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

SUMMARY: On April 29, 1994, the Secretary of Education published in the

Federal Register interim final regulations with an invitation for

comment for the Student Assistance General Provisions, Federal Family

Education Loan programs, and the Federal Pell Grant (59 FR 22348). The

final regulations listed the comment period end date as June 20, 1994.

Members of the financial aid community have requested an extension

of the comment period. The Secretary agrees that a longer comment

period would give the financial aid community a better opportunity to

thoroughly evaluate the final regulations and submit more comprehensive

comments to the Department. Therefore, the Secretary extends the

comment period to July 28, 1994, which is 90 days following the April

29 publication date.

This document also clarifies the Secretary's intent in publishing

``interim final regulations with invitation for comment,'' adds an

Office of Management and Budget (OMB) control number to certain

sections of the regulations, and corrects the effective date statement

and corrects an error in the preamble in the final regulations

published in the Federal Register on April 29.

DATES: Comments must be received on or before July 28, 1994. The

corrections to the April 29 regulations and the addition of OMB control

numbers in 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

are effective July 7, 1994.

ADDRESSES: All comments concerning the final 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 20202-5342.

FOR FURTHER INFORMATION CONTACT:

Greg Allen and Wendy L. 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 8

p.m., Eastern time, Monday through Friday.

SUPPLEMENTARY INFORMATION: The final regulations published on April 29

had an effective date of July 1, 1994, in accordance with 20 U.S.C.

1089(c), which required that the Secretary publish such regulations

``in final form by May 1, 1994'' to be in effect for the 1994-1995

award year, which begins on July 1, 1994. Under the terms of 20 U.S.C.

1089(c), any regulatory changes that the Secretary published after May

1, 1994, could not take effect, at the earliest, until July 1, 1995.

Thus, the April 29 regulations are final and effective at least with

respect to the period July 1, 1994 through June 30, 1995. The

``interim'' nature of the April 29 regulations reflected the

possibility that changes might be made to take effect on July 1, 1995.

The Secretary solicited public comment in the April 29 final

regulations to determine whether any changes should be made to take

effect on July 1, 1995, the earliest that any such changes can take

effect under 20 U.S.C. 1089(c). In order for any such changes to take

effect by July 1, 1995, the changes would, under 20 U.S.C. 1089(c),

have to be published in final form by December 1, 1994.

Compliance with the information collection requirements in certain

sections of the regulations published on April 29 was delayed until

those requirements were approved by OMB under the Paperwork Reduction

Act of 1990, as amended. On June 23, 1994, OMB approved those

information collection requirements, and affected parties must now

comply with those requirements. The Secretary corrects the effective

date statement in the April 29 regulations to reflect this more

accurately.

A section of the Analysis of Comments and Responses was omitted

from the final regulations published on April 29. The Secretary notes

that the changes to the regulatory text corresponding to this omitted

section of the preamble were included in the April 29 final

regulations. The omitted material, which is included in this document,

is the explanation for those changes.

(Catalog of Federal Domestic Assistance Numbers: 84.007 Federal

Supplemental Educational Opportunity Grant Program; 84.032 Federal

Stafford Loan Program; 84.032 Federal PLUS Program; 64.032 Federal

Supplemental Loans for Students Program; 84.033 Federal Work-Study

Program; 84.038 Federal Perkins Loan Program; 84.063 Federal Pell

Grant Program; 84.069 State Student Incentive Grant Program; 84.268

Federal Direct Student Loan Program; and 84.272 National Early

Intervention Scholarship and Partnership Program. Catalog of Federal

Domestic Assistance Number for the Presidential Access Scholarship.

Dated: June 30, 1994.

Richard W. Riley,

Secretary of Education.

1. The authority citation for part 668 of title 34 of the Code of

Federal Regulations continues to read as follows:

Authority: 20 U.S.C. 1091, 1092, and 1094, unless otherwise

noted.

2. The following sections are amended by adding ``(Approved by the

Office of Management and Budget under control number 1840-0537)'' at

the end of each of these sections: 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 690.083.

3. The following corrections are made in FR Doc. 94-10140,

published on April 29, 1994 (59 FR 22348):

a. On page 22348, column column 1, the first sentence after

``DATES: Effective Date:'' is corrected to read as follows: These

regulations take effect July 1, 1994, except that compliance is not

required with the information collection requirements in 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 until 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.

On page 22382, column 2, the following text is added after

``Changes: None.''

Comments: One commenter expressed concern that the Secretary had

not defined the circumstances in which an institution could satisfy the

financial responsibility requirements added through the Technical

Amendments of 1993 by demonstrating that it had sufficient resources to

ensure against precipitous closure. The commenter suggested that the

regulations need to provide specific guidance to institutions showing

when the exception can be used. Several other commenters also

questioned whether the general financial responsibility standards in

the proposed regulations were consistent with the statutory exception

permitting an institution to participate without restrictions by

demonstrating that it has sufficient resources to ensure against

precipitous closure.

Discussion: The Secretary agrees to establish a standard in the

regulations that is consistent with the explanation made by Senator

Pell that the technical amendments were intended to make sure that

financially at-risk institutions are subject to careful scrutiny, to

protect institutions that are not financially at risk, and to

accomplish these aims without weakening the general standards for

financial responsibility. See 139 Cong. Rec. 162-2, S16593 (daily ed.

November 19, 1993). The Secretary therefore considers it necessary to

define the limited circumstances in which an institution may satisfy

the statutory exception in a manner that will not create a lower

standard for financial responsibility.

Because an institution using this exception will not be required to

post surety or enter into provisional certification, the Secretary has

minimized the Federal risks in such unprotected participation by making

the exception only available to an institution that met the financial

responsibility requirements in its last timely submitted audited

financial statement. This structure will permit an institution that now

fails the financial responsibility requirements but meets the alternate

standards in the exception to have an opportunity to improve its

financial condition for one year without having to post surety or be

placed under provisional certification. This requirement prevents this

exception from becoming a means to continue participating under a lower

standard of financial responsibility than that required for all other

institutions. An institution that has not satisfied the general

standards of financial responsibility in its previous audit and has not

improved its operations to meet current financial responsibility

standards is not permitted to participate on an unrestricted basis

under this provision, and is required to provide the additional

safeguards presented through a surety or through provisional

certification.

If an institution that met the standards of financial

responsibility, as demonstrated by its last audited financial

statement, fails to meet these standards in its current audit, it can

show that it meets the alternate standards in this provision in order

to participate on an unrestricted basis for one year to give it an

opportunity to solidify its operations and demonstrate that it meets

financial responsibility standards in its next timely submitted audited

financial statement. Such participation without surety or provisional

certification can only be permitted where the institution meets all of

the requirements in Sec. 668.15(d)(2)(ii)(A) to show that it is current

in all tax obligations, its equity and operating income have not

materially decreased since its last audit, and that it is not shifting

the institution's operating capital to its owners or related parties.

These standards are necessary to show that the institution's financial

condition has not significantly deteriorated since it last demonstrated

financial responsibility, and that the institution's failure to meet

the current financial responsibility standards is not exacerbated by

benefits given to its owners or related parties.

In order to participate without restriction under this provision,

an institution that now fails to demonstrate financial responsibility

after having done so in its last audit, must show that it has not

accelerated the funds going to its owners or related parties through

disproportionately large salary increases, or through making

uncollateralized loans to these parties. The institution must also show

that all loans made to the institution's owners or related parties are

in repayment, and that a demand has been made for repayment of any

loans that did not carry fixed payment terms. These measures will help

ensure that the institution's failure to demonstrate financial

responsibility is not due to capital diverted to its owners or related

parties.

The institution must also show that there have been no material

findings in the institution's latest compliance audit, and that there

are no pending administrative or legal actions pending before a member

of the Triad or other Federal or State entity.

Changes: Section 668.15(d) now provides that the Secretary

considers an institution to be financially responsible, even if the

institution does not meet the general standards of financial

responsibility (except for the minimum cash reserve requirement) if the

institution establishes to the satisfaction of the Secretary, with the

support of an audited financial statement, that the institution has

sufficient resources to ensure against its precipitous closure. As a

part of this showing, an institution must establish that it has the

ability to meet all of its financial obligations, including refunds of

institutional charges and repayments to the Secretary for liabilities

and debts incurred in programs administered by the Secretary.

The Secretary considers the institution to have sufficient

resources to ensure against precipitous closure only if the institution

formerly demonstrated financial responsibility under the standards of

financial responsibility in its preceding audited financial statement

and that its most recent audited financial statement indicates the

following (if no prior audited financial statement was requested by the

Secretary, the institution must demonstrate in conjunction with its

current audit that it would have satisfied the following): (a) All

taxes owed by the institution are current; (b) The institution's net

income, or a change in total net assets, before extraordinary items and

discontinued operations, has not decreased by more than 10 percent from

the prior fiscal year, unless the institution demonstrates that the

decreased net income shown on the current financial statement is a

result of downsizing pursuant to a management-approved business plan;

(c) loans and other advances to related parties have not increased from

the prior fiscal year unless such increases were secured and

collateralized, and do not exceed 10 percent of the prior fiscal year's

working capital of the institution; (d) The equity of a for-profit

institution, or the total net assets of a nonprofit institution, have

not decreased by more than 10 percent of the prior year's total equity;

(e) Compensation for owners or other related parties (including

bonuses, fringe benefits, employee stock option allowances, 401(k)

contributions, deferred compensation allowances) has not increased from

the prior year at a rate higher than for all other employees; (f) The

institution has not materially leveraged its assets or income by

becoming a guarantor on any new loan or obligation on behalf of any

related party; (g) All obligations owed to the institution by related

parties are current, and the institution has demanded and is receiving

payment of all funds owed from related parties that are payable upon

demand. The regulations clarify that, for purposes of these provisions,

a person does not become a related party by attending an institution as

a student.

Finally, in order for the Secretary to consider the institution to

have sufficient resources to ensure against precipitous closure, the

institution would also have to demonstrate that (1) there have been no

material findings in the institution's latest compliance audit of its

administration of the Title IV, HEA programs and (2) there are no

pending administrative or legal actions being taken against the

institution by the Secretary, and other Federal agency, the

institution's nationally recognized accrediting agency, or any State

entity.

[FR Doc. 94-16400 Filed 7-6-94; 8:45 am]

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