii)(H)) Comments: One commenter appreciated the increase in the cost of token gifts allowed under this safe harbor, indicating that it would eliminate concerns at many institutions. Discussion: None. Changes: None. Profit Distributions (Section 668.14(b)(22)(ii)(I)) Comments: One commenter objected to this safe harbor because some institutions could treat revenue as profits. Discussion: We disagree with the commenter because institutions participating in the Title IV, HEA programs must submit compliance audits and financial statement audits, and such audits would uncover this practice. Changes: None. Internet-Based Activities (Section 668.14(b)(22)(ii)(J)) Comments: Almost all commenters supported this safe harbor. One commenter agreed that the Internet is a communications medium much like the U.S. mail and direct mail solicitations. The commenter noted, however, that compensation arrangements between institutions and direct mail servicers are typically not based upon enrollments, and therefore suggested that the Internet safe harbor exclude compensation arrangements that are based upon enrollments. Discussion: We disagree with the commenter. We believe that the use of the Internet is outside the scope of the incentive compensation prohibition, and, as indicated earlier, the point of the last 11 safe harbors is that they describe situations that would not violate the incentive compensation prohibition to make incentive payments to recruiters and other covered individuals based on enrollments. However, to highlight that the Internet is frequently used to refer prospective students to institutions, we are including that activity in the safe harbor. Changes: Section 668.14(b)(22)(ii)(J) is changed to add referring prospective students to the institution as a described safe harbor. Payments to Third Parties for Non-Recruitment Activities (Section 668.14(b)(22)(ii)(K)) Comments: One commenter requested that we clarify that recruiting activities do not include advertising or marketing. Discussion: We agree with the commenter that if an institution pays a third party for marketing and advertising, those contracted services are not considered recruiting. Changes: None. Payments to Third Parties for Recruitment Activities (Section 668.14(b)(22)(ii)(L)) Comments: Several commenters specifically indicated their support for this safe harbor. Several others objected to it because they believed that it violated the spirit of the incentive compensation prohibition as well as the literal language of that provision. Discussion: With regard to the reasons given by the commenters who objected to the safe harbor, as we stated in the preamble to the August 8, 2002 NPRM, we believe that Congress did not intend to limit an institution's ability to contract with outside entities for recruitment, admissions, enrollment, or financial aid services if the outside entity adheres to the same limitations that apply to institutions. Payments made by an institution to a third party would not violate the incentive payment restrictions as long as the individuals performing any activities related to recruitment, admissions, enrollment, or financial aid were compensated in a way that would otherwise be permissible under the standards in this section for covered employees of the institution. Changes: None. Institutions Required To Take Attendance (Section 668.22) Comments: One commenter did not believe that an institution that is required to take attendance by an outside entity for a limited time for census purposes should automatically qualify as an institution that is required to take attendance for purposes of the Return of Title IV Funds calculation. The commenter indicated that census records may not be appropriate for determining a student's withdrawal date. As such, the commenter suggested that the length of a limited period of census taking does not matter. Rather, if the institution's policy does not result in a student being withdrawn as a result of the census data, the institution should not be considered one that is required to take attendance for the census period. The commenter asked for clarification regarding the procedures that must be followed after the end of the period of required attendance taking. Discussion: Census taking was merely an example of a reason why an institution might be required to take attendance by an outside entity for a limited period of time. As stated in the preamble to the August 8, 2002 NPRM, if the outside entity determines that the institution is required to take attendance for any period, for any purpose, including census purposes, then the institution is considered to be one that is required to take attendance for that period of time. We would like to emphasize that the change to the regulations related to determining whether an institution is one that is required to take attendance, specifically revises § 668.22(b)(3)(i) to state that it is such an institution only if the outside entity has determined that the institution is required to take attendance. Thus, if an outside entity that imposes census taking requirements does not consider its requirements to require an institution to take attendance continuously for the limited period of time, the institution would be considered an institution that is not required to take attendance for that period for Title IV purposes. The exception that the preamble addressed was that even if the outside entity considers a one-day census activity to be required attendance taking, we would not consider the institution to be one that is required to take attendance. Unless an institution demonstrates that a withdrawn student who is not in attendance at the end of a limited period of required attendance taking attended after the limited period, the student's withdrawal date would be determined according to the requirements for an institution that is required to take attendance. That is, the student's withdrawal date would be the last date of academic attendance as determined by the institution from its attendance records. If the institution demonstrates that the student attended past the end of the limited period, the student's withdrawal date is determined in accordance with the requirements for an institution that is not required to take attendance. So, for a student who has attended past the limited period and unofficially withdrew, the student's withdrawal date is the midpoint of the payment period or period of enrollment. Consistent with the policy for documenting a student's last date of attendance at an academically-related activity, an institution is not required to take attendance to demonstrate a student's attendance past the end of the limited period of attendance taking. Changes: None. Leaves of Absence (Section 668.22) Comments: One commenter requested that we repeat the discussion in the August 8, 2002 NPRM on allowing multiple leaves of absence as long as the sum of the leaves does not exceed 180 days within any 12-month period and the requirement that an institution must require the student to submit a written reason for his or her request for an approved leave of absence. Discussion: The commenter is correct that the proposed change does mean that an institution can approve more than one leave of absence for a student as long as the total of all leaves for that student does not exceed 180 days in a 12-month period. The commenter is also correct that the new regulations require the student to submit a written reason for the request for the leave of absence. We refer the reader to the more extensive discussion on these matters that was included in the August 8, 2002 NPRM beginning on page 51726. Changes: None. Comments: One commenter agreed with our position that a student should be able to return to an institution from an approved leave of absence and repeat coursework as long as there are no additional institutional charges. Discussion: We clarified in the NPRM that a student may resume his or her academic program at a point earlier than the point where the academic program was suspended temporarily through an approved leave of absence. Under this guidance, both the student and the institution enjoy greater flexibility to deal with student academic needs. However, since the regulations provide that an institution may not impose additional charges when the approved leave of absence ends and the student resumes his or her program of study, a student who returns for the purpose of repeating prior coursework may not be assessed additional charges by the institution. Changes: None. Comments: One commenter noted that, especially for nonterm programs, there are a variety of reasons (most frequently scheduling problems) that prevent students from simply restarting their coursework at the same place they stopped. Particularly if the nonterm program offers its course in a series of modules, a returning student might choose to re-enter into a different course in a different module within the same program. The commenter suggested that students in nonterm programs be exempt from the requirement that, after returning from an approved leave of absence, they must return to the same point in the coursework that they were at the time the leave of absence began. Discussion: Currently, § 668.22(d)(1)(viii) requires that when a student returns from a leave of absence, the student must be permitted to complete the coursework he or she began prior to the leave of absence. This is because the concept of an approved leave of absence is that the payment period in which the student was originally enrolled in has been temporarily suspended due to the leave of absence. Upon the student's return, the student simply resumes or continues the same payment period and coursework and is not eligible for additional Title IV program assistance until the payment period has been completed. For term-based programs, where the payment period is the term, a student returning from a leave of absence must complete the term in order to complete the payment period and be eligible to receive a second or subsequent disbursement. In addition, as noted earlier, upon return from a leave of absence the student cannot be assessed any additional charges. Therefore, we think it very unlikely that a student enrolled in a term-based program could ever participate in the leave of absence process included as part of the Return of Title IV Funds requirements. However, for nonterm-based programs, the regulations in § 668.4, as finalized by this document, provide that the payment period is the period of time it takes a student to complete both half the number of credits and half the number of weeks of the academic year, program or remainder of the program, as appropriate. For clock-hour programs, the payment period is the period of time it takes a student to complete half the number of clock hours in the program. Therefore, whether the student returns to the point in the same course as when the leave of absence began, or the student starts in a new course within the program (without additional institutional charges), once half the required credits are earned and half the number of weeks are completed or, for a clock-hour program, half the number of clock hours are completed, the student has completed the payment period for which the student was previously paid Title IV funds. If otherwise eligible, the student may receive a second or subsequent disbursement of Title IV program funds. Thus, we agree with the commenter that flexibility in this area could be provided to students and institutions when the program is offered on a nonterm basis. Changes: Section 668.22(d)(1)(vii) is revised to provide that for a clock-hour program or a nonterm credit-hour program, the student need not complete the exact same coursework he or she began prior to the leave. Comments: One commenter suggested that we modify the proposed rule to allow an institution to offer the student a full tuition credit towards the course the student chooses to re-enter as a mechanism to comply with the requirement that the institution not assess the student any additional charges upon return from an approved leave of absence. Discussion: As we understand the commenter's suggestion, we do not see a need to modify the regulations. We believe that the commenter's proposal would meet the requirement that a student returning from an approved leave of absence not be assessed any additional institutional charges for completing the payment period. Changes: None. Expiration of Ability To Benefit Tests (Sections 668.32 and 668.151) Comments: While there was general support for the removal of the 12-month limitation on the acceptability of an ability to benefit (ATB) passing score, one commenter expressed concern about the exception that “home-schooled” students are not required to have passed the GED or an ATB test before becoming eligible for Title IV, HEA program assistance. Discussion: We appreciate the support for the elimination of the 12-month limitation of ATB passing scores. Section 484(d)(3) of the HEA provides that, as an alternative to a high school diploma, a student who has completed a secondary school education in a home school setting that is treated as a home school or private school under State law meets the applicable standard to be eligible for Title IV, HEA program assistance without the need for such a student to have passed the GED or an ATB test. Changes: None. Overpayments (Sections 668.35, 673.5, and 690.79) Comments: One commenter indicated that the de minimis standard of less than $25 for student original overpayment amounts is too low and should be increased to at least $100. Further, the commenter stated that excluding from the application of the de minimis standard situations in which the amount owed by the student was the result of an original overpayment amount that was paid down to less than $25, or was the result of the application of the $300 campus-based overaward threshold, makes the regulation too complicated for efficient program administration. Discussion: The less than $25 de minimis standard used in the regulations is based upon an amount that is cost effective for the Department to collect. We are able to successfully pursue collections of $25 or higher with Internal Revenue Service (IRS) offsets, as well as with other methods. As to the second comment, the regulations exclude two instances in which the de minimis amount provisions do not apply. In the case where the original overpayment amount was $25 or more, but has been reduced to less than $25, the student is still responsible for fully paying that remaining balance. Without this exclusion, students would be encouraged not to pay the last $24.99 of their overpayment. In the other case, a student is responsible for paying the balance of the overpayment, even if it is less than $25, when the overpayment is a result of applying the $300 campus-based overaward threshold to an FSEOG or Federal Perkins Loan overaward. Without this second exclusion, we would be creating a new campus-based overaward threshold of $324.99. There is no basis in the statute for changing the campus-based overaward threshold beyond $300. Changes: None. Comments: One commenter recommended that, in addition to applying the less than $25 de minimis amount to original overpayments owed by a student, the regulations provide the same treatment to an institution when it is liable for an overpayment. That is, the commenter suggested that an institution not be required to return an original overpayment that is less than $25. The commenter believed that the requirement for an institution to return small amounts is administratively burdensome to the institution and is not cost effective. Discussion: The purpose of having the less than $25 de minimis amount for student original overpayments is to allow needy students to continue to be eligible for Title IV aid when their overpayment obligation is a small amount. The overpayment amounts that an institution owes do not impact a student's eligibility. However, the regulatory change that we are making for student original overpayment amounts that are less than $25 provides for a consistent application across the Title IV programs, reduces the burden on needy students, and reduces the burden for institutions in the recording and collection of a small student debt. Changes: None. Comments: One commenter suggested that the language in the regulations requiring the institution to provide written notice of an FSEOG or Federal Pell Grant overpayment to the student be clarified. The commenter suggested that the regulations state that an institution is not required to send the written notice if the institution pays the overpayment on the student's behalf from its own funds, because there is no reason for the student to register a formal objection to an overpayment determination with the institution. Discussion: The written notice requirement for overpayments does not apply unless the student owes an overpayment that is outstanding. If the institution already paid the overpayment on the student's behalf from its own funds, the institution would not have to send the written notice to the student because there is no overpayment to collect. Changes: None. Rehabilitation of Defaulted Loans (Sections 668.35, 674.39, 682.405, and 685.211) Comments: One commenter objected to the addition of language in § 668.35(b) that allows a Perkins Loan borrower against whom a judgment has been obtained to regain eligibility for further Title IV student aid by making satisfactory repayment arrangements. The commenter noted that seeking a judgment against a defaulted Perkins Loan borrower is a last resort that involves considerable time and money and that a judgment is pursued only after a Perkins institution has exhausted all other means of collecting the defaulted loan. The commenter stated that extending further Title IV student financial assistance to such a borrower is against the taxpayers' best interests and that the only option that should be offered to a defaulted borrower against whom a judgment has been obtained is to pay the judgment amount in full. Discussion: The proposal to allow a borrower who is subject to a judgment to regain eligibility for Title IV program assistance reflects the concerns expressed by the negotiators that, under the original proposal presented to the negotiators, borrowers subject to a judgment would not only be excluded from the benefits of rehabilitation, but would also be unable to regain eligibility for Title IV aid. The negotiators felt that denying access to additional student financial assistance to a borrower who makes an agreement with the loan holder to repay the loan was excessively harsh and had the potential to effectively prohibit the borrower from furthering his or her education, securing employment, and being better able to repay student loan obligations. The new regulations in § 668.35(b) provide institutions and guarantors with significant flexibility to recover judgment debts by allowing the loan holder to determine the conditions that the judgment debtor must satisfy to regain eligibility for additional Title IV aid. For example, if, in a particular case, payment in full is the only repayment arrangement that is satisfactory to the holder, then a borrower who is subject to a judgment must pay the loan in full. Alternatively, should the holder agree to repayment arrangements with the judgment debtor, the holder is free to determine the number and amount of payments necessary to restore eligibility for further Title IV aid, as long as those arrangements include the borrower making at least six consecutive monthly payments. Changes: None. Comments: Some commenters noted that proposed language in § 682.405(b)(1), which defines “voluntary” payments for the purpose of loan rehabilitation, excluded payments made “after a judgment has been entered on a loan.” (The commenters incorrectly believed that this proposed change was the basis for excluding judgment borrowers from rehabilitation.) The commenters further noted that the proposed regulations in § 668.35(b) provided that a borrower who is subject to a judgment may reestablish Title IV eligibility if the borrower pays the debt in full or makes at least six payments under arrangements satisfactory to the judgment holder, but that the proposed regulation did not require that such payments be “voluntary.” Lastly, the commenters noted that the FFEL Program definition of “satisfactory repayment arrangements” in § 682.200(b) defines the term “voluntary payments” differently than it is defined in § 682.405(b)(1) of the FFEL Program regulations. While the commenters supported the proposed language in § 668.35(b) to provide a mechanism for judgment borrowers to regain Title IV eligibility, the commenters believed the interplay between this provision and the provisions within the FFEL Program regulations requiring differing “voluntary” payments is confusing and that clarification was needed. Several commenters representing institutions that participate in the Perkins Loan Program also noted that proposed § 668.35(b) is inconsistent with § 674.9(j) of the Perkins Loan Program regulations, in that the Perkins regulations require a defaulted Perkins Loan borrower subject to a judgment to make “voluntary” payments to reestablish eligibility for a Federal Perkins Loan. (Sections 674.9(j)(1) and (2) define “voluntary” payments as “payments made directly by the borrower, including payments made over and above payments made pursuant to a judgment * * * and do not include payments obtained pursuant to a judgment.”) In contrast, the commenters noted that proposed § 668.35(b) did not require that payments to reestablish Title IV eligibility be voluntary. The commenters suggested that we revise the FFEL regulations defining “satisfactory repayment arrangement” to clarify that a borrower against whom a judgment has been obtained can reestablish Title IV eligibility under § 668.35(b). With regard to the Perkins Loan program, the commenters suggested that we either revise proposed § 668.35(b) to reference the Perkins Loan program definition of “satisfactory repayment arrangement” or remove the reference to “voluntary” payments in § 674.9 for the purpose of regaining eligibility for a Perkins Loan. Discussion: We disagree with the commenters' assumption that the basis for excluding borrowers subject to a judgment from loan rehabilitation is that payments on a judgment are not considered “voluntary.” The preamble of the August 6, 2002 NPRM, beginning at 67 FR 51036, has a full discussion of the reasons we proposed to exclude borrowers subject to a judgment from the opportunity for loan rehabilitation. We agree with the commenters, however, that the interplay of provisions defining “voluntary” in the Perkins Loan and the FFEL program regulations and their relationship with proposed § 668.35(b) is confusing. We believe that the best resolution is to modify proposed § 668.35(b) to add the word “voluntary,” with a definition, to the description of the monthly payments that a borrower who is subject to a judgment must make before regaining eligibility for additional Title IV aid. We believe that the definition of “voluntary payments,” in the definition of “satisfactory repayment arrangement” in § 682.200(b) of the FFEL Program regulations is the most appropriate definition to use. Accordingly, we will define “voluntary” in § 668.35(b) as “payments made directly by the borrower, not including payments obtained by Federal offset, garnishment, or income or asset execution.” We would emphasize that a payment on a judgment is considered a “voluntary” payment under this definition if the borrower who is subject to the judgment makes a payment directly to the judgment holder and that there is no requirement that the payment be over and above the payment required on the judgment. We also believe that the definition of “voluntary” in § 674.9(j)(1) and (2) and in the Direct Loan Program definition of “satisfactory repayment arrangement” in § 685.102(b) should be changed to reflect the definition of “voluntary” in § 682.200(b). Changes: We have added the requirement that payments made pursuant to § 668.35(b) must be voluntary payments, along with a definition of “voluntary.” We have also amended the definition of “voluntary” in §§ 674.9(j) and 685.102(b) to reflect the definition of “voluntary” in current § 682.200(b). Comments: Several commenters requested that we revise the rules governing a guaranty agency's basic program agreement with the Secretary in § 682.401(b)(4), as they relate to reinstatement of borrower eligibility, to add a reference to proposed language in § 668.35(b) that allows a borrower who is subject to a judgment to reestablish eligibility for Title IV, HEA program assistance. The commenters believed that since loan rehabilitation would no longer be an option for a borrower with a loan on which a judgment has been obtained, a clarifying change was needed to exempt these borrowers from the FFEL Program rules governing reinstatement of borrower eligibility. Discussion: We agree that the addition of a reference in § 682.401(b)(4), stating that reinstatement of Title IV eligibility for a borrower with a defaulted loan on which a judgment has been obtained is governed by § 668.35(b), would add clarity. Changes: We have made the suggested change to § 682.401(b)(4). Comments: Several commenters supported the proposed regulations that excluded from rehabilitation defaulted Title IV loans on which a judgment has been obtained. Discussion: None. Changes: None. Comments: One commenter stated that rehabilitation of loans subject to a judgment has served as a beneficial and successful tool to encourage borrowers to repay their loans and objected to the proposed changes that excluded from rehabilitation defaulted loans on which a judgment has been obtained. The commenter stated that many borrowers default at an early age without realizing the serious and long-lasting consequences of their failure to repay their loan and that eliminating the option of rehabilitation denies borrowers subject to a judgment the ability to improve their credit history. Discussion: The negotiators reached consensus that the effort and expense associated with rehabilitating loans subject to a judgment outweighed the value of rehabilitation of judgment debts as a collection tool. However, as we pointed out in the August 6, 2002, NPRM, while the new regulations exclude a loan on which a judgment has been obtained from rehabilitation, a loan holder may, at its option, enter into an agreement with such a borrower to offer some of the benefits of rehabilitation while maximizing recovery of the debt. Moreover, we also proposed new language in § 668.35(b) to ensure that a borrower subject to a judgment may reestablish eligibility for further Title IV, HEA program assistance. Changes: None. Comments: Several commenters requested that we revise § 682.405(b)(1) to specify that the definition of the term voluntary in that section applies only to loan rehabilitation. The commenters felt that we introduced ambiguity with regard to the meaning of voluntary payments by placing language in the August 6, 2002 NPRM preamble describing proposed changes to § 682.405(b)(1) in the same paragraph as language describing reinstatement of Title IV eligibility. The commenters also suggested revising this paragraph to exclude payments obtained by state offset from the definition of voluntary payments for the purpose of loan rehabilitation. Discussion: Although we regret any confusion that resulted from the placement of preamble language describing proposed changes to § 682.405(b)(1) in the same paragraph as language describing reinstatement of Title IV eligibility, we do not see the need for a clarification that the term voluntary, as defined in § 682.405(b)(1), applies only to that section. The proposed language, by its placement within § 682.405, makes it clear that the definition of voluntary applies only to that section. We also disagree with the suggestion to revise this paragraph to add that payments made by state offset are excluded from the definition of voluntary payments for the purposes of loan rehabilitation because making such a change is more than a technical change to the regulations and was not subject to negotiated rulemaking. Changes: None. Comments: One commenter felt strongly that the regulations should specifically state that judgment holders may enter into an agreement with the judgment debtor that would allow the holder to provide many of the same benefits offered under loan rehabilitation programs. The commenter asked if the proposed addition of language in § 668.35(b), which allows a judgment borrower the opportunity to reestablish Title IV eligibility by making repayment arrangements that are satisfactory to the holder of the debt, gives the holder of a judgment the authority to enter into agreements with judgment borrowers that would provide borrowers with some of the benefits of rehabilitation. Discussion: In many cases, the terms of a court judgment make the entire obligation due and payable in full immediately, and any payment arrangements that arise between the parties to satisfy the judgment is solely by agreement between the debtor and the judgment holder. We do not see the need to specify in regulation the authority already held by a judgment holder to enter into such agreements with a judgment debtor. The new regulations in § 668.35(b) simply extend to a borrower who is subject to a judgment the opportunity to reestablish eligibility for Title IV student financial assistance. As stated earlier, the negotiators were concerned that borrowers who were subject to a judgment would no longer be entitled to rehabilitate their loans and would be left without any recourse if the borrower wished to return to school and needed additional financial aid. We note that a borrower who is subject to a judgment will reestablish Title IV eligibility as part of an agreement between the debtor and judgment holder, if the holder chooses to enter into such an agreement. However, the authority to enter into such an agreement stems from the nature of the judgment debt, not from this regulatory provision. Changes: None. Comments: Several commenters asked us to clarify what types of benefits a holder can provide to a borrower with a Title IV loan that is subject to a judgment pursuant to an agreement outside of the holder's loan rehabilitation program. The commenters were concerned that loan holders would not have the authority to offer removal of the borrower's negative credit history under such an agreement under the Fair Credit Reporting Act and loan program credit bureau reporting regulations. Several commenters wanted us to address the status of a loan on which a judgment has been obtained, both from the standpoint of the borrower and the judgment holder, once the borrower has reached an agreement with the judgment holder. One commenter asked us to clarify how long a borrower has to repay the loan and what interest rate would apply in cases when the borrower signs a new note under an arrangement between the borrower and the judgment holder. Discussion: The holder of a Title IV loan that is subject to a judgment has the option, but is not required, to enter into an agreement with the borrower in which the holder agrees to offer some benefits. We expect any agreement between a borrower subject to a judgment and the judgment holder to require the debtor to make at least six consecutive, voluntary monthly payments, the minimum standard contained in § 668.35(b) for a judgment borrower to reestablish Title IV eligibility. A judgment holder is also free to require other, more stringent repayment arrangements it considers appropriate. The benefits the judgment holder may offer the borrower as part of an agreement to resolve a judgment include the return of Title IV eligibility and removal of a borrower's negative credit history. Alternatively, the holder may offer to vacate the judgment and allow the borrower to sign a new promissory note after the borrower complies with the conditions of the agreement. However, it is up to the holder of the judgment to consider any legal and practical restrictions on its ability to offer the borrower certain benefits, such as credit report changes. In accordance with general legal principles and our longstanding policy, a judgment debt on a Title IV loan is considered a Title IV loan obligation. An agreement between a loan holder and a borrower to resolve a judgment does not change the character of the debt. Accordingly, if the holder vacates the judgment as part of such an agreement, the borrower's rights and responsibilities would be those of a defaulted Title IV borrower and would include the opportunity to enter into a formal regulatory rehabilitation agreement with the loan holder. The holder would be subject to the requirements and benefits associated with holding a defaulted Title IV loan. The interest rate and repayment options would be those available under the original promissory note. Changes: None. Comments: One commenter stated that the regulations addressing rehabilitation of loans, although now revised to exclude loans reduced to judgment, still may imply that the Secretary considers defaulted borrowers to be able to seek rehabilitation even after the Secretary has referred a loan to the Department of Justice for collection litigation. The commenter considered this implication unfounded as a matter of law, contrary to the interests of the loan programs and the Federal government, and urged the Secretary to clarify the proposed regulations to specify that neither the statute nor the regulations allow borrowers to rehabilitate loans that have been referred to the Department of Justice for litigation. Discussion: We believe that the HEA and the Federal Claims Collection Standards adequately address this concern and that a regulatory change is unnecessary. A rehabilitation agreement is a form of repayment arrangement; after a Federal agency has referred a debt owed the agency to the Department of Justice for litigation, the Federal Claims Collection Standards provide that the Department of Justice has “exclusive jurisdiction” over the debt, and the agency is no longer authorized to determine repayment terms for that debt (31 CFR 904.1(b)). Moreover, sections 432(a)(2) and 468(3) of the HEA state explicitly that the Secretary's broad power to enforce Title IV HEA loans remains subject to the full authority of the Attorney General to conduct litigation to collect those loans. The HEA both directs the institution, the guarantor, or the Secretary to offer the borrower in default an opportunity for rehabilitation of the loan, and directs that the Secretary's authority to arrange repayment terms ends where responsibility for enforcement of the debt passes to the Department of Justice. The Secretary therefore interprets the HEA itself to limit the defaulted borrower's ability to seek rehabilitation of a Title IV loan only to the period during which the loan is held by the Secretary. The option to rehabilitate a defaulted loan therefore lapses once the debt is referred to the Department of Justice. Changes: None. Comments: Two commenters recommended that borrowers subject to a judgment, who have begun the rehabilitation process but not completed the payment stream before final regulations are effective, be permitted to complete the rehabilitation process. Discussion: If a holder has agreed to allow a judgment borrower to attempt rehabilitation of his or her loan prior to the effective date of these final regulations, we expect the loan holder to honor such an agreement. However, if the judgment borrower misses any of the required payments, the holder is not required to allow the borrower another attempt at rehabilitation. Changes: None. Comments: One commenter asked if the holder of an institutional loan subject to a judgment has the option to enter into an agreement with the borrower and offer to remove the borrower's negative credit history under the proposed regulations. Discussion: The terms and conditions of non-Federal loans are not subject to the regulations that apply to the Title IV loan programs. Changes: None. Late Disbursements (Section 668.164) Comments: Several commenters objected to the proposal that an institution would be required to obtain the Secretary's approval in order to make late disbursements more than 120 days after the student was no longer eligible. Most of these commenters believed that we should continue the current practice of allowing guaranty agencies to approve late disbursements of FFEL Program funds. Two commenters stated that deciding to make a late disbursement was similar to professional judgment and argued that institutions should be permitted to make these disbursements without obtaining our approval. Discussion: While we appreciate the willingness of guaranty agencies to approve requests for late disbursements that are not made within the 120-day timeframe, we continue to believe that we should review and approve such disbursement requests. These rules (and previous late disbursement rules) provide an exception to the general rule that a student must be enrolled and eligible to receive Title IV student aid. If a disbursement is not made while a student is enrolled and eligible, an institution now has, regardless of the reason and without any approval, 120 days to make that disbursement. Beyond that, from both a policy and operations perspective, we need to be aware of the frequency and circumstances under which this exception is used. In addition, we believe it is more efficient, and more equitable to students and institutions, to direct all late disbursement requests requiring approval (those after the 120-day timeframe) to one party for review, particularly for requests that deal with funds from more than one Title IV program. To facilitate the process, before the effective date for these regulations, the Department plans to establish a process by which institutions will submit their request. In its request, an institution will provide the name of the student (or parent in the case of a PLUS loan), the type and amount of Title IV aid to be disbursed, and a description of the circumstances that resulted in the disbursement not being made, including why the disbursement was not made and was not the fault of the student or parent. After we review the request, we will promptly inform the institution of our decision or if necessary, request additional information. If the request is approved, the institution can, consistent with the requirements of the funding source ( i.e., FFEL lender or guaranty agency) make the late disbursement. We expect the institution to maintain documentation of its request and the Department's response to that request. Changes: None. Comments: One commenter did not agree with the proposal that an institution would be required to offer a late disbursement to a student who had completed a payment period or period of enrollment. The commenter contended that in many such cases the student would not owe the institution any money or would not be likely to have other remaining costs, thereby eliminating the need for the late disbursement. For this reason, the commenter was concerned that requiring an institution to make a late disbursement of a loan would needlessly increase a student's debt. Instead, the commenter suggested that an institution should have sole discretion in determining whether a late disbursement was necessary. Discussion: As we explained in the August 8, 2002 NPRM, because the student earned the funds for the period completed, it is up to the student, not the institution, to decide whether he or she needs the funds. Consequently, an institution must offer the late disbursement to the student and must make that disbursement if the student accepts the offer. If an institution believes a late disbursement is not needed or is concerned that a late disbursement of a loan may increase the risk of default, we encourage the institution to advise the student about how the disbursement may affect his or her eligibility for additional Title IV aid and caution the student about loan debt. An institution may do this in the offer it makes to the student. Changes: None. Comments: Many commenters supported the proposal eliminating the requirement that, for a student to qualify for late disbursement, an institution must have a valid SAR/ISIR for that student on or before the date the student became ineligible. Discussion: We appreciate the support for a proposal that makes it easier for a student to qualify for a late disbursement and easier for an institution to document that the student qualified. However, as we noted in the NPRM, an institution must still have a valid SAR/ISIR to make a late disbursement of a Federal Pell Grant. In this regard, two changes are necessary. Changes: Two conforming changes are necessary. First, we have made a conforming change to 668.22(a)(4)(ii)(B) to increase from 90 to 120 days the amount of time within which an institution must disburse a post-withdrawal disbursement. Second, we have made a conforming change to § 690.61(b) to exempt a student, who now otherwise qualifies for a late disbursement, from the requirement that the student submit a valid SAR/ISIR to the institution while the student is enrolled (the student now qualifies, in part, when the Department processes a SAR/ISIR with a valid EFC). As a result of this conforming change, the deadline date for receiving a valid SAR/ISIR in § 690.61(b)(2) no longer applies to a late disbursement of a Federal Pell Grant. Rather, the deadline date provisions for receiving a valid SAR/ISIR for the purpose of making a late disbursement of a Federal Pell Grant are now included as part of § 668.164(g)(4). Notices and Authorizations (Section 668.165) Comments: Many commenters supported the proposed change that would eliminate the requirement that an institution confirm receipt by a student of a notice sent electronically that Title IV loan funds were credited to a student's account. Discussion: We are appreciative of the commenters' support. Changes: None. Timely Return of Funds (Sections 668.171 and 668.173) Comments: Two commenters opposed the proposal under which an institution would have to return unearned Title IV program funds no later than 30 days after the institution determines that a student withdrew. The commenters stated that the process of determining which students unofficially withdrew, and the subsequent calculation of the amount of unearned funds, often takes longer than the 30-day period allowed for returning the funds. Discussion: We did not propose any changes to the 30-day timeframe for returning unearned Title IV program funds, as currently provided in § 668.22. The proposed changes focused solely on establishing clear requirements for returning unearned Title IV funds within the existing 30-day timeframe and the consequences if that timeframe is not met. Consequently, we decline to accept the commenters' proposal. Changes: None. Comments: A few commenters objected to the 45-day proposal for returning unearned funds by check, arguing it would be unreasonable to hold an institution responsible for the time it takes the Secretary or an FFEL Program lender to cash a check. One of these commenters believed that we should not impose any requirements along these lines, unless there is a deliberate pattern of delaying the return of unearned funds. Discussion: The Department or an FFEL lender (or its agent) will usually receive a check mailed by an institution within three to five days. Within the next day or two, that check is endorsed by the bank used by the Department or lender, resulting in a typical timeframe of four to seven days. Even if this process takes twice as long, an institution would still satisfy the requirements that unearned funds were returned in a timely manner (an institution must issue the check no later than 30 days after it determines the student withdrew, and the check must have been endorsed by the bank used by the Department or lender no later than 45 days after that date). Moreover, the regulations provide that if an institution can show that something unusual happened that delayed the delivery or receipt of a particular check, we will not hold the institution responsible. Changes: None. Comments: One commenter stated that the date on the back of the check is not necessarily the date it was received by an FFEL lender. To clarify the rule, the commenter suggested that we define the clearance date as the date the check clears the lender's or Department's bank account. Discussion: In proposing this provision, we intended to describe the first date that appears on a cancelled check. In this regard, the Federal Reserve banking regulations under 12 CFR part 229, appendix D, require a depository bank (in this case, the bank used by the Department or FFEL lender) to evidence that it received a check by endorsing that check. Under those regulations, the bank's endorsement must include the routing number, the name of the bank, and the endorsement date. We agree to revise the regulations to clarify that the endorsement date is the date used to determine whether an institution returned unearned funds by check in a timely manner. Changes: Section 668.173(b)(4)(ii) is revised to provide that if a check is used to return unearned funds, it must be endorsed by the bank used by the Department or FFEL Program lender no later than 45 days after the institution's determination that a student withdrew. Comments: One commenter suggested another method of returning unearned funds. In cases where an institution needs Title IV program funds to make disbursements to additional eligible students, the institution should be permitted to use unearned funds of withdrawn students to make those disbursements instead of depositing or transferring those funds into the institution's Federal account. Discussion: An institution that maintains a separate Federal bank account must deposit to that account, or transfer from its operating account to its Federal account, the amount of unearned program funds, as determined under § 668.22. The date the institution makes that deposit or transfer is the date used to determine whether the institution returned the funds within the 30-day timeframe permitted in the regulations. After that, the institution can use the unearned funds to make disbursements to other eligible students, provided those funds were originally received from the Department or from an FFEL lender under a process that allows the institution to use the unearned funds for this purpose. However, unless the Department requires an institution to use a separate account, the institution may use its operating account for Title IV purposes. In this case, the institution must designate that account as its Federal bank account, as required under § 668.163(a), and have an auditable system of records showing that the funds have been allocated properly and returned in a timely manner. Absent a clear audit trail, the Department can require the institution to begin maintaining Title IV funds in a separate bank account. Moreover, the institution has a fiduciary responsibility to segregate Federal funds from all other funds and to ensure that Federal funds are used only for the benefit of eligible students. Absent a separate Federal bank account, the institution must ensure that its accounting records clearly reflect that it segregates Federal funds. Under no circumstances may the institution use Federal funds for any other purpose, such as paying operating expenses, collateralizing or otherwise securing a loan, or earning interest or generating revenue in a manner that risks the loss of Federal funds or subjects Federal funds to liens or other attachments (such as would be the case with certain overnight investment arrangements or sweeps). Clearly, carrying out these fiduciary duties limits the ways the institution can otherwise manage cash in its operating account, simply because that account contains Federal funds. In any event, we consider an institution that maintains (co-mingles) Federal Title IV, HEA program funds and general operating funds in the same bank account to satisfy the requirement under § 668.173(b)(1) that it return unearned funds on a timely basis if (1) the institution maintains subsidiary ledgers of each type of funds co-mingled in that account that clearly show how and when those funds were used and reconciled to its general ledger, (2) the subsidiary ledgers for each Federal program provide a detailed audit trail on a student-by-student basis that reconciles to the amount of Federal Title IV, HEA program funds received and disbursed by the institution, and (3) the institution updates the relevant subsidiary ledger accounts in its general ledger no later than 30 days after it determines that the student withdrew. More specifically, the return of an unearned funds transaction should be recorded as a debit to the Federal program fund subsidiary ledger account and credit to the institution's operating fund subsidiary ledger account. The date of the return is the date this transaction is posted to the institution's general ledger. Changes: None. Comments: One commenter felt that the letter of credit trigger should be changed from a finding that an institution has not returned unearned funds for “10 percent or more” of the sampled students, to a finding that an institution has not returned unearned funds for “more than 10 percent” of the sampled students. The commenter noted that a “more than 10 percent” trigger would be consistent with the Department's Program Review Guide and the Department's School Site Review Guide for Guaranty Agencies, which use a trigger of “greater than 10 percent” as an indication of a possible significant problem. Discussion: We agree that the triggers should be consistent. Changes: Section 668.173(d)(3)(iv) has been changed to require a letter of credit upon a finding that an institution has not returned unearned funds for more than 10 percent of the sampled students. Federal Perkins Loan—Master Promissory Note (Sections 674.2 and 674.16) Comments: Many commenters supported the proposal to adopt a Master Promissory Note (MPN) in the Federal Perkins Loan Program. These commenters believe that the MPN will simplify the loan process by eliminating the need for institutions to prepare, and students to sign, a promissory note each award year. They also stated that uniformity across the Title IV loan program regulations, where possible, is beneficial for institutions and borrowers. One commenter representing several institutions participating in the Perkins Loan Program expressed concern about setting conditions under which an MPN would automatically expire. The commenter stated that there is no apparent reason for establishing arbitrary timeframes by which an MPN will automatically expire since participating institutions do not need to coordinate with a third party. The commenter believed that these timeframes would diminish the streamlining benefits of the MPN in the Perkins Loan Program and create additional burden on institutions because they would be required to ensure that funds are not advanced against an expired MPN. Discussion: We appreciate the overwhelming support for an MPN in the Perkins Loan Program and agree with those commenters that consistency across the Title IV loan programs is beneficial to both institutions and borrowers. We disagree with the commenter who objected to the time limits on the use of an MPN. Because a Perkins Loan borrower will be signing the MPN only once, we believe it is necessary to have time limits on the use of the MPN to achieve an appropriate balance between consumer protection and simplification of the loan process. Further, we are not aware of any public or private loan program that has open-ended promissory notes. In addition, the expiration date provisions are consistent with the expiration date provisions for FFEL and Direct Loan MPNs, and ensure that borrowers across all three Title IV loan programs are treated consistently. We do not believe that these time limits diminish the benefit of an MPN or cause any additional workload for institutions. Changes: None. Federal Perkins Loan—Write-Offs (Sections 674.9 and 674.47) Comments: Several commenters supported the proposed regulations in § 674.47(g) and (h) to allow institutions to write off accounts of less than $25, or less than $50, if the borrower has been billed for at least two years. These commenters also supported the provisions that would make it clear that a borrower whose balance has been written off is relieved of all repayment obligations. One commenter representing several Perkins Loan institutions recommended modifying the proposed language under § 674.47(h)(1)(ii) that would permit institutions to write off an account with a balance of less than $50 if the borrower has been billed for this balance for at least two years. The commenter recommended that the language be modified so that institutions would not be required, given the minimal amount owed, to keep accounts with balances of less than $50 open for two years before being able to write off these accounts. The commenter p [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A02-27627. Public record. Not legal advice.