Student Assistance General Provisions; Federal Family Education Loan Programs; Federal Pell Grant Program; Interim Final Rule DEPARTMENT OF EDUCATION

SUMMARY: The Secretary amends the Student Assistance General Provisions

regulations, the Federal Family Education Loan (FFEL) Program

regulations, and the Federal Pell Grant Program regulations to

implement changes in the Higher Education Act of 1965, as amended

(HEA), and to improve the monitoring and accountability of institutions

and third-party servicers participating in the student financial

assistance programs authorized by Title IV of the HEA (Title IV, HEA

programs). These changes also establish standards of administrative and

financial responsibility for third-party servicers that administer any

aspect of a guaranty agency's or lender's participation in the FFEL

programs.

These regulations seek to improve the efficiency of Federal student

aid programs and, by so doing, to improve their capacity to enhance

opportunities for postsecondary education. The Secretary invites

comment on these regulations.

DATES: Effective Date: These regulations take effect July 1, 1994 with

the exception of Secs. 668.3, 668.8, 668.12, 668.13, 668.14, 668.15,

668.16, 668.17, 668.22, 668.23, 668.25, 668.26, 668.90, 668.96,

668.113, appendix A to 34 CFR part 668, 682.414, 682.416, 682.711, and

690.83. Sections 668.3, 668.8, 668.12, 668.13, 668.14, 668.15, 668.16,

668.17, 668.22, 668.23, 668.25, 668.26, 668.90, 668.96, 668.113,

appendix A to 34 CFR part 668, 682.414, 682.416, 682.711, and 690.83

will become effective after the information collection requirements

contained in these sections have been submitted by the Department of

Education and approved by the Office of Management and Budget under the

Paperwork Reduction Act of 1980. If you want to know the effective date

of these regulations, call or write the Department of Education contact

persons. A document announcing the effective date will be published in

the Federal Register.

Comment Date: Comments on these interim final regulations must be

received on or before June 20, 1994.

ADDRESSES: All comments concerning these regulations should be

addressed to Greg Allen and Wendy Macias, U.S. Department of Education,

400 Maryland Avenue, SW. (Regional Office Building 3, room 4318),

Washington, DC 20202-5343.

FOR FURTHER INFORMATION CONTACT: Greg Allen or Wendy Macias, U.S.

Department of Education, 400 Maryland Avenue, SW. (Regional Office

Building 3, room 4318), Washington, DC 20202-5343. Telephone (202) 708-

7888. Individuals who use a telecommunications device for the deaf

(TDD) may call the Federal Information Relay Service (FIRS) at 1-800-

877-8339 between 8 a.m. and 6 p.m., Eastern time, Monday through

Friday.

SUPPLEMENTARY INFORMATION: The Higher Education Amendments of 1992,

Pub. L. 102-325, (the Amendments of 1992) and the Higher Education

Technical Amendments of 1993, Pub. L. 103-208 (the Technical Amendments

of 1993) amended the HEA in several areas relating to the participation

of institutions in the Title IV, HEA programs. Further, the Amendments

of 1992 amended the HEA to expand the Secretary's authority to regulate

the activities of those individuals and organizations now called third-

party servicers. The Student Assistance General Provisions regulations

contain requirements that are common to educational institutions that

participate in the Title IV, HEA programs.

On February 28, 1994, the Secretary published a Notice of Proposed

Rulemaking (NPRM) for parts 668 and 690 in the Federal Register (59 FR

9526). The NPRM included a discussion of the major issues surrounding

the proposed changes which will not be repeated here. The following

list summarizes those issues and identifies the pages of the preamble

to the NPRM on which a discussion of those issues can be found:

The Secretary proposed to clarify the terms used in the statutory

definition of academic year (pages 9529-9530);

The Secretary proposed a definition of an eligible program to

implement statutory requirements, including requirements for ``short-

term'' programs (at least 300 but less than 600 clock hours) that would

be eligible for the FFEL programs only. The Secretary proposed

methodologies for the measurement of completion and placement rates for

short-term programs, as required by the statute. Also in accordance

with the statute, the Secretary proposed further provisions to evaluate

the quality of short-term programs (pages 9530-9531);

The Secretary proposed to add two new sections to codify procedures

with regard to applications to participate initially or to continue to

participate in a Title IV, HEA program and procedures by which the

Secretary certifies that an institution meets the standards in subpart

B of these regulations and accordingly may participate in a Title IV,

HEA program. The Secretary proposed procedures to codify new statutory

provisions governing provisional certification procedures for

participation in a Title IV, HEA program (pages 9533-9536);

The Secretary proposed to amend the regulations governing program

participation agreements to include numerous new provisions added by

the Amendments of 1992 and provisions previously prescribed by the HEA

but not specifically spelled out in the regulations. The Secretary also

proposed provisions to amend the regulations governing program

participation agreements (pages 9536-9539);

The Secretary proposed significant changes to the section governing

the evaluation of an institution's financial responsibility. The

Secretary proposed to strengthen the factors used to evaluate an

institution's financial responsibility and to reflect statutory changes

(pages 9539-9544);

The Secretary proposed to strengthen and expand the standards of

administrative capability for participating institutions, addressing

areas previously not regulated or for which there were only guidelines

(pages 9544-9549);

The Secretary proposed to amend the provisions governing default

reduction measures to reflect statutory changes made by the Amendments

of 1992 and current departmental practices. The provisions in the

Technical Amendments of 1993 that address institutional appeals of

cohort default rates were not included in the NPRM (pages 9549-9551);

The Secretary proposed to clarify the terms used in the statutory

definition of a fair and equitable refund policy (pages 9551-9556);

The Secretary proposed to implement the statutory requirement that

institutions have annual compliance audits. The Secretary proposed to

extend the audit requirements to foreign institutions (pages 9556-

9557); and

The Secretary proposed to amend the Federal Pell Grant Program

regulations to implement section 487(c)(7) of the HEA that provides

that an institution may offset the amount of Title IV, HEA program

disbursements against liabilities or may receive reimbursement from the

Department for those amounts if, in the course of any audit conducted

after December 31, 1988, the Department discovers or is informed of any

Title IV, HEA program assistance (specifically, Federal Pell Grant

Program funds) that an institution has provided to its students in

accordance with program requirements, but the institution has not

previously received credit or reimbursement for these disbursements

(page 9558).

On February 17, 1994, the Secretary published an NPRM proposing

amendments to parts 668 and 682 in the Federal Register (59 FR 8044).

The NPRM included a discussion of the major issues involved in the

proposed changes. The following list summarizes those issues and

identifies the pages of the preamble to the NPRM on which a discussion

of those issues can be found:

The Secretary proposed a definition of third-party servicer as

applicable to those individuals or organizations that contract with an

institution to administer any aspect of the institution's participation

in the Title IV, HEA programs (page 8045);

The Secretary proposed to expand the factors of financial

responsibility of an institution to take into consideration substantial

control over both institutions and third-party servicers (pages 8046-

8047);

The Secretary proposed annual audit requirements for third-party

servicers as necessary to implement statutory provisions under the

Amendments of 1992 (pages 8047-8048);

The Secretary proposed notification requirements for third-party

servicers against which the Secretary has assessed a liability for a

violation of a Title IV, HEA program violation (pages 8048-8049);

The Secretary proposed to create a new section to codify contract

requirements between institutions and third-party servicers. As one of

the conditions in the contract, a third-party servicer would be

required to assume joint and several liability with an institution that

the servicer contracts with for any violation by the servicer of any

Title IV, HEA program requirement (pages 8049-8050);

The Secretary proposed to apply against a third-party servicer the

sanctions under subpart G of the Student Assistance General Provisions

that currently solely apply to institutions for any violation of a

Title IV, HEA program requirement (pages 8050-8051);

The Secretary proposed to apply the fiduciary standards that

currently only apply to institutions to third-party servicers so that

third-party servicers would be required to act at all times with the

competency necessary to qualify them as a fiduciary (page 8051);

The Secretary proposed a definition of third-party servicer

applicable to those individuals or organizations that contract with a

lender or guarantee agency to administer any aspect of the lender's or

guarantee agency's participation in the FFEL programs (page 8055);

The Secretary proposed to require a third-party servicer that

contracts with a lender or guaranty agency to assume joint and several

liability for any violation of any FFEL program requirement or

applicable statutory requirement. Collection of liabilities from the

violation would be collected first from the lender or guaranty agency

(page 8055-8056); and

The Secretary proposed a new section to codify Federal requirements

for third-party servicers that contract with lenders or guaranty

agencies. A third-party servicer would be required to meet certain

standards of financial responsibility and administrative capability to

be considered eligible to contract with a lender or guaranty agency. In

addition, this section would require a third-party servicer to have

performed an annual audit of the servicer's administration of a

lender's or guaranty agency's participation in the FFEL programs (page

8056);

Program Integrity Triad

In order to approve a postsecondary education institution to

participate in the student financial assistance programs authorized

under Title IV of the HEA (referred to as ``Title IV, HEA programs'')

and many other Federal programs, the Secretary must determine, in part,

that the institution satisfies the statutory definition of an

``institution of higher education.'' Under the HEA and many other

Federal statutes, one element of that definition requires an eligible

institution of higher education to be accredited or preaccredited by an

accrediting agency recognized by the Secretary as a reliable authority

as to the quality of the education or training provided by the

institution. Another element requires an eligible institution to be

legally authorized to provide an education program beyond the secondary

level in the State in which it is located. In addition, to participate

in the Title IV, HEA programs, the institution must be certified by the

Secretary as administratively capable and financially responsible.

Thus, the HEA provides the framework for a shared responsibility among

accrediting agencies, States, and the Federal government to ensure that

the ``gate'' to Title IV, HEA programs is opened only to those

institutions that provide students with quality education or training

worth the time, energy, and money they invest in it. The three

``gatekeepers'' sharing this responsibility have traditionally been

referred to as ``the triad.''

While the concept of a triad of entities responsible for

gatekeeping has had a long history, originating in 1952, the Higher

Education Amendments of 1992, Pub. L. 102-325, significantly increased

the gatekeeping responsibilities of each member of the triad.

Specifically, Congress amended the HEA to provide for a new part H of

Title IV entitled ``Program Integrity Triad.'' Under the new part H,

the requirements that accrediting bodies must meet if they are to be

recognized by the Secretary as ``gatekeepers'' for Title IV or other

Federal purposes are specified in detail. Part H also provides a new

oversight responsibility for States: the State Postsecondary Review

Program. Altogether, part H establishes a set of responsibilities for

accrediting agencies, States, and the Secretary that creates a stronger

and more coordinated evaluation of institutions that participate, or

wish to participate, in the Title IV, HEA programs.

The Secretary recognizes that the approach to significantly

increased gatekeeping activity outlined in the statute for the three

members of the triad is a new one. This approach will require

leadership in both implementation and evaluation if it is to achieve

the effectiveness that Congress intended. The Secretary will take steps

to assure that the various responsibilities of the triad members are

carried out in a manner that, in fact, results in the identification of

institutions that should not participate in the Title IV, HEA programs,

on the basis of either the quality of education they offer or their

inability to handle program funds. At the same time, the Secretary is

committed to carrying out the responsibility for coordinating the

activities of the triad members that are inherent in the statute in a

manner that causes the least burden to institutions participating in

the Title IV, HEA programs.

To these ends, the Secretary is committed to effective management

of the gatekeeping function. The Secretary will review carefully the

applications of accrediting bodies and the standards and operating

plans proposed by State Postsecondary Review Entities (SPREs) under the

State Postsecondary Review Program to insure that they meet the

requirements of the statute and these regulations and will enable these

triad agencies to fulfill their statutory purposes. The Secretary will

also place a priority on the completion of the ``Postsecondary

Education Participation System,'' the Department's new integrated data

base, which will contain the information that the Secretary generates

in the course of the Secretary's oversight of institutions

participating in Title IV, HEA programs. The Secretary will use the

data base to inform accrediting bodies and SPREs of actions taken by

the Secretary so that they may in turn carry out their

responsibilities. This expanded data base is also critical to the

Secretary's effective selection of institutions for program review.

Monitoring the results of the gatekeeping process is a very

important key to effective management. The Secretary will evaluate the

activities of accrediting agencies, SPREs, and the Department to

determine their effectiveness in improving the integrity of

institutions participating in Title IV programs and will take such

steps as may be indicated to improve the results. Finally, as provided

in the statute, the Secretary will seek the advice and counsel of the

National Advisory Committee on Institutional Quality and Integrity in

evaluating the effectiveness of the triad.

The Secretary believes that the approach best suited to achieving

the objectives of the statute is a complementary one, with each member

of the triad focusing its evaluation on its obligations within the

context of the HEA. Thus, the focus for accrediting agencies is the

quality of education or training provided by the institutions or

programs they accredit. States, in addition to providing the legal

authority to operate within the state required for participation in the

Title IV, HEA programs, will review institutions that meet certain

statutory review criteria related to institutional performance in the

Title IV, HEA programs. The focus of the Secretary's evaluation of

institutions is on the administrative and financial capacity of those

institutions to participate in the Title IV, HEA programs.

While the functions and responsibilities of each of the triad

members are generally different, the statute does require, in some

instances, that all members of the triad evaluate similar areas. For

the most part, the principle of complementary functions will lead to

the members evaluating those same areas from different perspectives for

different purposes. For example, all three of the triad members are

required to examine the finances of an institution. If each looks at

financial strength from a perspective complementary to that of the

others, accrediting agencies would focus principally on the capacity of

the institution to continue to offer programs at a level of quality

sufficient to meet accrediting agency standards and to fulfill the

institution's mission over a 5-10 year period of accreditation. The

emphasis of a review by a SPRE would be on whether or not the

institution possesses the full range of resources needed to serve

students currently attending the institution. The Secretary's

responsibilities focus on the institution's finances in light of its

ability to provide the services described in its official publications

and statements, to provide the administrative resources necessary to

comply with its Title IV, HEA program responsibilities, and to meet all

of its financial obligations, including, but not limited to, refunds of

institutional charges and repayments to the Secretary for liabilities

and debts incurred in programs administered by the Secretary.

Despite the Secretary's efforts to encourage complementary

functions for each of the triad members, it is theoretically possible

that, in some instances, an institution could be subject to three

different standards regulating the same area of operation. For this

reason, where a Title IV standard has been promulgated at the Federal

level, the Secretary expects accrediting agencies and States to take

this into account in establishing their own standards to insure that

varying standards do not pose an unnecessary burden on institutions. It

is also important that accrediting agencies and States do not impose

any standard that is weaker than comparable Title IV, HEA program

standards. The Secretary believes coordination of this is a federal

responsibility.

In view of the complementary approach to the functions of the triad

members, the Secretary believes, for example, that institutions should

not have to develop different methodologies to provide data that the

three members of the triad may require. The Secretary also believes

that, to the extent feasible, any other requests for data about the

institution, its students, or its graduates should rely on information

already in the institution's possession. To that end, the Secretary

expects accrediting agencies and States either to accept student data

based on the methodology that will be specified in the regulations

governing ``Student Right to Know,'' also mandated by the Higher

Education Amendments of 1992, or, where the institution may have other

methodologies for calculating data, such as a system designed to

provide data to a State higher education commission or other State

agency, to accept data in the format already being used by the

institution. Similarly, the Secretary expects accrediting agencies and

SPREs to use the audited financial statements institutions are now

required to provide to the Secretary on an annual basis to the extent

those statements are compatible with the nature of the reviews

conducted under their respective standards.

The Secretary also recognizes that other Federal agencies, such as

the Department of Labor and the Veterans Administration, also regulate

institutions in some areas that are similar to those included in part

H. The suggestion has been made that the Secretary should promulgate

Federal standards in the areas of overlap so that institutions would

not be subject to varying standards developed by other Federal agencies

and the triad members. However, the Secretary interprets part H as

permitting States and accrediting agencies to establish their own

standards, as opposed to using a Federal standard, and also believes

that this is the most effective approach. In addition, it is not clear

how the requirements of the different agencies are compatible with the

requirements of part H. The purposes of these programs administered by

other agencies may be very different. As a result, the Secretary has

not pursued this alternative. The Secretary does believe that it would

be useful to explore how the varying requirements of other Federal

agencies that are similar to those of part H might be coordinated to

reduce any burden on institutions and will initiate such exploration.

The Secretary believes that, where possible, data developed at the

national level should be made available to institutions, as well as to

States and accrediting agencies to assist them in carrying out their

responsibilities under part H. In particular, data concerning labor

markets and compensation for specific fields and information concerning

graduation and withdrawal rates at various types of institutions may be

helpful to both triad members and institutions. The Secretary will

facilitate the development of this type of information and, where

possible under the auspices of the Department, will coordinate the

development of data that will be helpful to institutions and the triad.

Finally, as part of the commitment to providing leadership to the

triad, the Secretary will convene representatives of the triad members

and institutions to exchange information about the gatekeeping process

and to discuss how the triad is functioning, both in identifying

institutions whose performance is questionable and in reporting

requirements that have proven to be unreasonably burdensome. The

Secretary invites comments concerning the functioning of the triad, as

it is implemented through these and other regulations governed by part

H. The Secretary will seek improvement, where possible, within existing

regulations and will propose modifications to regulations and to the

statute itself if experience indicates those changes are both necessary

to achieve effective gatekeeping, with minimal burden, and compatible

with the need to maintain, and assure the public of, the integrity of

the Title IV, HEA programs.

Substantive Changes to the NPRMs

Part 668--Student Assistance General Provisions

Subpart A--General

Section 668.2 General Definitions

Academic Year. In the February 28, 1994 NPRM, the Secretary

requested comment on how to implement the technical amendment that

provided that the Secretary may reduce, for good cause on a case-by-

case basis, the required minimum of 30 weeks of instructional time to

not less than 26 weeks of instructional time in the case of an

institution of higher education that provides a 2-year or 4-year

program of instruction for which it awards an associate or

baccalaureate degree. The Secretary did not propose specific criteria

to implement this technical amendment in the February 28, 1994 NPRM,

but instead requested comments on a definition of ``good cause'' and

requested comments on ways of implementing this provision that

addressed the Secretary's concern that reductions in the award year

would encourage many institutions to seek that treatment routinely.

After reviewing public comments on defining good cause, and developing

safeguards to discourage routine requests for reductions in the

academic year, the Secretary has implemented this technical amendment

in new Sec. 668.3.

Under this section, for the purpose of awarding Title IV, HEA

funds, the Secretary may reduce the length of an academic year for an

institution that submits a written request to the Secretary. Section

668.3 provides for a two-year ``phase-in'' period for institutions that

are currently participating, have an academic year of 26-29 weeks, and

meet the other applicable standards of the section. The Secretary will

consider all other requests for a reduction in the minimum number of

weeks of instructional time to not less than 26 weeks on a case-by-case

basis in accordance with the requirements of Sec. 668.3. Section 668.3

is discussed in greater detail in the section of the Analysis of

Comments and Changes that addressed the definition of an academic year

(Sec. 668.2).

In the February 28, 1994 NPRM, the Secretary requested comment on

how to address an abuse of the definition of an academic year whereby

an institution that has programs that are measured in credit hours

without terms could claim that it meets the requirements for the

minimum amount of work to be performed by a full-time student over an

academic year by giving a full-time student a minimal amount of

instruction over a 30-week (or more) period, which the institution

claims to be equivalent to 24 semester or 36 quarter hours. The

Secretary requested comment on whether a minimum full-time workload for

students enrolled in these educational programs should be established

to address this abuse. Several commenters agreed that this abuse should

be addressed. However, rather than changing the proposed definition of

full-time student to require measurement of student workloads, a

modification has been made to require that, for educational programs

using credit hours, but not using a semester, trimester, or quarter

system, a week of instructional time is any week in which at least five

days of regularly scheduled instruction, examinations, or preparation

for examinations occurs, as opposed to one day of regularly scheduled

instruction, examinations, or preparation for examinations for all

other programs. The Secretary believes it is important to ensure that

full-time students are performing comparable workloads regardless of

the type of institution they are attending, and that such work should

be ratably allocated throughout the period of instruction. The

Secretary notes that this is an area of abuse that is not fully

addressed by the implementation of the ``clock hour/credit hour''

regulations. A corresponding change has been made to the definition of

an eligible program.

One-third of an academic year and two-thirds of an academic year.

In response to public comment, the Secretary has defined one-third of

an academic year and two-thirds of an academic year in order to clarify

the procedure for prorating awards under the FFEL and NDSL programs.

Undergraduate student. Because the Secretary recognizes that, at

this time, there are legitimate reasons supported by statute for

separate definitions of an undergraduate student under the various

Title IV, HEA program regulations the definition of undergraduate

student has been deleted in these final regulations.

Section 668.8 Eligible Program

Qualitative factors. Section 668.8(e)(1)(iii) requires that, for a

short-term program, the length of the program may not exceed by more

than 50 percent the minimum number of clock hours required for training

in the recognized occupation for which the program prepares students,

as established by the State in which the program is offered, if the

State has established such a requirement. In response to public

comment, this provision has been amended to also prohibit a short-term

eligible program from exceeding by 50 percent any applicable minimum

number of clock hours required by a Federal agency for training in the

recognized occupation for which the program prepares students.

In response to public comment, Sec. 668.8(e)(2) has been revised to

clarify that, since a certified public accountant cannot certify the

accuracy of an institution's completion or placement-rate calculations,

the institution shall substantiate these calculations by having the

certified public accountant follow the procedures of an attestation

engagement.

Calculation of completion rate. Section 668.8(f)(4) has been

amended to require that a student must complete the educational program

in which he or she is enrolled within 150 percent of the published

length of the educational program in order to be counted as a completer

for purposes of this calculation. This change was made to conform with

the calculation of a completion rate under the Student Right-to-Know

provisions. The Secretary notes that the Department will continue to

evaluate the feasibility of replacing this methodology with the

methodology developed relative to the Student Right-to-Know Act once

that methodology has been published in final regulations.

Calculation of Placement Rate. In response to public comment, the

requirement in proposed Sec. 668.8(g)(1)(ii) that an institution

exclude from the calculation of a placement rate students who are hired

by the institution has been deleted from these regulations.

In response to public comment, a change has been made to the

placement rate calculation to clarify that every student must be

employed for at least 13 weeks in a recognized occupation for which

they were trained or in a related comparable occupation before that

student can be counted as placed.

The Secretary has amended Sec. 668.8 by revising paragraph (k) to

remove the provision that an institution offering an undergraduate

educational program measured in credit hours and at least two academic

years in length is exempt from applying the formula contained in

paragraph (l) to that program if the program provides an equivalent

degree as determined by the Secretary, or if each course within the

program is fully acceptable for credit toward that institution's

equivalent degree.

Paragraphs (k) and (l) were originally published in final

regulations on July 23, 1993 (58 FR 39618). In those final regulations,

the Secretary exempted from the requirements of the regulations,

undergraduate educational programs that were at least two years in

length and lead to an associate, bachelor's, professional, or an

equivalent degree as determined by the Secretary or if each course

within that program was fully acceptable for credit toward one of those

degree programs at that institution. The Secretary believed that it was

prudent to exempt programs that lead to an equivalent degree because

there might be a type of degree being offered (not an associate,

bachelor's, or professional degree) that the Secretary had not yet

encountered. The Secretary wanted to be able to examine the degree to

determine if that degree was in fact equivalent to an associate,

bachelor's, or professional degree. If the Secretary determined that

the degree was equivalent to an associate, bachelor's, or professional

degree, and was at least two academic years in length, the Secretary

would exempt from the regulations undergraduate educational programs

that lead to the equivalent degree or if each course within the program

was fully acceptable for credit toward that institution's equivalent

degree.

However, since publication of the final regulations on July 23,

1993, the Secretary has yet to encounter a degree that the Secretary

would consider to be an equivalent of an associate, bachelor's, or

professional degree. Conversely, dozens of institutions have submitted

to the Secretary arguments that their diploma programs are the

equivalent of an associate degree program. The regulations were never

meant to permit a determination that a nondegree program be classified

as the equivalent of a degree program. The regulations only applied to

a determination of whether a degree resulting from an educational

program is equivalent to an associate, bachelor's, or professional

degree. Because the diploma programs are not in themselves degree

programs, the Secretary does not consider those programs to lead to an

equivalent degree.

Because of this misconception by many institutions that

``equivalent degree'' means an educational program equivalent to a

degree granting program, and because the Secretary has not yet found a

true instance of an equivalent degree that is not an associate,

bachelor's, or professional degree, the Secretary is removing the

phrase ``equivalent degree as determined by the Secretary'' from

paragraph (k).

Subpart B--Standards for Participation in the Title IV, HEA Programs

Section 668.13 Certification Procedures

Period of participation. In response to concerns of many commenters

about the consequences (particularly the potential for provisional

certification) to a participating institution in the event that the

Secretary does not complete a review of the institution's application

prior to the expiration of the institution's program participation

agreement, even if the institution had filed its renewal application in

a timely manner, Sec. 668.13(b) is amended to provide that full

certification will be extended on a month to month basis following the

expiration of a program participation agreement where the institution's

application for recertification was materially complete, and submitted

at least 90 days prior to the expiration date.

Provisional certification. In response to public comment, proposed

Sec. 668.13(c)(1)(ii) that provided that the Secretary may

provisionally certify an institution if the financial responsibility

and administrative capability of the institution was being determined

for the first time has been deleted from these regulations. Although

this provision is statutory, the Secretary has decided that the other

standards requiring the use of provisional certification are adequate

to identify institutions that would be captured by this provision where

greater monitoring and procedural restrictions are appropriate.

Section 668.13(c)(2)(i) has been amended to clarify the maximum

permissible length of periods of provisional certification. Upon

further consideration, the Secretary has decided to repeat the language

of the statute that provides that periods of participation under

provisional certification should be for ``complete award years.'' So,

for example, the regulations will permit the Secretary to provisionally

certify an initial applicant for one complete award year, rather than

for a period of 12 months as proposed in the February 28, 1994 NPRM.

This will provide the Secretary with a complete award year of data on

which to base determinations of further participation for the

institution.

In response to public comment, Sec. 668.13(d)(1) that lists the

requirements for provisional certification to participate on a limited

basis for institutions that are not financially responsible has been

amended to make clear that the criteria of this section are not

required for an institution that meets the exceptions to the general

standards of financial responsibility under Sec. 668.15(d).

In response to public comment Sec. 668.13(d)(1)(ii) has been

amended to clarify that any required submission of a letter of credit

must be in an amount and in a form acceptable to the Secretary.

Proposed Sec. 668.13(d)(1)(iii)(B) has been revised, consistent

with similar changes in Sec. 668.15(b) (3) and (4), to make clear how

an institution demonstrates that it has met all of its financial

obligations and is current in its debt payments. This provision is

explained in greater detail in the section of the Analysis of Comments

and Changes that addresses the factors of financial responsibility

(Sec. 668.15).

In response to public comment, Sec. 668.13(d)(2) has been clarified

to explain that financial guarantees are only required if the

institution comes within the requirements of Sec. 668.15(c)(2), or

where the institution fails to demonstrate financial responsibility

under its current audit and has failed to do so at least one other time

under the standards in effect during the preceding five years.

In response to public comment, a new paragraph (e) is added to

Sec. 668.13 which provides for denial of certification to initial

applicants for participation in a Title IV, HEA program and to

participants that have undergone a change of ownership resulting in a

change of control, if the State in which those applicants or

participants are located does not participate in the State

Postsecondary Review Program. This addition conforms these regulations

to the requirements of the State Postsecondary Review Program in 34 CFR

part 667, and provides some further explanation of the consequences to

an institution if the State in which the institution is located does

not participate in the State Postsecondary Review Program. Under

paragraph (e), the Secretary may provisionally certify a participating

institution or branch campus in that State. Section 668.13(c)(2)(ii)

has also been revised to provide that the provisional certification of

an institution under these circumstances expires at the end of the

third complete award year following the date of the provisional

certification.

In response to public comment, a change has been made to provide

for notices of revocation of provisional certification to be sent by

certified mail, instead of registered mail.

In response to public comment, Sec. 668.13(f)(4)(i) has been

modified to provide that the official reviewing a request for

reconsideration of provisional certification must be different from,

and not subject to supervision by, the official that issued the notice

of revocation.

Section 668.14 Program Participation Agreement

In response to public comment, Sec. 668.14(b)(1) has been amended

to clarify that an institution must comply with all special

arrangements, agreements, or limitations entered into under the

authority of statutes applicable to Title IV of the HEA. Corresponding

changes have been made throughout the sections of 34 CFR part 668 and

34 CFR part 682 contained in this regulatory package.

In response to public comment, Sec. 668.14(b)(4) has been amended

to provide that an institution must provide information relating the

administrative capability and financial responsibility of the

information to a SPRE only if the institution was referred by the

Secretary under 34 CFR 667.5.

The proposed regulations prohibited any type of incentive payments,

particularly those based on ``retention.'' In response to public

comment, the Secretary has amended Sec. 668.14(b)(22) to allow that

token gifts may be given to students or alumni for referring other

students for admission to the institution, as long as:

(1) The gift is not money, check or money order;

(2) No more than one such gift is given to any student or alumnus;

and

(3) The value of the gift is no more than twenty-five dollars.

In response to public comment, proposed Sec. 668.16(k) that

requires that an institution: (1) Demonstrate a reasonable relationship

between the length of the program and occupational entry level

requirements and (2) establish the need for the training has been moved

to Sec. 668.14(b)(26). Further, the requirements of this provision have

been amended to require an institution to demonstrate a reasonable

relationship between the length of the program and occupational entry

level requirements established by any Federal agency.

Section 668.15 Factors of Financial Responsibility

Sections 668.15(b) (1), (2), and (3) have been amended to clarify

that, in order to be financially responsible, an institution must be

providing the services described in its official publications and

statements; providing the administrative resources necessary to comply

with the requirements of subpart B; and meeting all if its financial

obligations. This is a change from the proposed regulations that would

have required an institution to demonstrate that it was able to provide

and meet these requirements. The Secretary believes these changes more

accurately reflect the intent of the regulations.

In response to public comment, Sec. 668.15(b)(4) further defines

the requirement that an institution be current in its debt payments.

The Secretary considers an institution to be current in its long-term

debt obligations if it is not in violation of existing loan agreements

at the end of the institution's fiscal year. The Secretary considers an

institution to not be current in all of its debt obligations whenever

the institution is more than 120 days delinquent in making payments,

and a legal claim has been initiated against the institution or a lien

has been filed on its assets due to the non-payment of the obligation.

The Secretary believes that an institution's non-payment of obligations

is a serious concern because the possibility exists that legal actions

brought by creditors may result in forfeiture of some or all of an

institution's assets. Consistent with the determination that payment

delinquencies place the institution at risk, the Secretary notes that

such actions are also often precede an action by creditors to force a

company into bankruptcy.

In response to public comment, Sec. 668.15(b)(5) has been amended

to require that the amount of an institution's required cash reserve

shall be one-quarter of the amount the institution paid in refunds

during its previous year, as shown in its audited financial statement.

By using historical information specific to the individual institution,

the Secretary provides for adequate reserves for all institutions,

rather than establishing an across the board measure which would be

inadequate for some and inappropriate for others. Also, in response to

the comments, the regulations have been changed to require the cash

reserve to be maintained as a cash deposit in a federally insured bank

account or an investment in U.S. Treasury securities, with an original

maturity of three months or less.

Proposed Sec. 668.15(b)(6)(ii) that would have provided that an

institution is financially responsible if the institution does not have

a finding of unauthorized use of donor restricted net assets to meet

current operating expenses, has been removed from these regulations.

This change was made based upon general considerations that were

presented in the public comments concerning the need to implement

consistent standards for determining financial responsibility for for-

profit and nonprofit institutions, and to simplify the administrative

resources necessary to determine whether institutions were in

compliance with the regulations.

In response to numerous public comments, Sec. 668.15(b)(7)(i)(A)

and (b)(8)(i)(B) have been amended to require that both for-profit

institutions and nonprofit institutions must meet an acid test ratio of

1:1 to replace the proposed ratio requirements that differed for for-

profit and nonprofit institutions. The acid test ratio is defined as

the sum of cash and current accounts receivable, divided by current

liabilities. The Secretary has kept the regulatory exclusions of

unsecured or uncollateralized related party receivables because they

represent capital outflows from an institution that do not contain

provisions for repayment. The Secretary has allowed the inclusion of

the institution's cash reserve requirement in the calculation of the

acid test ratio.

In response to public comment concerning the proper development of

standards for nonprofit and for-profit institutions,

Sec. 668.15(b)(7)(i)(B) has been amended to require that a for-profit

institution may not have operating losses in one or both years

exceeding ten percent of equity capital. The Secretary's intent is to

determine whether a trend of continuing losses exists, or if a loss

occurs in any one year that it's magnitude is such that it does not

materially impact the equity of the institution. The Secretary has

changed the reference year used in the calculation to be that of the

beginning of the first year in the two year period rather than the most

recently completed fiscal year.

In response to public comment, Sec. 668.15(b)(7)(ii), (b)(8)(ii),

and (b)(9)(v) have been added to provide that a for- profit

institution, a nonprofit institution, or a public institution may

demonstrate that it is financially responsible if it submits evidence

of a superior bond rating as an alternative to having to meet the tests

for financial responsibility. The Secretary considers an institution to

be financially responsible if the institution has currently issued an

outstanding debt obligations that are, without insurance, guarantee, or

credit enhancement rated at or above the second highest level of rating

given by a nationally recognized statistical rating organization.

Section 668.15(b)(8)(i)(C)(1) has been changed from the NPRM to

incorporate the existing requirement that a nonprofit institution must

have a positive unrestricted current fund balance or positive

unrestricted net assets. This requirement is unchanged from the former

requirement in effect for more than fourteen years that a nonprofit

have a positive unrestricted current fund balance.

Section 668.15(b)(8)(i)(C)(2) has been amended to require that a

nonprofit institution may not have excess current fund expenditures in

either or both of two years that results in a decrease in the current

unrestricted fund or a decrease in unrestricted net assets of greater

than ten percent of the institution's unrestricted current fund balance

or unrestricted net assets in the beginning of the first year of the

two year period. The proposed regulation would have required that a

nonprofit institution not have a decrease in total net assets of such

significance that if continued would result in a current ratio of less

than 1:1. As in the requirement for for-profit institutions, the

Secretary's intent is to determine whether a trend of continuing excess

expenditures exists, or if a significant excess expenditure in any one

year is so great in magnitude that it materially affects the

unrestricted current fund balance or the unrestricted net assets of the

institution.

In the NPRM the Secretary proposed that a public institution is

financially responsible only if it has its liabilities backed by the

full faith and credit of a state. In response to public comment,

Sec. 668.15(b)(9) has been revised to add three alternatives that a

public institution may employ to demonstrate that it is financially

responsible: for institutions reporting under the Single Audit Act, a

positive unrestricted current fund balance; a positive unrestricted

current fund balance in a state's Higher Education Fund, as presented

in the general purpose financial statements of the state; or the

submission of a statement by the State Auditor General that the

institution has sufficient resources to meet all of its financial

obligations.

In response to public comment, Sec. 668.15(d)(ii) has been amended

to identify the circumstances where an institution that does not

otherwise demonstrate financial responsibility can continue to

participate fully by showing that it meets certain conditions to

demonstrate that it has sufficient resources to ensure against its

precipitous closure.

In response to public comment, Sec. 668.15(e)(3) has been added to

clarify that the submission of an audit performed in accordance with

the Single Audit Act satisfies the requirement for a submission of an

audited financial statement under Sec. 668.15(e)(1).

Section 668.16 Standards of Administrative Capability

In response to public comment, the Secretary has modified the

proposed administrative standards significantly. The Secretary made

some changes and clarified implementation of standards where commenters

pointed out that the Secretary could achieve the same goal by requiring

less detail or action by those institutions that have demonstrated a

history of compliance with regulations governing the Title IV, HEA

programs and by imposing more requirements or restrictions on

institutions that either have no track record or have a record of

problems administering the Title IV, HEA programs. The Secretary

removed other sections of the proposed standards because there was

overlap with the responsibilities of accrediting agencies or SPREs or

duplication of other sections of the regulations.

In response to public comment, Sec. 668.16(a) clarifies that an

institution must administer the Title IV, HEA programs in accordance

with all the statutory and regulatory provisions, and with any

applicable special arrangement, agreement or limitation entered into

under the authority of statutes applicable to Title IV of the HEA.

In response to public comment, Sec. 668.16(b)(1) is amended by

adding documented success in administering Title IV, HEA programs to

the list of factors the Secretary may consider in determining whether

an individual is capable. The Secretary intends to use the list of

factors in Sec. 668.16(b)(2) primarily to assess the adequacy of staff

levels at institutions that apply for initial participation, change of

ownership, or the addition of a location or branch campus; institutions

that make other changes that have an impact on the administrative

capability of the institution, such as ceasing to use a financial aid

servicer; and institutions with documented compliance violations.

In the preamble to the February 28, 1994 NPRM, the Secretary

solicited comment on the regulation of appropriate staffing levels at

institutions. In response to public comment, the Secretary does not

plan to specifically regulate in this area at this time. However,

Sec. 668.16 has been amended to clarify that the Secretary will look at

the number and distribution of financial aid staff when determining if

an institution uses an adequate number of qualified persons to

administer the Title IV, HEA programs. The Secretary believes this

addition is inherent to this provision and should be clearly stated.

However, the Secretary does not plan to closely scrutinize the number

or distribution of financial aid staff at an institution unless the

Secretary finds other indications that the institution may not be

administratively capable due to understaffing or a poor distribution of

staff at the institution.

In response to public comment, use of third-party servicers is

added to the list of factors in Sec. 668.16(b)(2).

After consideration of public comment, the Secretary agrees that

the burden to an institution of having to prepare written procedures

for or written information indicating the nature and frequency of

communication of pertinent information among all the offices that have

an impact on the administration of the Title IV, HEA programs outweighs

the benefit that this provision would provide to the Secretary.

Therefore, proposed Sec. 668.16(b)(4)(i) has been removed from these

final regulations. The Secretary also agrees that, unless compliance

problems relevant to the listed responsibilities are identified,

institutions may satisfy the requirement in Sec. 668.16(b)(4) that an

institution have written procedures for or written information

indicating the responsibilities of the various offices with respect to

the approval, disbursement, and delivery of Title IV, HEA program

assistance and the preparation and submission of reports to the

Secretary by a general written description of the responsibilities of

the various offices.

In response to public comment, Sec. 668.16(e)(3)(B) is amended to

clarify that a maximum time frame in which a student must complete his

or her educational program must be no longer than 150 percent of the

published length of the educational program for full-time students.

This section is also amended to clarify that the time frame must be

divided into increments of equal size. The Secretary is making this

change, as well as the change from previous regulations that requires

increments to be the lesser of an academic year or one-half of the

length of the program, to make clear that no increment can coincide

with the length of the maximum time frame.

Some institutions have used the previous provision as a means of

avoiding determining satisfactory academic progress for a student until

the student completes his or her program. Increments of the maximum

time frame are expected to coincide with an institution's payment

period, however. For example, in a program of one academic year that is

structured on a quarter basis, the increments would be expected to be

the quarters.

In response to public comment, Sec. 668.16(f)(3) has been modified

to include documentation of a student's social security number in the

information normally available to an institution and for which the

institution must have a system to identify and resolve discrepancies.

In response to public comment, Sec. 668.16(g) has been amended to

clarify that an institution must only refer to the Office of the

Inspector General of the Department of Education credible information

indicating fraud and abuse.

In response to public comment, the following sections have been

removed from these regulations: proposed Sec. 668.16(i) that provided

that an institution that serves significant numbers of students with

special needs must have and implement plans for providing students with

information about how to meet their needs; proposed Sec. 668.16(j) that

would require institutions to have procedures for receiving,

investigating, and resolving student complaints; proposed

Sec. 668.16(l), requiring that certain information be made available to

students; proposed Sec. 668.16(m) that required that an institution

have advertising, promotion, and student recruitment practices that

accurately reflect the content and objective of the educational

programs offered at the institution; proposed Sec. 668.16(o) which

addressed the issue of outstanding liabilities; and proposed

Sec. 668.16(r), which proposed consideration of completion, placement

and pass rate standards. The specific reasons for the removal of these

provisions are discussed in the section of the Analysis of Comments and

Changes that addresses administrative capability (Sec. 668.16).

In response to public comment, proposed Sec. 668.16(k) that

requires that an institution: (1) demonstrate a reasonable relationship

between the length of the program and occupational entry level

requirements and (2) establish the need for the training has been moved

to the program participation agreement section (Sec. 668.14).

In response to public comment, Sec. 668.16(j) has been amended to

specify that the significant problems identified in reviews of the

institution that the Secretary will take into account in determining

administrative capability, relate to the administration of Title IV,

HEA programs.

Proposed Sec. 668.16(s), which would have made an annual cohort

default rate of 20% in the FFEL programs and a 15% default rate in the

Federal Perkins Loan Program immutable standards of administrative

capability, has been modified in these final regulations in

Sec. 668.16(m) as follows. The Secretary accepted commenters' arguments

that it would be more logical to use a 25% cohort default rate for the

FFEL programs over a three-year period. Further, the Secretary has

specified in this section of the regulations that if an institution

cannot be determined administratively capable solely because the

institution fails to comply with this section, the Secretary will

provisionally certify the institution in accordance with

Sec. 668.13(c). An institution will have the right to appeal

noncompliance with this provision by submitting an appeal in accordance

with Sec. 668.17(d). The Secretary has amended Sec. 668.17(c)(6) to

specify that this standard will not apply to tribally controlled

colleges, HBCUs, and Navajo community colleges.

In response to public comment, the Secretary has amended

Sec. 668.16(l) to provide for the use of net enrollment figures, after

deduction of students who were entitled to a 100 percent refund, in the

calculation of withdrawal rate. In addition, the Secretary has now

restricted the calculation of withdrawal rates to withdrawals of

undergraduate students. The Secretary believes that the undergraduate

enrollment pattern is an adequate measurement of an institution's

ability to administer the Title IV, HEA programs.

Section 668.17 Default Reduction Measures

In accordance with statute, Sec. 668.17(c)(6) has been amended to

extend the exemption of historically black colleges or universities

(HBCUs), tribally controlled community colleges, and Navajo community

colleges from the provisions of Sec. 668.17(c)(1) to July 1, 1998.

Section 668.17(c)(1) addresses the loss of participation in the FFEL

programs for institution's with cohort default rates above the

specified thresholds.

Section 668.17(f) which addresses Federal SLS Program participation

has been deleted since the Federal SLS Program is no longer in

existence.

Section 668.22 Institutional Refunds and Repayments

Section 668.22(a)(1)(ii), (e)(1)(i), (g)((2)(iv), (i)(1)(i)(B), and

(i)(2)(iii) have been revised to reflect that a student who has taken

an approved leave of absence is considered to have withdrawn for

purposes of Title IV, HEA program refunds and repayments. This change

has been made to ensure the treatment of leaves of absence is

consistent for all Title IV, HEA programs. The Federal Pell Grant

Program regulations consider a student on a leave of absence to have

withdrawn for purposes of receiving Federal Pell Grant Program funds.

This was inconsistent with the FFEL programs regulations, which allowed

an institution to consider a student on a leave of absence to still be

enrolled. The FFEL programs treatment of leaves of absence remains in

effect, but only for in-school deferment purposes, not for purposes of

Title IV, HEA refunds and repayments. All Title IV, HEA programs will

now treat a leave of absence as a withdrawal for refund and repayment

purposes. Corresponding changes have been made by removing the language

addressing leaves of absence in proposed Sec. 668.22(i)(1)(ii), (i)(2),

and (i)(3)(iii).

Section 668.22(a)(2) has been amended to clarify that the

institution must provide refund examples to students only upon request,

and must inform students of the availability of these examples in the

written statement of its refund policy. The language proposed in the

February 28, 1994 NPRM was unclear and implied that the required

written refund statement must include the refund examples themselves.

In response to public comment, Sec. 668.22(c)(2) and (f)(2)(ii) has

been amended to include allowable late disbursements of unsubsidized

Federal Stafford loans and loans made under the FDSL Program when

calculating a student's unpaid charges. This language has also been

changed to allow for the inclusion of late disbursements of State

student financial assistance, provided the State in question has a

standard written late disbursement policy which the institution follows

in calculating unpaid charges and provided the student is eligible to

receive the late disbursement in spite of having withdrawn. If an

institution chooses to count a late disbursement of State student aid

in this manner, the institution will be liable for any amount not

disbursed within 60 days after the student's withdrawal. If the late

disbursement of State aid does not come in, the institution must

recalculate the Title IV, HEA program refund and return any additional

amounts required to the appropriate Title IV, HEA program accounts or

to the lender within the applicable regulatory deadlines.

The February 28, 1994 NPRM proposed that certain fees could be

subtracted from the refund due under a pro rata refund calculation.

This treatment was consistent with previous pro rata guidance given

under the FFEL programs. The February 28, 1994 NPRM pointed out that,

as proposed, the calculation included the fees in the institutional

costs, allowed the institution to retain a prorated portion of those

institutional costs, and then allowed the full amount of those fees to

be subtracted from the resulting refund. The resulting ``double-

counting'' allowed the institution to retain more than the actual fees

that were charged. In response to commenters that supported the

elimination of such double-counting, Sec. 668.22(c)(4) has been revised

to allow an institution to exclude certain fees from the pro rata

refund calculation so that the most an institution would be allowed to

retain is 100 percent of an institutional charge.

Further, in response to comment, the reference to an application

fee as an excludable fee has been deleted as it is not necessary to

specifically allow for such an exclusion. The Secretary agrees with the

commenters that asserted that an application fee should not be a factor

in the calculation of an institutional refund for Title IV, HEA program

purposes, because it is not an educational cost.

The provision allowing for the exclusion of expended board credits

in excess of the attributable prorated portion (proposed

Sec. 668.22(c)(1)(iv)), based on the period attended by the student

prior to withdrawal, has been removed. After further examination, the

Secretary has found this provision to be excessively complicated and

not entirely effective in the purpose intended. No support for this

provision was received from commenters and the Secretary plans to

revisit this issue in the future, after seeking further input from the

financial aid community. Except for treatment under the provision in

Sec. 668.22(c)(6)(i), all room and board charges must be included in

the pro rata refund calculation and refunded at the applicable

percentage, as required by the Amendments of 1992.

The language of Sec. 668.22(c)(5) (and corresponding language in

Appendix A) has been changed to clarify the specific requirements

related to ``other charges assessed the student by the institution''

under the pro rata refund calculation. ``Other charges'' includes, but

is not limited to, charges for any equipment, books, or supplies issued

by an institution to the student, provided that the enrollment

agreement signed by the student specifies a separate charge for such

equipment or provided that the institution refers the student to an

affiliated vendor for purchase of the equipment. An institution may

exclude the documented cost of such equipment from the pro rata refund

calculation in the following instances: For unreturnable equipment, if

the student actually receives and keeps the equipment; or for

returnable equipment, the student does not return the equipment in good

condition allowing for reasonable wear and tear, within 20 days after

withdrawal. For example, an item is not considered to be in good

condition and, hence, is unreturnable, if it cannot be reused because

of clearly recognized health and sanitary reasons. Institutions must

clearly disclose in the enrollment agreement any restrictions on the

return of equipment, including identifying equipment that is

unreturnable. The regulatory language has been changed to reflect that

an institution must notify the student in writing, prior to enrollment,

that return of such equipment will be required within 20 days of

withdrawal. It is the responsibility of the institution to determine

whether specific equipment is returnable or not, in accordance with

State and accrediting agency guidelines. This change conforms with a

similar provision from the FFEL programs regulations. The Secretary

believes that it would be unreasonable to expect a student to return

equipment within a certain time period without ensuring that the

student has been informed of the conditions of acceptable return of

equipment.

The February 28, 1994 NPRM proposed that institutions be exempted

from making refunds of $25 or less, because the burden and cost of

making such a refund would exceed the amount refunded. However, that

proposed change will not be made. Section 668.22(f)(3)(iii) has been

amended to remove the proposed minimum dollar amount below which a

refund would not have to be made. After further consideration, the

Secretary believes that this proposed provision is inconsistent with

the amendment made to section 490 of the HEA that established criminal

penalties for failure to pay refunds, specifically including refunds of

less than two hundred dollars. Further, the Secretary believes that by

the time the institution has determined the amount of the refund, most

of the administrative effort and cost has been expended. The Secretary

believes that neither the institution nor the student would benefit

from the proposal to allow institutions to forego making refunds of $25

or less. Also, the Secretary believes that part of the institution's

administrative costs are recouped through the administrative fee that

is allowed to be excluded from the pro rata refund calculation.

In response to public comment, language has been added to

Sec. 668.22(i)(1)(ii) to limit an institution's determination of a

student's unofficial withdrawal to no later than 30 days after the

expiration of the enrollment period, the academic year, or the program,

whichever is earlier.

Section 668.22(i)(2) has been amended to clarify that the refund

deadline in that paragraph is applicable only to refunds made to

students, and does not alter or affect the FFEL regulatory deadlines

for returning a refund to a lender or the regulatory deadline for

returning a refund to a Title IV, HEA program account.

In response to public comment, the Secretary has provided the

following examples to aid in the implementation of the refund

requirements:

Example #1

Fair and Equitable Refund: Term Institution

Institutional Profile. Term Community College (TCC) offers two-

and four-year programs, measured in credit hours, and its academic

year is divided into two semesters, each 15 weeks long. TCC

participates in the Federal Pell Grant program, the Federal Family

Education Loan (FFEL) programs, and the Federal campus-based

programs. TCC charges by the semester: $1800 for tuition, $2500 for

on-campus housing and meals, $25 for application, and $75 for

administrative costs. Noninstitutional charges include: books and

supply costs (because these items are purchased separately by the

student, from the campus bookstore or an unaffiliated vendor),

living expenses and meals (if the student lives in off-campus

housing), transportation, and personal miscellaneous expenses.

(Noninstitutional costs vary by student budget, depending in part

upon the educational program in which the student enrolls.)

Applicable Refund Policies. The State in which TCC is located

has a modified pro rata refund policy: students who withdraw on or

before the 25 percent point of the enrollment period receive a 75

percent refund; students who withdraw after the 25 percent point but

on or before the 50 percent point of the enrollment period receive a

50 percent refund; and students who withdraw after the 50 percent

point but on or before the 75 percent point of the enrollment period

receive a 25 percent refund. (Students withdrawing after the 75

percent point of the enrollment period receive no refund under State

guidelines.)

TCC's accrediting agency refund guidelines offer a 50 percent

refund to students who withdraw in the first four weeks of the

enrollment period, and a 25 percent refund to those who withdraw

after four weeks but before the beginning of the ninth week.

(Students withdrawing after that point receive no refund under the

accrediting agency policy.)

Student Profile. Sam the Student enrolled in a two-year program

at TCC, moved into on-campus housing, and began attending classes.

Sam made a cash payment of $500 toward institutional charges.

Financial Aid Package and Disbursements. Sam's financial aid

package for the academic year consisted of a $2200 Federal Pell

Grant, a $2400 Federal Stafford Loan, a $1600 FSEOG, and $1000 in

Federal Work-Study funds. Sam's first disbursement of Federal Pell

Grant funds ($1100), his first disbursement of Federal Stafford Loan

funds ($1116--loan and origination fees have been subtracted), and

his first disbursement of FSEOG funds ($800), were credited to his

institutional account. Sam received $400 of his Federal Work-Study

award, paid directly to him for living expenses, before he

officially withdrew at the end of the fifth week.

Step One: Figuring the Educational Costs. Only institutional

costs are included in the refund calculation. TCC must use the

institutional costs as charged, by the term, for a total of $4375--

$1800 tuition, $2500 on-campus housing and meals (because Sam lives

on-campus), and $75 for administrative costs. (The $25 application

fee is not a cost of education, so it is not included.)

Noninstitutional costs are treated in the repayment calculation.

(See Example #3.)

Step Two: Figuring the Totals Paid to Institutional Costs. TCC's

records show that Sam paid $500 in cash toward his institutional

costs, and that a total of $3016 in student aid was paid toward

institutional charges [$1100 Federal Pell+$1116 Federal Stafford+800

FSEOG=$3016]. (The Federal Work-Study funds are not reflected in

this total, because funds earned through work-study cannot be

required to be refunded or returned, and are therefore not included

in the calculation of a refund.)

The total paid to institutional costs (student payments and

financial aid) is $3516 [$500+$3016=$3516]. Only funds paid to

institutional charges are included in the refund calculation; aid

disbursed to the student for noninstitutional expenses is treated in

the repayment calculation. (See Example #3.)

Step Three: Checking for Pro Rata Eligibility Under the Law. To

determine whether Sam is eligible for a statutory pro rata refund

calculation, TCC must determine if he's a first-time student and if

he withdrew on or before the 60 percent point in time of the

enrollment period for which he was charged. Sam is a first-time

student, because he's never attended classes at TCC prior to this

term. He withdrew at the end of the fifth week in the term; the term

is 15 weeks long, and the 60 percent point is figured in calendar

time for term institutions [15 weeks x .60=9, so any withdrawal

prior to the end of the ninth week falls within the 60 percent

requirement of statutory pro rata]. Sam withdrew at the end of the

fifth week, so he is entitled to a statutory pro rata refund

calculation.

Step Four: Calculating the Unpaid Charges. Because a student's

unpaid charges impact the refund calculation, TCC must first

calculate Sam's unpaid charges (as defined in Sec. 668.22(c) and

(f)) using the following formula:

Total Institutional Costs

-Total Aid Paid to Institutional Costs

----------------------------------------------------------------------

=Student's Scheduled Cash Payment (SCP)

-Student's Cash Paid to Institutional Costs

----------------------------------------------------------------------

=Unpaid Charges

To calculate Sam's unpaid charges, TCC subtracts the $3016 in total

aid paid to institutional costs (from Step Two, above) from the

Total institutional costs of $4375 (from Step One, above). The

resulting scheduled cash payment is $1359 [$4375-$3016=$1359]. From

that total, TCC subtracts Sam's cash payment of $500 (from Step Two,

above) and Sam's unpaid charges equal $859 [$1359-$500=$859]. This

amount ($859) will be used in all three refund calculations.

Step Five: Calculating a Fair and Equitable Refund. Under the

Amendments of 1992, TCC must calculate Sam's refund under State and

accrediting agency guidelines, and under statutory pro rata

requirements. TCC must then use whichever calculation provides the

largest refund.

In accordance with the June 8, 1993 Student Assistance General

Provisions regulations, for all refunds other than statutory pro

rata refunds, the student's unpaid charges must be subtracted from

the amount the institution may otherwise retain. Therefore, in

calculating Sam's refund under State and accrediting agency

guidelines, $859 (from Step Four, above) must be subtracted from the

amount TCC could otherwise retain.

The State refund guidelines allow Sam a 50 percent refund (he

withdrew after the 25 percent point but before the 50 percent

point), which means TCC is allowed to retain 50 percent of the

institutional charges. Total institutional costs (from Step One,

above) are $4375. Assessed at 50 percent, this allows TCC to retain

$2188 [$4375 x .50=$2187.5]. (Figures are rounded to the nearest

dollar.) However, in accordance with the June 8, 1993 regulations,

TCC must subtract Sam's unpaid charges of $859 (from Step Four,

above) from this amount. Therefore, TCC is actually allowed to

retain $1329 [$2188-$859=$1329]. Sam's refund under the State policy

is $2187, figured by subtracting the amount TCC can retain from the

total paid to institutional costs (from Step Two, above)

[$3516-$1329=$2187].

The accrediting agency refund guidelines allow Sam a 25 percent

refund (he withdrew after four weeks but before the beginning of the

ninth week), which means TCC is allowed to retain 75 percent of the

institutional charges. Total institutional costs (from Step One,

above) are $4375. Assessed at 75 percent, this allows TCC to retain

$3281 [$4375 x .75=$3281.25]. (Figures are rounded to the nearest

dollar.) However, in accordance with the June 8, 1993 regulations,

TCC must subtract Sam's unpaid charges of $859 (from Step Four,

above) from this amount. Therefore, TCC is actually allowed to

retain $2422 [$3281-$859=$2422]. Sam's refund under the accrediting

agency policy is $1094, figured by subtracting the amount TCC can

retain from the total paid to institutional costs (from Step Two,

above) [$3516-$2422=$1094].

To figure Sam's refund under the statutory pro rata refund

calculation, TCC must first calculate the portion of the enrollment

period that remains (in accordance with Sec. 668.22(c)) by using the

following formula for credit-hour programs:

Weeks Remaining in Period

Total Weeks in Period

----------------------------------------------------------------------

=Portion of Enrollment Period That Remains

Sam withdrew at the end of the fifth week of a fifteen-week

semester, so 10 weeks remain in the term. TCC calculates that for

Sam, 60 percent of the enrollment period remains [10+15=.666,

rounded down to the nearest tenth]. The statutory pro rata

calculation allows Sam a refund proportionate to the portion of the

enrollment period that remains: 60 percent. Total institutional

costs (from Step One, above) are $4375. However, under the statutory

pro rata refund calculation, TCC is allowed to exclude from this

amount an administrative charge, not to exceed the lesser of $100 or

5 percent of the institutional charges (provided that the fee is a

real and documented charge). Therefore, the $75 administrative fee

charged to all TCC students can be excluded, making the total

institutional costs for statutory pro rata purposes equal $4300

[$4375-$75=$4300]. (Had the administrative fee exceeded $100 or 5

percent of TCC's total institutional charges, TCC could only have

excluded the allowable portion of the fee.) Total institutional

costs are assessed at 60 percent, making Sam's initial refund equal

$2580 [$4300 x .60=$2580]. However, in accordance with the law, TCC

must subtract Sam's unpaid charges of $859 (from Step Four, above)

from his initial refund amount. Therefore, Sam's actual refund under

the statutory pro rata refund calculation is $1721

[$2580-$859=$1721].

After calculating all of Sam's possible refunds, TCC must use

the calculation which provides for the largest refund. In this case,

the largest refund is provided by the State refund calculation:

$2187. This refund amount must be returned, in Sam's behalf, first

to the Title IV, HEA programs and then to Sam, in accordance with

the allocation priorities in Sec. 668.22(g); no portion of the

refund due can be used to pay Sam's unpaid charges to TCC.

Example #2

Fair and Equitable Refund: Nonterm Institution.

Institutional Profile. Nonterm Technical Institute (NTI) offers

900-hour and 1200-hour programs, measured in clock hours, and its

academic year is 30 weeks long. NTI participates in the Federal Pell

Grant program and the Federal Family Education Loan (FFEL) programs.

NTI charges by the program and requires payment up-front. The

institutional costs of the 900-hour program are: $3000 for tuition;

$520 for equipment, books, and supplies; and a $100 administrative

fee. Institutional costs for the 1200-hour program are: $4000 for

tuition; $740 for equipment, books, and supplies; and a $150

administrative fee. Noninstitutional charges include: living

expenses and meals (NTI has no on-campus housing or food service),

transportation, and personal miscellaneous expenses.

(Noninstitutional costs vary by student budget, depending in part

upon the educational program in which the student enrolls.)

Applicable Refund Policies. The State in which NTI is located

provides a 90 percent refund to students who withdraw before

completing 10 percent of the program; students who withdraw after

the 10 percent point but before completing 25 percent of the program

receive a 70 percent refund; students who withdraw after the 25

percent point but before completing 50 percent of the program

receive a 45 percent refund; and students who withdraw after the 50

percent point but before completing 75 percent of the program

receive a 20 percent refund. (Students withdrawing after completing

75 percent of the program receive no refund under State guidelines.)

NTI's accrediting agency gives an 80 percent refund to students

who withdraw before completing 15 percent of the program; students

who withdraw after the 15 percent point but before completing 45

percent of the program receive a 50 percent refund; and students who

withdraw after the 45 percent point but before completing 60 percent

of the program receive a 25 percent refund. (Students withdrawing

after completing 60 percent of the program receive no refund under

the accrediting agency policy.)

Student Profile. Susan the Student, who lives in an off-campus

apartment, enrolled in a 900-hour program at NTI and began attending

classes. Susan made a cash payment of $800 toward institutional

charges.

Financial Aid Package and Disbursements. Susan's financial aid

package for the program consisted of a $2000 Federal Pell Grant and

a $2325 Federal Stafford Loan. Susan's first Federal Pell Grant

disbursement ($1000) and the first disbursement of her Federal

Stafford Loan ($1081--loan and origination fees have been

subtracted) were credited to her institutional account. At the end

of the academic year, NTI determined that Susan had unofficially

withdrawn. The last record of Susan's attendance was a midterm exam

she'd taken after completing 450 hours of the program.

Step One: Figuring the Educational Costs. Only institutional

costs are included in the refund calculation. NTI must use the

institutional costs as charged, by the term, for a total of $3620--

$3000 tuition, $520 for equipment, books, and supplies, and $100 for

administrative costs. Noninstitutional costs are treated in the

repayment calculation. (See Example #3.)

Step Two: Figuring the Totals Paid to Institutional Costs. NTI's

records show that Susan paid $800 in cash toward her institutional

costs, and that a total of $2081 in student aid was paid toward

institutional charges [$1000 Federal Pell+$1081 Federal

Stafford=$2081].

The total paid to institutional costs (student payments and

financial aid) is $2881 [$800+$2081=$2881]. Only funds paid to

institutional charges are included in the refund calculation; aid

disbursed to the student for noninstitutional expenses are treated

in the repayment calculation. (See Example #3.)

Step Three: Checking for Pro Rata Eligibility Under the Law. To

determine whether Susan is eligible for a statutory pro rata refund

calculation, NTI must determine if she's a first-time student and if

she withdrew on or before the point in time when she had completed

60 percent of the clock hours scheduled for the period of enrollment

for which she was charged. Susan enrolled last year in the same

program at NTI, but she never began attending classes and so was

entitled to a 100 percent refund. Therefore, in accordance with the

regulatory definition in Sec. 668.22(c), Susan is a first-time

student. Susan's last recorded date of attendance was at the point

of having completed 450 clock hours; 900 clock hours are scheduled

for the program, and 60 percent of the scheduled hours would be 540

clock hours [900 hours x .60=540]. Because Susan is a first-time

student and she withdrew before completing 60 percent of the hours

scheduled, she is entitled to a statutory pro rata refund

calculation.

Step Four: Calculating the Unpaid Charges. Because a student's

unpaid charges impact the refund calculation, NTI must first

calculate Susan's unpaid charges (as defined in Sec. 668.22(c) and

(f)) using the following formula:

Total Institutional Costs

-Total Aid Paid to Institutional Costs

----------------------------------------------------------------------

=Student's Scheduled Cash Payment (SCP)

-Student's Cash Paid to Institutional Costs

----------------------------------------------------------------------

=Unpaid Charges

To calculate Susan's unpaid charges, NTI subtracts the $2081 in

total aid paid to institutional costs (from Step Two, above) from

the total institutional costs of $3620 (from Step One, above). The

resulting scheduled cash payment is $1539 [$3620-$2081=$1539]. From

that total, NTI subtracts Susan's cash payment of $800 (from Step

Two, above) and Susan's unpaid charges equal $739 [$1539-$800=$739].

This amount ($739) will be used in all three refund calculations.

Step Five: Calculating a Fair and Equitable Refund. Under the

Amendments of 1992, NTI must calculate Susan's refund under State

and accrediting agency guidelines, and under statutory pro rata

requirements. NTI must then use whichever calculation provides the

largest refund.

In accordance with the June 8, 1993 Student Assistance General

Provisions regulations, for all refunds other than statutory pro

rata refunds, the student's unpaid charges must be subtracted from

the amount the institution may otherwise retain. Therefore, in

calculating Susan's refund under State and accrediting agency

guidelines, $739 (from Step Four, above) must be subtracted from the

amount NTI could otherwise retain.

The State refund guidelines allow Susan a 20 percent refund (she

withdrew after the 50 percent point but before completing 75 percent

of the program), which means NTI is allowed to retain 80 percent of

the institutional charges. Total institutional costs (from Step One,

above) are $3620. Assessed at 80 percent, this allows NTI to retain

$2896 [$3620 x .80=$2896]. However, in accordance with the June 8,

1993 regulations, NTI must subtract Susan's unpaid charges of $739

(from Step Four, above) from this amount. Therefore, NTI is actually

allowed to retain $2157 [$2896-$739=$2157]. Susan's refund under the

State policy is $724, figured by subtracting the amount NTI can

retain from the total paid to institutional costs (from Step Two,

above) [$2881-$2157=$724].

The accrediting agency refund guidelines allow Susan a 25 percent

refund (she withdrew after the 45 percent point but before completing

60 percent of the program), which means NTI is allowed to retain 75

percent of the institutional charges. Total institutional costs (from

Step One, above) are $3620. Assessed at 75 percent, this allows NTI to

retain $2715 [$3620 x .75=$2715]. However, in accordance with the June

8, 1993 regulations, NTI must subtract Susan's unpaid charges of $739

(from Step Four, above) from this amount. Therefore, NTI is actually

allowed to retain $1976 [$2715-$739=$1976]. Susan's refund under the

accrediting agency policy is $905, figured by subtracting the amount

NTI can retain from the total paid to institutional costs (from Step

Two, above) [$2881-$1976=$905].

To figure Susan's refund under the statutory pro rata refund

calculation, NTI must first calculate the portion of the enrollment

period that remains (in accordance with Sec. 668.22(c)) by using the

following formula for clock-hour programs:

Hours Remaining in Period

Total Hours in Period

=Portion of Enrollment Period That Remains

Susan's last recorded date of attendance was at the point of having

completed 450 clock hours, so 450 hours remain in the program. NTI

calculates that for Susan, 50 percent of the enrollment period

remains [450900=.50]. The statutory pro rata calculation

allows Susan a refund proportionate to the portion of the enrollment

period that remains: 50 percent. Total institutional costs (from

Step One, above) are $3620. However, under the statutory pro rata

refund calculation, NTI is allowed to exclude from this amount an

administrative charge, not to exceed the lesser of $100 or 5 percent

of the institutional charges (provided that the fee is a real and

documented charge). Therefore, the $100 administrative fee charged

to all NTI students can be excluded, making the total institutional

costs for statutory pro rata purposes equal $3520

[$3620-$100=$3520]. (Had the administrative fee exceeded $100 or 5

percent of NTI's total institutional charges, NTI could only have

excluded the allowable portion of the fee.) NTI could also exclude

(from the total institutional costs) the documented cost of any

returnable equipment that Susan failed to return in accordance with

Sec. 668.22(c), and the documented cost of any unreturnable

equipment that was actually issued to Susan (and kept by Susan) in

accordance with 668.22(c). Total institutional costs are assessed at

50 percent, making Susan's initial refund equal $1760

[$3520 x .50=$1760]. However, in accordance with the law, NTI must

subtract Susan's unpaid charges of $739 (from Step Four, above) from

her initial refund amount. Therefore, Susan's actual refund under

the statutory pro rata refund calculation is $1021

[$1760-$739=$1021].

After calculating all of Susan's possible refunds, NTI must use

the calculation which provides for the largest refund. In this case,

the largest refund is provided by the statutory pro rata refund

calculation: $1021. This refund amount must be returned, in Susan's

behalf, first to the Title IV, HEA programs and then to Susan, in

accordance with the allocation priorities in Sec. 668.22(g); NTI

cannot bill Susan for any unpaid charges, because under the

statutory pro rata refund calculation, those charges have been paid

by Title IV, HEA program funds.

Example #3

Repayment Calculation

Institutional Profile. United States Academy (USA) offers one-

and two-year programs on a semester system; its academic year is 30

weeks long and divided into two equal semesters, each 15 weeks in

length. USA participates in the Federal Pell Grant program and the

Federal Family Education Loan (FFEL) programs. USA charges $800

tuition per semester. Noninstitutional costs are assessed by the

semester at the following average rates: $3000 for living expenses

and meals (USA has no on-campus housing or food service), $250 for

books and supplies (not purchased through the institution), $600 for

transportation, and $300 for personal miscellaneous expenses.

(Noninstitutional cost assessments are amended as necessary based on

individual student needs and circumstances.)

Institutional Repayment Policy. In keeping with the local

bookstore's refund policy, 50 percent of the books and supplies

allowance is incurred at the time of purchase. All other

noninstitutional (living) expenses are prorated based on the

percentage of the semester completed.

Student Profile. Sarah the Student, who lives in an off-campus

apartment, enrolled for the winter semester at USA and began

attending classes. She made a $400 cash payment toward her tuition

costs. Her noninstitutional costs are adequately reflected in the

institution's average student budget.

Financial Aid Package and Disbursements. Sarah's financial aid

package for the program consisted of a $1800 Federal Pell Grant and

a $2000 Federal Stafford Loan. Sarah's first Federal Pell Grant

disbursement ($900) was applied first to her tuition balance ($400)

and the remaining $500 was then disbursed to her in cash. The first

disbursement of her Federal Stafford Loan ($930--loan and

origination fees have been subtracted) was also disbursed directly

to her. Sarah officially withdrew after attending 4 weeks.

Step One: Figuring Expenses Actually Incurred. Only

noninstitutional costs are included in a repayment calculation.

Institutional costs are treated in the refund calculation. (See

Examples #1 and #2.) According to USA's repayment policy, 50 percent

of Sarah's $250 books and supplies allowance was incurred at the

time of purchase [$250 x .50=$125]. The rest of her semester

expenses, for living expenses and meals, transportation, and

personal miscellaneous expenses, are prorated based on the

percentage of the term completed. Total noninstitutional costs equal

$3900 [$3000+$600+$300=$3900]. Because Sarah completed 4 of 15

weeks, these costs should be prorated at 27 percent

[415=.266, rounded to the nearest tenth]. Therefore, Sarah's

noninstitutional costs incurred equal $1053 [$3900 x .27=$1053].

Step Two: Figuring the Total Federal Student Financial Aid (SFA)

Disbursed as Cash. Sarah received $500 of her Federal Pell Grant in

cash, and all of her first Stafford Loan disbursements, $930, in

cash. However, in accordance with Sec. 668.22(e), the repayment

calculation does not include any Title IV, HEA program loan amounts

disbursed as cash, because those loan funds will have to be repaid

by the student anyway. Therefore, a total of $500 cash disbursed is

considered for repayment purposes. (As with the refund calculation,

the repayment calculation does not include any Federal Work-Study

funds disbursed as cash, because repayment of work earnings cannot

be required. Notice that students Sam and Susan, from Examples #1

and #2 respectively, would not have owed repayments because they

received no cash disbursements other than FFELP loan funds or

Federal Work-Study funds.)

Step Three: Calculating the Repayment Owed. To calculate Sarah's

owed repayment, USA must subtract the total costs incurred ($1053,

from Step One above) from the total cash disbursed ($500, from Step

Two above). In Sarah's case, this calculation results in a negative

number [$500-$1053=0], which means she owes no repayment. If her

cash disbursement had exceeded her costs incurred, however, she

would have been required to repay the balance back to the Title IV,

HEA program funds (the Federal Pell Grant program, in this case), in

accordance with the allocation priorities in Sec. 668.22(g); if

Sarah had owed unpaid charges to USA, no portion of the repayment

owed could be used to pay those charges.

Section 668.23 Audits, Records, and Examinations

The Secretary has amended Sec. 668.23 by requiring an institution

or a third-party servicer with which the institution contracts to

cooperate with the institution's nationally recognized accrediting

agency in the conduct of audits, investigations, or program reviews

authorized by law, in addition to the other authorized entities that

were stipulated in the NPRMs.

In addition, the Secretary has amended this section to require an

institution to have performed, without exception, on an annual basis, a

compliance audit of an institution's administration of its Title IV,

HEA programs or a third-party servicer to have performed, without

exception, on an annual basis, a compliance audit of a third-party's

administration of an aspect of an institution's participation in a

Title IV, HEA program.

The Secretary is removing the audit exceptions proposed in the

NPRMs that would have exempted certain institutions and third-party

servicers from some or all of the audit requirements of this section

because upon further review, the Secretary has determined that the

proposed exemptions were inconsistent with the requirement in section

487(c) of the HEA that annual compliance audits be provided for in

these regulations. However, changes are planned for the Student

Financial Assistance Programs Audit Guide to reduce administrative

costs by allowing institutions meeting certain performance-based or

funding criteria to submit compliance audits under a reviewed or

compiled basis rather than a full compliance audit.

Paragraph (c)(3) is revised to specify that an institution's or

third-party servicer's audit report must be submitted to the Department

of Education's Office of Inspector General within 120 days after the

end of the institution's or servicer's fiscal year. An institution or

third-party servicer that submits an audit conducted in accordance with

the Single Audit Act (Chapter 75 of Title 31, United States Code) is

required to submit that audit report in accordance with the deadlines

established in that act.

Finally, paragraph (c)(4) is revised to include the Secretary of

Veterans Affairs in the list of entities that the Secretary may require

an institution or a third-party servicer to provide, upon request, the

results of any audit conducted under this section.

Subpart G--Fine, Limitation, Suspension and Termination Proceedings

Section 668.82 Standard of Conduct

The Secretary has revised paragraph (d)(1)(D) to clarify that a

third-party servicer violates its fiduciary duty and that of any

institution with which the servicer contracts if the servicer uses or

contracts in a capacity that involves any aspect of the administration

of the Title IV, HEA programs any person, agency, or organization that

has been or whose officers or employees are guilty of a crime or

judicially or administratively determined to have committed fraud or

other material violation of law with respect to government funds.

Section 668.92 Fines

The Secretary has revised this section to take into account

additional criteria when determining the amount of a fine against a

third-party servicer. Paragraph (a)(5) is revised so that a repeated

mechanical systemic unintentional error is not counted as a single

violation if the third-party servicer, against whom the fine is

assessed, had already been cited for a similar violation and had not

taken the appropriate steps to correct the problem. The Secretary will

also take into consideration in determining the amount of the fine, the

amount of Title IV, HEA program funds that were wasted as a result of

the repeated mechanical systemic unintentional error. The Secretary

also makes a conforming change in Sec. 682.413 to parallel the changes

described in this section.

Part 682--Federal Family Education Loan Programs

Subpart D--Guaranty Agency Programs

Section 682.413 Remedial Actions

The Secretary has revised the provisions of this section governing

the means of collecting a liability that results from a third-party

servicer's violation of applicable Title IV, HEA program requirements

in administering a lender's or guaranty agency's FFEL programs. A

third-party servicer is required to repay any outstanding liabilities

because of its violation only if the lender or guaranty agency has not

paid the full amount of the liability or has not made satisfactory

arrangements to pay the amount of the liability within 30 days from the

date that the lender or guaranty agency receives the notice from the

Secretary of the liability. If the 30-day period elapses and the lender

or guaranty agency has not paid the full amount of the liability within

that time frame or has not set up a payment plan acceptable to the

Secretary to repay that liability, the Secretary will attempt to

collect any remaining amount owed by offsetting the lender's or

guaranty agency's first bill to the Secretary for interest benefits or

special allowance. After that, if the liability has not been completely

paid, the Secretary will seek payment for the remainder of the

liability from the third-party servicer.

Section 682.416 Requirements for Third-Party Servicers and Lenders

Contracting With Third-Party Servicers

The Secretary has revised paragraph (b) to specify that the

Secretary will apply the provisions of 34 CFR 668.15(b) (1)-(4) and

(6)-(9) to determine that a third-party servicer is financially

responsible under this part. Any references to an institution under

those provisions shall be understood to mean the third-party servicer,

for this purpose.

Analysis of Comments and Changes

In response to the Secretary's invitation in the NPRMs, 84 parties

submitted comments on the NPRM published on February 17, 1994 and 421

parties submitted comments on the NPRM published on February 28, 1994.

An analysis of the comments and of the changes in the regulations since

publication of the NPRMs follows.

Substantive issues are discussed under the section of the

regulations to which they pertain. Technical and other minor changes

and suggested changes the Secretary is not legally authorized to make

under the applicable statutory authority are not addressed.

General comments that refer to broad issues rather than a specific

section or sections of the proposed regulations are discussed first,

followed by a discussion of other issues in the order in which they

appeared in the NPRMs.

It should be noted that not all comments are addressed in these

final regulations. There are several reasons for this. First, many of

the concerns expressed by commenters were directed to the statute, not

the proposed regulations. In some instances, those comments are

mentioned in the discussion that follows because of the importance of

the issues that were raised. In most instances, however, they are not

mentioned because the Secretary is not legally authorized to make the

changes suggested by commenters. Second, many commenters made excellent

suggestions for editorial and technical changes, as well as other minor

changes, that, in the Secretary's opinion, strengthened the

regulations; the Secretary has merely incorporated these suggestions

without comment. Third, some comments appeared to be based on

misunderstandings of what was actually in the NPRMs. For example, a few

commenters expressed concern about the absence of a particular

provision that was, in fact, included in the NPRMs. In general, these

types of comments are not discussed.

General Comments

The Secretary received numerous comments about the overall impact

of the proposed regulations. In general, commenters opposed to the

proposed regulations believed that the February 28, 1994 NPRM did not

achieve the coordinated balance of responsibilities among the triad

members that it sought to achieve, and that it provided for extensive

and duplicative data collection and reporting requirements that created

a costly and unnecessary burden on the higher education community.

Further, they believed that the regulations did not regulate ``narrowly

to the law,'' as they purported to do. In general, these commenters

suggested that the Secretary should review each requirement in the

proposed regulations to determine if it was required by the statute and

should further ensure that all requirements that meet this test and are

included in the final regulations are implemented in the most

reasonable and cost effective manner. This, they believed, would ensure

the Department's compliance with Executive Order 12866.

The more specific concerns of commenters opposed to the proposed

regulations may be summarized as follows:

(1) The proposed regulations are overly prescriptive and excessive

in detail and either exceed the statutory authority of the Secretary or

significantly expand the statute beyond Congressional intent.

(2) The proposed regulations will force institutions and third-

party servicers to engage in excessive and duplicative information

gathering and reporting, at considerable cost, with no net increase in

the quantity or quality of information available to the public, and

will result in the diversion of institutions' and third-party

servicers' already scarce resources away from their primary mission of

providing a quality education.

(3) The proposed regulations threaten the diversity of American

higher education and fail to focus oversight properly on vocational

institutions.

In addition to receiving comments in opposition to the proposed

regulations, the Secretary received comments supportive of the NPRM.

For example, these commenters favored the increased protections for

students in the changes to the refund provisions, and approved of the

strengthening of the administrative capability and financial

responsibility standards.

Finally, the Secretary received suggestions from several commenters

that the Department should strongly encourage all triad members to work

together and adopt the same or similar language for the various

standards, should collect the necessary data through a common source

such as readily available public information or IPEDS, and should use

common methodologies for various calculations such as completion or

withdrawal rates.

Discussion: As suggested by several commenters, the Secretary has

carefully reviewed each requirement in the proposed regulations in

light of statutory intent. The Secretary has also carefully considered

both the burden of the proposed regulations on institutions and third-

party servicers, in terms of cost, duplication of effort, and the added

recordkeeping and reporting requirements. Similarly, the Secretary has

considered the benefits of the proposed regulations, not just to

institutions and third-party servicers but to students and the general

public as well. A particular concern of the Secretary has been how to

ensure that the regulations hold the three members of the triad

accountable for the manner in which they fulfill their responsibilities

under the HEA yet still provide each member of the triad the

flexibility to determine the appropriate means to carry out those

responsibilities.

In general, the Secretary has responded to the concerns of

commenters by eliminating much of what was perceived as excessive

detail in the February 28, 1994 NPRM, thus providing institutions more

flexibility to meet a particular requirement in the manner that best

suits their needs. The final regulations make it quite clear that the

Secretary continues to bear the primary responsibility for enforcing

standards and requirements to ensure that institutions and third-party

servicers administer Title IV, HEA program funds properly.

The Secretary does not believe that the Department's role

overshadows those of the accrediting agencies or the States. These

regulations not only speak to the responsibilities of each member of

the triad, but also establish the Federal requirements for institutions

and third-party servicers under the HEA. Therefore, the Federal role in

these regulations may appear larger than that envisioned for the States

and accrediting bodies, but this appearance is due to the inclusion of

the implementing regulations for these responsibilities. Without

question, the States and accrediting bodies will exercise their

responsibilities by promulgating and implementing standards for HEA

program participants, and the Secretary anticipates that any overview

of all such requirements by the triad would show that the Federal role

has been appropriately established. The Secretary notes that some of

the commenters specific concerns are addressed in the Analysis of

Comments and Changes section of these regulations.

Finally, with regard to the issue of whether the regulations

properly focus on vocational institutions, the Secretary wishes to note

that Congress found abuses in all sectors of higher education, not just

the vocational sector. For this reason, the regulations apply to all

institutions.

Changes: The specific changes to the regulations are discussed

below.

Part 668--Student Assistance General Provisions

Subpart A--General

Section 668.2 General Definitions.

Academic Year. Comments: Many commenters argued that the proposed

definition of a week in determining the length of an academic year

should not be based on the number of days of instructional time for

institutions that use clock hours to measure program length. These

commenters suggested that a week of instructional time should be based

on the number of clock hours completed by a student. Some of these

commenters suggested that a week of instructional time should be

defined as 24 clock hours; another commenter suggested 30 clock hours.

A number of these commenters suggested that this approach was more

consistent with the regulatory requirements for calculating pro-rata

refunds, which relies on the number of clock hours completed by

students.

Discussion: Section 481(d)(1) of the HEA requires that an academic

year must be a minimum of 30 weeks of instructional time in which a

full-time student is expected to complete at least 900 clock hours at

an institution that measures program length in clock hours. Thus, the

statute requires a minimum of 30 weeks and a minimum of 900 clock

hours; both standards must be met.

Changes: None.

Comments: Many commenters recommended that the Secretary implement

the provision in the Technical Amendments of 1993 that provides that

the Secretary may reduce, for good cause, the 30-week minimum to not

less than 26 weeks of instructional time.

Many of these commenters suggested that ``good cause'' should be

based on educational outcomes, such as placement rates or completion

rates. Some commenters suggested the same standard that was proposed

for short-term programs in Sec. 668.8--a 70 percent completion rate and

a 70 percent placement rate. Other commenters suggested that approval

by an institution's nationally recognized accrediting agency or State

postsecondary review entity (SPRE) would demonstrate good cause. Some

commenters suggested that good cause should be based on whether an

educational program has historically provided instruction for less than

30 weeks in previous academic years. Other factors suggested for

defining good cause included fiscal stability of an institution,

scheduling adjustments due to natural disasters, ethnic composition of

an institution's student population, an accelerated or concentrated

educational program, and educational programs that offer advanced

placement.

Some commenters recommended that no reductions in the 30-week

minimum should be permitted or that reductions should be approved on an

extremely limited basis in order to avoid inequitable treatment of

institutions and students.

Discussion: The Secretary did not propose specific criteria to

implement this technical amendment in the February 28, 1994 NPRM, but

instead requested comments on a definition of ``good cause'' and

requested comments on ways of implementing this provision that

addressed the Secretary's concern that reductions in the award year

would encourage many institutions to seek that treatment routinely.

After reviewing public comments on defining good cause, and developing

safeguards to discourage routine requests for reductions in the

academic year, the Secretary has implemented this technical amendment

through regulation.

In an effort to discourage routine requests, the Secretary will

grant a reduction for institutions that can demonstrate a commitment to

changing to a 30-week academic year, but will not permit the period of

reduction to exceed two years. For institutions that do not demonstrate

a commitment to changing to a 30-week academic year, the Secretary may

grant a reduction for a limited period, on a case-by-case basis.

The Secretary agrees with the commenters that suggested approval by

an institution's nationally recognized accrediting agency or State body

that authorizes the institution to provide postsecondary programs

should be considered as factors in determining good cause on a case-by-

case basis, but such approval may not be a sufficient reason for

granting an institution's request. Other factors that should be taken

into account include the number of hours of attendance and other

coursework that a full-time student is required to complete in the

academic year, and any unique circumstances that justify granting the

institution's request.

The Secretary does not believe that placement rates, completion

rates or other educational outcomes that may measure the quality of an

educational program are relevant in determining whether the instruction

offered in less than thirty weeks is sufficient to justify a reduction

in the minimum standard. Other factors suggested by commenters may

qualify as unique circumstances that justify granting the institution's

request, depending upon the context in which these factors are

presented in a particular case.

Every institution that requests a reduction must also demonstrate

that it has provided Title IV, HEA program funds to its students based

on the academic-year requirements in section 481(d) of the HEA since

July 23, 1992, as the requirements became applicable to the various

Title IV, HEA programs. The Secretary believes institutions must have

made a good faith effort to comply with the requirements of the

statute. Institutions that did not comply with the law should not now

expect to receive a temporary waiver.

Changes: A new Sec. 668.3 is established, under which, for the

purpose of awarding Title IV, HEA funds, the Secretary may reduce the

length of an academic year for an institution that submits a written

request to the Secretary. The request must identify each educational

program for which a reduced academic year is requested and specify the

requested length, which may not be less than 26 weeks of instructional

time. The Secretary considers requests for reducing an academic year

only for educational programs at institutions that provide 2-year and

4-year programs leading to associate degrees or baccalaureate degrees,

respectively. In addition, an institution must demonstrate that it has

provided Title IV, HEA program funds to its students based on the

academic-year requirements in section 481(d) of the HEA since July 23,

1992.

In addition, for an institution that currently has an academic year

of less than 30 weeks and demonstrates that it is in the process of

changing to a 30-week academic year, the Secretary will grant a

reduction for a period not to exceed two years.

For an institution that meets all of the above requirements other

than demonstrating a commitment to changing to a 30-week academic year,

the Secretary may grant a reduction for a limited period, on a case-by-

case basis, The Secretary considers such factors as approval of the

academic year for each educational program by the institution's

accrediting agency or State body that legally authorizes the

institution to provide postsecondary education, the number of hours of

attendance and other coursework that a full-time student is required to

complete in the academic year, and any unique circumstances that

justify granting the institution's request.

Comments: Some commenters supported the proposed definition of a

week as a seven-day period of instructional time in which one day of

regularly scheduled instruction, examination, or preparation for

examination occurs. Some commenters argued that the standard of one day

a week was too lax and susceptible to abuse. One commenter suggested

that the minimum standard for one week of instructional time should be

revised to require one instructional hour per week. Another commenter

suggested that the definition of an academic year should be based on

the total number of days of scheduled instruction.

Discussion: The Secretary agrees with those commenters who were

concerned that the proposed definition of a week of instructional time

was susceptible to abuse. Based on these comments and on information

the Secretary has received regarding abuses in this area, the Secretary

believes that the standard of one regularly scheduled instructional day

per week needs to be increased to five days of regularly scheduled time

per week for educational programs using credit hours and not using a

semester, trimester, or quarter system. Under the proposed definition

published in the February 28, 1994 NPRM, institutions could structure

programs that do not use clock hours or standard academic terms to

provide one class a week and permit those classes to be ``made up''

later in the program, in order to maximize the amount of Title IV, HEA

program funds received by the institution.

Changes: A change has been made. For an educational program using

credit hours but not using a semester, trimester, or quarter system,

the Secretary considers a week of instructional time to be any week in

which at least five days of regularly scheduled instruction,

examinations, or preparation for examinations occurs. A corresponding

change has been made to the definition of an eligible program.

Comments: A number of commenters suggested that instructional time

should include internships. Some commenters suggested including other

activities, such as periods of orientation, cooperative education,

independent study, special studies, and research.

Discussion: The Secretary agrees that internships, cooperative

education programs, independent study, and other forms of regularly

scheduled instruction can be considered as part of an institution's

academic year. In most cases, research is not considered to be

regularly scheduled instruction. Orientation programs do not provide

educational instruction related to class preparation or examination and

must not be included in determining the length of an academic year.

Changes: None.

Comments: Several commenters argued that the proposed academic year

definition would make it difficult for institutions to develop creative

programs that allow students to accelerate their educational programs.

One commenter believed that, if the Secretary does not account for

these types of programs, a student will no longer have an incentive to

accelerate his or her educational program, and the Department will

expend more Title IV, HEA program funds on longer periods of study.

Discussion: Because the cost of a student's education includes

living expenses in addition to the cost of tuition and fees, the

Secretary believes that students who have an incentive to reduce their

costs by accelerating their educational programs will still have a

strong incentive to pursue a more concentrated or intensive course

load. In addition, the Secretary will consider unique circumstance in

determining whether to reduce the academic year for programs that are

eligible for such consideration.

Changes: None.

Comments: A commenter suggested that the Secretary define two-

thirds of an academic year as a minimum of 15 weeks of instructional

time and one-third of an academic year as 10 weeks of instructional

time in order to clarify the procedure for prorating the awards for

students attending programs that are less than an academic year.

Discussion: The Secretary agrees that the procedure for prorating

the awards for students attending programs that are less than an

academic year needs to be clarified. However, the Secretary does not

believe that 15 weeks of instructional time is an adequate minimum

standard for two-thirds of an academic year. If the minimum standard

for a full academic year is 30 weeks, the minimum standard for two-

thirds of an academic year should be two-thirds of 30 weeks (20 weeks).

Changes: A change has been made. In Sec. 668.2, the Secretary

defines two-thirds of an academic year as a period that is at least

two-thirds of an academic year as determined by an institution. At a

minimum, two-thirds of an academic year must be a period that begins on

the first day of classes and ends on the last day of classes or

examinations and is a minimum of 20 weeks of instructional time during

which, for an undergraduate course of study, a full-time student is

expected to complete at least 16 semester or trimester hours or 24

quarter hours in an educational program whose length is measured in

credit hours or 600 clock hours in an educational program whose length

is measured in clock hours. For an institution whose academic year has

been reduced under Sec. 668.3, one-third of an academic year is the

pro-rated equivalent, as measured in weeks and credit or clock hours,

of at least two-thirds of the institution's academic year.

In Sec. 668.2, the Secretary also defines one-third of an academic

year as a period that is at least one-third of an academic year as

determined by an institution. At a minimum, one-third of an academic

year must be a period that begins on the first day of classes and ends

on the last day of classes or examinations and is a minimum of 10 weeks

of instructional time during which, for an undergraduate course of

study, a full-time student is expected to complete at least 8 semester

or trimester hours or 12 quarter hours in an educational program whose

length is measured in credit hours or 300 clock hours in an educational

program whose length is measured in clock hours. For an institution

whose academic year has been reduced under Sec. 668.3, one-third of an

academic year is the pro-rated equivalent, as measured in weeks and

credit or clock hours, of at least one- third of the institution's

academic year.

Comments: Several commenters suggested that the definition of an

academic year in Sec. 668.2 should be amended to reflect the provision

in the Technical Amendments of 1993 specifying that the definition of

academic year in section 481 of the HEA applies only to an

undergraduate course of study.

Discussion: The Secretary agrees that a limitation in the

definition of academic year needs to be included in Sec. 668.2.

However, the Secretary notes that the requirement that an academic year

require a minimum of 30 weeks of instructional time applies to both

undergraduate and graduate courses of study.

Changes: A change has been made to clarify that the amount of

instruction that a full-time student is required to complete during an

academic year applies only to an undergraduate course of study.

Full-time student. Comments: Several commenters believed that the

Secretary should address the potential for abuse under the definition

of academic year for educational programs that are measured in credit

hours. One commenter suggested that the Secretary establish a weekly

minimum full-time workload for full-time students in these programs by

tying quarter hours to actual quarters to prevent an institution from

claiming to offer a full academic year's worth of work over a thirty-

week period by giving a full-time student a small amount of

instruction, which the institution claims to be equivalent to 24

semester or 36 quarter hours. The commenter also suggested that the

Secretary eliminate the use of quarter or semester hours for

institutions that do not have quarters or semesters and instead require

those institutions to measure their programs in clock hours.

Two commenters urged the Secretary to reject any mechanism where

the institution would be responsible for self-measuring the quantity of

work required because it would be too easy for unscrupulous

institutions to evade. Instead, the commenters recommended that only

bona fide courses, related work, research, or special studies would

count toward whether a student would be full-time, and that each

institution's quantification would have to be approved during the

certification process set forth in Sec. 668.13. One commenter also

suggested that the Secretary change the procedures and not permit

institutions to measure workloads for term or semester based schools in

clock hours, because the clock hour schedules permitted institutions to

compress the course offerings into too short a time period.

A few commenters advised that the clock hour/credit hour regulation

would provide the protection necessary for the weekly schedules of

students enrolled at institutions offering credit hours without terms,

and recommended that no further action be taken in changing the

proposed definition of full-time student. Several other commenters

stated that they believed the proposed definition was sufficient to

prevent abuse without further additions to establish a minimum full-

time course workload. One commenter suggested that no stricter

definition be adopted for full-time students enrolled at institutions

offering credit hours without terms because this area is currently

addressed by accrediting agencies, which are in a better position to

evaluate the variety of delivery systems used by postsecondary

institutions. One commenter also questioned whether it was fair to

adopt a more stringent criterion for credit hour programs without

academic terms rather than adopting uniform criteria and standards for

full-time students for all sectors of postsecondary education.

One commenter suggested that the proposed definition was unfair

because it requires the same number of credit hours for a student

regardless of whether the courses are measured in semester hours or

quarter hours, resulting in students having to perform a greater

quantity of work during a quarter calendar if they were taking semester

hours. Several other commenters suggested that the proposed definition

was unfair because it would prohibit students from taking cooperative

employment for periods that were less than eighteen weeks. These

commenters suggested that shorter periods of cooperative education

should be accepted in conjunction with a smaller number of credits so

long as the workload was pro-rated to match the academic workload of a

full-time student. For example, a student taking cooperative education

for one-fourth of the credits necessary to be a full-time student would

have to complete the cooperative training in one-fourth of the time

allotted to a full-time student in an eighteen week program. Two other

commenters stated that the proposed definition would establish

workloads that could not readily be satisfied by part-time students or

students that were taking evening or weekend classes. These commenters

believed that students in these circumstances were often making many

more sacrifices to pursue their education than full-time day students,

and that it was unfair to reduce or eliminate aid that these students

currently receive because they do not carry enough credits to qualify

for comparable aid under the proposed regulations.

One commenter suggested that the in-class attendance should be the

only component of the student workload considered for this provision,

and that under that standard the definition for full-time student would

require at least 12 hours of attendance per week to correspond to the

12 credit hour workload.

A few other commenters suggested that the proposed definition be

clarified to show that only students taking classes ``entirely'' by

correspondence would not be required to meet the workload requirements

set out in the proposed definition. Others suggested that the language

for credit hour workloads be amended to show that trimester hours would

require the equivalent workload for semester hours for academic terms

and academic years.

Discussion: As stated in the February 28, 1994 NPRM, this

definition of full-time student is based primarily on the longstanding

definition found in the Federal Pell Grant and the campus-based program

regulations. The Secretary believes this definition of full-time

student has proved to be appropriate and effective and does not believe

any substantive changes are necessary. The Secretary notes that this

definition is now applicable for purposes of all Title IV, HEA

programs. The individual Title IV, HEA program regulations will be

amended at a later date to remove the definition of full-time student.

The Secretary believes that additional changes are appropriate in

the regulations to prevent institutions from establishing elongated

instructional schedules that do not require an appropriate workload

throughout that period for a full-time student. Institutions offering

credit hour programs without terms have more flexibility in shifting

the workload requirements for their programs over an indefinite period,

and the Secretary believes that it is appropriate to establish some

minimum instructional periods that must be used for full-time students

attending these institutions. No corresponding changes need to be made

where students are already required to receive a minimum amount of

clock hours of training per week to be full- time students, or where

the institution has fixed terms.

The Secretary also believes it is important to ensure through

regulations that full-time students are performing comparable workloads

regardless of the type of institution they are attending, and that such

work should be ratably allocated throughout the period of instruction.

The Secretary notes that this is an area of abuse that is not fully

addressed by the implementation of the ``clock hour/credit hour''

regulations.

Rather than changing the proposed definition of full-time student

to require measurement of student workloads, a modification is being

made to require a minimum number of days of instruction per week for

institutions that offer credit hour programs without terms. A

discussion of the specific change is included in the section of the

Analysis of Comments and Changes that addresses the definition academic

year (Sec. 668.2).

Changes: None.

Undergraduate student. Comments: Several commenters objected to

defining an undergraduate student as a student who has not earned a

baccalaureate or first professional degree. The commenters noted that

this would prevent students who were pursuing further undergraduate

studies from receiving any Title IV, HEA program assistance. The

commenters noted that this was a departure from current departmental

practice that permits such a student to receive assistance under the

Title IV, HEA loan programs.

Discussion: The Secretary recognizes that there are legitimate

reasons supported by statute for separate definitions of an

undergraduate student based upon the different statutory requirements

for the various Title IV, HEA program regulations. The Secretary

believes it is not appropriate at this time to include a general

definition of an undergraduate student in the Student Assistance

General Provisions regulations.

Changes: The definition of undergraduate student has been removed

from these final regulations.

Third-party servicer. Comments: Many commenters asked the Secretary

not to include computer services or software in the examples of

activities that constitute administration of a Title IV, HEA program,

on the grounds that this type of service encompasses activities in a

broad spectrum, from computer software distributors of popular

commercial spreadsheet programs to computer on-line Federal news

services. Several commenters stated that computer services are simply

technological means utilized in administering the programs; computer

servicers who actually perform administrative functions would be

covered, therefore there is no need to separately include such

providers in the definition. Other commenters argued for the inclusion

of computer services or software in the examples of a Title IV-related

activity. These commenters argued that it was necessary to include

providers of computer services and software in the definition of third-

party servicer because many distributors of software certify that their

computer programs--represented to satisfy Title IV, HEA program

requirements--comply with all applicable Title IV, HEA program

requirements. As a result, institutions contracting with a provider for

the software take for granted that the software is in compliance with

all Title IV, HEA program requirements. If a violation of a Title IV,

HEA program requirement occurs because of the software, the provider of

that software should be held responsible. Several commenters argued

that those software providers could be subject to potential liabilities

for Title IV, HEA program violations, even though the computer programs

of the provider could be modified by the user.

Discussion: The Secretary agrees with those commenters who either

objected to the inclusion of computer services or software providers in

the examples of Title IV-related activities, or who saw no need to

separately include such providers. In adopting the definition of third-

party servicer, the Secretary is not including providers of those

services or software because the Secretary believes that this type of

service is simply a technological means to assist in carrying out

certain administrative functions that are already included in the

proposed definition of a third-party servicer.

Changes: None.

Comments: Two commenters were concerned that a third-party servicer

could avoid the requirements of these regulations by simply not

entering into a written contract with an eligible institution to

administer any aspect of that institution's participation in the Title

IV, HEA programs. The commenters recommended that the regulations

stipulate that the acceptance of fees by the servicer from the

institution for administration of any aspect of the institution's

participation in a Title IV, HEA program would constitute a contract

with the institution for purposes of the definition of third-party

servicer under these regulations.

Discussion: The Secretary disagrees with the commenters that a

third-party servicer that contracts with an eligible institution could

be exempt from these regulations simply by not executing a written

contract with that institution. A third-party servicer is defined as

anyone who contracts with an institution, and is not limited to only

those entering a written contractual agreement. Oral contracts, payment

of fees for services rendered and other arrangements also constitute

enforceable contracts. The Secretary recognizes these types of

contracts and will consider an individual or organization employing

such a method to contract with an institution to administer any aspect

of the institution's participation in the Title IV, HEA programs to be

a third-party servicer and therefore subject to these regulations. The

Secretary cautions institutions and third-party servicers that verbal

contracts or other non-written contracts do not exempt institutions

from documenting in writing the contractual obligations of both

parties, including the requirements in Sec. 668.25, and submitting a

copy to the Secretary, if so instructed by the Secretary.

Changes: None.

Comments: One commenter felt that the activities of Multiple Data

Entry (MDE) Processors and the Central Processor should be included in

the examples of what constitutes administration of participation in a

Title IV, HEA program because the data generated by MDEs or the Central

Processor is the foundation for determining a student's eligibility for

Title IV, HEA program assistance.

Discussion: The Secretary disagrees with the commenter. The

Secretary has previously explained in the NPRM published on February

17, 1994, that MDEs serve under contract with the Department and are

already bound by that contract and other Department of Education

requirements. Therefore, the Secretary does not believe it necessary to

separately regulate MDE activities as part of these regulations.

Changes: None.

Comments: One commenter was of the opinion that the activities of

administering or scoring ability-to-benefit tests should be included in

the examples of what the Secretary considers to be a third-party

servicer activity because these activities constitute the determination

of student eligibility.

Discussion: The Secretary agrees with the commenter that these

activities could be considered to be an aspect of the administration of

Title IV, HEA programs and therefore should be regulated. However, the

Secretary believes that any abuses in these types of activities will be

protected against in the regulations governing the administration of

ability-to-benefit tests. The Secretary plans to issue an NPRM on this

subject shortly. Therefore, the Secretary does not believe it necessary

to regulate administering or scoring ability-to-benefit test activities

as part of these regulations.

Changes: None.

Comments: A few commenters requested that attorneys litigating on

behalf of institutions to collect loan funds or interpreting statutory

or regulatory requirements be excluded from the definition of third-

party servicer.

Discussion: The Secretary generally considers attorneys not to be

covered by the definition of a third-party servicer under these

regulations. The Secretary, in promulgating the definition of third-

party servicer, applied the definition to a set of activities relating

to the administration of the Title IV, HEA programs, and thus is not

regulating distinct entities by their identity but rather the

activities that individuals or organizations perform in contracting

with institutions. Provision of legal advice is not one of these

activities. However, it is conceivable that an attorney would be

considered a third-party servicer under these regulations if the

activity of the attorney, performed on behalf of an institution,

constitutes administration of the Title IV, HEA programs. It would not

be appropriate to state that attorneys are never considered third-party

servicers as that would permit services to escape oversight simply by

being provided under attorney signature or by non-attorneys working for

attorneys or their law firms.

Changes: None.

Section 668.8 Eligible Program

Definitions. Comments: Some commenters believed that the definition

of ``equivalent of an associate degree'' would be difficult to

administer because colleges do not have consistent standards for

accepting two-year programs for full credit toward a bachelor's degree

and for qualifying a student for admission into the third year of a

bachelor's degree program. Some of these commenters suggested that any

person who completes the equivalent number of credit hours necessary to

receive an associate degree should be included in this definition as

long as the person earned those credits from an institution that was

accredited by a nationally recognized accrediting agency. Other

commenters suggested that any program that leads to an occupational

objective that requires licensing or certification and equals at least

the length of a typical associate degree program, should be added to

the proposed definition. Another commenter expressed support for the

provision as written in the February 28, 1994 NPRM.

Discussion: As stated in the February 28, 1994 NPRM, this

definition is modeled after section 1201(a)(3) of the HEA, and is

designed to measure the educational backgrounds of students admitted to

programs offered by a proprietary institution of higher education and

postsecondary vocational institutions. The Secretary believes that a

student does not have the equivalent of an associate degree unless he

or she has completed an educational program that includes two critical

characteristics: the student successfully completed at least a two-year

program that is acceptable for full credit toward a bachelor's degree

and the student qualifies for admission into the third year of a

bachelor's degree program. The alternatives suggested by commenters

lack these characteristics.

In response to comments about the absence of consistent standards,

the Secretary notes that inconsistent standards apply to students with

associate degrees as well. The two-year programs completed by students

with an associate degree may be fully transferable to some institutions

offering bachelor's degree, but not to other institutions. Institutions

that have programs leading to a bachelor's degree also have different

standards for determining a transfer student's standing.

Changes: None.

Qualitative Factors. Comments: Some commenters argued that short-

term programs (programs of less than 600 clock hours) should not be

required to be in existence for a year before establishing eligibility

because the rate of technological change in the workplace dictates

rapid responses by institutions in offering educational programs to

meet those changes. Some of these commenters also believed that factors

related to quality should be determined by accrediting agencies.

Another commenter suggested that initial eligibility for these programs

should be based on an institution's track record of success rather than

the existence of the program for one year.

Discussion: The Secretary believes that a good track record of

success is whether an institution can maintain a new program for one

year. The Secretary agrees that the quality of these programs should

continue to be monitored by accrediting agencies, but the history of

abuse in these programs necessitates Federal regulatory standards as

well. Institutions are not prevented from responding rapidly to the

demands of the economy by offering new short-term programs, but

institutions must be able to demonstrate that these new programs can

meet the minimum placement and completion rate standards before Title

IV, HEA funds are provided to students enrolled in these programs.

Obviously, this data cannot be provided unless the program has been in

existence for a period of time.

Changes: None.

Comments: A number of commenters objected to limiting the length of

a program to no more than 150 percent of the minimum number of clock

hours required for training in the recognized occupation for which the

program prepares students, as established by the State in which the

program is offered, if the State has established such a requirement.

Some of these commenters observed that the requirement would create

inconsistent standards because States have different requirements and

that maximum program lengths should be determined by accrediting

agencies. Another commenter argued that differing State standards would

make it difficult to train students from neighboring States if those

States have higher standards.

Some commenters believed that ``course stretching'' was a frequent

source of abuse. They cited examples of institutions' combining short

programs into one accredited course that does not specifically lead to

licensure, purely for the purpose of exceeding the statutory 600 clock

hour minimum. These commenters recommended that the standard in the

February 28, 1994 NPRM was too lenient and that the program length

should not exceed the minimum State standard. Some commenters suggested

that the minimum licensing standards of the Federal government should

also be taken into account in limiting the length of a program. Another

commenter suggested that exceptions should be made to the general

standard if the education provided by a particular program was better

than average.

Discussion: The Secretary believes that 150 percent of the State

minimum allows enough latitude for institutions to provide quality

programs and furnishes a sufficient safeguard against the abuses of

course stretching. Because States have different licensing standards,

the Secretary does not believe that a single standard for a maximum

program length is appropriate. The argument made by one commenter about

training students from neighboring States with higher standards only

serves to illustrate the importance of recognizing each State's

requirements. Training students who will not be able to meet the

licensing requirements of the States in which they intend to work is a

terrible disservice to those students. The Secretary agrees that these

regulations ought to recognize any minimum standards established by

various Federal agencies for applicable short-term programs.

Changes: This provision is revised to prohibit a short-term

eligible program from exceeding by 50 percent any applicable minimum

number of clock hours required by a Federal agency for training in the

recognized occupation for which the program prepares students.

Comments: Some commenters argued that programs with a small number

of graduates would not provide a statistically valid measure for

completion or placement rates.

Discussion: The Secretary believes these rates are statistically

valid unless fewer than thirty students complete a program in an award

year. The percentage of educational programs this size participating in

the Title IV, HEA programs is so small, that the issue of statistical

validity does not need to be addressed in the regulations.

Changes: None.

Award Year. Comments: Many commenters suggested that the period of

time for calculating the placement rate should be based on the most

recent calendar year or on the award year ending twelve months earlier

(i.e., for 1995-96, the placement rate would apply to students who

graduated in 1993-94) instead of the immediately preceding award year,

to account fully for the 180-day period permitted to demonstrate that a

graduate has been placed and the 13-week period required to count an

employed student as placed. The ability to count individuals as

placements under these circumstances becomes increasingly difficult as

graduation dates approach the end of an award year. Some of these

commenters believed that this approach would be consistent with the

reporting procedures of many States and accrediting agencies.

Other commenters suggested that the burden on institutions would be

reduced significantly if the formula for calculating placement and

completion rates were the same as the Department's Student-Right-to-

Know provisions, and if the same formulas were used by accrediting

agencies and State licensing agencies.

Discussion: As noted in the earlier discussion, one reason that

the Secretary has adopted the requirement for a short-term program to

be in existence for at least one year is to allow for a track record of

completion and placement rates. If the calculation of these rates were

to be based on an earlier award or calendar year than the one specified

in these regulations, the Secretary would need to require that newly

established short-term programs remain ineligible for an even longer

period so that track record could be established. The Secretary does

not wish to discourage the creation of legitimate, high quality short-

term programs by requiring too great a period of ineligibility for

those programs. The Secretary notes, of course, that once these

regulations have been in effect for at least a year, data for currently

eligible programs, based on earlier years, will be available for

review.

The Secretary agrees that a standard rate is desirable, to the

extent that a standard rate will provide the information the Department

and other entities seek to obtain. Some rates may have to differ in

order to achieve the purpose for which they are mandated. For example,

a rate that is designed purely for consumer information purposes may

require different data or time periods, than a rate that must coincide

with student aid program calendars or a rate that is used for long-term

academic studies. The Secretary cannot control the design of placement

rates required by State agencies or accrediting agencies, but a

standard rate or rates that can be calculated from the same data

sources would help to reduce the burden on institutions. The Secretary

encourages States and accrediting agencies to foster the development of

uniform standards the Secretary could adopt, or adopt the standards in

these regulations.

The Student-Right-to-Know regulations are currently being drafted

with the intention of developing a completion rate that will be useful

for all Title IV, HEA programs when the statute so permits; but the

Student-Right-to-Know regulations will not require a placement rate

calculation.

Changes: None.

Calculation of Completion Rate. Comments: Some commenters

suggested that the definition of ``enrolled'' for purposes of

calculating completion rates should be amended to reflect only students

who begin attending classes.

Another commenter noted that some institutions do not charge new

students for any institutional costs during the first month that the

students attended classes, because administrators at these institutions

believe that if these students withdrew before tuition and fees were

assessed, the students could be excluded from the calculation of a

completion rate.

Discussion: As stated in the February 28, 1994 NPRM, when

calculating the completion rate, an institution would subtract from the

number of regular students who were enrolled in the program those

students who withdrew, dropped out of, or were expelled from the

program and were entitled to and actually received in a timely manner

in accordance with the refund requirements of these regulations, a

refund of 100 percent of their tuition and fees (less any permitted

administrative fee) under the institution's refund policy. The

Secretary believes that this provision addresses the commenters

concerns.

Changes: None.

Comments: Some commenters suggested that students who transfer to

another program or who withdraw because they have found a new job,

should be excluded from the completion-rate formula.

Discussion: The Secretary believes that transfer students and

students who withdraw for the purpose of starting new jobs or withdraw

for other reasons are accounted for by allowing up to 30 percent of the

enrolled students to withdraw from the program.

Changes: None.

Calculation of Placement Rate. Comments: Many commenters objected

to the requirement that a student must be employed for at least 13

weeks following graduation from an institution to be included in that

institution's placement-rate calculation. These commenters believed

that this requirement is overly burdensome because the institution

would have to track those students for long periods. They believed that

an institution should not be held accountable for factors that are

beyond the institution's control, such as layoffs, plant closings,

illnesses, forced relocations, or the motivation of students. Some

commenters suggested that instead of tracking students (who tend to be

very mobile) for 13 weeks, evidence of the initial hiring by an

employer should suffice. A commenter suggested that the period of

employment should be reduced to 30 days.

Discussion: As discussed in the February 28, 1994 NPRM, the

Secretary believes that an employment requirement of 13 weeks will help

stem abuses by institutions that may arrange to have students hired for

short-term jobs in order to boost placement rates. In addition, a

period of time beyond the initial hiring by an employer should be used

to determine that the student received adequate training from the

institution. The Secretary believes that extraneous factors affecting a

student's employment are accounted for by using a placement rate that

excludes up to 30 percent of the institution's graduates. The 13-week

period is consistent with the period of time a student must be employed

to be counted in the institution's placement rate under the procedures

delineated in Sec. 668.17(d) for the appeal of an institution's loss of

participation due to an unacceptable cohort default rate

Changes: None.

Comments: A commenter suggested that students who are placed in

jobs that are not related to their training should be counted, or at

least excluded from the placement-rate formula. Another commenter

suggested that placements should be limited to graduates who obtained a

job in the recognized occupation for which they were trained in order

to prevent program abuse.

Discussion: Students who are placed in jobs not related to their

training should be treated in the formula in the same manner as

students who are not employed. The placement rate is designed to

measure the effectiveness of the training provided by the institution,

and employment in an unrelated job does not demonstrate that the

training was effective. The Secretary believes that graduates who are

employed in occupations that are comparable and related to the

occupation for which they have been trained should be included in the

numerator of the placement rate formula. In these circumstances, the

training provided by the school is likely to have been a contributing

factor in obtaining employment. However, the Department may revise this

provision in the future if there are numerous incidents of abuse in

this area.

Changes: None.

Comments: A number of commenters contended that it would be too

burdensome for institutions to document the placement rates of students

because students and employers would have little incentive to provide

written verification of employment. Some commenters believed the

substantiation requirement would discourage employers from hiring

students from institutions that solicited documentation. Some

commenters recommended that the institution should be required to

record information, such as the name, address, and telephone number of

the employer, the job title, and the starting date of employment,

instead of obtaining the documentation proposed in the February 28,

1994 NPRM. A State agency, or the Department's reviewers, or an auditor

could then use this information to verify the placement. Other

commenters suggested that a written statement from the student that his

or her employment was a result of the institution's training would be

sufficient verification; or that an institution should merely be

required to document its attempt to obtain written verification from

employers or graduates.

Many commenters also were concerned about the cost of the

Secretary's proposed requirement that an institution's auditor should

review the documentation of placement rates for each student in the

placement-rate calculation. Some of these commenters suggested that the

auditor be permitted to verify the placement rates by selecting a

random sample. Some commenters suggested that the Department should

administer and pay for its own placement substantiation procedures.

Discussion: As stated in the preamble to the February 28, 1994

NPRM, the Secretary believes that requiring institutions to document

this data and requiring an auditor to review this data will help curb

abuse by institutions that may overstate their placement rates to

achieve and maintain eligibility for short-term programs. In order to

address this concern, the Secretary believes that documentation of

employment must be made by a reliable source and that written

statements by the student or the institution are not sufficient. The

failure of an employer or student to respond to requests for

documentation is accounted for by using a placement rate that excludes

up to 30 percent of the institution's graduates.

The Secretary disagrees with comments that the requirement of

auditing each placement rate is unnecessary or prohibitively expensive.

The audit will be conducted as part of the institution's annual

compliance review and specific guidance provided in the Department of

Education's audit guide should be drafted in a manner sufficient to

detect abuse and avoid unnecessary costs.

Changes: None.

Comments: Some commenters suggested that based on auditing

literature, certified public accountants cannot certify the accuracy of

an institution's placement-rate calculations, but must instead follow

the procedures of an attestation engagement.

Discussion: The Secretary agrees with the commenters that a

clarification is necessary.

Changes: This section has been amended to require that an

institution shall substantiate the calculation of its completion and

placement rates by having the certified public accountant who prepares

its audit report required under Sec. 668.23 report on the institution's

calculations based on performing an attestation engagement in

accordance with the Standards for Attestation Engagements of the

American Institute of Independent Certified Public Accountants (AICPA).

Section 668.24 has also been amended to reflect the same type of change

discussed here.

Comments: Some commenters argued that students who are hired by an

institution either before or after they receive a degree or certificate

from that institution, should not be excluded from the placement rate

calculation. The commenters suggested that institutions would be

penalized for hiring the most qualified candidate and that any abuse in

this area could be easily detected. Other commenters suggested that

graduates who are employed by separate businesses that are operated by,

or financially linked to, an institution's owner(s) should be excluded

from the placement-rate calculation. Some commenters suggested that

graduates who were student employees should not be subtracted from the

number of students who have degrees or certificates if they find a

position with another employer.

Discussion: Upon further consideration, the Secretary agrees that

including students who are hired by an institution would have a

negligible effect on the institution's placement rate, particularly if

the hiring is based on a legitimate employment selection process.

The Secretary does not agree with the suggestion to exclude

graduates from an institution's placement-rate formula if they are

hired by separate businesses that have some financial connection to the

institution. In many of these cases, the potential for abuse is not as

great because the economic interests of the parties that control the

separate businesses do not necessarily coincide with the financial

interests of the institutions.

The Secretary agrees that student employees who are no longer

employed by the institution upon graduation and who are hired by

another employer after graduation, should not be excluded from the

placement rate calculation.

Changes: The requirement that an institution exclude from the

calculation of a placement rate students who are hired by the

institution has been deleted from these regulations.

Comments: Some commenters believed that the placement rate

calculation may be misinterpreted by some institutions because the

proposed placement rate calculation requires the school to include

students in the numerator who, ``on the date of this calculation are

employed, or have been employed for at least 13 weeks following receipt

of the credential by the institution.'' These commenters suggested that

the phrase ``are employed'' will be interpreted to mean that any

student employed at the time the calculation is made, regardless of

whether they have met the 13-week standard, can be included in the

numerator.

Discussion: Every student must be employed for at least 13 weeks in

a recognized occupation for which they were trained or in a related

comparable occupation before that student can be counted as placed. The

Secretary agrees to clarify this provision.

Changes: A change has been made to clarify that every student must

be employed for at least 13 weeks in a recognized occupation for which

they were trained or in a related comparable occupation before that

student can be counted as placed by inserting a comma after the words

``have been employed.''

English as a Second Language. Comments: Some commenters argued that

the purpose of the testing requirement for students who completed a

program in English as a Second Language (ESL) was unclear, and that

testing the proficiency of these students was an intrusion on an

institution's internal academic affairs and a violation of the

Department of Education Organization Act. Another commenter recommended

testing students before they enrolled in an ESL program to determine

whether they needed to improve their proficiency skills, as well as

testing students who completed the program. A commenter suggested that

the ESL testing provisions should also apply to vocational programs

that include ESL education within the curriculum. Another commenter

expressed support for the provision as written in the February 28, 1994

NPRM.

Discussion: As discussed in the February 28, 1994 NPRM, the purpose

of this requirement, which is based on a California law, is to curb

abuses by institutions. Some institutions have received significant

amounts of Federal Pell Grant funds for students who have not attained

an adequate proficiency in written and spoken English to use already

existing knowledge, training and skills. Because this testing

requirement is limited to ESL programs that are ancillary to an

institution's academic programs, the Secretary does not believe it is

an intrusion on an institution's internal academic affairs.

The suggestions to add a pre-test requirement or to extend the

testing requirement to vocational programs that include ESL courses

were not adopted at this time. However, the Secretary intends to

monitor reports of abuse in these areas to see if regulation is

necessary. Institutions are encouraged to test all students before and

after they enroll in ESL courses to determine whether the students need

to improve their proficiency skills and to determine whether the

students have attained the desired proficiency skills after completing

the courses.

Changes: None.

Subpart B--Standards for Participation in the Title IV, HEA Programs

Section 668.11 Scope

Comments: A few commenters opposed subjecting a third-party

servicer to proceedings under subpart G of this part, which governs

emergency actions, fines, and limitation, suspension, or termination of

participation in the Title IV, HEA programs. The commenters felt that

since the Secretary has noted that institutions are ultimately

responsible for any liabilities incurred that the institutions should

be responsible for monitoring the activities of the organization with

which they contract.

Discussion: The Secretary disagrees with the commenters who argued

that third-party servicers should not be subject to proceedings under

subpart G of this part. The statute specifically requires the Secretary

to apply subpart G proceedings to third-party servicers. The Secretary

agrees with commenters that institutions have a duty to monitor the

actions of their third-party servicers, and that an institution is

always ultimately liable for any violations caused by those servicers,

but, the Secretary believes that Congress clearly intended for the

Secretary to directly hold third-party servicers accountable for any

program violations through the use of all sanctions that the Secretary

is able to impose. The sanctions under subpart G of this part are an

appropriate recourse to use to correct program violations because a

third-party servicer, as an agent of an institution, contracts with

institutions to provide services that parallel an institution's

responsibilities under the institution's program participation

agreement.

Changes: None.

Section 668.12 Application Procedures

Applications for continued participation. Comments: This section of

the regulations generated many comments. Some commenters were concerned

about the circumstances under which their institutions might be

required to file an application in order to continue to participate in

a Title IV, HEA program. The majority of the comments concerned the

need for institutions to be notified enough in advance of the

expiration of their program participation agreements so the

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