# Program Integrity and Improvement

> Briefs, arguments, decisions, and more.

URL: https://www.frixlaw.com/law-library/documents/fr%3A2015-27145

## Record

- **Collection:** Federal Register
- **Document type:** Rule
- **Published:** October 30, 2015
- **Citation:** 80 FR 67126

## Text

DEPARTMENT OF EDUCATION
34 CFR Part 668
RIN 1840-AD14
[Docket ID ED-2015-OPE-0020]
Program Integrity and Improvement

AGENCY:

Office of Postsecondary Education, Department of Education.

ACTION:

Final regulations.

SUMMARY:

The Secretary amends the cash management regulations and other sections of the Student Assistance General Provisions regulations issued under the Higher Education Act of 1965, as amended (HEA). These final 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, the final regulations update other provisions in the cash management regulations and otherwise amend the Student Assistance General Provisions. The final regulations also clarify how previously passed coursework is treated for title IV eligibility purposes and streamline the requirements for converting clock hours to credit hours.

DATES:

Effective date:
These regulations are effective July 1, 2016.

Compliance dates:
Compliance with the regulations in § 668.164(e)(2)(vi) and (f)(4)(iii) is required by September 1, 2016; § 668.164(d)(4)(i)(B)(
2
) by July 1, 2017; and § 668.164(e)(2)(vii) and (f)(4)(iv) by September 1, 2017.

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 Nathan Arnold, U.S. Department of Education, 1990 K Street NW., Room 8081, Washington, DC 20006-8502.
Telephone:
(202) 219-7134 or by email at:
nathan.arnold@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:

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
1

credit balances via a more convenient electronic means. However, as we describe in more detail elsewhere in this preamble and in the preamble to the notice of proposed rulemaking published in the
Federal Register
on May 18, 2015 (NPRM),
2

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.

1
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.

2
80 FR 28484, 28488-28490. The NPRM is available at
http://www.gpo.gov/fdsys/pkg/FR-2015-05-18/pdf/2015-11917.pdf.
We cite to the NRPM in subsequent references as 80 FR at [page].

According to these reports, the following practices were found:

• Providers were prioritizing disbursements to their own affiliated accounts over aid recipients' preexisting bank accounts;

• Providers and schools were 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 was 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 were charged onerous, confusing, or unavoidable fees in order to access their student aid funds or to otherwise use the account.

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 every year, that students are a captive audience subject to marketing from their institutions, that the college card market is expanding, and because there have been numerous concerns raised by existing practices, we believe regulatory action governing the disbursement of title IV, student aid is warranted.

In addition, we include in these 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 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 regulatory changes will result in more equitable treatment of student aid recipients and simplify title IV requirements in these areas.

The NPRM contained background information and our reasons for proposing the particular regulations. The final regulations contain changes from the NPRM, which are fully explained in the
Analysis of Comments and Changes
section of this document.

Summary of the Major Provisions of This Regulatory Action:

The regulations—

• Explicitly 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”;

• Define a “T1 arrangement” as an arrangement between an institution and a third-party servicer, under which the servicer (1) performs one or more of the functions associated with processing direct payments of title IV funds on behalf of the institution, and (2) offers one or more financial accounts under

the arrangement, or that directly markets the account to students itself or through an intermediary;

• 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. However, if an institution documents that, in one or more of the three recently completed award years, no students received credit balances at the institution, the requirements associated with T2 arrangements do not apply. If, for the three most recently completed award years, the institution documents that on average fewer than 500 students and less than five percent of its enrollment received credit balances then only certain requirements associated with T2 arrangements apply;

• Require institutions that have T1 or T2 arrangements to establish a student choice process that: prohibits an institution from requiring students to open an account into which their credit balances must be deposited; requires an institution to provide a list of account options from which a student may choose to receive credit balance funds electronically, where each option is presented in a neutral manner and the student's preexisting bank account is listed as the first and most prominent option with no account preselected; and ensures electronic payments made to a student's preexisting account are initiated in a manner as timely as, and no more onerous than, payments made to an account made available pursuant to a T1 or T2 arrangement;

• Require that any personally identifiable information shared with a financial account provider as a result of a T1 arrangement before a student makes a selection of that provider (1) does not include information about the student other than directory information under 34 CFR 99.3 that is disclosed pursuant to 34 CFR 99.31(a)(11) and 99.37, with the exception of a unique student identifier generated by the institution (that does not include a Social Security number, in whole or in part), the disbursement amount, a password, PIN code, or other shared secret provided by the institution that is used to identify the student, and any additional items specified by the Secretary in a
Federal Register
notice; (2) is used solely for processing direct payments of title IV, HEA program funds, and (3) is not shared with any other affiliate or entity for any other purpose;

• Require that the institution obtain the student's consent to open an account under a T1 arrangement before the institution or account provider sends an access device to the student or validates an access device that is also used for institutional purposes, enabling the student to use the device to access a financial account;

• Require that the institution or financial account provider obtain consent from the student to open an account under a T2 arrangement before (1) the institution or third-party servicer provides any personally identifiable information about that student to the financial account provider or its agents, other than directory information under 34 CFR 99.3 that is disclosed pursuant to 34 CFR 99.31(a)(11) and 99.37 and (2) the institution or account provider sends an access device to the student or validates an access device that is also used for institutional purposes, enabling the student to use the device to access 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, by prohibiting both point-of-sale (POS) fees and overdraft fees charged to student account holders, and by providing students with the ability to conveniently access title IV, HEA program funds via domestic withdrawals and transfers in part and in full up to the account balance, without charge, at any time following the date that such title IV, HEA program funds are deposited or transferred to the financial account;

• Require that contracts governing T1 and T2 arrangements are conspicuously and publicly disclosed;

• Require that cost information related to T1 arrangements is conspicuously and publicly disclosed;

• Require that cost information related to T2 arrangements is conspicuously and publicly disclosed when on average over three years five percent or more of the total number of students enrolled at the institution received a title IV credit balance or the average number of credit balance recipients for the three most recently completed award years is 500 or more;

• Require that institutions that have T1 arrangements establish and evaluate the contracts governing those arrangements in light of the best financial interests of students; and

• Require that where a T2 arrangement exists and where either on average over three years five percent or more of the total number of students enrolled at the institution received a title IV credit balance, or the average number of credit balance recipients for the three most recently completed award years is 500 or more, the institution establish and evaluate the contract governing the arrangement in light of the best financial interests of students.

The regulations also—

• Allow an institution offering term-based programs to count, for enrollment status 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.

Costs and Benefits:
The expected effects of these final regulations include improved information to facilitate consumer choice of financial accounts for receiving title IV credit balance funds, reasonable access to title IV funds without fees, and redistribution of some of the costs of payment of credit balances among students, institutions, and financial institutions; updated cash management rules to reflect current practices; streamlined rules for clock-to-credit-hour conversion; and the ability of students to receive title IV funds for repeat coursework in certain term programs. Institutions, third-party servicers, and financial institutions will incur implementation costs related to the regulations. The anticipated effects of the regulations are detailed in the
Discussion of Costs, Benefits, and Transfers
in the Regulatory Impact Analysis as well as the
Paperwork Reduction Act of 1995
section of this preamble.

Public Comment:
In response to our invitation in the NPRM, 211 parties submitted comments on the proposed regulations. We group major issues according to subject, with appropriate sections of the regulations referenced in parentheses. We discuss other substantive issues under the sections of the proposed regulations to which they pertain. Generally, we do not address technical or other minor changes.

Analysis of Comments and Changes:
An analysis of the comments and of any changes in the regulations since publication of the NPRM follows.

General Comments

Comments:
The Department received many positive comments regarding the proposed regulations. These commenters argued that in light of several recent consumer and government reports and legal actions documenting troubling practices on the

part of financial account providers, the Department was justified in proposing changes to the cash management regulations to ensure title IV student aid recipients are able to access their title IV funds. The commenters praised the Department's proposed regulations and stated that the changes would provide strong protections for students and disclosure rules that would provide incentives for better behavior in the college card marketplace.

Many other commenters had concerns about the regulations or suggestions for how to improve them. These suggestions are discussed in detail in the remaining sections of this preamble.

Other commenters argued that it would be counterproductive for the Department to regulate in this area. One commenter asserted that the fees that students are paying are already lower than the fees they would be charged for a standard bank account. Other commenters argued that providers of both T1 and T2 arrangements would be forced to exit the marketplace, leaving institutions with limited options for delivering title IV credit balances. Another commenter stated that institutions would choose not to renew contracts with account providers. One commenter noted that if this happens, students may be pushed towards higher-fee products. Other commenters contended that the costs of compliance would force institutions to raise tuition. One commenter suggested that the Department assist institutions with the cost of compliance.

Discussion:
We thank the commenters who provided thoughtful suggestions for how to improve the proposed regulations, and we also thank those who supported the proposal generally.

We disagree with the commenter who stated that fees under T1 and T2 arrangements are lower than the fees students would encounter in traditional banking relationships. As stated in the NPRM, there is significant evidence that students are incurring unreasonably high fees, particularly, although not exclusively, under T1 arrangements.
3

3
80 FR at 28506.

We also disagree with commenters who expressed concerns that the new requirements will drive account providers from the marketplace, to the disadvantage of both institutions and students. We note that account providers are still permitted to charge the institution whatever costs the two parties agree to, we have simply limited the amount and types of fees that are charged to title IV recipients (and also note that certain fees, including monthly maintenance fees, can still be passed on to offset costs). In addition, we believe that account providers recognize the long-term value in establishing relationships with students who may, in the future, require other products and services offered by their financial institutions. Because these more transparent and commonplace fees will be allowable under the regulations and because of the future opportunities created by establishing a banking relationship with students, we do not foresee a situation in which account providers will exit the market and students will be forced to choose among options that include even higher fees. Because third-party servicers will still be able to offer savings to institutions, we do not believe that institutions will choose to abandon their providers.

We also note that schools are responsible for the costs of participating in the title IV programs and are required to ensure that students receive the full balance of title IV funds to which they are entitled, without additional financial assistance from the Department.

Changes:
None.

Legal Authority

Comments:
Some commenters supported the Department's legal authority to regulate issues relating to disbursements of title IV funds, to ensure that institutions and their servicers act as responsible stewards of taxpayer dollars, and to enable students to access the full balance of their Federal student aid.

Several commenters questioned our legal authority to promulgate these regulations, arguing that the Department lacks the legal authority to regulate banks and financial accounts.

Commenters further argued that the Department was acting outside its statutory authority in regulating T2 arrangements, because the bank accounts under those arrangements fall within the purview of other government agencies and not within the authority of the Department under the HEA. Instead, the commenters believed that the Department should limit its regulations to institutions. These commenters also pointed to section 492(a)(1) of the HEA, which states that for purposes of negotiated rulemaking, the Department must consult with “representatives of the groups involved in student financial assistance programs under this title, such as students, legal assistance organizations that represent students, institutions of higher education, State student grant agencies, guaranty agencies, lenders, secondary markets, loan servicers, guaranty agency servicers, and collection agencies.” The commenters argued that because banks are not among those groups enumerated in this list, the Department does not have authority to regulate them.

Another commenter argued that the proposed regulations impermissibly expanded the definition of “disbursement,” and that the HEA does not authorize the Department to expand the definition of “disbursement services.”

Another commenter argued that the proposed regulations violate the First Amendment. Specifically, the commenter argued that by requiring institutions to list a student's preexisting bank account as the first and most prominent option, the Department was depriving institutions that believe that a student's preexisting account is not in the student's best interests of the right to more prominently display another account. The commenter argued that a less restrictive means of achieving the Department's goal would be to require that all account options are listed neutrally and with objective information.

Discussion:
We appreciate the comments supporting our proposal and agreeing that we have the statutory authority to promulgate the regulations.

We disagree with the commenters who argued that these regulations are outside of our purview under title IV of the HEA. The Department is responsible for overseeing Federal student aid, which annually disburses billions of dollars intended to benefit students, to ensure that the program operates as effectively and efficiently as possible. Multiple statutory provisions vest the Department with broad rulemaking authority to effectuate the purposes of the program.
See, e.g.,
20 U.S.C. 1094(c)(1)(B); 1221e-3; 3474. As the statute makes clear, foremost among those purposes is ensuring that students actually receive the awards Congress authorized. Thus, for example, Section 487 of the HEA requires that in the program participation agreement an otherwise eligible institution must enter into before it is authorized to award title IV funds, the institution must pledge to “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 “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.” Similarly, section 401(f)(1) of the HEA provides that “[e]ach 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)(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.” Given that these provisions and many more demonstrate an overriding purpose of ensuring that students receive their title IV funds, it is the Department's responsibility to use its rulemaking authority to ensure title IV does not operate as a means to benefit third parties while inhibiting students' access to the full amounts of their awards. The GAO report and other investigations show that college card programs can and sometimes do operate to impair full access. These regulations are narrowly tailored to prevent that from continuing to happen. The regulations address a problem directly within the Department's cognizance and are an appropriate exercise of the Department's rulemaking authority.

We have consistently interpreted the HEA as authorizing regulation of the matters addressed in the regulations, including in the 2007 cash management regulations 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.

Furthermore, we disagree that section 492(a)(1) of the HEA provides evidence that we are acting outside our statutory authority; on the contrary, we believe that section further supports our authority. Section 492(a)(1) provides a list of the groups “involved” in the title IV programs, “such as” lenders, secondary markets, and collection agencies. The term “such as” signifies that the list is illustrative, rather than comprehensive; indeed, the Department has previously included several other types of representative groups in negotiated rulemaking. The rulemaking that led to these final regulations included banking sector representatives who provided helpful expertise in improving the regulations we proposed. In addition, the term “involved” denotes Congress's recognition that the Department's regulation of institutions would necessarily impact groups that are not directly regulated, as is the case here. Finally, lenders, secondary markets, and collection agencies are certainly entities that are directly regulated by other government entities, yet are impacted by the Department's regulation of institutions and the title IV programs, similar to financial account providers in these regulations. We are regulating the disbursement process and institutions (and their servicers) that are authorized to disburse title IV funds under the HEA.

We also disagree with the commenter who argued that we do not have the authority to clarify the definition of disbursement services. In section 401(e) of the HEA, regarding Pell Grants, Congress directed 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.” This section further states 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. . . .” Under section 455(a)(1) of the HEA, Congress directed the Secretary to prescribe such regulations as may be necessary to carry out the purposes of the Direct Loan program. This includes regulations applicable to third-party servicers and for the assessment against such servicers of liabilities for violations of the program regulations, to establish minimum standards with respect to sound management and accountability of the Direct Loan programs. 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.

Finally, we disagree with the commenter who argued that the proposed regulations violate the First Amendment. The regulations do not require an institution to endorse a particular banking product as a vehicle for title IV credit balance funds—in fact, the regulations prohibit institutions from expressly stating or implying that a particular account is required to receive their funds. We included this limitation to counteract the practices employed by some financial account providers that were leading title IV recipients to believe that a particular account was required. The provision requiring that the student be given a neutral list of accounts affords the student the opportunity to select an account that is the best fit for that individual. The requirement that a student's preexisting account be listed first and most prominently, rather than endorsing that option, simply ensures that students can easily locate and select the option to receive their funds via an account they have already chosen without confusion or additional steps. As we described in more detail in the NPRM,
4

we proposed this requirement because government and consumer reports found several examples where it was difficult or impossible for a student to determine how to have funds deposited in a preexisting account. In addition, we have eliminated the requirement for a “default” option (please refer to the student choice section of this preamble for further discussion); we believe that this will provide a student with a simple, neutral means of determining the available options for receiving title IV funds and represents the least restrictive means for doing so. For these reasons, among others, the provision does not violate the First Amendment, but is absolutely necessary.

4
80 FR at 28497-28499.

Changes:
None.

Possible Conflict With Existing Laws and Regulations

Comments:
Some commenters argued that the Department's regulatory efforts are duplicative of, or will conflict with, existing banking regulations from other Federal entities. These commenters argued that other existing federal laws and regulations, including the Electronic Fund Transfer Act,
5

the Dodd-Frank Wall Street Reform and Consumer Protection Act,
6

the Truth in Savings Act,
7

the Expedited Funds Availability Act,
8

and the Federal Trade Commission Act of 1914,
9

already

provide sufficient student choice measures and protections and the Department's efforts would conflict with those provisions.

5
Public Law 95-630, and implemented in Regulation E, 12 CFR part 205.

6
Public Law 111-203.

7
Public Law 102-242.

8
Public Law 100-86.

9
15 U.S.C. 41-58.

Commenters contended that the existence of these laws demonstrates a congressional intent to exclude the Department from regulating in this area, and that the Department lacks the expertise to do so. One commenter also alleged that the Department issued the proposed regulations based only on information from consumer advocacy groups and without consulting banking regulators.

Discussion:
We disagree with commenters who argued that the proposed regulations would duplicate or conflict with existing banking regulations. As we repeatedly stated throughout the preamble to the NPRM, we are not regulating banks or banking products. As a threshold matter, to the extent that institutions elect to contract with other parties, the regulations may impact those contracted parties. That does not, however, make those parties the subjects of the Department's regulations.

We recognize that there are numerous laws, regulations, and government entities that govern the banking sector and we have specifically limited the reach of the regulations where there might have been conflict or overlap (for example, by not requiring a duplicative disclosure of account terms already required under banking regulations when a student has already selected an account outside the student choice menu). We wish to make clear that these regulations govern institutions and the arrangements they voluntarily enter into that directly affect title IV disbursements, recipients, and taxpayer funds authorized under the HEA.

The commenters did not identify language in any law or regulation administered by another Federal agency that conflicts with the regulations, and neither have we in conducting our review or consulting with other agencies, including the Consumer Financial Protection Bureau (CFPB). Congress entrusted the Department with the responsibility for protecting the integrity of the title IV, HEA programs, and that is the purpose these regulations serve.

We also disagree with the commenter who stated that the Department did not seek out the expertise of banking regulators. As stated in the NPRM, the Department “consulted Federal banking regulators at FDIC, [the Office of the Comptroller of the Currency] OCC, and the Bureau of the Fiscal Service at the United States Department of the Treasury (Treasury Department), and CFPB, for help in understanding Federal banking regulations and the Federal bank regulatory framework” while developing the proposed regulations.
10

We have continued discussing these matters as we developed the final regulations to ensure that any regulatory changes are appropriate given existing banking rules.

10
80 FR at 28523.

Changes:
None.

Role of Existing Protections and Validity of Consumer and Government Reports

Comments:
Some commenters argued that existing cash management regulations provide sufficient protections for students and these regulations are unnecessary. These commenters noted that existing regulations already contain certain disclosure, notification, and insurance requirements, as well as some fee prohibitions. One commenter argued that existing Federal requirements have already resulted in corrective action.

One commenter questioned the validity of the reports underlying the justification for the proposed regulations. This commenter noted that the Office of the Inspector General (OIG) only studied four schools, just one of which had a T2 arrangement, and that no issues were found regarding the T2 arrangement. This commenter also contended that the Government Accountability Office (GAO) stated that the practices it uncovered already violated current regulations and consumer protection laws.

Discussion:
We disagree with the commenters who argued that the Department's existing cash management regulations provide sufficient protections to students. As commenters noted, our long-standing regulations authorized under the HEA already contain requirements relating to disclosures, notifications, fee prohibitions, and several other topics involving the institutional disbursement process. While we believe these protections are important for students, the numerous instances of troubling behavior identified by government and consumer groups and discussed in detail in the NPRM demonstrate that additional protection is necessary. We also note that while the legal system has addressed some issues associated with these types of arrangements, it has not and cannot resolve every issue that has been raised regarding T1 and T2 arrangements, and thousands of title IV recipients would be harmed in the intervening time. We believe the regulatory framework presented in this document is better suited to address the issues and recommendations jointly agreed upon by numerous government and consumer investigations.

We also disagree with the commenter who questioned the Department's reliance on an OIG report. Although the OIG reviewed the practices of only four schools, those schools collectively represent 158,000 enrolled students and 596.6 million title IV dollars in total.
11

The OIG noted in its report that under what would now been defined as T2 arrangements, “students sometimes misunderstood how the two accounts worked and whether the checking account was required.”
12

Additionally, the proposed regulations were based on much more than a single report. As we noted throughout the preamble to the NPRM, a number of independently prepared government and consumer reports from the GAO, United States Public Interest Research Group (USPIRG), Consumers Union, and others all came to a consensus (shared by the OIG report) regarding the severity and scope of the troubling practices employed by several financial account providers in the college card market. Additionally, legal actions, both by private individuals and government entities, substantiated many of the claims in these reports. These reports were also in agreement that corrective action and additional protections are needed. For all these reasons—rather than on the basis of a single, limited report as the commenter implied—we proposed regulatory changes to subpart K.

11
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].”

12
OIG at 11.

We also disagree that the GAO only found violations of current consumer protection laws and regulations. For example, the GAO specifically recommended several corrective actions for the Secretary to undertake, including developing requirements for distributing objective and neutral information to students and parents.
13

Changes:
None.

13
United States Government Accountability Office. “College Debit Cards: Actions Needed to Address ATM Access, Student Choice, and Transparency,” page 35 (2014), available at
www.gao.gov/assets/670/660919.pdf
(hereinafter referred to as “GAO at [page number]”).

Request for Extension of the Comment Period

Comments:
In view of the length and nature of the issues discussed in the NPRM, some commenters requested that the Department extend the comment period. One commenter requested a 30-

day extension, while another commenter requested an extension of at least 60 days to be consistent with the general recommendations in Executive Order 13563.

Discussion:
While we agree that the issues addressed in the proposed regulations are important and deserve thoughtful deliberation and discussion, we also have a duty to protect title IV funds, aid recipients, and taxpayers. If we had extended the comment period beyond 45 days, we would have been unable to comply with the master calendar provision of section 482(c) of the HEA, which requires that the Department publish final regulations before November 1 to take effect on July 1 of the following year. (In this case, we need to publish final regulations by November 1, 2015, in order for the regulations to be effective on July 1, 2016.) An extension of the comment period would therefore allow the abuses identified to persist an additional year. We also believe that 45 days provided the public a meaningful opportunity to comment, and this is supported by the complex and thoughtful comments we received.

Executive Order 13563 seeks, where feasible and in accordance with law, to promote participation and input by and from the public and interested stakeholders in general notice and comment rulemaking that is conducted pursuant to the Administrative Procedure Act (APA), 5 U.S.C. 553. The APA, in contrast to title IV, does not contemplate proceedings that include negotiated rulemaking—extensive additional participatory proceedings that are generally required by title IV and were in fact conducted as part of this rulemaking. Those negotiations, preceded by regional public hearings, provided opportunities for public participation and stakeholder input far in excess of 60 days. The purposes of the Executive order have been more than met, and a longer comment period would have been neither feasible, consistent with the master calendar provision, nor in the public interest.

We also note that we directly responded to each of the commenters who requested an extension of the comment period with a message similar in substance to the preceding discussion. We sent these responses as quickly as was practicable to provide notice to these commenters that we would not be extending the comment period and to give them sufficient time to submit substantive comments on the proposed regulations prior to the close of the comment period.

Changes:
None.

Definitions (§ 668.161(a))

Comments:
One commenter generally appreciated the inclusion of credit unions in the definitions of “financial institution” and “depository institution.” However, this commenter also asked that the Department recognize the unique structure of credit unions as “member-owned cooperatives” when drafting future regulations. Another commenter asked that the Department exempt credit unions that serve students and alumni of an institution. Another commenter praised the Department for adding definitions of “access device,” “depository account,” “EFT (Electronic Funds Transfer),” “financial account,” “financial institution,” and “student ledger account.”

However, one commenter also asked that we include a clear definition of “third-party servicer” in the regulations, stating that it was unclear without such a definition whether certain banking activities could cause a financial institution to become a T1 entity.

Discussion:
We thank the commenters for their support of our definitions, and we will take note of one commenter's request to keep the unique structure of credit unions in mind as we draft future regulations. However, on review of the final regulations, we have found no provisions warranting separate treatment of credit unions.

Finally, for a more thorough discussion regarding what types of activities would trigger the T1 requirements, please see the
Tier One (T1) Arrangements
section of this preamble.

Changes:
Consistent with the removal of “parents” in § 668.164(d)(4)(i), (e), and (f) in this final rule(the reasons for which are discussed in the student choice section of this preamble), we have also removed references to “parent” from the definition of “access device.”

Non-Prepaid/Debit Provisions

Paying Credit Balances Under the Reimbursement and Heightened Cash Monitoring (HCM) Payment Methods (§ 668.162(c) and (d))

Comments:
Several commenters objected to the provision in § 668.162(c) and (d) under which an institution must pay any credit balance due to a student or parent before it seeks reimbursement from, or submits a request for funds to, the Secretary. For the benefit of the reader, HCM1 refers to the payment method described under the heightened cash monitoring provisions in § 668.162(d)(1) and HCM2 refers to the provisions in § 668.162(d)(2).

One of the commenters argued that a credit balance does not occur when an institution posts on a student's ledger account, as an “anticipated disbursement,” the amount of title IV, HEA program funds that the student is expected to receive. The commenter asserted that at the time the institution submits a reimbursement request such postings are merely transactions on student ledger accounts pending the Department's review and subsequent release of the funds associated with the posted amounts. The commenter argued that without a requirement on the Department to process reimbursement requests in a timely manner, institutions will have to wait for the requested funds through a process than can be arduous and riddled with delays, citing instances where reimbursement requests were delayed for 45 to 60 days because the analysts assigned by the Department to review those requests were out of the office or assigned to other projects. The commenter stated that these delays are further exacerbated by an administrative process under which the Department allows an institution to submit only one reimbursement request every 30 days, which further delays the release of title IV, HEA program funds to the institution to cover a student's direct cost of tuition, books, and fees. However, the commenter believed this proposal was reasonable for an institution placed on HCM1 because under that payment method the institution is not dependent on the Department to act timely—it controls the timing of its cash requests. Finally, some commenters stated that the HCM requirements were not clearly articulated in the proposed regulations, and questioned whether the requirement to first pay credit balances applied to an institution placed on HCM1. The commenters suggested that the Department only require institutions placed in HCM2 to pay credit balances before seeking reimbursement.

Another commenter noted that guidance published in the 2014-15 FSA Handbook already provides that an institution placed on reimbursement must first pay required credit balances before it submits a reimbursement request, but questioned why the Department extended that provision in the NPRM to apply to an institution placed on heightened cash monitoring. This commenter, and others, argued that the Department should consider the nature of the compliance concerns that trigger whether an institution is placed on reimbursement or HCM. For example, where there are serious concerns about an institution's ability to

account appropriately for title IV, HEA program funds an institution would be placed on reimbursement, but for technical reasons or less troublesome compliance and financial issues, the institution could be placed on HCM1. The commenters noted that an institution is typically placed on HCM1 for failing to meet the financial responsibility standards under Subpart L of the General Provisions regulations; but under those regulations the institution must a submit a letter of credit for an amount determined by the Department and payable to the Department. The commenters stated that the letter of credit serves as a sufficient guarantee of the institution's ability to fulfill its financial obligations.

Under the circumstance where administrative capability is not at issue, the commenters questioned why the Department proposed to require the institution, which may be operating at lean margins at the beginning of a payment period, to “front” additional funds to pay credit balances to students that may include significant amounts for student housing and other living expenses. Similarly, another commenter believed that an institution would be penalized by having to act as a private lender of their own funds to students to meet the proposed requirement to pay credit balances before seeking funds from the Department. The commenter suggested regulatory language that would allow the institution to pay credit balances upon receiving funds from the Department. Alternatively, the commenter suggested changing the definition of disbursement for an institution placed on HCM or reimbursement to stipulate that funds requested for non-direct costs that would generate a credit balance are considered disbursed after the institution credits the student's account and receives the funds from the Department.

One commenter argued that requiring the institution to pay credit balances with institutional funds would push it into a temporary cash-flow position under which the institution would shoulder the costs of students' decisions about how much to borrow above the cost of tuition and fees, particularly where those decisions are beyond the control of the institution. The commenter stated that under the gainful employment regulations, the Department does not hold an institution accountable for costs that it does not control and should therefore refrain from placing undue financial strain on an institution that stems from decisions made by students. Moreover, because students may add or drop classes early in a payment period, students may move from one category to the other, introducing additional burden. For these reasons, the commenter suggested that an institution placed on HCM should have the option of (1) paying credit balances before seeking reimbursement, or (2) putting in escrow an amount equal to the expected credit balances and subsequently requesting funds prior to paying those credit balances.

One commenter stated that if the intent of the proposed regulations is to require an institution placed on HCM1 to first make credit balance payments, the commenter suggested that the Department explicitly require that as soon as an HCM1 institution initiates an EFT to the student's account, it may immediately request the funds from the Department and that those funds will be available within the same 24-48 hours timeframe that is currently in place.

A commenter questioned whether the Department intended to require an institution to credit all of a student's title IV, program funds at once, thereby creating a credit balance, or prohibit the institution from submitting a reimbursement request that includes a credit balance that has not been paid. The commenter provided the following example: a student is due to receive $15,000 in title IV program funds and institutional charges are $10,000. Can the institution credit just $10,000, get reimbursed, then credit or directly pay the other $5,000, and then get reimbursed for that, or must the institution credit all $15,000 and pay out the $5,000 before it can get any funds back in reimbursement? Along the same lines, another commenter argued that the proposed regulations present a significant administrative burden for an institution placed on HCM1 because the institution would need to seek payment from the Department separately for two categories of students—those who are expected to receive a credit balance and those who are not.

A commenter requested the Department to provide examples of documentation that may be considered appropriate proof that an institution paid credit balances prior to seeking reimbursement, and to outline the steps necessary for the institution to be removed from the HCM and reimbursement payment methods.

Discussion:
As a general matter, under the current and previous regulations the payment method under which the Department provides title IV, HEA program funds to an institution does not in any way excuse the institution from meeting the 14-day credit balance requirements under § 668.164(h) or the provisions for books and supplies under § 668.164(m). In the NPRM, we proposed to require an institution placed on HCM or reimbursement to make any credit balance payments due to students and parents before the institutions would be able to submit a reimbursement request under HCM2 or submit a request for cash under HCM1, to assure the Department that the institution made those payments before title IV funds are provided or made available to the institution. We note that an institution may still make credit balance payments at any time within the 14-day timeframe, but if the institution wants to include in its reimbursement or cash request a student or parent who is due a credit balance, the institution must pay that credit balance even if there is time remaining under 14-day provisions to make that payment.

With regard to payment methods, under section 401(a)(1) of the HEA and § 668.162(a), the Secretary has the sole discretion to determine whether to provide title IV, HEA program funds to an institution in advance or by way of reimbursement. The Department places an institution on reimbursement or HCM for compliance, financial, or other issues the Department believes necessitate a higher level of scrutiny. In general, these issues relate directly to the compliance history of the institution or its failure to satisfy financial standards that serve as proxy for the institution's ability to (1) provide the services described in its official publications, (2) administer properly the tile IV, HEA programs in which it participates, and (3) meet all of its financial obligations. Requiring institutions to pay credit balances prior to obtaining funds from the Department is consistent with that higher level of scrutiny.

To provide the reader a more complete primer, under § 668.164(a), a disbursement of title IV, HEA program funds occurs on the date that the institution credits the student's ledger account or pays the student or parent directly with (1) funds its receives from the Secretary, or (2) institutional funds used in advance of receiving title IV, HEA program funds. With regard to crediting a student's ledger account, we clarified in the preamble to the NPRM published on September 23, 1996 (61 FR 49878) and in the preamble to the final regulations published on November 29, 1996 (61 FR 60589) that a “credit memo” is not a disbursement—it merely represents an entry made by the institution, noting the type and amount of the title IV, HEA program awards the student qualifies to receive, for the purpose of generating invoices or bills

to students for institutional charges not covered by those awards.

With this background in mind, the comment that transactions on the student's ledger account are merely anticipated disbursements pending review by the Department of a reimbursement request is, at best, confusing. If the postings of anticipated disbursements are credit memos, then an institution placed on reimbursement or HCM cannot submit a reimbursement or cash request because it has not properly made disbursements to eligible students. If the postings represent actual disbursements, then regardless of any delays or administrative processes, under current and past regulations the institution is obligated to pay any credit balances due to students regardless of when the institution received funds to make those payments. With regard to comments about processing reimbursement requests timely, the Department takes care to assign adequate staff, but minor delays will occur from time to time. We note that the vast majority of delays in approving reimbursement requests occur because institutions do not provide the requested documentation or acceptable documentation.

With regard to the comments that the Department should distinguish between the alternate methods of payment (
i.e.,
between HCM and reimbursement or between HCM1 and HCM2) in applying the requirement to pay credit balances before requesting funds, we do not believe the distinction is warranted. Regardless of the alternate payment method the institution is placed on, or whether it submits a letter of credit to the Department for failing to satisfy the financial responsibility standards or for other reasons, the institution must still make required credit balance payments to students in a timely fashion. While we agree with the commenters that a letter of credit provides some measure of protection to the Department, it does nothing for students who are the primary beneficiaries of title IV, HEA program funds, and is not tied in any way that we can determine with the institution's fiduciary duty to make timely payments to students.

With respect to the comments that an institution would have to “front” institutional funds to students, that has always been and continues to be the nature of the alternate payment methods. As previously noted, in the ordinary course, an institution is placed on an alternate payment method based on concerns about its financial capacity or ability to properly administer the title IV, HEA programs. Requiring that the student beneficiaries are protected under these circumstances is consistent with the purpose behind the alternate methods of payment. In addition, we do not believe it is appropriate to change the disbursement process, such as putting credit balances in escrow or altering when funds are considered disbursed, to accommodate institutions with compliance issues.

With respect to the comment that the Department does not hold an institution accountable under the gainful employment regulations for costs it does not control, we note that a student's loan debt is capped at the total amount of tuition, fees, books, supplies, and equipment in determining the debt to earnings (D/E) rate of a program. So, to the extent that the student borrows funds in excess of that amount to pay for living costs, the excess funds are not counted in calculating the D/E rate, but all of the student's loan funds are counted in calculating the median loan debt of the program that is used for disclosure purposes. In any event, capping loan debt for the purpose of calculating a performance metric has no bearing on paying credit balances to students. Regardless of whether an institution has or exercises control of the amount of title IV, HEA program funds the student elects to borrow, the institution is responsible for disbursing the awards, including making credit payments to those students.

In response to the comment that the Department explicitly allow an institution on HCM1 institution to request funds immediately after it initiates an EFT to the student's account, we note that under § 668.164(a) an institution makes a disbursement on the date it credits a student's ledger account or pays the student directly. As provided in § 668.164(d), an institution pays a student directly on the date it initiates an EFT to the student's financial account. So, the regulations already provide that as soon as an institution on HCM1 makes a disbursement, it may request funds from the Department.

In response to the comment about whether an institution must credit the student's account with all the funds the student is eligible to receive for a payment period, it depends. For example, if the institution determines at or before the time it submits a reimbursement or cash request that a student is eligible for a Federal Pell Grant but not yet eligible for a Direct Loan (either because the student has not signed a master promissory note or for some other reason), the institution may include the student on that reimbursement or cash request. When the student establishes eligibility for the Direct Loan, the institution is required to credit the student's account with the loan funds and pay any resulting credit balance before including that student on a subsequent reimbursement or cash request. In most cases, however, the institution will have determined before submitting a reimbursement or cash request that the student was eligible to receive all of his or her awards for a payment period and therefore the amount of all of those awards will have to be credited, in full, to the student's ledger account and the institution will have to pay any resulting credit balance before including the student on a reimbursement or cash request.

With respect to the request that the Department provide examples of the documentation needed to prove that an institution paid credit balances and outline the steps necessary for an institution to be removed from the HCM and reimbursement payment methods, we believe that both of these issues are best addressed administratively on a case-by-case basis depending on how the payments were made or the steps than an institution takes to correct its financial or compliance issues.

Changes:
None.

Institutional Depository Account (§ 668.163)

Comments:
Under proposed § 668.163(a), an institution located in a State must maintain title IV, HEA program funds in an insured depository account. Some commenters supported the Department's proposal that an institution may not engage in any practice that risks the loss of Federal funds.

One commenter noted than an institution may have a “sub” account for title IV, HEA program funds within its operating account and asked whether this arrangement was acceptable or whether the institution needed to maintain title IV funds in a completely different bank account with no other operating funds and insured at the FDIC limit of $250,000. Similarly, another commenter asked the Department to clarify the insurance requirement because most institutions maintain title IV funds in accounts with balances that exceed FDIC or NCUA insurance limits.

Another commenter asked whether an institution had to disburse title IV, HEA program funds from the same account that the funds were originally deposited into, and, if not, whether the institution could sweep the funds in the account from which they are disbursed.

Another commenter stated that nightly sweeps are a standard practice for large organizations and the commenter is not aware of any losses

stemming from funds held in secured investment accounts. However, because most colleges and universities disburse title IV funds before submitting a cash request or disburse shortly after receiving the funds, the commenter stated the issue of where the funds are held is less important than it was in the past.

Discussion:
Under § 668.163(b), the Department may require an institution with compliance issues to maintain title IV, HEA program funds in a separate depository account. However, as a general matter, an institution may use its operating account, or a subaccount of its operating account, as long as the operating account satisfies the requirements in § 668.163(a)(2). With regard to the insurance limit, it does not matter whether an institution maintains title IV, HEA programs funds in a depository account in an amount higher than the insurance limit, it only matters that the account itself is insured by the FDIC or NCUA.

In response to whether an institution must use the same account for depositing and disbursing title IV, HEA program funds, the institution may choose to use the same depository account or different accounts (
e.g.,
a depository account into which title IV, HEA program funds received from the Department are transferred or deposited and an operating account from which disbursements are made to students and parents). Regardless of whether the institution uses the same account or more than one account, it must ensure that title IV, HEA program funds maintained in any account are not included in any sweeps of any account. For example, if an institution transfers funds from its title IV depository account to its operating account, any title IV funds held on behalf of students cannot be included as part of the sweep of other funds in its operating account.

With regard to the commenter who stated no losses have occurred on title IV funds held in secure investment accounts, we reiterate our position that, given the $500 limit on retaining interest earnings, there is no point in placing Federal funds at risk. About the comment regarding the declining importance of maintaining Federal funds in investment accounts, we assume the commenter is referring to the wind-down of the Federal Perkins Loan Program (see Dear Colleague Letter GEN-15-03). Previously, an institution could maintain its Perkins Loan Fund in a secure investment account and any interest earned would become part of the Fund and available to the institution to make Perkins Loans to students. Now that the statutory authority for institutions to make Perkins Loans has ended, there is no need for investment accounts.

Changes:
None.

Comments:
A commenter agreed with our proposal in § 668.163(a)(1) that the Secretary may approve a depository account designated by a foreign institution if the government of the country in which the institution is located does not have an agency equivalent to the FDIC or NCUA. However, the commenter believed that the requirements in § 668.163(a)(2)—that the name of the depository account must contain the phrase “Federal funds” or the institution must notify the depository institution that the account contains title IV, HEA program funds—were not meaningful in a foreign context and should be removed. In addition, the commenter noted that the laws in foreign countries may in some cases preclude an institution from maintaining funds in interest-bearing accounts as required under § 668.163(c). To avoid conflicts with the regulations in these instances, the commenter suggested that the provisions for interest-bearing accounts apply only to domestic institutions.

Discussion:
We agree that the provisions for maintaining title IV, HEA program funds in interest-bearing accounts, and for including the phrase “Federal funds” in the name of the depository account or notifying the depository institution that Federal funds are maintained in those accounts, may not be meaningful or relevant to foreign institutions.

Changes:
We have revised the notice requirements in § 668.163(a)(2) and the interest-bearing account requirements in § 668.163(c)(1) so they apply only to institutions located in a State.

Disbursements During the Current Payment Period (§ 668.164(b)(1))

Comments:
Under proposed § 668.164(b)(1), an institution must disburse during the current payment period the amount of title IV, HEA program funds the student or parent is eligible to receive, except for Federal Work Study (FWS) funds or unless the provisions in 34 CFR 685.303 apply. Because § 685.303 contains a number of provisions, one commenter asked the Department to specify the provisions that apply to disbursing funds during the current payment period.

Discussion:
We agree with the commenter that a specific cross reference to § 685.303 would be helpful. Under § 685.303(d)(4)(i), if one or more payment periods have elapsed before an institution makes a disbursement, the institution may include loan proceeds for completed payment periods in the disbursement. This is the only circumstance in § 685.303 that is an exception to the general rule specified in § 668.164(b)(1) that an institution must disburse during the current payment period the amount of title IV, HEA program funds the student or parent is eligible to receive.

Changes:
We have amended § 668.164(b)(1) to specify that an institution must disburse during the current payment period the amount of title IV, HEA program funds the student or parent is eligible to receive except for FWS funds or unless 34 CFR 685.303(d)(4)(i) applies.

Confirming Eligibility (§ 668.164(b)(3))

Comments:
Some commenters objected to the proposal in § 668.164(b)(3) under which a third-party servicer, along with the institution, would be responsible for confirming a student's eligibility at the time a disbursement is made. The commenters stated the current regulations are clear that a disbursement occurs when an institution credits a student's account with title IV funds or pays title IV funds to a student directly. These commenters argued that the proposal contradicts the existing provision in 34 CFR 668.25(c)(4) by expanding the requirement to confirm student eligibility to servicers who have any involvement with the disbursement process and not just to servicers who actually disburse funds as already provided in § 668.25. The commenters noted that many third-party servicers provide, among other services, reporting and reconciliation of institutionally provided data to the Department as a liaison between the institution and the Department. The commenters stated that extensive regulations already cover disbursement of Federal aid to eligible students, and that it is ultimately the institution's responsibility to ensure fiscal accountability and to fulfill its fiduciary duty under the terms of its Program Participation Agreement. The commenters opined that requiring a servicer to confirm a student's eligibility results in a higher standard of care, additional administrative burdens and cost being forced upon institutions that elect to engage a servicer that do not exist for institutions that do not use a servicer. The commenters argued that the additional and duplicative confirmation process would also likely result in unnecessary disbursement delays to eligible students. The commenters also objected to third-party servicers being held jointly responsible for the veracity of any information provided to them by the institution,

arguing that servicers are not officials of the institution, or part of its ownership or on-campus management team. The commenters reasoned that requiring a servicer, or any other unrelated entity, to be responsible for information provided by its client institution is comparable to requiring a CPA or other tax preparation service to be responsible for the accuracy, completeness, and validity of their clients' income, expense, and deduction claims. Because rules are already in place regarding taxpayer and institutional liability for non-compliance with Federal aid disbursements, the commenters argued that expanding institutional liability to third-party servicers that have no authority to control the actions of institutions or their employees is unnecessary. The commenters stated that institutions that typically engage a servicer are small businesses and the significant cost that they would incur to have servicers perform a function that the institution is already required by regulation to perform would result in either school closures, higher tuition costs, or inexperienced aid administrators with no ability to engage a servicer.

Similarly, another commenter opined that the proposed regulations would apply to nearly all servicers since virtually all of them perform activities that could be characterized as “leading to or supporting” disbursements. The commenter stated that the function of confirming the enrollment and eligibility status for each student for whom a disbursement is ordered requires review of original source records and information created and maintained by the institution, a process which can entail a considerable amount of time. Although the commenter acknowledged that the Department indicated in the preamble to the NPRM that an institution and a servicer could establish a process under which the servicer periodically affirms that the institution confirmed student eligibility at the of disbursement, the commenter argued that the language in proposed § 668.164(b)(3) appeared to impose a duty on the servicers themselves to confirm enrollment and eligibility status. In addition, the commenter argued that the process discussed in the preamble was ambiguous, with many unaddressed factors including the frequency of servicer reviews, the percentage of files that need to be sampled, the method of selecting files, the level of error that should be cause for concern, and the course of action that should be taken if that error level is detected.

The commenter also inferred that third-party servicers who perform activities leading to or supporting a disbursement will be required to calculate the return of title IV funds for those students who withdraw prior to completing a payment period for which a disbursement is made. The commenter argued this proposal effectively redefines when a servicer is considered to be a servicer who “disburses funds” for purposes of 34 CFR 668.25(c)(4). Moreover, the commenter was concerned that if a servicer is considered to have a separate and independent duty to confirm enrollment and eligibility under § 668.164(b)(3), the servicer would be liable under 34 CFR 668.25(c)(3) for paying those liabilities in the event the institution closed. In addition, the commenter opined that the HEA does not authorize the Secretary to impose on servicers, through an expansive definition of disbursement, title IV functions and obligations of an institution that the servicer has not agreed to assume under its contractual relationship with that institution.

The commenter lastly opined that it would be inconsistent to treat a software provider as a third-party servicer if the provider used student aid information from its software product to perform COD reporting, reconciliations, or other business functions, but not treat as a third-party servicer a software provider whose product performs the same functions, including activities that lead to or support a disbursement, that are carried out by an institution. Along these lines, the commenter concluded that third-party servicers and software providers that perform title IV functions on behalf of institutions would potentially be jointly and severally liable for title IV errors, but a software provider whose product is used solely by an institution would not, even though that product performs functions that lead to or support disbursements. For these reasons, the commenter concluded that the proposed regulations likely will preclude many institutions from having access to the expertise and services provided by third-party servicers and software service providers and thereby will result in a higher incidence of title IV errors. In addition, the commenter argued that the proposed regulation likely will put some third-party servicers, software service providers, and institutions out of business.

Another commenter noted that organizations are considered third-party servicers if they deliver title IV credit balances, but opined that the cash management regulations appear to be written for a very small subset of servicers who have complete access to all award and billing information, enabling them to make title IV eligibility determinations and consequently control the disbursement process. The commenter stated that most third-party servicers participate in only a few steps of the overall disbursement process and have very little insight or influence on the process of awarding financial aid. These third-party servicers are not involved in determining the eligibility of students or the corresponding amounts to be disbursed. The commenter was concerned that unless the proposed rule is amended, the responsibility and potential liability of a service provider could far outweigh any reasonable charges for disbursement services, and suggested that the Department clarify the various types of service providers and the degree of responsibility and liability associated with each type.

Discussion:
We disagree with the commenters that portray a third-party servicer as merely a liaison between an institution and the Department or as an unrelated entity that simply uses whatever information a client provides to conduct transactions on the client's behalf. As provided in § 668.25(c)(1), when a third-party servicer enters into a contract with an institution, the servicer must agree to comply with the statutory provisions in the HEA and the regulations governing the title IV, HEA programs that fall within the ambit of the activities and transactions the servicer will perform under that contract. In performing those activities and transactions on behalf of the institution, the third-party servicer must act as a fiduciary in the same way that the institution is required to act if it performed those activities or transactions itself. So, in the capacity of a fiduciary, the third-party servicer is subject to the highest standard of care and diligence in performing its obligations and in accounting to the Secretary for any title IV, HEA program funds that it administers on behalf of the institution.

In situations like those described in the NPRM, where a third-party servicer determines the type and amount of title IV, HEA program awards that students are eligible to receive, requests title IV funds from the Department for those students, or accounts for those funds in reports and data submissions to the Department, the servicer has a fiduciary duty to ensure that disbursements are made only to eligible students for the correct amounts. Otherwise, improper disbursements may be made to students that in turn affect the accuracy of the institution's fiscal records and data

reported to the Department. Moreover, where a third-party servicer is engaged to perform one or more of these activities it is not possible to confine the servicer's fiduciary responsibilities to discrete functions, as the commenters proffer, because these activities are interrelated. For example, a servicer that determines the type and amount of awards that students are eligible to receive and requests funds from the Department, would rely on the award amounts for those students in requesting the funds necessary to meet the institution's immediate disbursement needs.

We disagree with the assertion made by the commenters that an institution is solely responsible for disbursement errors simply because the institution makes an entry crediting a student's ledger account. As a practical matter, where a third-party servicer is engaged to determine the type and amount of title IV, HEA program funds that a student is eligible to receive, the institution may reasonably rely on that information in crediting the student's ledger account. Moreover, disbursing funds is a process that begins with determining the awards that a student is eligible to receive and culminates in making payments of those awards to the student. So, the act of crediting the student's ledger account is just part of that process—it simply identifies the date on which the student receives the benefit of title IV, HEA program funds.

With regard to the concerns raised by the commenters that requiring a third-party servicer to confirm eligibility at the time of disbursement would be costly, cause delays, and duplicate the work of the institution, we believe those concerns are overstated. As discussed more fully in Volume 4, Chapter 2 of the FSA Handbook,
14

in confirming eligibility, an institution determines whether any changes or events have occurred, from the date that a student's awards were made to the date the student's ledger account is credited, that may affect the type and amount of those awards. Most of these changes and events relate to the student's enrollment at the institution—whether the student began attendance in classes, the student's enrollment status, whether the student successfully completed the hours in the prior payment period, and whether a first-time borrower has completed the first 30 days of his or her program. Other events include whether the institution has any new information that would cause the student to exceed his or her lifetime eligibility for Federal Grants, or for Direct Loans, whether the student has a valid master promissory note. These are basic enrollment and award tracking functions required of all institutions under the record retention provisions in § 668.24 and applicable program regulations, so we see no reason why it would be costly or time consuming for an institution to implement a process where this information is shared with its third-party servicer.

14
Available at
https://ifap.ed.gov/ifap/byAwardYear.jsp?type=fsahandbook&awardyear=2015-2016.

As we explained in the preamble to the NPRM (80 FR 28495), the institution and its third-party servicer may establish a process under which the institution confirms eligibility and the servicer verifies periodically that the confirmations were made in accordance with that process. With regard to the comments that the Department should specify the requirements or procedures used under these processes, we do not believe that is necessary—the institution and the servicer should be sufficiently motivated to implement credible processes because they are jointly responsible and jointly liable.

With regard to comments that the proposed regulations contradict the existing provisions in § 668.25(c)(4), the Department respectfully disagrees. As discussed previously in this section and in the NPRM, the language holding an institution and its third-party servicer responsible for confirming a student's eligibility is not a new policy or a change in policy—it merely emphasizes current requirements and reiterates institutional and servicer responsibilities.

In response to the comment about whether software providers or the use of their products are treated in the same way as third-party servicers, we would make that determination on a case-by-case basis depending on the how the software products are used and the role of the software provider in performing title IV functions.

With regard to the comments that the proposed regulations require servicers who perform activities leading to or supporting a disbursement to also calculate the return of Title IV funds for students who withdraw, that responsibility already exists in 34 CFR 668.25(c)(4)(ii). Changes to that regulation are beyond the scope of these regulations.

In response to the suggestion that the Department clarify the various types of service providers and the degree of responsibility and liability associated with each type, doing so is beyond the scope of these regulations. However, a third-party servicer is not subject to the provisions for confirming eligibility under § 668.164(b)(4) if, for example, the servicer is engaged only to deliver credit balance payments to students, or only to provide exit counseling to student loan borrowers.

Changes:
We have revised § 668.164(b) to clarify that an institution remains responsible for confirming a student's eligibility at the time of disbursement. We also clarify that a third-party servicer is responsible for confirming eligibility if the servicer is engaged to perform activities or transactions that lead to or support a disbursement, and identify the general scope of those activities and transactions.

Books and Supplies (§ 668.164(c)(2))

Comments:
Under proposed § 668.164(c)(2), if an institution includes the costs of books and supplies as part of tuition and fees it must separately disclose those costs and explain why including them is in the best financial interests of students.

Several commenters stated that these disclosures were redundant and unnecessary. Some of the commenters cited section 133 of the HEA and the Department's Dear Colleague Letters GEN 08-12 and GEN 10-09 that describe the provisions for textbook disclosures, and noted that, according to these sources, institutions are required to comply with the textbook disclosure requirements even if the textbooks are included as part of the tuition and fees. A few commenters believed the proposed disclosure requirements violate section 133(i) of the HEA, which prohibits the Secretary from regulating textbook disclosures.

In response to our request for comment about how and the frequency with which an institution should disclose the costs of books and supplies that are included as part of tuition and fees, one commenter recommended that the disclosures be made at the time of enrollment and then again at the beginning of each payment period.

Another commenter stated that if these disclosures would be most useful when a student is deciding whether to contract for the program of study, the disclosures should be made prior to a student entering into a financial obligation with the institution for enrolling in a program of study. Further, if the costs of books and supplies are included as part of tuition and fees for all students in a program, the commenter recommended that charges for those materials should be listed in an offer of admission and financial aid, so that students are able to make enrollment decisions that include all mandatory costs.

One commenter argued that there are no effective ramifications of the disclosure (
e.g.,
there is no obligation on the institution to reverse those charges so the student can purchase the materials elsewhere) so the only real effect of the disclosure is to persuade the student not to enroll or to seek a similar program elsewhere. However, the commenter did not recommend that an institution be required to reverse the charges, stating that would undermine legitimate efforts by the institution to negotiate better deals for students on a volume basis. The commenter, and others, also suggested that any student consumer information or disclosures should be not be part of the cash management regulations, but in subpart D of the General Provisions regulations.

Another commenter agreed with the Department's concerns regarding institutions artificially inflating the cost of books and supplies, but did not believe that such disclosures are warranted under the statute, and doubted that they would actually address the Department's concerns. The commenter contended that the disclosure provision would be potentially time-consuming and expensive to implement, and confusing or meaningless to students.

A commenter supported the disclosures arguing that the cost of books and supplies should be listed as specific line items on the bill or invoice sent to the student, along with the explanation of why those materials are required, so the student can make appropriate financial aid decisions.

A few commenters did not find compelling or relevant the Department's rationale for initially proposing that institutions may not include books and supplies as part of tuition and fees, and they stated that the attorneys present at the negotiated rulemaking sessions submitted documents that did not include any findings of institutions charging inflated prices. Although there was a report submitted at a Department hearing concerning books and supplies, the concerns raised in that report had more to do with manipulating credit balances to coerce students to buy books directly from the institution rather than the issues raised by the Department in the NPRM. In addition, the commenters stated that the Department's regulatory intent was not clear, with one commenter providing an example where an institution includes as part of tuition and fees the cost of a new hardbound textbook under an arrangement where it negotiated a discount in the student price of that textbook from $400 to $100. In this case, the commenter asked whether the Department would allow that arrangement as in the best financial interest of the student or disallow the arrangement because the textbook is nevertheless available in the marketplace.

The same commenters took exception to the Department's position in the preamble to the NPRM that the costs of attendance provisions in section 472 of the HEA treat books and supplies as separate from tuition and fees. One commenter argued that under the plain meaning of the statute, institutions have the sole discretion to determine what constitutes tuition and fees, pointing to the provision in section 472(1) of the HEA that states that tuition and fees may include the costs for rental or purchase of “any materials” or “supplies.” The commenter opined that these terms are broad enough to include learning materials like textbooks and digital learning platforms. Where tuition and fees do not include the costs of materials and supplies, the cost of attendance also includes an allowance for books, supplies, transportation, and other expenses under section 472(2) of the HEA. The commenters concluded that instead of providing the Department with authority to limit the institutions' ability to include books and supplies as part of tuition and fees, section 472 of the HEA appears to provide institutions with authority to do just that—
i.e.,
include books and supplies as part of tuition and fees. Moreover, the commenters contended that while section 401(e) of the HEA limits the disbursement of title IV funds to tuition and fees, because it is silent on the question of what constitutes tuition and fees, it does nothing to limit the discretion vested in institutions by section 472.

Some commenters argued that using title IV funds to pay for books and supplies included as part of tuition and fees benefits students in two ways. First, it ensures that students are able to have all the required learning materials in their possession on the first day of class, which educators agree is an important element in overall student success. Second, it often provides students with substantial discounts, because, by including books and supplies as tuition and fees, institutions are able to negotiate volume discounts on behalf of their students. In addition, as more classes are taught using digital learning platforms, institutions will require flexibility to adopt new models for how those materials may be used and purchased. Digital learning platforms fully integrate content with personalized learning technologies and other elements to provide students with a holistic learning experience that can be accessed with a laptop, a tablet, a smartphone or some combination of devices. The commenter stated that the emergence of digital learning platforms will also create new market dynamics. While many of these new dynamics are over the horizon, some are reasonably clear at present. Because digital learning platforms integrate content with personalized quizzes, exercises and problems as well as a calendar of assignments and student-faculty online communication, the platforms are not optional—students must have access to the digital learning platform by the first day of class. Moreover, the commenter contended there can be no legitimate aftermarket for digital learning platforms and there is no way to legitimately access the platforms except through portals authorized by the digital learning company. Consequently, including digital learning platforms as tuition and fees is one way to ensure that students have access to this new technology in a convenient and timely manner.

A few commenters stated that if the Department goes forward with the regulations, it should require that, as proposed by the community colleges during negotiated rulemaking, if an institution includes the cost of books and supplies as part of tuition and fees, it must separately and publicly disclose such costs in the schedule of tuition and fees along with a written statement justifying the reason for this inclusion and the value to students for taking this approach by the institution. The commenters argued that this proposal requires disclosure and promotes transparency, and also incorporates the concept of “value to the student” which would include both the financial best interest of the student as well as the pedagogical value to the student. The commenters explained that under the community colleges' proposal, books and supplies could be included as tuition and fees where there is pedagogical benefit to the student but the effect on the student's financial best interest is neutral. The commenters concluded by stating that it is clear that including books and supplies as tuition and fees can provide pedagogical benefits to students: Those benefits should be taken into account by any regulation promulgated by the Department and should be sufficient in and of themselves to justify including books and supplies as part of tuition and fees.

Other commenters agreed with the proposal. Some believed the proposal would provide helpful transparency around the practice of including charges for books and supplies along with

tuition and fees which sometimes limits the ability of students to make purchasing decisions on their own. Another commenter noted this that this provision will prevent institutions from automatically lumping books and supplies into tuition and fees, which simply increases the amount of funds that the institution gets to keep before making credit balance payments to students. In addition, the commenter believed the provision provides students with needed transparency about precisely what is being charged by institutions, arguing that if an institution cannot provide a plausible explanation that it is providing the materials at below market cost or the provided materials are generally not otherwise available, then the institution will not be able to include these costs. Instead, those costs will be treated in the traditional manner as part of the additional cost of attendance and the aid that would have otherwise been used to pay those costs will be forwarded to the student.

While acknowledging the Department's concerns about overcharging for otherwise widely available materials, one commenter disagreed that imposing the “best financial interest” requirement on all institutions is warranted or applicable when course materials are not widely available or available electronically only through the institution. Instead, the commenter suggested that the regulations merely require an institution to disclose the amounts separately, arguing that this allows for students to do a cost comparison for materials that may be available through other channels and make an informed decision.

Discussion:
After considering all of the comments received on this topic, we are revising the provision to set forth three conditions under which an institution may include the costs of books and supplies as part of tuition and fees. Because the final regulations do not require an institution to make textbook disclosures, we are not addressing as part of this discussion the merits of the comments regarding those disclosures.

We take issue with the notion that institutions enjoy complete discretion to include books and supplies in tuition and fees pursuant to section 472 of the HEA. Books are referenced in section 472(2), a paragraph separate and apart from section 472(1), the provision regarding tuition and fees. Moreover, “supplies” are addressed not only in section 472(1), but also in 472(2)—the first covering “tuition and fees normally assessed a student carrying the same academic workload as determined by the institution, and including costs for rental or purchase of any equipment, materials, or supplies required of all students in the same course of study,” and the second covering “an allowance for books, supplies, transportation, and miscellaneous personal expenses. . . .” So section 472 on its face contains no justification for including books, whether paper or digitized, as tuition and fees; and it permits an institution to treat supplies as tuition and fees only if they are “normally assessed” and “required of all students in the same course of study.” This structure is inconsistent with the commenter's claims.

Furthermore, it would be unlawful to read section 472 in isolation from the other portions of title IV of the HEA. Whenever books and supplies are included in tuition and fees, this results in students having no opportunity to decide for themselves whether or how to obtain these materials or what if anything to pay for them. Two separate provisions of title IV prohibit such a result. Section 401(e) of the HEA, regarding Pell Grants, provides that “any disbursement allowed to be made [by an institution] by crediting the student's [ledger] account
shall be limited
to tuition and fees and, in the case of institutionally owned housing, room and board.
The student may elect to have the institution provide other such goods and services
by crediting the student's [ledger] account.” (Emphasis added). Section 455(j)(1) of the HEA, regarding Direct Loans, states that “Proceeds of loans to students under this part 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.”
(Emphasis added). Sections 401(e) and 455(j)(1) serve to ensure students are free to make the choices they regard as in their own best interests as consumers. Under well-settled principles of statutory construction, these consumer rights cannot be read out of the statute through a construction of section 472(1) as permitting institutions broad discretion to designate charges for goods and services that are purchased rather than produced by the institution as tuition and fees. Instead, reading the statute as a whole and in harmony as required by law, any such discretion is circumscribed and must conform to the purposes of sections 401(e) and 455(j)(1) of protecting the rights of students as consumers.

With regard to the request that we adopt the community college proposal under which an institution that includes books and supplies as part of tuition and fees would provide a written statement justifying the reason and the value to student for doing so, we decline. As noted by the commenters, under this proposal an institution could provide a pedagogical reason for including books and supplies. Although well intended, the proposal would allow some institutions to include the costs of books and supplies as part of tuition and fees to the detriment of students. Neither students nor the Department would be positioned to evaluate claims regarding pedagogical value, and under HEA sections 401(e) and 455(j)(1) consumer protection supersedes pedagogy. For these reasons, and to enable to the Department to take enforcement actions, we proposed in the NPRM that including books and supplies had to be in the best financial interests of students. However, we are partially persuaded by the commenters to adopt a different approach that is beneficial to students and institutions, while also addressing the Department's concerns.

Under this approach, an institution may include the costs of books and supplies as part of tuition and fees under three circumstances: (1) The institution has an arrangement with a book publisher or other entity that enables it to make those books or supplies available to students at below competitive market rates, (2) the books or supplies, including digital or electronic course materials, are not available elsewhere or accessible by students enrolled in that program from sources other than those provided or authorized by the institution; or (3) the institution demonstrates there is a compelling health or safety reason.

The commenters made a persuasive argument that including books and supplies would not only enable an institution to negotiate better prices for its students, it would result in students having required course materials at the beginning of a term or payment period. Although the commenters did not elaborate on the extent to which an institution could negotiate better prices, if the price charged to students is not below prevailing market prices, the only remaining benefit to the student is that he or she will have the materials at the beginning of the term. But, that is already addressed by § 668.164(m), which requires an institution to provide a way for many students to obtain or purchase required books and supplies

by the seventh day of a payment period. Therefore, we believe that arrangements with book publishers or other entities must result in books and supplies costs that are below competitive market rates.

However, even if the institution's prices are below competitive market rates, by allowing the institution to include books and supplies as part of tuition and fees, students will not have the option of seeking even lower cost alternatives such as used books, rentals, or e-books. This is the same outcome that may occur by the way an institution provides books and supplies to students under § 668.164(m). Under that section, the student may opt out of the way provided by the institution and use his or her credit balance funds to obtain books and supplies elsewhere. The same opt out provision is needed here to enable students to seek potentially lower cost alternatives. We note that a student who opts out under this section is considered to also opt out under § 668.164(m), and vice versa, because the student has determined to obtain books and supplies elsewhere. But, even with an opt out provision, we are concerned that students who would otherwise seek lower cost alternatives will settle, out of sheer convenience, for the price of books and supplies negotiated by the institution. So, we encourage institutions to negotiate agreements with publishers and other entities that provide options for students. Finally, we adopt for this provision the same approach used in § 668.164(m), that an institution must provide a way for a student to obtain the books and supplies included as part of tuition and fees by the seventh day of a payment period.

We are convinced that digital platforms, and digital course content in general, will become more ubiquitous and that including digital content as part of tuition and fees ensures that students have access to this technology. Similarly, we agree with some commenters that where books and supplies are not available from sources other than institution, those materials may be included as part of tuition and fees.

Lastly, as discussed during the negotiated rulemaking sessions, if there are compelling health or safety concerns, an institution may include, as part of tuition and fees, the cost of materials, supplies, or equipment needed to mitigate those concerns. For example, as part of a marine biology or oceanographic degree program, an institution requires students to take a scuba diving class where it is critical that those students have specific and properly functioning equipment to avoid serious health issues. To ensure the safety of its students, the institution maintained and provided the same equipment to all of the students in the class.

An institution that does not satisfy or choose to exercise at least one these options, may not include the costs of books and supplies as part of tuition and fees for a program. In that case, the institution has to obtain the student's authorization under § 668.165(b) to use title IV, HEA programs to pay for books and supplies that it provides. We remind institutions that under § 668.165(b)(2)(i), they may not require or coerce a student to provide that authorization. Therefore, an institution may not require a student to purchase or obtain books and supplies that it provides. This consequence, and the condition where an arrangement with a publisher or other entity must result in below market prices, addresses the Department's concerns that students may be overcharged for books and supplies.

Changes:
We have amended § 668.164(c) to state that an institution may include the costs of books and supplies as part of tuition and fees if: (1) The institution has an arrangement with a book publisher or other entity that enables it to make those books or supplies available to students at below competitive market rates. However, the institution must provide a way for a student to obtain the books and supplies by the seventh day of a payment period and must establish a policy under which a student may opt out of the way provided by the institution, (2) the institution documents on a current basis that the books or supplies, including digital or electronic course materials, are not available elsewhere or accessible by students enrolled in that program from sources other than those provided or authorized by the institution, or (3) the institution demonstrates there is a compelling health or safety reason.

Prior-Year Charges (§ 668.164(c)(3) and (4))

Comments:
Proposed § 668.164(c)(3) addresses the payment of prior year charges with current year funds. One commenter supported our proposal in § 668.164(c)(3)(ii) to define the terms “current year” and “prior year” in the same way those terms were defined in our Dear Colleague Letter GEN 09-11. However, another commenter suggested that the Department allow an institution the flexibility to determine the current year period when both loans and other title IV funds (
e.g.,
Pell Grants or campus-based funds) are in play. The commenter also stated that the guidance issued by the Department defining a prior year was confusing in a number of circumstances. In general, the commenter was concerned that the regulation's lack of flexibility could cause some undesirable outcomes when the loan period for a Direct Loan and the award year for a Pell Grant did not match up, for example, situations where there are multiple loan periods within the same academic year, and where institutions assign summer cross-over periods to either the upcoming award year or to the concluding award year. The commenter did not like the fact that in some situations, charges that fell within the same academic year had to be considered prior year charges because a loan period was being used instead of an award year to define the current year for payment purposes. The commenter also took issue with the fact that, because an institution has the authority to assign cross-over payment periods on a student by student basis, the results might vary student by student depending on which award year the institution assigns to a cross-over payment period. Basically, the comment reflected frustrations that others have expressed over the years with the fact that there is a limitation on the amount of a student's “current year” aid that can be used to pay for outstanding “prior year” charges.

On a separate issue, this commenter asked whether proposed § 668.164(c)(4) would work as intended when aid from different title IV, HEA programs comes in at different times. The commenter posited the example of a student getting Pell Grant and campus-based aid for the fall and spring terms on time, but also getting a Direct Loan (that was intended for the fall and spring) disbursed as a single late payment in the spring term. In view of proposed § 668.164(c)(4) which allows an institution to include in the current payment period allowable charges from a previous payment period in the current award year or loan period for which the student was eligible, if the student was not already paid for such a previous payment period, the commenter asked whether the portion of the loan applicable to the fall could be used to credit the student's account for allowable outstanding fall charges under proposed § 668.164(c)(1) (basically tuition and fees, and room and board charges) without the student's permission even though the student was paid other aid in the fall. The commenter also asked whether there would be an exception to the rule in § 668.164(c)(4) when institutional charges were greater in one term compared to another term, since Pell

Grant and Direct Loan payments are made in equal installments.

Discussion:
The basic premise behind the limitation on the use of current year funds to pay for prior year charges is the statutory construct that title IV, HEA program funds are provided to a student to cover educational expenses associated with a particular period of time. Thus, it could be argued that none of a student's title IV, HEA program funds for a given year should ever be used to cover expenses associated with a prior year. However, because students may be prevented from registering for classes because of minor unpaid prior year charges and, more importantly, because these charges are small enough to be construed as inconsequential, the Department has taken the position that it is acceptable to use a corresponding
de minimis
amount of current year funds (currently $200 or less) to pay for prior year charges. It should be an unusual situation when title IV funds for a current period are used for expenses for a prior period, and such a use should only be allowed when the expenses in question are of a
de minimis
nature. This then left us with the issue of how to determine the period of time that should be used to define “current year” and “prior year” for purposes of this provision. Considering the complicating facts that (1) Federal title IV aid is often given for different periods of time, and (2) schools often comingle a student's aid from different sources in a single student account, the Department proposed a rule that would allow the school to use a single period of time as the current year, depending on whether a Direct Loan was part of the aid package. While this appeared to work well in the vast majority of situations for the past six years, we agree that less than desirable results can sometimes occur. Thus, we are revising the “current year/prior year charges” provision in § 668.164(c)(3) to allow a school some additional flexibility in this area, while still maintaining the concept that, except for the $200 that can be used for prior year expenses, aid intended for a current year must be used for expenses associated with that current year.

With regard to § 668.164(c)(4), we agree with the commenter who suggested that Direct Loan funds (or any title IV funds) that are intended to cover previous payment period expenses, but are disbursed late in a lump sum in a subsequent payment period, should be allowed to be credited to a student's account without the student's permission to cover unpaid charges from those previous payment periods, notwithstanding the fact that the student may have already been paid some other title IV aid for those previous payment periods. Had the aid in question been ideally disbursed, it would have been disbursed in all payment periods for which it was intended and such disbursements would have alleviated, or substantially reduced, any carry over charges from the earlier payment periods. In fact, we believe that the institution should be able to bring forward to the current payment period any unpaid allowable charges from previous payment periods in the current award year or current loan period for which the student was eligible for title IV, HEA program funds. The principle behind § 668.164(c)(1) is that an institution should not be able to collect from title IV funds institutional charges for the entire program in the first few payment periods, thereby denying the student the ability to use some of his or her funds for non-institutional educational expenses in those early payment periods. Ideally, some of a student's title IV aid should be available to the student to pay for non-institutional educational expenses in each payment period. However, if the student has allowable outstanding institutional charges associated with previous payment periods in the current award year or loan period, as opposed to charges associated with future payment periods, then we believe it is appropriate for the institution to be able to use title IV funds to cover those expenses before it makes those funds available to the student for non-institutional educational expenses.

Changes:
We have revised § 668.164(c)(3)(ii) to state the following rules. If a student's title IV aid package includes only a Direct Loan, the current year is the current loan period. If a student's title IV aid package includes only non-Direct Loan aid, the current year is the award year. If a student's title IV aid package includes both a Direct Loan and other aid, the institution may choose to use either the loan period or the award year as the current year. And, we have clarified that a prior year is any loan period or award year prior to the current loan period or award year.

We have also revised § 668.164(c)(4) to indicate that all allowable unpaid prior payment period charges from payment periods in the current award year or loan period for which the student was eligible for title IV aid can be brought forward and associated with the current payment period.

Prorating Charges (668.164(c)(5))

Comments:
When an institution charges a student up front (
i.e.,
it debits the student's account) for more than the costs associated with a payment period, for the purpose of determining the amount of any credit balance, the institution must prorate those charges under the procedures in § 668.164(c)(5) to reflect the amount associated with the payment period.

One commenter asked whether book charges must be prorated in the same way as tuition and fees, and room and board. Another commenter opined that the prorating provisions effectively preclude an institution from charging by the program. A third commenter believed that the proposed method for prorating charges was appropriate, but questioned whether it would have any effect on the regulation addressing the treatment of title IV funds under § 668.22 when a student withdraws from the institution. The commenter also noted that current rules addressing the cost of attendance for loan recipients require an institution that charges for more than one year up front to include all the program charges in the cost of attendance for a loan made for the first year, and include only costs other than the program charges in the cost of attendance for loans made for subsequent years. The commenter reasoned that this loan provision coupled with the proposed requirement to evenly prorate institutional charges over the number of payment periods in the program may result in large credit balances provided to the student for the payment periods covered by the first year loan, while the smaller, subsequent year loan payments applied to prorated charges may not produce any credit balances for the student.

Discussion:
Under § 668.164(c)(5), an institution is required to prorate charges for books only if those charges are included as part of tuition and fees under § 668.164(c)(2), and the institution charges the student upfront for an amount of tuition and fees that exceeds the amount associated with the payment period.

Prorating charges under § 668.164(c)(5) does not affect the return of title IV funds calculation under § 668.22.

We acknowledge that that the cost of attendance rules for loans coupled with prorating charges could result in the outcome noted by the commenter. However, we believe the advantages of prorating charges—that students will generally have credit balance funds available to meet current educational expenses—outweigh the anomalous situation created by institutions that charge students upfront. If they choose, institutions can easily avoid the outcome of uneven credit balances by

charging students each payment period, instead of upfront.

Changes:
None

Direct Payments by the Secretary (§ 668.164(d)(3))

Comments:
Although proposed § 668.164(d)(3) states that the Department may pay title IV credit balances directly to students or parents using a method established or authorized by the Secretary, it does not say that the Department will use that method. However, a number of commenters believed the regulation would set up such a payment system. Those who were against having such a direct payment system argued that it would cause delays for students, and stifle competition that could otherwise lead to improvements in payment systems. Some of these commenters also believed that the government usually does not perform as efficiently as private business and they worried about the transition between the current use of private sector systems and the “up-coming” use of a government system. Some commenters also believed that, with a government system set up to disburse title IV funds, there would still need to be a private system to disburse non-title IV funds and that the two systems would be costly and inefficient. One commenter argued that the government should not rely on its experience with the disbursement of Social Security benefits, noting a number of differences between that program and its recipients compared to the Federal student aid programs and its recipients. Several commenters urged the Department to engage in additional notice and comment rulemaking before implementing a governmental payment system.

Those who favored establishing a direct payment system noted that other Federal agencies have successfully implemented such systems and that the receipt of Federal benefits under those systems has gone smoothly. Some commenters also noted that government-issued cards can be a good solution for people without bank accounts; and one noted that the government's negotiating power could compel vendors to create a product with low fees and consumer-friendly features. Thus, some commenters urged the Department to continue to explore such a method of payment and, in fact, to expedite its initiation.

Discussion:
Section 668.164(d)(3) states that the Secretary may pay title IV credit balances directly to students (or parents). This regulation does not set up such a payment system, but simply serves as a notice of the Secretary's prerogative in this area. If the Secretary should determine that it would be prudent to put such a system into effect, the Department would provide advance notice to institutions and others that the system will be implemented by publishing that information in the
Federal Register
. If the Secretary should adopt a method that requires a revision to existing regulations through negotiated rulemaking, the Secretary would initiate those proceedings. A determination on that matter, however, cannot be made unless and until the Secretary decides whether and how to exercise his or her authority in this area.

We thank all those commenters who shared their thoughtful analyses of whether such a direct payment system would be in the best interests of students, institutions, private parties, and the government itself. Their comments constitute a good beginning in the overall analysis of the possible benefits and pitfalls of establishing a direct payment system. We will consider this feedback as we continue to determine how title IV credit balance funds may be delivered to students in the most effective, efficient, and convenient manner possible.

Changes:
None.

Tier One (T1) Arrangements (§ 668.164(e)(1))

Comments:
We received several comments expressing support for our regulatory framework that differentiates the arrangements institutions enter into with third-party servicers that also offer accounts to students from arrangements between institutions and non-third-party-servicers that are typically more traditional banking entities (the accounts offered under these two types of arrangements were described as “sponsored accounts” during negotiated rulemaking and not differentiated in the regulations prior to the NPRM). These commenters stated that the proposed approach struck an appropriate balance in light of practices that led to the rulemaking. Some commenters who also served as non-Federal negotiators noted that this issue was particularly difficult for the rulemaking committee and commended the Department for employing an approach with differentiated levels of regulatory scrutiny that appropriately responded to the levels of risk presented by different arrangements. These commenters agreed that government and consumer reports illustrated both the incentives for securing short-term, fee-related revenue for T1 arrangements and the evidence that students opening accounts under such arrangements were more likely to face unusual or onerous fees. The commenters stated that the proposed regulations provided strong consumer protections in situations where USPIRG, Consumers Union, GAO, and OIG noted troubling practices.

Other commenters stated that the Department's increased scrutiny of T1 arrangements and third-party servicers was misplaced and unwarranted. These commenters argued that we did not demonstrate why a higher level of scrutiny was appropriate for third-party servicers that offer financial products than for more traditional banking entities that directly market their products to students.

Discussion:
We appreciate the comments supporting our proposed regulatory approach and our decision to bifurcate the level of scrutiny applied to different types of arrangements that govern the accounts offered to title IV recipients. We agree with the commenters that noted the troubling examples cited in government and consumer reports and that led to legal actions against certain account providers, and believe that a higher level of regulatory scrutiny is appropriate for certain types of arrangements, especially with respect to fees, to protect title IV recipients from abusive practices and ensure they are able to access the student aid funds to which they are entitled.

We disagree with the commenters who asserted that we did not provide sufficient justification for subjecting accounts offered under a T1 arrangement to a higher level of regulatory scrutiny. To the contrary, in the preamble to the NPRM, we describe in detail the findings of several consumer groups and government entities. As stated in the NPRM, “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.”
15

Banks and credit unions have incentives to create long-term relationships with college students because such providers are working to establish a relationship (and resultant fee- or interest-based revenue) long after the student has left the institution.
16

15
80 FR at 28498.

16
Consumers Union. “Campus Banking Products: College Students Face Hurdles to Accessing Clear Information and Accounts that Meet Their Needs,” page 5 (2014), available at:
consumersunion.org/wp-content/uploads/2014/08/Campus_banking_products_report.pdf
(hereinafter referred to as “Consumers Union at [page number]”).

Other types of entities—third-party servicers in particular—are more likely to “seek to partner with schools to provide fee-based services to both the

institution and the student.”
17

The relationship with a student typically ends once the student is no

[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%3A2015-27145. Public record. Not legal advice.