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

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URL: https://www.frixlaw.com/law-library/documents/fr%3A94-10140

## Record

- **Collection:** Federal Register
- **Document type:** Uncategorized Document
- **Published:** April 29, 1994

## Text

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 comme

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A94-10140. Public record. Not legal advice.