# Program Integrity and Improvement > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A2015-11917 ## Record - **Collection:** Federal Register - **Document type:** Proposed Rule - **Published:** May 18, 2015 - **Citation:** 80 FR 28484 ## Text DEPARTMENT OF EDUCATION 34 CFR Part 668 [Docket ID ED-2015-OPE-0020] RIN 1840-AD14 Program Integrity and Improvement AGENCY: Office of Postsecondary Education, Department of Education. ACTION: Notice of proposed rulemaking. SUMMARY: The Secretary proposes to amend the cash management regulations under subpart K and other sections of the Student Assistance General Provisions regulations issued under the Higher Education Act of 1965, as amended (HEA). These proposed regulations are intended to ensure that students have convenient access to their title IV, HEA program funds, do not incur unreasonable and uncommon financial account fees on their title IV funds, and are not led to believe they must open a particular financial account to receive their Federal student aid. In addition, these proposed regulations update other provisions in the cash management regulations under subpart K and otherwise amend the Student Assistance General Provisions. We also propose to clarify how previously passed coursework is treated for title IV eligibility purposes and streamline the requirements for converting clock hours to credit hours. DATES: We must receive your comments on or before July 2, 2015. ADDRESSES: Submit your comments through the Federal eRulemaking Portal or via postal mail, commercial delivery, or hand delivery. We will not accept comments submitted by fax or by email or those submitted after the comment period. To ensure that we do not receive duplicate copies, please submit your comments only once. In addition, please include the Docket ID at the top of your comments. If you are submitting comments electronically, we strongly encourage you to submit any comments or attachments in Microsoft Word format. If you must submit a comment in Adobe Portable Document Format (PDF), we strongly encourage you to convert the PDF to print-to-PDF format or to use some other commonly used searchable text format. Please do not submit the PDF in a scanned format. Using a print-to-PDF format allows the Department to electronically search and copy certain portions of your submissions. • Federal eRulemaking Portal: Go to www.regulations.gov to submit your comments electronically. Information on using Regulations.gov, including instructions for accessing agency documents, submitting comments, and viewing the docket, is available on the site under “Are you new to the site?” • Postal Mail, Commercial Delivery, or Hand Delivery: The Department strongly encourages commenters to submit their comments electronically. However, if you mail or deliver your comments about the proposed regulations, address them to Jean-Didier Gaina, U.S. Department of Education, 1990 K Street NW., Room 8055, Washington, DC 20006. Privacy Note: The Department's policy is to make all comments received from members of the public available for public viewing in their entirety on the Federal eRulemaking Portal at www.regulations.gov. Therefore, commenters should be careful to include in their comments only information that they wish to make publicly available. FOR FURTHER INFORMATION CONTACT: For clock-to-credit-hour conversion: Amy Wilson, U.S. Department of Education, 1990 K Street NW., Room 8027, Washington, DC 20006-8502. Telephone: (202) 502-7689 or by email at: amy.wilson@ed.gov. For repeat coursework: Vanessa Freeman, U.S. Department of Education, 1990 K Street NW., Room 8040, Washington, DC 20006-8502. Telephone: (202) 502-7523 or by email at: vanessa.freeman@ed.gov or Aaron Washington, U.S. Department of Education, 1990 K Street NW., Room 8033, Washington, DC 20006-8502. Telephone: (202) 502-7478 or by email at: aaron.washington@ed.gov. For cash management: Ashley Higgins, U.S. Department of Education, 1990 K Street NW., Room 8037, Washington, DC 20006-8502. Telephone: (202) 219-7061 or by email at: ashley.higgins@ed.gov or Tony Gargano, U.S. Department of Education, 1990 K Street NW., Room 8020, Washington, DC 20006-8502. Telephone: (202) 502-7519 or by email at: anthony.gargano@ed.gov. If you use a telecommunications device for the deaf (TDD) or a text telephone (TTY), call the Federal Relay Service (FRS), toll free, at 1-800-877-8339. SUPPLEMENTARY INFORMATION: Throughout this preamble, we refer to title IV, HEA program funds using naming conventions common to the student aid community, including “title IV student aid” and similar phrasing. Executive Summary Purpose of This Regulatory Action: Over the past decade, the student financial products marketplace has shifted and the budgets of postsecondary institutions have become increasingly strained, in part due to declining State funding. These changes have coincided with a proliferation of agreements between postsecondary institutions and financial account providers. Cards offered pursuant to these arrangements, usually in the form of debit or prepaid cards and sometimes cobranded with the institution's logo or combined with student IDs, are marketed as a way for students to receive their title IV credit balances via a more convenient electronic means. However, as we describe in more detail elsewhere in this preamble, a number of reports from government and consumer groups document troubling practices employed by some financial account providers. Legal actions, especially those initiated by the Federal Reserve and Federal Deposit Insurance Corporation (FDIC), against the sector's largest provider reinforce some of these concerns. According to these reports, many of the following practices were found: • Providers prioritizing disbursements to their own affiliated accounts over aid recipients' preexisting bank accounts; • Providers and schools strongly implying to students that signing up for the college card account was required to receive Federal student aid; • Private student information unrelated to the financial aid process being given to providers before aid recipients consented to opening accounts; • Access to the funds on the college card was not always convenient; and • Aid recipients being charged onerous, confusing, or unavoidable fees in order to access their student aid funds or to otherwise use the account. As discussed in further detail under the heading “Fee provisions for T1 accounts,” these practices indicate that many institutions have shifted costs of administering the title IV, student aid programs from institutions to students. Given that approximately nine million students attend schools with these agreements, that approximately $25 billion dollars in Pell Grant and Direct Loan program funds are disbursed to undergraduates at these institutions, that students are a captive audience subject to marketing from their institution, that the college card market is expanding, and given the concerns raised by existing practices, we believe regulatory action governing the disbursement of title IV, student aid is warranted. In addition, we include in the proposed regulations a number of minor changes that reflect updated Office of Management and Budget (OMB) guidance for Federal awards, clarify some provisions to further safeguard title IV funds, and remove references to programs that are no longer authorized. Finally, we address in the proposed regulations two issues unrelated to cash management—repeat coursework and clock-to-credit-hour conversion—that were identified by the higher education community as requiring review. We believe these proposed regulatory changes would result in more equitable treatment of student aid recipients. Summary of the Major Provisions of This Regulatory Action: The proposed regulations would— • Explicitly reserve the right for the Secretary to establish a method for directly paying credit balances to student aid recipients; • Establish two different types of arrangements between institutions and financial account providers, “tier one (T1) arrangement” and “tier two (T2) arrangement,” respectively; • Define a “T1 arrangement” as an arrangement between an institution and a third-party servicer that performs one or more of the functions associated with processing direct payments of title IV funds on behalf of the institution and that offers one or more financial accounts to students and parents; • Define a “T2 arrangement” as an arrangement between an institution and a financial institution or entity that offers financial accounts through a financial institution under which financial accounts are offered and marketed directly to students or their parents, with the regulatory consequences of T2 status to apply absent documentation from the institution that students or parents do not have credit balances at the institution; • Require institutions that have T1 or T2 arrangements to establish a student choice process that: Prohibits an institution from requiring students or parents to open an account into which their credit balances must be deposited; requires an institution to provide a list of account options that a student may choose from to receive credit balance funds, where each option is presented in a neutral manner and the student's preexisting bank account is listed as the first, most prominent, and default option; and ensures electronic payments made to a student's preexisting account are as timely as, and no more onerous, as payments deposited to an account made available pursuant to a T1 or T2 arrangement; • Require that the institution obtain consent from the student or parent to open an account under a T1 or T2 arrangement (1) before the institution shares personal information about that student or parent with the financial account provider, and (2) before the institution or account provider sends an access device to the student or parent or links the student's ID card with a financial account; • Mitigate fees incurred by student aid recipients by requiring reasonable access to surcharge-free automated teller machines (ATMs), and, for accounts offered under a T1 arrangement, both prohibiting point-of-sale fees and overdraft fees charged to student and parent account holders, and providing students and parents with 30 days following a disbursement of title IV funds to access those funds without any fees; • Require that contracts governing T1 or T2 arrangements and cost information related to those contracts are publicly disclosed; and • Require that institutions that have T1 or T2 arrangements establish and evaluate the contracts governing those arrangements in light of the best financial interests of students. The proposed regulations would also— • Allow an institution offering term-based programs to count, for enrollment purposes, courses a student is retaking that the student previously passed, up to one repetition per course, including when a student is retaking a previously passed course due to the student failing other coursework; and • Streamline the requirements governing clock-to-credit-hour conversion by removing the provisions under which a State or Federal approval or licensure action could cause a program to be measured in clock hours. Please refer to the Significant Proposed Regulations section of this preamble for a detailed discussion of the major provisions contained in the proposed regulations. Costs and Benefits: The benefits of these proposed regulations include providing information that will allow students and parents to make informed and beneficial decisions regarding the handling and distribution of their title IV funds. These disclosures will also help prevent students from being misled into believing that they are required to use a financial account or access device that has the apparent endorsement of their school. These proposed regulations would also benefit students by guaranteeing the right to receive their title IV credit balances at a financial institution and through an access device of their choice. Students who decide to choose accounts with lower fees, and who would have otherwise been steered toward a higher-cost account, will save money and be able to use more of their title IV aid for educational expenses. Students who open accounts covered by these regulations would benefit from having more surcharge-free ATMs from which to access their title IV credit balances. The proposed regulations also would help protect both students and parents from deceptive marketing practices aimed at encouraging them to do business with a particular financial institution in order to access title IV funds. There would be costs incurred by postsecondary and financial institutions under these proposed regulations. Some postsecondary institutions and financial institutions that do not choose to price their products competitively or that do not justify higher prices (with, for example, superior customer service, better account features, free banking services, the elimination of certain fees) could lose future customers as students or parents decide to use lower-cost accounts as a result of fee disclosures. The T1 arrangement fee provisions will also have cost implications for affected financial institutions and for institutions that currently receive free- or reduced-price title IV administrative services (or other remuneration), and will likely lower the revenue for schools when financial account providers' ability to pass costs on to title IV recipients is limited under these regulations. Some of these costs will include performing due diligence reviews to ensure that contracts are made in the best interests of students, the costs of providing surcharge-free ATM network access, and the costs of presenting credit balance recipients with a list of neutral account options. Other costs would depend upon aid recipient behavior, and the Department expects that many financial account providers may earn less from their student accounts under the proposed regulations. The provisions regarding convenient access benefit students and could also have cost implications for some financial account providers and institutions. Financial account providers could have to deploy additional ATMs or pay fees to ATM network providers to comply with these proposed requirements. Some institutions with T1 or T2 arrangements could incur costs when establishing a student choice process that would allow students to select among a list of available accounts into which title IV credit balances would be disbursed. Institutions would also likely incur some paperwork burden related to making fee disclosures, and students would incur an additional paperwork burden when selecting an option for how to receive their credit balance from a list of options. Invitation to Comment: We invite you to submit comments regarding the proposed regulations. In particular, we request comment on: • Whether proposed methods for prorating institutional charges under § 668.164(c)(5) are appropriate; • How an institution should disclose the costs of books and supplies that are included as part of tuition and fees under § 668.164(c)(2) and frequency of those disclosures; • Whether the option to receive a check should continue to be affirmatively offered to students as provided under proposed § 668.164(d)(4)(i)(B)( 4 ); • Whether there is a need to establish a minimum number of credit balance recipients at an institution before the institution must comply with the provisions of proposed § 668.164(f)(4); • Whether the personal information that an institution may provide before a student or parent consents to open a financial account, as provided under § 668.164(e)(2)(i)(A) and (f)(4)(i)(A), is sufficient to meet the needs of a servicer or financial institution; • Whether the Department should take more proscriptive action than the one proposed in this NPRM to prevent abusive marketing practices with respect to institutional devices such as student IDs and associated financial accounts; • Whether 30 days following a disbursement is an appropriate timeframe to allow a title IV aid recipient an opportunity to reasonably access aid dollars free of charge as provided under proposed § 668.164(e)(2)(iii)(B)( 4 ); • Whether, as proposed in § 668.164(e)(2)(vii) and (f)(4)(vii), it would be in the best financial interests of students to require institutions that have a T1 or T2 arrangement to periodically conduct reasonable due diligence reviews to ascertain whether the fees imposed under the arrangement are excessive; and • Whether the proposed regulations would require transmission of information that any other agency or authority of the United States gathers or makes available. Please refer to the relevant portions of the Significant Proposed Regulations section of this preamble for more detail on each of the issues for which we specifically request comment. To ensure that your comments have maximum effect in developing the final regulations, we urge you to identify clearly the specific section or sections of the proposed regulations that each of your comments addresses, and provide relevant information and data, as well as other supporting materials in the request for comment, even when there is no specific solicitation of data. We also urge you to arrange your comments in the same order as the proposed regulations. Please do not submit comments outside the scope of the specific proposals and proposed regulations in this notice of proposed rulemaking, as we are not required to respond to comments that are outside of the scope of the proposed rule. See ADDRESSES for instructions on how to submit comments. We invite you to assist us in complying with the specific requirements of Executive Orders 12866 and 13563 and their overall requirement of reducing regulatory burden that might result from the proposed regulations. Please let us know of any further ways we could reduce potential costs or increase potential benefits while preserving the effective and efficient administration of the Department's programs and activities. During and after the comment period, you may inspect all public comments about the proposed regulations by accessing Regulations.gov. You may also inspect the comments in person in room 8055, 1990 K Street NW., Washington, DC, between 8:30 a.m. and 4 p.m., Washington, DC time, Monday through Friday of each week except Federal holidays. If you want to schedule time to inspect comments, please contact the person listed under FOR FURTHER INFORMATION CONTACT . Assistance to Individuals with Disabilities in Reviewing the Rulemaking Record: On request, we will provide an appropriate accommodation or auxiliary aid to an individual with a disability who needs assistance to review the comments or other documents in the public rulemaking record for the proposed regulations. If you want to schedule an appointment for this type of accommodation or auxiliary aid, please contact the person listed under FOR FURTHER INFORMATION CONTACT . Public Participation On May 1, 2012, we published a notice in the Federal Register (77 FR 25658) announcing our intent to establish a negotiated rulemaking committee under section 492 of the HEA to develop proposed regulations designed to prevent fraud and otherwise ensure proper use of title IV Federal Student Aid program funds, especially within the context of current technologies. In particular, we announced our intent to propose regulations to address the use of debit cards and other banking products for disbursing title IV Federal Student Aid program funds, and to improve and streamline the campus-based Federal Student Aid programs. On April 16, 2013, we published a notice in the Federal Register (78 FR 2247), which we corrected on April 30, 2013 (78 FR 25235), announcing additional topics for consideration for action by a negotiated rulemaking committee. The following topics for consideration were identified: Cash management of funds provided under the title IV Federal Student Aid programs; State authorization for programs offered through distance education or correspondence education; State authorization for foreign locations of institutions located in a State; clock-to-credit-hour conversion; gainful employment; changes to the campus safety and security reporting requirements in the Clery Act made by the Violence Against Women Act; and the definition of “adverse credit” for borrowers in the Federal Direct PLUS Loan program. In that notice, we announced three public hearings at which interested parties could comment on the topics suggested by the Department and could suggest additional topics for consideration for action by a negotiated rulemaking committee. We also invited parties unable to attend a public hearing to submit written comments on the additional topics and to submit other topics for consideration. On May 13, 2013, we announced in the Federal Register (78 FR 27880) the addition of a fourth hearing. The hearings were held on May 21, 2013, in Washington, DC; May 23, 2013, in Minneapolis, Minnesota; May 30, 2013, in San Francisco, California; and June 4, 2013, in Atlanta, Georgia. Transcripts from the public hearings are available at http://www2.ed.gov/policy/highered/reg/hearulemaking/2012/index.html. Written comments submitted in response to the April 16, 2013, notice may be viewed through the Federal eRulemaking Portal at www.regulations.gov, within docket ID ED-2012-OPE-0008. You can link to the ED-2012-OPE-0008 docket as a related docket inside the ED-2013-OPE-0124 docket associated with this notice of proposed rulemaking. Alternatively, individuals can enter docket ID ED-2012-OPE-0008 in the search box to locate the appropriate docket. Instructions for finding comments are also available on the site under “How to Use Regulations.gov” in the Help section. Negotiated Rulemaking Section 492 of the HEA, 20 U.S.C. 1098a, requires the Secretary to obtain public involvement in the development of proposed regulations affecting programs authorized by title IV of the HEA. After obtaining advice and recommendations from the public, including individuals and representatives of groups involved in the title IV, HEA programs, in most cases the Secretary must subject the proposed regulations to a negotiated rulemaking process. If negotiators reach consensus on the proposed regulations, the Department agrees to publish without alteration a defined group of regulations on which the negotiators reached consensus unless the Secretary reopens the process or provides a written explanation to the participants stating why the Secretary has decided to depart from the agreement reached during negotiations. Further information on the negotiated rulemaking process can be found at: http://www2.ed.gov/policy/highered/reg/hearulemaking/hea08/neg-reg-faq.html. On November 20, 2013, we published a notice in the Federal Register (78 FR 69612) announcing our intent to establish a negotiated rulemaking committee to prepare proposed regulations to address program integrity and improvement issues for the Federal Student Aid programs authorized under title IV of the HEA. That notice set forth a schedule for the committee meetings and requested nominations for individual negotiators to serve on the negotiating committee. The Department sought negotiators to represent the following groups: Students; legal assistance organizations that represent students; consumer advocacy organizations; State higher education executive officers; State attorneys general and other appropriate State officials; business and industry; institutions of higher education eligible to receive Federal assistance under title III, parts A, B, and F and title V of the HEA, which include Historically Black Colleges and Universities (HBCUs), Hispanic-Serving Institutions, American Indian Tribally Controlled Colleges and Universities, Alaska Native and Native Hawaiian-Serving Institutions, Predominantly Black Institutions, and other institutions with a substantial enrollment of needy students as defined in title III of the HEA; two-year public institutions of higher education; four-year public institutions of higher education; private, non-profit institutions of higher education; private, for-profit institutions of higher education; regional accrediting agencies; national accrediting agencies; specialized accrediting agencies; financial aid administrators at postsecondary institutions; business officers and bursars at postsecondary institutions; admissions officers at postsecondary institutions; institutional third-party servicers who perform functions related to the title IV Federal Student Aid programs (including collection agencies); State approval agencies; and lenders, community banks, and credit unions. The Department considered the nominations submitted by the public and chose negotiators who would represent the various constituencies. The negotiating committee included the following members: Chris Lindstrom, U.S. Public Interest Research Group, and Maxwell John Love (alternate), United States Student Association, representing students. Whitney Barkley, Mississippi Center for Justice, and Toby Merrill (alternate), Project on Predatory Student Lending, The Legal Services Center, Harvard Law School, representing legal assistance organizations that represent students. Suzanne Martindale, Consumers Union, representing consumer advocacy organizations. Carolyn Fast, Consumer Frauds and Protection Bureau, New York Attorney General's Office, and Jenny Wojewoda (alternate), Massachusetts Attorney General's Office, representing State attorneys general and other appropriate State officials. David Sheridan, School of International & Public Affairs, Columbia University in the City of New York, and Paula Luff (alternate), DePaul University, representing financial aid administrators. Gloria Kobus, Youngstown State University, and Joan Piscitello (alternate), Iowa State University, representing business officers and bursars at postsecondary institutions. David Swinton, Benedict College, and George French (alternate), Miles College, representing minority serving institutions. Brad Hardison, Santa Barbara City College, and Melissa Gregory (alternate), Montgomery College, representing two-year public institutions. Chuck Knepfle, Clemson University, and J. Goodlett McDaniel (alternate), George Mason University, representing four-year public institutions. Elizabeth Hicks, Massachusetts Institute of Technology, and Joe Weglarz (alternate), Marist College, representing private, non-profit institutions. Deborah Bushway, Capella University, and Valerie Mendelsohn (alternate), American Career College, representing private, for-profit institutions. Casey McGuane, Higher One, and Bill Norwood (alternate), Heartland Payment Systems, representing institutional third-party servicers. Russ Poulin, WICHE Cooperative for Educational Technologies, and Marshall Hill (alternate), National Council for State Authorization Reciprocity Agreements, representing distance education providers. Dan Toughey, TouchNet, and Michael Gradisher (alternate), Pearson Embanet, representing business and industry. Paul Kundert, University of Wisconsin Credit Union, and Tom Levandowski (alternate), Wells Fargo Bank Law Department, Consumer Lending & Corporate Regulatory Division, representing lenders, community banks, and credit unions. Leah Matthews, Distance Education and Training Council, and Elizabeth Sibolski (alternate), Middle States Commission on Higher Education, representing accrediting agencies. Carney McCullough, U.S. Department of Education, representing the Department. Pamela Moran, U.S. Department of Education, representing the Department. The negotiated rulemaking committee met to develop proposed regulations on February 19-21, 2014, March 26-28, 2014, and April 23-25, 2014. During the March session, the Department proposed adding a negotiated rulemaking session to the schedule to give the negotiators more time to consider the issues and reach consensus on proposed regulatory language. The negotiators agreed to add a fourth and final session. On April 11, 2014, we published in the Federal Register (79 FR 20139) a notice announcing the addition of a fourth session. That final session was held on May 19-20, 2014. At its first meeting, the negotiating committee reached agreement on its protocols and proposed agenda. These protocols provided, among other things, that the committee would operate by consensus. Consensus means that there must be no dissent by any member in order for the committee to have reached agreement. Under the protocols, if the committee reached a final consensus on all issues, the Department would use the consensus-based language in its proposed regulations. Furthermore, the Department would not alter the consensus-based language of its proposed regulations unless the Department reopened the negotiated rulemaking process or provided a written explanation to the committee members regarding why it decided to depart from that language. During the first meeting, the negotiating committee agreed to negotiate an agenda of six issues related to student financial aid. These six issues were: Clock-to-credit-hour conversion; State authorization of distance education; State authorization of foreign locations of domestic institutions; cash management; retaking coursework; and PLUS loan adverse credit history. Under the protocols, a final consensus would have to include consensus on all six issues. During the meeting, the Department explained that it planned to include the proposed regulations that would be published after completion of the negotiated rulemaking process in two separate notices of proposed rulemaking (NPRMs). One NPRM would contain the proposed regulations regarding the definition of adverse credit history for PLUS loans. The second NPRM would contain the remaining topics. The Department has already published an NPRM and final regulations regarding the PLUS loan issues. This NPRM addresses the remaining issues, except for State authorization of distance education and State authorization of foreign locations of domestic institutions. While the Department continues to examine these two issues and work with the higher education community to explore how to address these important topics, we do not want those deliberations to delay the publication of regulations necessary to address cash management, clock-to-credit-hour conversion, and retaking coursework. For more information on the negotiated rulemaking sessions, please visit: http://www2.ed.gov/policy/highered/reg/hearulemaking/2012/programintegrity.html#info. Summary of Proposed Changes The proposed regulations would— • Establish and modify the definitions of key terms applicable to subpart K; • Remove outdated references to programs no longer authorized, especially with respect to the Federal Family Education Loan (FFEL) program; • Require that an institution exercise the level of care and diligence required of a fiduciary with regard to managing title IV, HEA program funds; • Remove the reference to the just-in-time payment method, and rename the “cash monitoring payment method” as the “heightened cash monitoring payment method”; • Require institutions placed on the reimbursement or heightened cash monitoring payment methods to credit a student ledger account for the amount of title IV funds the student is eligible to receive, and pay any credit balance due to that student before seeking reimbursement from the Department; • Require institutions to maintain title IV funds in an insured depository account consistent with guidance issued by OMB on December 26, 2013, codified at 2 CFR chapter I, 200, et al., Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards; • Provide that, with limited exceptions, an institution must disburse during a payment period the amount of title IV funds that a student or parent is eligible to receive for that payment period; • Provide that an institution may credit a student's ledger account to pay for allowable charges associated with a payment period; • Provide that an institution may include the cost of books and supplies as part of tuition and fees; • Reserve the Secretary's right to establish a method for directly paying credit balances to student aid recipients; • Establish two different types of arrangements between institutions and financial account providers, “tier one (T1) arrangements” and “tier two (T2) arrangements,” respectively; • Define a “T1 arrangement” as an arrangement between an institution and a third-party servicer that performs one or more of the functions associated with processing direct payments of title IV funds on behalf of the institution and that offers one or more financial accounts to students and parents; • Define a “T2 arrangement” as an arrangement between an institution and a financial institution or entity that offers financial accounts through a financial institution, under which financial accounts are offered and marketed directly to students or their parents, with the regulatory consequences of T2 status to apply absent documentation from the institution that students or parents do not have credit balances at the institution; • Require institutions that have T1 or T2 arrangements to establish a student choice process that: Prohibits an institution from requiring students or parents to open a certain account into which their credit balances are deposited; requires an institution to provide a list of account options that a student may choose from to receive credit balance funds, where each option is presented in a neutral manner and the student's preexisting bank account is listed as the first, most prominent, and default option; and ensures electronic payments made to a student's preexisting account are as timely as, and no more onerous to the student than, payments deposited to an account made available pursuant to a T1 or T2 arrangement; • Require that the institution obtain consent from the student or parent to open an account under a T1 or T2 arrangement (1) before the institution shares personal information about that student or parent with the financial account provider, and (2) before the institution or provider sends an access device to the student or parent or links the student's ID card with a financial account; • Mitigate fees incurred by student aid recipients by requiring reasonable access to surcharge-free ATMs, and, for accounts offered under a T1 arrangement, both prohibiting point-of-sale fees and overdraft fees charged to students and parents, and providing students and parents with 30 days following a disbursement of title IV funds to access those funds without any fees; • Require that contracts governing T1 or T2 arrangements and cost information related to those contracts are publicly disclosed; • Require that institutions that have T1 or T2 arrangements establish and evaluate the contracts governing those arrangements in light of the best financial interests of students; and • Prohibit an institution under the reimbursement or heightened cash monitoring payment methods from holding credit balance funds on behalf of a student or parent. The proposed regulations would also— • Allow an institution offering term-based programs to count, for enrollment purposes, courses a student is retaking that the student previously passed, up to one repetition per course; and • Streamline the requirements governing clock-to-credit-hour conversion by removing the provisions under which a State or Federal approval or licensure action could cause a program to be measured in clock hours. Significant Proposed Regulations Background Over the past several years, a confluence of factors has significantly altered the landscape of financial products offered to students on college campuses. In 2009, due largely to concerns raised by consumer advocates and students related to the marketing practices and financial incentives contained in contractual relationships between institutions and credit card providers, 1 Congress passed, and the President signed, the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act). 2 The CARD Act made a number of significant changes to the consumer protections available to college students by authorizing new rules to curtail overzealous credit card marketing practices on campus, impose transparency requirements (the contract must be annually sent to the Consumer Financial Protection Bureau (CFPB)), ban “free” gifts for signing up for an account, and require consumers under the age of 21 to show ability to pay or get a co-signer in order to get a credit card. 3 1 USPIRG. “The Campus Debit Card Trap.” [Pages 4-5] (2012), available at www.uspirg.org/sites/pirg/files/reports/thecampusdebitcardtrap_may2012_uspef.pdf. With subsequent references “USPIRG at [page number].” 2 Public Law 111-24. 3 United States Government Accountability Office. “College Debit Cards: Actions Needed to Address ATM Access, Student Choice, and Transparency.” [Page 32] (2014), available at www.gao.gov/assets/670/660919.pdf. With subsequent references “GAO at [page number].” A second product widely offered to students was a recommended or “preferred” student loan. In 2007, then-Attorney General for New York Andrew Cuomo led an investigation into financial incentives provided to colleges for steering students into certain types of student loans. As a result, Congress, as a part of the Higher Education Opportunity Act of 2008, banned gifts and revenue sharing as part of the so-called “preferred lender list” reforms. In 2010, Congress passed the President's student loan reform, moving to a 100 percent Direct Loan program for Federal student loans. Finally, over the past several years, States have made significant cuts to higher education funding, resulting in budget shortfalls that have fostered an environment of tuition increases and other measures shifting costs to students which has coincided with the proliferation of college debit and prepaid card agreements between institutions and financial account providers. 4 4 Center on Budget and Policy Priorities. “Recent Deep State Higher Education Cuts May Harm Students and the Economy for Years to Come.” [Page 13](2013), available at: www.cbpp.org/files/3-19-13sfp.pdf. The combination of funding cuts and limitations on cost-shifting to students through the CARD Act and preferred lender list reforms has created an environment where some colleges are increasingly searching for revenue-increasing strategies, especially those that can be borne by students. This has led to what the United States Public Interest Research Group (USPIRG) referred to as “the next financial frontier for banks and financial firms” that affects students, especially those receiving aid—the proliferation of marketing of campus debit and prepaid cards to students in exchange for monetary benefits to schools, often in the form of significant remuneration or the low- or no-cost administration of financial aid disbursement services. 5 Consumers Union stated “as regulations around the marketing of private student loans and school-branded credit cards have tightened in recent years, financial firms have increasingly marketed campus banking products to colleges, universities, and their students.” 6 CFPB has recognized this market transformation as well, stating that, “financial product marketing partnerships have shifted from credit cards and student loans to student checking, debit, and prepaid card products.” 7 Schools officials have admitted that “outsourcing eliminated a school process that consumed significant resources, which has been especially important in recent years as schools have faced difficult fiscal conditions and staffing reductions.” 8 5 USPIRG at 5. 6 Consumers Union. “Campus Banking Products: College Students Face Hurdles to Accessing Clear Information and Accounts that Meet Their Needs.” [Page 1](2014), available at: consumersunion.org/wp-content/uploads/2014/08/Campus_banking_products_report.pdf. With subsequent references “Consumers Union at [page number].” 7 Consumer Financial Protection Bureau presentation. “Perspectives on Financial Products Marketed to College Students.” [Page 5] (2014), available at: www2.ed.gov/policy/highered/reg/hearulemaking/2014/pii2-cfpb-presentation.pdf. With subsequent references “CFPB Presentation at [Page number].” 8 Office of the Inspector General. “Third-Party Servicer Use of Debit Cards to Deliver Title IV Funds.” [Page 3] (2014), available at www2.ed.gov/about/offices/list/oig/auditreports/fy2014/x09n0003.pdf. With subsequent references “OIG at [Page number].” Credit Balances As the House report on the Higher Education Opportunity Act of 2008 stated, “[t]he nation's financial aid system exists for a single purpose: To serve students and their families.” 9 The title IV, HEA programs, most prominently Pell Grants and Direct Loans, are designed to help students pay for the costs of attending college. 9 Committee on Education and Labor. “House Report Accompanying HR 4137, the College Opportunity and Affordability Act of 2007.” [Page 240] (2007), available at https://www.congress.gov/110/crpt/hrpt500/CRPT-110hrpt500.pdf. The amount of Federal financial aid awarded to students and parents is determined, in part, on the basis of an enrolled student's cost of attendance. This includes charges typically paid directly to the school (such as tuition, fees, and on-campus room and board), as well as other costs such as books and supplies, housing, transportation, and dependent care. Typically, an institution applies the total amount of a student's aid against institutional charges, then releases a “credit balance” to the student in cases where the amount of aid exceeds the amount of charges. When we refer to a credit balance in this document, we are referring to the remaining amount of title IV aid after all allowable charges, including tuition and fees, have been paid to the institution. At lower cost institutions, like community colleges, that enroll lower-income and historically underrepresented students, a higher percentage of students receive credit balances. 10 10 GAO at 12. The College Banking Market In the past several years, especially in light of tightening budgets and fewer revenue-generating credit card partnerships and student loans, “a growing number of schools have begun offering banking products to their students in the form of debit and prepaid cards issued through agreements with financial services providers.” 11 The Government Accountability Office (GAO) found that about 11 percent of colleges and universities participating in the Federal Student Aid programs had agreements with financial account providers. 12 While this percentage is relatively low, the size of the institutions that have such agreements are generally large; specifically, about 40 percent of all postsecondary students are enrolled in institutions with these agreements, although not all students at such institutions use the cards. 13 14 11 GAO at 1. 12 Ibid. at 8. 13 Ibid. 14 USPIRG at 11. The agreements are more typical at public institutions—29 percent of public schools had such agreements, compared to 6.5 percent of nonprofit not-for-profit schools and 3.5 percent of for-profit schools. 15 Almost half of all schools that use college-affiliated debit or prepaid cards to disburse financial aid and other payments to students are community colleges. 16 According to a USPIRG analysis, “32 of the 50 largest public 4-year universities and 26 of the [largest] 50 community colleges” had a campus debit or prepaid card contract with a bank or financial firm. 17 15 GAO at 10. 16 GAO at 12. 17 USPIRG at 6. As these agreements have begun to proliferate, one provider in particular has become the predominant actor in the market. “As of July 2013, one provider, Higher One Holdings, Inc., held about a 57 percent share of the college card market, as measured by number of agreements between schools and card providers, as well as number of students at schools with agreements,” according to a GAO analysis. 18 This represents more than 800 campuses that use its services to disburse aid dollars. 19 The balance of the market is comprised mainly of seven other bank and nonbank providers, including U.S. Bank, Citibank, PNC, and Wells Fargo. 20 21 18 GAO at 13. 19 Consumers Union at 4. 20 GAO at 13. 21 Consumers Union at 10. According to a National Association of College and University Business Officers (NACUBO) survey polling roughly 400 institutional respondents, “19 [percent] of surveyed institutions offer a credit balance on a stored value or debit card, 58 [percent] offer an [electronic funds transfer (EFT)] to a student's preexisting bank account, and 10 [percent] offer an EFT to a bank account at a school-selected bank or vendor.” 22 The survey found that “26 [percent] [of institutions] reported that they contract with a third-party vendor to process credit balance refunds; a third of those that do not are considering doing so in the future.” 23 22 National Association of College and University Business Officers. “Student Refunds and Personal Banking at Colleges and Universities.” [Page 1] (2014), available at www.nacubo.org/Documents/BusinessPolicyAreas/NACUBOSURVEY.pdf. With subsequent references “NACUBO at [Page number].” 23 NACUBO at 2. Troubling Practices The proliferation of these agreements has coincided with a number of troubling practices that were first reported by USPIRG and reiterated and expanded upon in reports from GAO, the Department's Office of Inspector General (OIG), Consumers Union, and in inquiries from members of Congress. These practices have also resulted in adverse legal actions, especially against the largest financial account provider, Higher One. Each practice is discussed in detail in the relevant section of the preamble. These reports made several recommendations, which include: Ensuring timely delivery of credit balances to students regardless of account sponsorship; providing a meaningful choice of how to receive title IV dollars, especially when a student has a preexisting bank or prepaid account; clarifying the nature of implied institutional endorsement of certain accounts; ensuring that private student information is not released prior to receiving students' consent to do so; providing neutral account disclosures to enable students to make informed choices about account selection; and giving aid recipients the ability to access their student aid balances conveniently and without onerous, confusing, or unavoidable fees. In view of the reports from consumer groups and government organizations, the feedback we received from the public through hearings and negotiated rulemaking, and after meeting with staff from the FDIC, Office of the Comptroller of the Currency and Bureau of the Fiscal Service at the U.S. Department of the Treasury (Treasury), and CFPB, we believe it is critical to address the troubling practices arising from college card agreements. Moreover, given the number of students affected by these agreements, the amount of taxpayer-funded title IV aid at stake, and the expanding breadth of the college card market, we believe this regulatory action is necessary. The provisions in this NPRM regulate institutions and third-party servicers that administer the title IV, HEA programs, and do not regulate banking entities. To the extent that these regulations have a material impact on financial account providers, they do so indirectly and only for those providers that choose to engage with institutions that disburse title IV credit balances electronically. Other Provisions We are proposing a number of more minor changes in subpart K related to the management of title IV, HEA program funds generally. In addition, we have also removed outdated cross references and references to programs that are no longer authorized, the most prominent of which is the FFEL program. There are two additional issues that were raised as part of the program integrity and improvement negotiated rulemaking that are addressed in the proposed regulations: (1) Retaking coursework and (2) clock-to-credit-hour conversion rules. These issues, which are distinct from the cash management topics that comprise the majority of the proposed regulations, are discussed in the final portion of this preamble. We discuss substantive issues under the sections of the regulations to which they pertain. Generally, we do not address regulatory provisions that are technical or otherwise minor in effect. PART 668—STUDENT ASSISTANCE GENERAL PROVISIONS Statutory Authority 24 24 The statutory authority cited in the following paragraphs is relevant to all of the current regulations and proposed regulations described in this preamble except where otherwise noted. Section 401(e) of the HEA, regarding Pell Grants, provides that “[p]ayments under this section shall be made in accordance with regulations promulgated by the Secretary for such purpose, in such manner as will best accomplish the purpose of this section.” It adds that “[a]ny disbursement allowed to be made by crediting the student's account shall be limited to tuition and fees and, in the case of institutionally owned housing, room and board. . . .” Section 401(a)(1) of the HEA provides that the Secretary shall pay “to each institution such sums as may be necessary to pay each eligible student . . . a Pell Grant.” It also provides for the Department to pay institutions the necessary sums prior to the start of each payment period; but, in addition, authorizes the Secretary to “determine[ ] and publish in the Federal Register with an opportunity for comment, an alternative payment system that provides payments to institutions in an accurate and timely manner, except that this sentence shall not be construed to limit the authority of the Secretary to place an institution on a reimbursement system of payment.” Section 452(c) of the HEA, regarding Direct Loans, states that loan funds “shall be paid and delivered to an institution by the Secretary prior to the beginning of the payment period established by the Secretary in a manner that is consistent with payment and delivery of Federal Pell Grants. . . .” Section 487 of the HEA requires, as a prerequisite to title IV participation, that an otherwise eligible institution enter into a program participation agreement with the Secretary conditioning its initial and continuing participation upon compliance with requirements that, among other things, the institution “use funds received by it for any program under this title and any interest or other earnings thereon solely for the purpose specified in and in accordance with the provision of that program,” and it “not charge any student a fee for processing or handing any application, form, or data required to determine the student's eligibility for assistance under this title or the amount of such assistance.” The HEA also contains numerous provisions to ensure that students receive the title IV awards for which they are eligible for under the statute. For example, section 401(f)(1) of the HEA provides that “Each student financial aid administrator [at each institution] shall . . . (C) make the award to the student in the correct amount.” Under section 454(j) of the HEA, “proceeds of loans to students under [the Direct Loan program] shall be applied to the student's account for tuition and fees, and, in the case of institutionally owned housing, to room and board. Loan proceeds that remain after the application of the previous sentence shall be delivered to the borrower by check or other means that is payable to and requires the endorsement or other certification by such borrower.” Section 454(a)(3) of the HEA requires Direct Loan program participation agreements to provide that the institution “accepts responsibility and financial liability stemming from its failure to perform its functions pursuant to the agreement.” Section 454(a)(5) of the HEA provides that the Direct Loan program participation agreement shall “provide that the institution will not charge fees of any kind, however described, to student or parent borrowers for origination activities or the provision of any information necessary for a student or parent to receive a loan under this part, or any benefits associated with such loan.” Under section 455(a)(1) of the HEA, the Secretary may prescribe such regulations as may be necessary to carry out the purposes of the Direct Loan program, including regulations applicable to third-party servicers and for the assessment against such servicers of liabilities for program violations of the program regulations against such servicers, to establish minimum standards with respect to sound management and accountability of those the Direct Loan programs. More broadly, section 487(c)(1)(B) of the HEA provides that the Secretary “shall prescribe such regulations as may be necessary to provide for” reasonable standards of financial responsibility, and appropriate institutional administrative capability to administer the title IV programs, in matters not governed by specific program provisions, “including any matter the Secretary deems necessary to the sound administration of the financial aid programs.” Third-party servicers are likewise by statute subject to the Department's oversight, including under HEA sections 481(c) and 487(c)(1)(C), (H), and (I) of the HEA. The Department has consistently interpreted the HEA as authorizing regulation of the matters addressed in the proposed regulations, 25 including the 2007 cash management regulations 26 prohibiting account opening fees, requiring reasonable free ATM access, and requiring prior consent from a student before opening a financial account, and the 1994 regulations relating to third-party servicers. 27 25 61 FR 60603 (November 29, 1996). 26 72 FR 62028 (November 1, 2007). 27 59 FR 22441 (April 29, 1994). Definitions (§ 668.161(a)) PART 668—STUDENT ASSISTANCE GENERAL PROVISIONS Definitions (§ 668.161(a)) Current Regulations: Section 668.161(a) provides definitions for key terms used in subpart K of the General Provisions Regulations. It does not currently include definitions for the terms “access device,” “depository account,” “electronic funds transfer,” “financial account,” “financial institution,” “or a “student ledger account.” Access Device Proposed Regulations: We propose to add the term “access device” to § 668.161(a) and define an access device as “a card, code, or other means of access to a financial account, or any combination thereof, that may be used by the student or parent to initiate electronic fund transfers.” Reasons: The proposed definition of “access device” borrows from the definition of the term in Consumer Financial Protection Bureau regulations at 12 CFR 1005.2(a)(1), except that we propose to substitute “financial account” for “consumer account,” and “student or parent” for “consumer.” The inclusion of “financial account,” which would be a defined term under these proposed regulations, not only tailors the definition of “access device” to the current context, but, like the definition of “financial account,” is inclusive, and therefore, unlike current CFPB rules, includes all prepaid card accounts. 28 Our intent is to capture all types of access devices to all types of accounts into which a student or parent may wish to deposit his or her title IV credit balance. 28 As discussed elsewhere, the CFPB has proposed amending its definition of “access device” at 12 CFR 1005.2 to include prepaid accounts, but a final rule has not yet been issued. Furthermore, the proposed definition of “access device” has the advantage of providing a concise way of referring to the different types of current and future tools students could use to access their financial accounts. During negotiated rulemaking, negotiators expressed concerns that our current terminology might not include new technologies students could use to access their funds. Since technology in this field is advancing rapidly, we were also concerned that the terminology could become outdated unless it referred to financial tools broadly. To address these concerns, the proposals that we circulated during negotiated rulemaking referred to “access devices” in conjunction with a prepaid card or debit card. However, to simplify the regulations, we simply define and use the term access device to mean both prepaid cards and debit cards. It is our intent to include new technologies in this definition, such as digital wallets and other technological advances that may emerge, so that we do not need to amend the regulations by listing the specific types of tools students may use to access their accounts. Depository Account Proposed Regulations: We propose to add the term “depository account” and to define it as “an account at a depository institution described in 12 U.S.C. 461(b)(1)(A), 29 or an account maintained by a foreign institution at a comparable depository institution that meets the requirements of § 668.163(a)(1).” 29 Section 19(b)(1)(A) of the Federal Reserve Act. Reasons: If used alone in these proposed regulations, the term “account” could refer to a student's or parent's account at a financial institution, a student's account at an institution of higher education, or an institutional bank account into which the Secretary transfers title IV funds. For clarity, we qualify the term to differentiate these uses. The term “depository account” refers to an account maintained by the institution into which the Secretary deposits title IV funds requested by the school. During the second session of negotiations, some of the non-Federal negotiators suggested including the term “depository account” to clarify that an account does not need to be held at an institution organized as a “bank.” 30 We agreed with these negotiators, and added this definition to clarify that we are referring accounts held at banks, credit unions, and other institutions that meet the statutory definition of a “depository institution.” The proposal in these regulations contains the same definition that was presented during the fourth session of negotiations. 30 Kundert and Levandowski. Memo to Negotiated Rulemaking Committee. [Page 2] (2014), available at www2.ed.gov/policy/highered/reg/hearulemaking/2014/pii2-kl4-draftlanguagechgs.pdf. EFT (Electronic Funds Transfer (EFT)) Proposed Regulations: We propose to add the term “EFT” and to define it as “a transaction initiated electronically instructing the crediting or debiting of a financial account, or an institution's depository account. For purposes of transactions initiated by the Secretary, the term “EFT” includes all transactions covered by 31 CFR 208.2(f). For purposes of transactions initiated by or on behalf of an institution, the term “EFT” includes, from among the transactions covered by 31 CFR 208.2(f), only Automated Clearinghouse transactions.” Reasons: In general, the Department is required to make payments by EFT. See 31 CFR 208.1. For purposes of that requirement, the definition of EFT is “any transfer of funds, other than a transaction originated by cash, check, or similar paper instrument, that is initiated through an electronic terminal, telephone, computer, or magnetic tape, for the purpose of ordering, instructing, or authorizing a financial institution to debit or credit an account,” and it provides a non-exhaustive list of the types of transactions covered, including, but not limited to, Automated Clearing House transactions. See 31 CFR 208.2(f). The proposed definition adopts 31 CFR 208.2(f) for purposes of transactions initiated by the Secretary, but in order to facilitate compliance with other applicable Treasury regulations, including 31 CFR 210.5, 31 authorizes only Automated Clearing House transactions for payments initiated by or on behalf of institutions. 31 31 CFR 210.5 includes requirements for accounts into which Federal payments are made and includes provisions relating to account insurance and compliance with the Electronic Funds Transfer Act, among other requirements. Financial Account Proposed Regulations: We propose to add the term “financial account” and to define a financial account as “a student's or parent's checking or savings account, prepaid card account, or other consumer asset account held directly or indirectly by a financial institution.” Reasons: Instead of delineating all of the different account types of accounts that a student or parent may open to receive title IV, HEA program funds, we believe that using a single term simplifies the regulations. Financial Institution Proposed Regulations: We propose to add the term “financial institution” and to define it as “a bank, savings association, credit union, or any other person or entity that directly or indirectly holds a financial account belonging to a student or parent that issues an access device associated with a financial account and agrees with a student or parent to provide EFT services.” Reasons: By defining this term, we will clarify that when we refer to a “financial institution,” we mean the entity or entities that directly or indirectly hold, offer or manage the student's or parent's Title IV funds. The term is used in proposed § 668.164(d), (e) and (f) to refer to the entity or entities that enter into card agreements with postsecondary institutions and hold the title IV funds of students and parents who open accounts offered under T1 or T2 arrangements. Student Ledger Account Proposed Regulations: We propose to add the term “student ledger account” and to define a student ledger account as “a bookkeeping account maintained by an institution to record the financial transactions pertaining to a student's enrollment at the institution.” Reasons: As discussed previously, we qualify the term “account” to refer to its intended use. For this definition we refer to student accounts maintained on the institution's books reflecting the institution's charges and the students' payments. We note that crediting the student's ledger account marks the date on which a disbursement is made and in cases where the ledger account is credited on or after the first day of class, marks the beginning of the 14-day period for paying credit balances specified in § 668.164(h)(2). Federal Interest in Title IV, HEA Program Funds and Standard of Conduct (§ 668.161(b)-(c)) Current Regulations: Current § 668.161(b) provides that title IV, HEA program funds received by an institution are held in trust for the intended student beneficiaries, the Secretary, or lender or guaranty agency under the FFEL programs. The institution, as a trustee of Federal funds, may not use or hypothecate title IV, HEA program funds for any other purpose. Under current § 668.163(e), an institution must exercise the level of care and diligence required of a fiduciary with regard to maintaining and investing title IV, HEA program funds. Proposed Regulations: Proposed § 668.161(b) removes the reference to a lender or guaranty agency under the FFEL programs and provides that an institution may not engage in any practice that risks the loss of title IV, HEA program funds. We relocate the current standard of conduct provisions in § 668.163(e) to proposed § 668.161(c), and revise § 668.161(b) of these regulations to specify that an institution must exercise the level of care and diligence required of a fiduciary with regard to managing title IV, HEA program funds. Reasons: Currently, institutions that seek to maximize the earnings on funds that would otherwise remain idle in one or more of their operating or depository accounts enter into arrangements where all or part of the funds in those accounts are swept overnight into savings accounts, money market mutual funds, or other securities. While it is outside of the scope of these regulations to limit how an institution chooses to invest or manage its own funds, we do not believe that an institution should sweep title IV, HEA program funds. 32 So, to the extent that an institution's operating or depository accounts contain title IV, HEA program funds, the institution must ensure that those funds are not swept or otherwise placed at risk of financial loss. By removing the provision for investing title IV funds, and prohibiting practices that risk loss of those funds, the Department intends to preclude risky management practices, including sweeps containing title IV funds. 32 The term “sweep” as customarily used in the financial services sector refers to the practice of automatically transferring funds in excess of a preset amount into an account or other investment vehicle with the potential to earn a higher rate of return. This practice is designed to earn higher returns on otherwise idle funds, but may subject those funds to a higher risk of investment loss. We acknowledge that some sweep accounts are relatively risk free; however, other sweep accounts or investment vehicles may subject funds to losses, liens, or other attachments. Although we could attempt to differentiate between the two or define a safe investment account, we see no reason to do so. Under the current § 668.163(c)(4) that governs interest-bearing accounts, an institution must return to the Secretary any interest earnings over $250. Under proposed § 668.163(c), an institution must return any interest earnings over $500. Therefore, unlike the situation where an institution invests its own funds, there is no incentive to maximize earnings because the amount of earnings that an institution may retain is insignificant. As a trustee of Federal funds, the institution must ensure that all of the title IV, HEA program funds it receives from the Secretary remain unencumbered and delivered timely to students and parents that qualify for those funds. We believe that relocating the standard of conduct provisions to the scope and institutional responsibility section of the proposed regulations is appropriate because an institution must exercise the level of care and diligence required of a fiduciary in managing title IV, HEA program funds under these proposed regulations. Payment Methods Generally (§ 668.162) Current Regulations: Current § 668.162(a) specifies that the Secretary may provide title IV, HEA program funds to an institution under one of the following payment methods: Advance, reimbursement, just-in-time, or cash monitoring. Section 668.162(c) describes the just-in-time payment method. Under § 668.166(a)(2), the provisions governing excess cash do not apply to an institution that receives title IV, HEA program funds under the just-in-time payment method. Proposed Regulations: Proposed § 668.162(a) removes the reference to the just-in-time payment method, and changes the name of the cash monitoring payment method to the “heightened cash monitoring payment method.” We are also proposing to remove current § 668.162(c), which describes the just-in-time payment method. In addition, we propose to make a corresponding change to the excess cash regulations in § 668.166(a) by removing the reference to the just-in-time payment method. Reasons: Other than a few institutions that last piloted the just-in-time payment method in 2010, the Department does not use this payment method, and does not intend to do so because the advance payment method, as currently implemented, is sufficient to meet institutional and Department needs. Reimbursement and Cash Monitoring Payment Methods (§ 668.162(c)-(d)) Current Regulations: Current § 668.162(d)(1) specifies that under the reimbursement payment method an institution must first make disbursements to students and parents for the amount those students and parents are eligible to receive under the Federal Pell Grant, TEACH Grant, Direct Loan, and campus-based programs before the institution may seek reimbursement from the Secretary for those disbursements. The Secretary considers an institution to have made a disbursement once it has credited the student's account or paid the student or parent directly with its own funds. Paragraphs (d)(2) through (d)(4) of this section describe the procedures an institution must follow and the documentation the institution must provide in submitting a reimbursement request, as well as the conditions the documentation must satisfy to support the request. Similarly, the current provisions governing the cash monitoring payment method under § 668.162(e) specify that an institution must first make disbursements to students and parents for the amount of title IV, HEA program funds those students and parents are eligible to receive before the institution seeks reimbursement from the Secretary for those funds. Under paragraph (e)(2) of this section, an institution seeks reimbursement by following the procedures under the reimbursement payment method, except that the Secretary may modify the documentation requirements and review procedures used to approve the reimbursement request. Current § 668.164(e) requires that whenever the amount of title IV, HEA program funds credited to a student's account exceeds the amount of tuition and fees, room and board, and other authorized charges assessed the student, the institution must pay the resulting credit balance directly to the student or parent within a 14-day timeframe. Proposed Regulations: Proposed § 668.162(c) specifies that an institution must first credit a student's ledger account for the amount of title IV, HEA program funds the student or parent is eligible to receive, and pay the amount of any credit balance due under proposed § 668.164(h), before the institution seeks reimbursement from the Secretary for those funds. In addition, proposed § 668.164(c)(3) requires an institution to submit, with its request for reimbursement, documentation that the institution paid directly to students or parents any credit balances that were due under proposed § 668.164(h). Similarly, under the heightened cash monitoring payment method in proposed § 668.162(d), an institution must first credit a student's ledger account for the amount of title IV, HEA program funds the student or parent is eligible to receive, and pay any credit balance due under proposed § 668.164(h), before the institution seeks reimbursement from the Secretary for those funds. Reasons: The credit balance provisions in the current regulations and these proposed regulations specify a 14-day timeframe within which an institution must pay a credit balance directly to a student or parent. The 14-day timeframe applies regardless of the payment method under which the Secretary provides title IV, HEA program funds to an institution. However, under the reimbursement and heightened cash monitoring payment methods, an institution must first pay title IV, HEA program funds for the amount that a student or parent is eligible to receive before the institution seeks reimbursement from the Department for those funds. Therefore, the institution may not include in its reimbursement request any student or parent for whom a credit balance was due but not yet paid. In the context of a program review, audit, or other enforcement action, the issue of whether the institution complied with the 14-day timeframe depends on the date the institution credits the student's ledger account with title IV, HEA program funds and the date it pays the credit balance; however, for seeking reimbursement, it does not matter when the credit balance was paid, only that it was paid. The current provisions under which the Department determines whether to approve a reimbursement request do not specify that an institution must submit documentation showing that it paid the credit balances that are due to students and parents. These proposed regulations make explicit that an institution placed on the reimbursement payment method or heightened cash monitoring payment method under § 668.162(d)(2) must demonstrate in accordance with procedures established by the Secretary that it paid directly to students and parents the credit balances that are included in its request for reimbursement before the Department will consider that request. For an institution placed on the heightened cash monitoring payment method under § 668.162(b)(1), the institution must maintain documentation showing that it paid any required credit balances directly to students and parents before it initiates a request for funds that includes those students and parents. Maintaining Title IV, HEA Program Funds in an Institutional Depository Account (§ 668.163(a)) Current Regulations: Current § 668.163(a)(1) specifies that an institution must maintain title IV, HEA program funds in a bank or investment account that is Federally insured or secured by collateral of value reasonably equivalent to the amount of those funds. Proposed Regulations: Proposed § 668.163(a)(1) requires an institution to maintain title IV, HEA program funds in a depository account. For an institution located in a State, the depository account must be insured by the FDIC or National Credit Union Administration (NCUA). For a foreign institution, the depository account may be insured by the FDIC or NCUA, or by an equivalent agency of the government of the country in which the institution is located. If there is no equivalent agency, the Secretary may approve a depository account designated by the foreign institution. Reasons: We do not see any value in continuing to allow institutions located in a State to maintain title IV, HEA program funds in non-insured accounts. As discussed more fully under the heading “Interest-bearing accounts” this proposal is consistent with OMB guidance in 2 CFR 200.305(b)(7)(ii), which provides that “advance payments of Federal funds must be deposited and maintained in insured accounts whenever possible.” In view of the rigorous regulatory requirements that financial institutions must satisfy before their depository accounts are insured by the FDIC or NCUA, and the FDIC and NCUA oversight over those financial institutions, we believe this requirement will help ensure that Federal funds are not put at undue risk of loss. In addition, because the current regulations do not address the accounts into which foreign institutions must maintain Direct Loan program funds, we propose to apply the same requirements, to the extent possible, to those institutions—a depository account that is insured by the FDIC, NCUA, or by an equivalent agency of the government where the institution is located. We recognize, however, that there may be instances where there is no equivalent agency, so these proposed regulations would permit the Secretary to approve a bank account designated by the foreign institution. Interest-Bearing Bank Account (§ 668.163(c)) Current Regulations: Current § 668.163(c)(1) requires an institution to maintain the fund described in § 674.8(a) of the Federal Perkins Loan program regulations (the Fund) in an interest-bearing bank account or investment account consisting predominately of low-risk, income-producing securities, such as obligations issued or guaranteed by the United States. 33 Any interest or income earned on Federal Perkins Loan funds are retained by the institution as part of the Fund. Under paragraph (c)(3) of this section, an institution does not have to maintain other title IV, HEA program funds in an interest-bearing account if (1) the institution drew down less than $3 million in the prior award year and anticipates that it will not draw down more than that amount in the current award year, (2) the institution demonstrates by its cash management practices that it will not earn over $250 on those funds during the award year, or (3) the institution requests funds under the just-in-time payment method. In addition, except for interest earned on Federal Perkins Loan funds and retained in the Fund, an institution may keep up to $250 in interest earnings, but must remit to the Secretary by June 30 of the award year any interest earnings over $250. 33 We note that under section 461(b)(1) of the HEA, the authority for schools to make a Federal Perkins Loan ended on September 30, 2014, with an automatic one-year extension pursuant to section 422(a) of the General Education Provisions Act. Absent congressional action, the program will be wound down, and the Department will provide instructions to institutions currently participating in the program as to, for example, the disposition of Perkins Loan Program revolving funds. Proposed Regulations: Proposed § 668.163(c) adopts by reference the guidance in 2 CFR part 200, issued by OMB on December 26, 2013, entitled Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards. Section 200.305(b)(8) states: (8) The non-Federal entity must maintain advance payments of Federal awards in interest-bearing accounts, unless the following apply. (i) The non-Federal entity receives less than $120,000 in Federal awards per year. (ii) The best reasonably available interest-bearing account would not be expected to earn interest in excess of $500 per year on Federal cash balances. (iii) The depository would require an average or minimum balance so high that it would not be feasible within the expected Federal and non-Federal cash resources. (iv) A foreign government or banking system prohibits or precludes interest-bearing accounts. Section 200.305(b)(9) states: (9) Interest earned on Federal advance payments deposited in interest-bearing accounts must be remitted annually to the Department of Health and Human Services, Payment Management System, Rockville, MD 20852. Interest amounts up to $500 per year may be retained by the non-Federal entity for administrative expenses. Reasons: The current interest-bearing account provisions were largely based on OMB guidance in effect at the time we published the initial cash management regulations in November 1996. These proposed regulations are consistent with updated OMB guidance. Disbursements by Payment Period (§ 668.164(b)) Current Regulations: In general, current § 668.164(b)(1) and (2) provide that, except for paying a student under the Federal Work Study (FWS) program, an institution must disburse title IV, HEA program funds on a payment-period basis. More specifically, unless any of the disbursement provisions governing the Direct Loan program now found under 34 CFR 685.303(d) apply, or the institution chooses to make more than one disbursement in a payment period for Federal Perkins Loan, Federal Pell Grant, the institution must disburse the title IV, HEA program funds that a student or parent is eligible to receive at least once each payment period. Current § 668.164(b)(3) provides that except for late disbursements, an institution may disburse title IV, HEA program funds to a student or parent for a payment period only if the student is enrolled for classes for that payment period and is eligible to receive those funds. Under § 668.2, a third-party servicer is defined as an organization, person, or State that enters into a contract with an eligible institution to administer any aspect of the institution's participation in any title IV, HEA program. This includes performing any function required by statute or regulation, or any arrangement, agreement, or limitation entered into under the authority of statutes applicable to title IV of the HEA, such as, but not limited to, e.g., receiving, disbursing, or delivering title IV, HEA program funds, preparing and certifying requests for funds under the advance or reimbursement payment methods, determining student eligibility and related activities, preparing applications, and other functions noted in paragraph (i) of the definition. Current § 668.25 provides, in part, that in a contract with an institution, a third-party servicer must (1) comply with all statutory provisions of or applicable to title IV of the HEA, and all regulatory provisions prescribed under that statutory authority; (2) report to the OIG for investigation any information indicating there is a reasonable cause to believe that the institution may have engaged in fraud or other criminal misconduct in connection with administering the title IV, HEA programs, (3) be jointly and severally liable with the institution to the Secretary for any violation by the servicer of any statutory or regulatory provision of or applicable to title IV of the HEA, and (4) if the servicer disburses title IV, HEA program funds to a student, confirm the eligibility of the student before making that disbursement, where the confirmation must include but is not limited to any applicable information contained in the records required under § 668.24. Proposed Regulations: Proposed § 668.164(b)(1) and (2) specify that, except for paying a student under the FWS program, for making prior-year, late, or retroactive disbursements, or unless any of the disbursement provisions governing the Direct Loan program now found under 34 CFR 685.303(d) apply, an institution must disburse during a payment period the amount of title IV, HEA program funds that an enrolled student, or the student's parent, is eligible to receive for that payment period. Proposed § 668.164(b)(3) provides that at the time that a disbursement is made for a payment period, the institution, along with the third-party servicer engaged by the institution to draw down title IV, HEA program funds or otherwise perform activities leading to or supporting that disbursement, must confirm that the student is enrolled at the institution, and that the student, or the student's parent, is eligible for that disbursement. Reasons: We wish to clarify the current requirement that, except for the cited circumstances, an institution must disburse title IV, HEA program funds on a payment-period basis by specifying that the institution must disburse during a payment period all of the funds that a student or parent is eligible to receive for that payment period. This requirement, along with the proposed provisions under § 668.164(c) and (h) that require an institution to credit a student's ledger account to pay only for charges associated with a payment period, helps ensure that students and parents receive their credit balance funds on a timely basis. In program reviews of several institutions and third-party servicers, the Department found that neither the institution nor the servicer confirmed that students were eligible to receive title IV, HEA program funds before disbursements were made to those students. Under the contracts between these institutions and servicers, the servicers would perform a wide range of activities on behalf of the institutions including packaging aid awards, drawing down or requesting title IV funds, accounting for funds, and submitting data or reports to the Department. However, the contracts used the phrases “make arrangements for disbursements,” “intercept disbursement requests,” and “process awards including [the] preparation of disbursement journals” to apparently refer to a process where the servicer would provide the institution a list of the students and the amounts of their aid awards, and the institution would then credit the students' ledger accounts for those amounts, presumably after confirming the eligibility of those students. But those confirmations were either not performed or not performed adequately, in part, because the procedures under which the institution was expected to confirm the eligibility of its students were lacking or not documented. Nevertheless, the servicers accepted at face value that the institution confirmed eligibility when it disbursed title IV, HEA program funds by crediting the students' ledger accounts, and reported those disbursements to the Department as valid payments made to those students. The Department finds it incongruous that a servicer who essentially controls the entire process for making awards to students would carve out in its contract with an institution the most fundamental aspect of the administering the title IV aid programs—that disbursements are made only to eligible students. Nevertheless, because the third-party servicer is bound by the same provisions that apply to an institution, the servicer must carry out its contracted activities in a manner keeping with a fiduciary under the title IV, HEA programs. In this regard, the servicer cannot feign ignorance over what the institution did or did not do in confirming eligibility. To the extent that the servicer relies on information provided by the institution that leads to or supports a disbursement, is used in determining the amount of funds to draw down for eligible students, or subsequently used for reporting valid disbursements to the Department, the servicer, along with the institution, is responsible for the veracity of that information. In the program reviews, the findings could have been ameliorated if the parties established and agreed to a documented process under which the institution would confirm eligibility and the servicer would verify periodically that the confirmations were made in accordance with that process. We wish to emphasize that our proposed language holding an institution and its third-party servicer responsible for confirming a student's eligibility is not new policy or a change in policy—it merely emphasizes current requirements and reiterates institutional and servicer responsibilities. Crediting a Student's Ledger Account (§ 668.164(c), (h)) Current Regulations: Under current § 668.164(d), an institution may, without obtaining the student's or parent's authorization, use title IV, HEA program funds to credit a student's account at the institution to satisfy (1) current year charges for tuition and fees and, if the student contracts with the institution for those services, for room and board, and (2) prior year charges for tuition, fees, room, or board. In addition, if the institution obtains the student's or parent's authorization, it may credit the student's account with title IV, HEA program funds to satisfy other current year and prior-year educational charges incurred by the student at the institution. However, § 668.164(d)(2) limits the amount of current year title IV, HEA program funds that may be used to satisfy prior-year charges to $200. Current § 668.164(e) provides that whenever an institution disburses title IV, HEA program funds by crediting a student's account and the total amount of those funds exceeds the amount of tuition and fees, room and board, and other authorized charges the institution assessed the student, the institution must pay the resulting credit balance directly to the student or parent as soon as possible but no later than (1) 14 days after the balance occurred, if the credit balance occurred after the first day of class of a payment period, or (2) 14 days after the first day of class of a payment period, if the credit balance occurred on or before the first day of class of that payment period. Proposed Regulations: Proposed § 668.164(c)(1) specifies that an institution may credit a student's ledger account with title IV, HEA program funds to pay for allowable charges associated with the current payment period. Allowable charges are (1) the amount of tuition, fees, and institutionally-provided room and board charges assessed the student for the payment period, or the prorated amount of those charges if the institution debits the student's ledger account for more than charges associated with the payment period, and (2) the costs incurred by the student for the payment period for purchasing book, supplies, and other educationally-related goods and services provided by the institution for which the institution obtains the student's or parent's authorization. Proposed § 668.164(c)(2) provides that, if an institution includes the cost of books and supplies as part of the amount it charges for tuition and fees, the institution must disclose those costs separately and explain why including them is in the student's best financial interests. Proposed § 668.164(c)(3) specifies that an institution may include, in a payment period for the current year, prior-year charges of not more than $200 for (1) tuition, fees, and institutionally-provided room and board without obtaining a student's or parent's authorization, and (2) educationally related goods and services provided by the institution for which the institution obtains the student's or parent's authorization. The “current year” is defined as the current loan period for a student or parent who receives a Direct Loan, or the current award year for a student who does not receive a Direct Loan. A “prior year” is defined as any loan period or award year prior to the current loan period or award year, as applicable. Under proposed § 668.164(c)(4), an institution may include in the current payment period allowable charges stemming from any previous payment period in the current year for which the student is eligible, if the student was not already paid for that previous payment period. If an institution debits a student's ledger account for the entire cost of a program or otherwise debits the ledger account for more than the charges associated with the payment period, proposed § 668.164(c)(5) requires the institution to determine the prorated amount of charges for the payment period by (1) for a program that has substantially equal payment periods, dividing the total amount of institutional charges for the program by the number of payment periods in the program, or (2) for any other program, dividing the number of credit or clock hours the student enrolls in or is expected to complete in the current payment period by the total number of credit or clock hours in the program and multiplying that result by the total institutional charges for the program. Under proposed § 668.164(h)(1), a title IV, HEA program credit balance occurs whenever the amount of title IV, HEA program funds credited to a student's ledger account for a payment period exceeds the amount of allowable charges associated with that payment period. Proposed § 668.164(h)(2) maintains the same 14-day credit balance payment timeframes as the current regulations. Reasons: By prorating institutional charges to the amount associated with a payment period, and specifying that a credit balance occurs whenever the amount of title IV, HEA program funds exceeds the prorated amount of charges, the Department aims to correct a situation where credit balance funds that would be used to pay for living expenses and other education-related costs are not paid to the student or parent until after the first payment period. For example, a student who attends an institution that charges $8,000 for a year-long program (which includes two payment periods) receives $5,000 of title IV, HEA program funds per payment period, or $10,000 per year. Currently the institution may debit the student's ledger account for $8,000 in the first payment period, the full cost of the program, and then credit the account for only $5,000, the amount of title IV, HEA program funds the student is eligible to receive for the first payment period. The student would not receive a credit balance until several months later when the institution credits the student's ledger account during the second payment period with another $5,000, because only at that point the total amount of title IV, HEA program funds exceed institutional charges (by $2,000). Under this proposal, the institution would only be able to charge a prorated amount of $4,000 during each payment period, so the student or parent would receive a credit balance of $1,000 during the first payment period and another $1,000 during the second payment period. In this example, the prorated amount of institutional charges associated with a payment period is $4,000 (the total amount of institutional charges of $8,000 is divided by two, the number of payment periods in the program). We note that the vast majority of institutions, particularly those that are term-based, already charge on a term or payment period basis, so this proposed change in the regulations will have no impact on those institutions. The Department seeks comment on whether the proposed methods for prorating institutional charges under § 668.164(c)(5) are appropriate. With regard to the definitions in proposed § 668.164(c)(3), we seek to codify in regulations the meaning of the terms “current year” and “prior year” that were previously used in guidance issued on September 8, 2009, in Dear Colleague Letter GEN-09-11. In cases where institutions include the costs of required books and supplies as part of the total amount of tuition and fee charges, relevant information about those materials and the cost charged by institutions for those materials is not frequently provided to students. This practice effectively prevents students from purchasing required materials elsewhere for a lower price. For this reason, and based on findings by State attorneys general that some institutions required students to purchase books and supplies directly from them at grossly inflated prices, we proposed during negotiated rulemaking to prohibit institutions from including books and supplies as part of tuition and fees. However, some of the non-Federal negotiators noted that institutions are increasingly developing course-specific or course-embedded materials for pedagogical or safety reasons. 34 The negotiators argued that because these materials are part and parcel of the course, they would typically not be available as separate items in the public domain. For this reason, the non-Federal negotiators believed the Department's proposal would dampen innovative or safety-related efforts by institutions. 34 During negotiations, non-Federal negotiators cited various examples of these types of materials, especially in cases where uniformity was required for learning or safety and health reasons, such as the type of instruments used in a cosmetology or culinary program. The Department is persuaded there are valid reasons for including some books and supplies as part of tuition and fees. While we acknowledge that course-embedded materials blur the distinction between tuition and fees and books and supplies, we continue to believe that where required books and supplies are separate items available for purchase in the marketplace, those books and supplies should generally not be included as part of tuition and fees. Indeed, section 472 of the HEA, regarding “costs of attendance,” treats books and supplies as separate from tuition and fees; and under other provisions ( e.g., section 401(e) of the HEA), payments made by crediting the student's account are limited to tuition and fees and room and board, absent student consent. However, under the proposed regulations, an institution may include the costs of books and supplies as part of tuition and fees only if it separately discloses the costs of those items and explains why including them is in the student's best financial interest; that is, the institution is providing the books and supplies at or below market costs, or providing materials not otherwise generally available for purchase by the public. To the extent that an institution includes course-embedded materials as part of tuition and fees, the institution must separately disclose the cost of accessing those materials and explain why it is in the student's best financial interest to do so. For example, an institution may disclose that it charges students a $100 fee for accessing course material that replaces a book that typically sells for $400. We specifically invite comment on how and when an institution should make these disclosures. Payments by the Secretary (§ 668.164(d)(3)) Current Regulations: Under current § 668.164(a)(1), an institution is responsible for disbursing title IV, HEA program funds to a student or parent, including paying a credit balance directly to the student or parent. Proposed Regulations: Proposed § 668.164(d)(3) specifies that the Secretary may pay directly to students and parents any credit balances due under § 668.164(h), and the disbursement of title IV funds (up to the credit balance amount) for books and supplies under § 668.164(m), using an alternative method established or authorized by the Secretary and published in the Federal Register . Alternative methods include making direct payments to prepaid or debit cards sponsored by the Department or another Federal agency. Reasons: We recognize the growing popularity of electronic banking as evidenced by the increasing numbers of students and their parents who receive their title IV, HEA credit balances via direct deposit to their financial accounts. We are also aware that a number of government benefits are distributed to recipients via prepaid government debit cards. For example, Treasury's Direct Express® prepaid debit card program is used to distribute Social Security and other Federal benefits to over 5 million beneficiaries. At this time, the Department is not establishing a debit or prepaid card for direct payments of title IV, HEA funds; however, we will continue to explore whether such a card would be beneficial to students and parents. If the use of a government-issued debit or prepaid card shows the potential of savings in costs and other efficiencies for students, their parents, and the government, the Secretary may wish to establish such a card and make it available for the direct payments of title IV, HEA credit balances. Designation as a Tier One (T1) Arrangement or a Tier Two (T2) Arrangement (§ 668.164(e)(1) and § 668.164(f)(1)-(3)) 35 35 These sections appear in the proposed regulations after § 668.164(d)(4), which primarily discusses direct payments made pursuant to a student choice process established for institutions with T1 or T2 arrangements. We have elected to discuss § 668.164(e)(1) and § 668.164(f)(1)-(3) first, to detail what T1 and T2 arrangements are and our reasons for designating them as such. We believe ordering the preamble in this way will make the discussion of § 668.164(d)(4) easier to understand. Current Regulations: Current § 668.164(c)(3) states that an institution may establish a policy requiring its students to provide bank account information or open an account at a bank of their choosing as long as this policy does not delay disbursement of title IV, HEA program funds to students. If the institution opens a bank account on behalf of a student or parent, establishes a process the student or parent follows to open a bank account, or similarly assists the student or parent in opening a bank account, the institution must comply with the bank account provisions specified in § 668.164(c)(2)(i) through (vii). Proposed Regulations: The provisions of § 668.164(d)(4), (e), and (f) apply to arrangements between an institution and a third-party servicer, and between an institution and a financial institution. Proposed § 668.164(e)(1) specifies that in a T1 arrangement, an institution has a contract with a third-party servicer under which the servicer performs one or more of the functions associated with processing direct payments of title IV, HEA program funds on behalf of the institution to one or more financial accounts that are offered under the contract or by the third-party servicer, or by an entity contracting with or affiliated with the third party servicer to students and their parents. Proposed § 668.164(f)(1) specifies that in a T2 arrangement, an institution has a contract with a financial institution or entity that offers financial accounts through a financial institution, under which financial accounts are offered and marketed directly to students or their parents. Proposed § 668.164(f)(2) provides that the Secretary presumes that title IV, HEA program funds are deposited or transferred into the financial accounts offered and marketed under § 668.164(f)(1). However, the institution does not have to comply with the requirements described in § 668.164(f)(4) if it documents that, for the most recently completed award year, no student or parent received a credit balance. Proposed § 668.164(f)(3) explains that a financial account is “directly marketed to students and their parents” in three situations: (1) The institution communicates information directly to its students or their parents about the financial account and how it may be opened; (2) the financial account or access device is co-branded with the institution's name, logo, mascot, or other affiliation; and (3) a card or tool that is provided to the student or parent for institutional purposes, such as a student ID card, is linked with the financial account or access device. Reasons: Over the past several years, institutions of higher education have entered into arrangements with financial institutions and nonbank entities to offer students a variety of debit and prepaid cards to receive title IV credit balance disbursements. Institutions have also begun to rely on third-party servicers to handle the administrative operations of their aid disbursement processes. In many cases, these third-party servicers provide both student financial and institutional administrative services. The institution benefits from these arrangements, either in the form of remuneration, receiving reduced-price or free administrative services, or in reduced institutional costs. As the incidence of these types of agreements has increased, so too has the scrutiny of the practices associated with them. In the past few years, USPIRG, Consumers Union, GAO, and OIG have conducted reviews into the college card marketplace and released reports detailing their findings and recommendations. A number of the findings in these reports are troubling, and the reports lay out recommendations for Department action that are explained in more fully in each of the relevant sections of this preamble, along with explanations of the provisions designed to address these findings. This section discusses a threshold issue—the types of arrangements that are subject to the proposed regulations. During negotiated rulemaking, the committee spent a significant amount of time trying to identify which financial accounts would be considered “sponsored,” or endorsed by the institution. After multiple negotiating sessions, the Department's final proposal in the negotiations included the term “sponsored account,” which was defined as an account, access device, card (including student ID), or other tool that: (1) Is specified or included in a contract between the institution and an entity, (2) Is offered to a student (or parent) enrolled at the institution, and (3) May be used by the student (or parent) to receive title IV funds. This definition encompasses a variety of possible accounts. While the student advocates supported this definition, banking sector representatives opposed the definition, arguing that it was (1) overly broad and applicable to accounts that are outside the scope of the Department's interest in regulating the delivery of title IV aid, and (2) too vague as to what which accounts would fall under the definition. We acknowledge the concerns raised by banking industry representatives, so have tailored the proposed rules based on the circumstances in which the troubling practices have occurred. In describing the questionable practices of the college card market, a consensus emerged from the consumer and government reports: Not all arrangements resulted in equivalent levels of troubling behavior, largely because the financial entities and third-party servicers with which institutions contract face divergent monetary incentives. Banks and credit unions have an incentive to create long-term relationships with college students—a potentially lucrative future cohort—at the time when those students have not yet established a relationship with a bank. 36 Banks may not necessarily rely on short-term fee income when providing products to students, because banks may be seeking to establish a customer base that will be profitable over the long term when those students secure mortgages, auto loans, or other types of consumer credit. 36 Consumers Union at 5. Other financial institutions, including, but not necessarily limited to, non-bank firms (such as third-party servicers), “may have different incentives for pursuing relationships with students.” 37 These entities have a different type of business model, and are more likely to “seek to partner with schools to provide fee-based services to both the institution and the student.” 38 This is primarily a relationship with the student that ends once the student is no longer enrolled, and “the nature of this short-term interaction creates an incentive to increase fee revenue over what traditional banks might charge.” 39 As a result, there has been a proliferation of uncommon, difficult to understand, and oftentimes unreasonable fees assessed by such providers against accounts with credit balances. Moreover, by their nature as servicers handling the duties of the institutions, they “can take over all aspects of the disbursement process from schools.” 40 As a result, these third-party servicers can determine the way that the college card is portrayed to students, establish different timeframes for electronic delivery of credit balances based on how the student electronically receives funds, and access personal student information for targeted marketing purposes. 37 Ibid. 38 USPIRG at 13. 39 Ibid. 40 USPIRG at 13. Ordinarily, an institution's incentive to agree to assessing high fees against students might be offset by its interest in protecting its students from the loss of significant financial assistance. However, colleges also have strong incentives to establish arrangements that provide for fee revenue (which ultimately benefits the institution in the form of remuneration or reduced-cost services from the third-party servicer). “Schools are searching for ways to make their services more cost effective and increase revenues,” and one increasingly common way of reducing costs is by hiring a third-party servicer to handle the administration of the student aid disbursement process. 41 Institutions have stated that employing a third-party servicer provides a more efficient credit balance delivery method than delivering checks; they have also acknowledged that, “during difficult budget times, this option was cost effective.” 42 By valuing agreements that are more likely to prioritize short-term fee-based revenue, many institutions have created a situation where the best financial interests of students may not be the primary consideration. 41 Ibid. 42 NACUBO at 2. These incentive structures have led to a number of troubling practices. OIG found that schools relinquished “significant control” over the title IV aid disbursement process and relied on servicer compliance to meet title IV regulations. “However, the schools did not appear to routinely monitor all servicer activities related to this contracted function, including compliance with all title IV regulations and student complaints.” 43 OIG also determined that, after student identifiers and credit balance disbursement figures were provided to servicers, “the schools did not adequately oversee the servicers' activities to ensure that policies were followed, continued to be in the best interests of students, and complied with program requirements.” 44 OIG determined that “the Department should take action to better ensure that student interests are served when schools use servicers to deliver credit balances.” 45 43 OIG at 5. 44 Ibid. at 7. 45 Ibid. at 5. Third-party servicers' practices have also led to legal action. In August 2012, FDIC announced settlements with Higher One and one of its former bank partners, Bancorp Bank, after alleging “unfair and deceptive practices” relating to the manner in which it charged fees and other practices. Specifically, the FDIC alleged that the two firms violated the Federal Trade Commission Act by “charging student account holders multiple insufficient funds fees from a single transaction; allowing accounts to remain in overdrawn status for long periods and allowing these insufficient funds fees to continue accruing; and collecting the fees from subsequent deposits to the students' accounts, typically funds for tuition and other college expenses.” 46 47 Furthermore, in November 2013, Higher One announced it had agreed in principle to settle a class action lawsuit for $15 million. In that action, student plaintiffs claimed that Higher One misled them “by marketing its debit card as schools' preferred method for making financial aid and other payments, improperly steered them into depositing funds into Higher One accounts, and charged excessive and inadequately disclosed ATM and PIN fees.” Higher One and its banking partners (Bancorp Bank and Wright Express Financial Services Corporation) that were named as co-defendants disclaimed wrongdoing. 48 46 GAO at 24. 47 FDIC. “FDIC Announces Settlements With Higher One, Inc., New Haven, Connecticut, and the Bancorp Bank, Wilmington, Delaware for Unfair and Deceptive Practices.” [Page 1] (2012), available at www.fdic.gov/news/news/press/2012/pr12092.html . With subsequent references “FDIC at [page number].” 48 GAO at 25. We believe that absent targeted provisions addressing specific concerns, and especially because students are a captive audience to institutional marketing, students will continue to be subject to the troubling practices identified by government agencies and consumer groups. For these reasons, we propose to designate as “tier 1” those arrangements between an institution and a third-party servicer under which the servicer performs one or more of the functions associated with processing direct payments of title IV, HEA program funds for the institution, and offers accounts to students and parents. Institutions entering into such arrangements would be responsible for ensuring that accounts offered by third-party servicers comply with both the fee requirements and disclosure requirements of the regulations. As explained above, in contrast to third-party servicers, traditional financial institutions and entities that offer financial accounts through a financial institution that do not engage in third-party servicing functions have stronger incentives to provide student-friendly accounts and convince students to become long-term customers. 49 Many such providers of student bank accounts or campus cards do not charge fees “higher than those associated with other banking products available to students.” 50 While financial institutions not employed in a third- party servicer role were cited in some instances, practices by those firms are generally not as troubling, the agreements generally impose fewer fees on students, and, in some cases, students actually receive better-than-market rates on such accounts. Based on these findings, in the proposed regulations, the fee-related provisions for T1 arrangements do not extend to arrangements not involving a third-party servicer. 49 Consumers Union at 5. 50 GAO at 15. However, arrangements between institutions and financial institutions that are not third-party servicers are not without the potential for harm to students. The biggest concern involving these accounts is that the apparent institutional endorsement of a particular financial account has the potential to lead aid recipients to believe that the account in question is required for aid receipt, has been competitively bid and negotiated by the school, or, at a minimum, represents a good deal because it has been endorsed by the institution. There are multiple ways institutions convey this impression to students. The most obvious way this occurs is with student IDs. In one-third of schools surveyed by GAO, student IDs, which are distributed to all students, have the capacity to be activated as either a debit or prepaid card. 51 While activating the financial functions of the card is not required, the card itself typically is. In the most troubling circumstances, students are led to believe that activating the financial functions is required. 52 Even in cases where this does not occur, students still must carry a student ID that is effectively an institutionally-sponsored advertisement for the financial provider and may misunderstand which functions are required. 53 51 GAO at 9. 52 OIG at 11. 53 USPIRG at 21. More general co-branding can cause similar confusion. “Schools can appear to implicitly or explicitly endorse their college cards, by virtue of the relationship with the provider and co-branding of the card. Many students trust their schools and, as a result, may view co-branding as an endorsement and an indication their school has negotiated the best terms for them.” 54 USPIRG echoed this concern, stating that, “Many students trust their schools and often think of co-branding as an endorsement. This causes many students to drop their guard, expecting their school has negotiated the best deal for them.” 55 54 GAO at 26. 55 USPIRG at 21. Finally, when schools convey the information about a contracted-for financial account directly to students, students listen. “Card providers and schools market college cards directly to students through various methods, including mailings, on-campus presentations, and co-branded Web sites. Some card providers offer marketing assistance or materials to schools. For example, one provider told us it prefers assisting the school in developing messages, because students pay more attention to the information if it comes from the schools.” 56 56 GAO at 27. These direct marketing methods appear to be especially effective. As Rohit Chopra, Student Loan Ombudsman at the CFPB, stated in his presentation to the negotiated rulemaking committee, “If a certain financial product where the school has a financial interest is chosen as the `default' choice or implies endorsement of the school, this can lead to mismatched incentives . . . [and] school incentives may impact financial product adoption rates.” 57 57 CFPB presentation at 14-15. As GAO has recognized, there are no comprehensive data on the number of students who elect to receive their credit balances on a college card. However, “the largest provider reported that overall, 43 percent of students receiving financial aid payments at its client schools opened debit accounts.” 58 Furthermore, GAO found that take-up rates ranged from 20 to 75 percent of participating students at schools that were examined. 59 CFPB, in its request for information relating to college cards, similarly found that adoption rates in such circumstances were high. 60 For many card providers, adoption rates were close to 50 percent of students; some providers' rates exceeded 80 percent. 61 At a minimum, these adoption rates demonstrate that the method of direct marketing employed by institutions, their associated financial institutions, and third-party servicers is particularly effective, but also suggest that students may misunderstand that receiving their financial aid this way is optional. Because institutions are currently not explicitly required to put student and parent interests first in negotiating their marketing agreements, the financial accounts marketed may not have particularly favorable terms or be particularly convenient for students and parents. 58 GAO at 12. 59 Ibid. 60 Consumer Financial Protection Bureau, Request for Information Regarding Financial Products to Students Enrolled in Institutions of Higher Education (Feb. 2013). With subsequent references “CFPB RFI.” 61 Ibid. On the other hand, direct marketing by financial institutions in itself does not always establish that these accounts impact title IV aid. For example, a financial institution may contract with an institution to offer financial accounts to students in circumstances where no credit balances exist (typically at high-cost institutions), and students are therefore not receiving credit balances into the offered financial accounts. Where such circumstances exist, the integrity of the title IV programs is not at issue. For this reason, we are limiting our oversight of T2 arrangements to institutions at which students and parents subject to these direct marketing tactics are expected to receive credit balances. Under this approach, if an institution documents that none of its students or parents received a credit balance in the most recently completed award year, it does not have to comply with the restrictions in § 668.164(f) that otherwise apply to financial accounts offered under a T2 arrangement. This approach is appropriate because it allows for the identification of arrangements where no credit balances are expected, while at the same recognizing the remarkable effectiveness of the marketing campaigns in general and the immediate need of students and parents for a place in which to have title IV credit balances deposited. 62 62 This approach reserves an opportunity for an institution having a financial aid history at odds with the presumption to avoid applicability of the restrictions that would otherwise apply under § 668.164(f)(4). The institution would need to maintain its documentation for use in the event of an audit or program review. We invite comment on whether there is a need to establish a minimum threshold of credit balance recipients at an institution before that institution's arrangement would implicate the T2 provisions. We are seeking feedback to determine whether a threshold would be needed to balance burden on institutions and financial institutions against the benefits to students of proposed § 668.164. If a threshold is recommended, we are requesting data and analysis supporting the number chosen. For the reasons discussed in the preceding paragraphs, we propose to limit the definition of “T2 arrangements” to arrangements where students receive credit balances and are subject to direct marketing, either in the form of marketing from the school, 63 or through the implied or direct endorsement of the product via a co-branding of a card or the ability to link an account to a student ID. We emphasize that these proposed regulations govern postsecondary institutions and their arrangements with financial institutions; these limitations narrow the scope of the regulatory requirements to these specific arrangements. As discussed previously, the concerns related to these accounts are not as significant as those involving third-party servicers. Instead, the proposed requirements relating to T2 arrangements are designed to improve the information available to students and parents so they understand their options. The proposed requirements include contractual disclosures and information related to average account holder costs; and for any account listed on the institution's list of credit balance receipt options, disclosure of the accounts fees and terms in an easily understandable format. 64 We believe these disclosure requirements will enable financial providers and institutions with the best financial interests of students in mind to continue offering accounts that are student-friendly and will not result in the loss to aid recipients of critical Federal student aid dollars. 63 Examples of this include: A recommendation of a particular account offering to students or mailing, emailing, or otherwise directly conveying information about an account to students pursuant to the contract between the i [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%3A2015-11917. Public record. Not legal advice.