Student Assistance General Provisions; Proposed Rule DEPARTMENT OF EDUCATION

SUMMARY: The Secretary proposes to amend the Student Assistance General

Provisions regulations by revising subpart B and adding a new subpart

K. The proposed regulations would govern the management of funds an

institution receives under the Federal Pell Grant, Federal Supplemental

Educational Opportunity Grant (FSEOG), Federal Work-Study (FWS),

Federal Perkins Loan, Federal Family Education Loan (FFEL), Federal

Direct Student Loan (Direct Loan), and Presidential Access Scholarship

(PAS) programs authorized by title IV of the Higher Education Act of

1965, as amended (title IV, HEA programs). The purpose of the proposed

regulations is to promote sound cash management practices by

institutions that participate in the title IV, HEA programs by

strengthening and making uniform the cash management rules for those

programs. In so doing, the Secretary expects to reduce the cost to the

Federal government of making title IV, HEA program funds available to

students and institutions under these programs.

DATES: Comments must be received on or before October 31, 1994.

ADDRESSES: All comments concerning these proposed regulations should be

addressed to John Kolotos, U.S. Department of Education, 600

Independence Avenue, S.W., Room 4318, ROB-3, Washington, D.C. 20202-

5244. (Internet address: [email protected]).

A copy of any comments that concern information collection

requirements should also be sent to the Office of Management and Budget

at the address listed in the Paperwork Reduction Act section of this

preamble.

FOR FURTHER INFORMATION CONTACT: John Kolotos or Kim Goto. Telephone:

(202) 708-7888. (Internet address: [email protected]).

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 rules and procedures under which an

institution requests, maintains, disburses, and otherwise manages funds

that the institution receives under each title IV, HEA program in which

it participates are currently codified in those program regulations, or

described in Department of Education publications. In this notice of

proposed rulemaking, the Secretary proposes to consolidate, in a new

subpart K of the Student Assistance General Provisions regulations,

most of the current cash management requirements in the title IV, HEA

program regulations. Also, the Secretary proposes to codify in subpart

K existing cash management policies and procedures currently specified

in subregulatory guidance. Lastly, the Secretary proposes new

requirements and proposes to amend some existing requirements to

promote sound cash management practices by institutions.

The Secretary wishes to make clear that while proposed subpart K

would establish a common set of cash management rules and procedures,

subpart K would not contain all of the rules and procedures that an

institution would follow with regard to managing title IV, HEA program

funds. An institution would continue to follow other cash management

rules and procedures particular to a title IV, HEA program.

The Secretary intends to amend the appropriate sections of each of

the title IV, HEA program regulations on or before December 1, 1994 to

eliminate conflicting requirements between the program regulations and

proposed subpart K of the General Provisions regulations and to

otherwise harmonize the proposed subpart K requirements with other

Federal cash management requirements. In this regard, the Secretary has

identified throughout the following discussion the major sections of

the title IV, HEA program regulations and sections of other relevant

Federal regulations that would be amended and consolidated in subpart

K.

Provisions Proposed by the Regulations

The following discussion reflects the proposed provisions under

which an institution would request, maintain, disburse, and otherwise

manage title IV, HEA program funds. The provisions are discussed in the

order in which they appear in the proposed regulations. If a provision

applies to more than one section, it is discussed the first time it

appears and with an appropriate cross-reference to its other

appearances.

Proposed Sec. 668.161 Scope and Purpose

The purpose of these regulations is to promote sound cash

management practices by institutions and to minimize the financing

costs to the Federal Government of making available title IV, HEA

program funds to students and institutions. To achieve these

objectives, the Secretary proposes new requirements, proposes to amend

existing regulations, and proposes to establish in this subpart uniform

rules and procedures under which an institution requests, maintains,

disburses, and otherwise manages funds that it receives under each

title IV, HEA program in which it participates. To establish uniformity

in title IV, HEA program requirements, the Secretary proposes to

consolidate in this subpart the cash management rules that are now in

each of title IV, HEA program regulations and to codify existing

departmental cash management policies and practices.

In proposed Sec. 668.161(b), the Secretary would adopt the

provision in Sec. 668.18 that specifies that funds received by an

institution under the title IV, HEA programs are held in trust for the

intended student beneficiaries and the Secretary and that as a trustee

of Federal funds, the institution may not use or hypothecate those

funds for any other purpose.

In addition, the Secretary wishes to make clear the rules and

procedures that apply to an institution under this subpart would also

apply to a third-party servicer.

Proposed Sec. 668.162 Definitions

Disburse: The Secretary proposes to define the term disburse to

encompass all the methods by which an institution pays title IV, HEA

program funds to a student or parent. Accordingly, under this proposal,

these methods would be (1) Crediting the student's account at the

institution, (2) issuing a check or cash to the student or a parent

borrower under the Direct Loan or FFEL programs, and (3) initiating an

electronic funds transfer (EFT) to a bank account designated by the

student or by a parent borrower under the Direct Loan or FFEL programs.

The Secretary acknowledges that the term disburse has a different

meaning under the FFEL programs (34 CFR 682.200). Under those programs,

a disbursement is defined as ``The transfer of loan proceeds by a

lender to a borrower, a school, or an escrow agent by issuance of a

check or by electronic funds transfer.'' Because the Secretary does not

intend to change the definition of the term disbursement under the FFEL

programs, the Secretary wishes to make clear that solely for the

purposes of these proposed regulations that the term disburse would

correspond to the concept of the delivery of proceeds under the FFEL

programs.

Issue checks. The Secretary proposes to define very broadly the

term issue checks to include any means by which an institution pays a

student or parent by check. Under the proposed definition, an

institution would be considered to have issued a check to a student or

parent when the institution has released, distributed, or otherwise

made that check available to the student or parent. Although the

Secretary does not wish to regulate the mechanisms that an institution

may use to issue checks, the Secretary intends to enforce rigorously

the liability provisions described in proposed Sec. 668.166 on any

institution that does not issue checks to students shortly after the

institution writes those checks.

Proposed 668.163 Requesting Funds

In proposed Sec. 668.163, the Secretary would codify existing

policy and practice under which the Secretary provides title IV, HEA

program funds, other than FFEL program funds, to institutions. The

Secretary provides title IV, HEA program funds to institutions under

either the advance payment method or the reimbursement payment method.

Under the advance payment method, the Secretary accepts an

institution's request for cash and transfers the amount requested to a

bank account designated by the institution. The amount of the

institution's request for cash may not exceed the institution's

``immediate need.'' Since 1986 the Secretary has required an

institution to limit the amounts of its cash requests to the amounts

needed to make disbursements to students within 3 business days. The

Department's current policy regarding the meaning of the term

``immediate need'' is articulated in the following publications:

(1) OMB Circular A-110, as contained in the Education Department

General Administrative Regulations (EDGAR), July 6, 1994, 34 CFR

74.22(b);

(2) The Recipient's Guide for the Department of Education Payment

Management System (EDPMS), October 1993, Chapter 5;

(3) The Audit Guide, U.S. Department of Education, Office of the

Inspector General, March 1990, Section II;

(4) The Blue Book, U.S. Department of Education, December 22, 1988,

Chapter 5; and

(5) The Department of the Treasury regulations, September 24, 1992,

31 CFR part 205.

As noted in these publications, an institution on the advance

payment method must limit the amount of its request for cash to the

amount needed to make disbursements to students and must time its

request for cash to be in accordance with its actual and immediate cash

requirements.

In proposed Sec. 668.163(b), the Secretary would codify this

longstanding 3-day immediate-need standard for the following reasons.

First, the Department can deliver reliably by EFT title IV, HEA program

funds to institutions. Second, the Secretary believes that 3 business

days provides an institution sufficient time to make disbursements to

students. Moreover, the Secretary believes that the 3-day immediate-

need standard furthers the objective of minimizing the financing costs

to the Treasury of making title IV, HEA program funds available to

students and institutions.

In proposed Sec. 668.163(c), the Secretary would merely codify

existing procedures under which the Secretary provides title IV, HEA

program funds to an institution on the reimbursement payment method.

Under those procedures, an institution must first disburse funds to

eligible students before the institution may submit a request for cash.

The amount of the institution's request for cash may not exceed the

amount of the actual disbursements the institution made to those

students. The Secretary approves the institution's request for cash if

the Secretary determines that the institution (1) Determined properly

the eligibility for title IV, HEA program funds of each student

identified in its request for cash, (2) made disbursements for the

correct amounts of title IV, HEA program funds to those students, and

(3) submitted any documentation required by the Secretary to

substantiate the information provided by the institution on its request

for cash.

Proposed Sec. 668.164 Maintaining Funds

In proposed Sec. 668.164, the Secretary would consolidate and

amend, as noted below, several requirements that are currently in

Sec. 674.19 of the Federal Perkins Loan Program, Sec. 675.19 of the FWS

Program, Sec. 676.19 of the FSEOG Program, Sec. 690.81 of the Federal

Pell Grant Program, and proposed Sec. 685.308 of the Direct Loan

Program regulations regarding the account into which an institution

deposits and otherwise maintains Federal funds.

First, the Secretary proposes to consolidate in one place, with a

minor modification, current provisions that require an institution to

maintain a bank account into which the Secretary transfers or the

institution deposits Federal funds (other than FFEL program funds) that

the institution receives from the title IV, HEA programs. Under current

regulations, an institution must either (1) Ensure that the name of the

account discloses clearly that Federal funds are deposited into that

account, or (2) notify the bank of the accounts that contain Federal

funds and retain a record of that notice in its recordkeeping system.

Under proposed Sec. 668.164(a), an institution would have to comply

with both of these requirements. The Secretary notes that this proposal

is consistent with the requirements under Sec. 685.308(h) of the

proposed Direct Loan Program regulations.

Second, the Secretary proposes to incorporate in Sec. 668.164(b)

the current provisions that require an institution to maintain an

interest-bearing account for the deposit of Federal Perkins Loan

Program funds. Specifically, the account must be (1) An interest-

bearing account that is either federally insured or secured by

collateral of value reasonably equivalent to the amount of funds in the

account, or (2) an investment account consisting predominantly of low-

risk, income-producing securities.

The Secretary believes, however, that where it is cost-effective an

institution should be required to maintain all title IV, HEA program

funds (except FFEL program funds) it receives in a federally insured,

interest-bearing account. Therefore, in proposed Sec. 668.164(b), the

Secretary would require an institution to maintain in any award year an

interest-bearing account if the institution drew down in the prior

award year a total amount greater than $1 million from the title IV,

HEA programs. The Secretary notes that this requirement does not

preclude an institution that is below the proposed $1 million threshold

from choosing to maintain title IV, HEA program funds in an interest-

bearing account.

Under section 487 of the HEA and 34 CFR 668.14(b)(1), an

institution must use interest earned on funds it receives under the

title IV, HEA programs solely for purposes of those programs. In

proposed Sec. 668.164(b)(4), the institution would have to remit at

least annually to the Federal government interest earned on all title

IV, HEA program funds except Federal Perkins Loan Program funds (see,

34 CFR 674.18, 34 CFR 674.19, and section 463 of the HEA). In proposing

the $1 million threshold, the Secretary weighed the benefits to the

Federal government of recovering the interest earned on title IV, HEA

program funds maintained in interest-bearing accounts against the cost

to, and administrative burden on, institutions of maintaining those

accounts. The Secretary wishes to make clear that, except for Federal

Perkins Loan Program funds, the proposed interest-bearing account would

be merely a temporary holding account for title IV, HEA program funds,

and that any interest earned on funds maintained in that account,

including interest earned on funds pending the clearance of checks,

would be remitted to the Federal government.

The Secretary notes, however, that under the referenced EDGAR and

OMB provisions (see 34 CFR 74.22 and OMB Circular A-110, subpart C,

respectively) an institution must maintain Federal funds in an

interest-bearing account unless: (1) The institution receives less than

$120,000 in Federal funds per year (other than title IV, HEA program

funds), (2) the best reasonably available interest-bearing account

would not be expected to earn interest in excess of $250 per year on

Federal cash balances, or (3) the bank would require an average or

minimum balance so high that it would not be feasible within the

expected Federal and non-Federal cash resources. In addition, the EDGAR

and OMB provisions allow an institution to retain interest earnings in

an amount up to $250 per year for the administrative expense of

maintaining an interest-bearing account. (The Secretary proposes to

adopt this allowance.)

The Secretary especially invites comment on the appropriateness of

the requirement for a $1 million threshold and on the extent to which

the Secretary should adopt the EDGAR and OMB provisions described above

regarding interest-bearing accounts.

In proposing a requirement for interest-bearing accounts, the

Secretary does not wish to imply that the Secretary is in any way

encouraging an institution to maintain Federal funds in excess of its

immediate need solely to earn interest on those funds. To the contrary,

the Secretary simply recognizes that an institution may not always be

able to disburse title IV, HEA program funds to students immediately

upon receiving those funds, and wishes only to recover for the Treasury

the interest earned on those funds while the funds are in the

institution's account.

Third, in Sec. 668.164(c), the Secretary proposes to require an

institution to maintain a separate bank account for title IV, HEA

program funds if the Secretary finds that the institution is unable to

account adequately for the receipt, disbursement, or use of those

funds. These requirements are consistent with current title IV, HEA

program regulations and with the standards described in OMB Circular A-

110 and 34 CFR 74.22 that govern the use of banks as depositories of

Federal funds.

Finally, because the Secretary has proposed that institutions

maintain an interest-bearing account for all title IV, HEA program

funds (except FFEL program funds), the Secretary clarifies that an

institution must exercise the level of care and diligence required of a

fiduciary with regard to depositing and investing Federal funds (see 34

CFR 668.82).

Proposed Sec. 668.165 Disbursing Funds

The Secretary proposes to consolidate and amend, as noted below,

several requirements that are currently in Sec. 674.16 of the Federal

Perkins Loan Program, Sec. 675.16 of the FWS Program, Sec. 676.16 of

the FSEOG Program, Sec. 690.78 of the Federal Pell Grant Program, and

proposed Sec. 685.303 of the Direct Loan Program regulations under

which an institution disburses title IV, HEA program funds to eligible

students.

In proposed Sec. 668.165(a) the Secretary would consolidate the

provisions common to all the program regulations, except the FWS

Program, with respect to paying a student. An institution must continue

to follow the disbursement procedures contained in 34 CFR 675.16 for

paying a student his or her wages under the FWS Program. To encourage

the use of more efficient methods of payment than issuing checks, the

Secretary proposes to allow an institution to make a payment to a

student by EFT. Under this proposal, the institution would have to

obtain once each award year written authorization from a student or

parent to make EFT payments to the student's or parent's bank account,

as applicable.

In proposed Sec. 668.165(b), the Secretary would clarify and make

uniform the procedures under which an institution credits a student's

account. For example, the campus-based program regulations (see, for

example, 34 CFR 676.16(c)) require only that an institution may credit

a student's account or pay the student directly. (The campus-based

programs are the Federal Perkins Loan, FSEOG, and FWS programs.) Under

the Federal Pell Grant Program regulations (see 34 CFR 690.78(a)(2)),

an institution may credit a student's account only for specified

institutional charges. Assuming that the institution drew down the

entire amount of the student's award, the institution would pay the

student directly any amount of his or her Federal Pell Grant award in

excess of the specified institutional charges. However, under current

policy the Secretary allows an institution, for accounting purposes and

for administrative convenience, to apply to a student's account his or

her entire award, and if that amount exceeds allowable institutional

charges, directly pay the student that balance. The proposed procedures

would codify existing policy and specify the period of time within

which an institution would pay a student any balance on his or her

account.

Under the proposed procedures, an institution would credit a

student's account by applying the student's title IV, HEA program funds

to allowable institutional charges. (However, consistent with current

policy, the institution would not be permitted to credit the student's

account for charges the institution assessed the student in a prior

award year.) If the amount of title IV, HEA program funds the

institution applies to the student's account exceeds the amount of

allowable institutional charges, the Secretary proposes to require the

institution to pay the balance remaining on the account directly to the

student as soon as possible but within the later of (1) 7 days after

the date that balance occurs, (2) 14 days after the first day of

classes of the payment period or period of enrollment, as applicable

(the Secretary intends this provision to apply also to second

disbursements of Direct Loan and FFEL program funds), or (3) 7 days

after the date the student rescinds his or her permission regarding the

charges for which the institution may credit the student's account. The

Secretary believes that these procedures strike an appropriate balance

between the institution's obligation to provide title IV, HEA program

funds to students in a timely manner and the administrative needs of an

institution.

However, the Secretary is concerned over findings by the Office of

Inspector General and other offices within the Department that some

institutions maintain for long periods, and use for their own purposes,

title IV, HEA program funds in excess of allowable institutional

charges. Those funds belong to students and to the Secretary. The

Secretary believes it is imperative that institutions, as stewards of

Federal funds, request funds only when needed and provide those funds

to their students as expeditiously as possible. On the other hand, the

Secretary recognizes that it does not make sense to require an

institution immediately to pay a student the balance on his or her

account if the student will incur within a short period of time

additional institutional charges as a result of adding classes to his

or her schedule. Consequently, in proposed Sec. 668.165(b)(2)(ii), an

institution would be permitted to maintain the balance on a student's

account for up to 14 days after the student's first day of classes. The

Secretary particularly invites comments on this 14-day credit balance

provision. In addition, the Secretary seeks comments on alternative

approaches that would provide administrative relief to institutions for

dealing with situations where students incur additional institutional

charges by adding classes, while still requiring prompt payment for the

majority of students who do not incur those charges.

In proposed Sec. 668.165(b)(3), the Secretary would adopt for all

title IV, HEA programs, the Federal Pell Grant Program and Direct Loan

Program statutory provisions, sections 401(e) and 455(j) of the HEA,

respectively, under which an institution may credit a student's account

only for allowable institutional charges. Those charges are (1) Tuition

and fees and (2) room and board, if the student contracts with the

institution for room and board. In addition, the Secretary proposes to

adopt the Federal Pell Grant Program requirement that an institution

must obtain permission from a student to credit his or her account for

other cost-of-attendance charges (but no other charges), as defined in

section 472 of the HEA. Implicit in this requirement, and consistent

with current policy, a student may at any time withdraw that permission

and request the institution to pay him or her the remaining balance on

his or her account.

In proposed Sec. 668.165(b)(4), the Secretary would adopt for all

title IV, HEA programs, the procedures in the Direct Loan and FFEL

program regulations (see, proposed Sec. 685.303(c)(3), and 34 CFR

682.604(d), respectively) under which an institution holds title IV,

HEA program funds for the benefit of the student. Under those

procedures, a student may request an institution to hold funds in

excess of allowable institutional charges to assist him or her in

managing those funds during an award year. If the institution chooses

to hold those funds for the student, it must maintain those funds in a

separate account established solely for that purpose. In addition, the

institution may not commingle those funds with other funds or use those

funds for any other purpose. The Secretary wishes to make clear that

the account into which an institution deposits student funds under this

provision may be an interest-bearing or a noninterest-bearing account.

If the account is interest-bearing the interest would accrue to the

institution and the institution may rebate that interest to students.

In addition, the Secretary proposes to amend and make uniform the

early payment requirements common to the title IV, HEA programs

governed under this subpart (see, for example, 34 CFR 676.16(d) and

690.78(b)). Under those requirements, the earliest an institution may

credit a student's account is 21 days before the first day of a payment

period or period of enrollment. The 21-day requirement was established

at a time when the Federal government provided to institutions title

IV, HEA program funds by Treasury check. Under the standards of that

time, an institution requested cash for an amount the institution

anticipated it needed to meet its disbursement needs for 30 days.

Because it usually took several weeks for the Treasury to deliver the

check to the institution, the institution could not determine with

certainty when it would receive that check. However, with the advent of

EFT, the Federal government can reliably transmit within 3 business

days title IV, HEA program funds to an institution. Therefore, in

proposed Sec. 668.165(c), the Secretary would provide that the earliest

an institution may credit a student's account is 10 days before the

first day of a payment period or period of enrollment. The Secretary

believes that under this proposal an institution will not be

financially burdened, as it may have been under the 30-day need

standard with Treasury checks, because the institution may request

funds as often as needed and the Federal government is able to provide

those funds quickly and reliably. Moreover, sound financial management

supports the conclusion that the Department of Treasury should not make

available Federal funds to institutions for such extended periods.

Finally, the Secretary recognizes that a student may incur

educational expenses before he or she starts classes, and therefore has

decided to adopt for all title IV, HEA programs the current requirement

in the Federal Pell Grant, campus-based, FFEL, and Direct Loan program

regulations under which the earliest an institution may directly pay a

student is 10 days before the first day of a payment period or period

of enrollment.

The Secretary notes that under section 428G(b)(1) of the HEA and

proposed Sec. 685.303(b)(4) of the Direct Loan Program regulations, an

institution must delay releasing for 30 days the first installment of a

FFEL or Direct Loan program loan, as applicable, to a first-year,

first-time borrower.

Proposed Sec. 668.166 Excess Cash

In proposed Sec. 668.166(a), the Secretary would define excess cash

as any amount of title IV, HEA program funds, other than FFEL or

Federal Perkins Loan Program funds, that an institution does not

disburse to students by the end of the 3rd business day following the

date the institution received those funds. As discussed previously, the

selection of 3 business days is consistent with departmental guidance

in the Blue Book, a publication setting out the procedures for

``Accounting, Recordkeeping, and Reporting By Postsecondary Educational

Institutions for Federally-Funded Student Financial Aid Programs,''

with audit guidelines issued by the Department of Education Office of

Inspector General, and with requirements from the Department of the

Treasury. Except as discussed below, an institution must return

promptly to the Secretary any excess funds in its account.

The Secretary realizes that an institution may be unable to

disburse title IV, HEA program funds within 3 business days because of

circumstances beyond the institution's control (for example, changes in

student enrollment status, failure of a student to attend classes as

scheduled, changes in a student's award as a result of verification).

Although the Secretary does not intend to prescribe the methods by

which an institution determines its 3-day immediate cash needs, the

Secretary expects the institution to take into consideration the

circumstances identified above, and any other circumstances the

institution knows of, to determine more accurately its actual cash

needs. Therefore, in proposed Sec. 668.166(b), the Secretary would

merely as practical matter allow an institution to maintain nominal

excess cash balances under certain conditions and only on an exception

basis. First, an institution would not have to return excess cash for

amounts of $5,000 or less. In making this proposal, the Secretary

expects the institution to eliminate its excess cash balance by

reducing the amount of its next request for cash by that amount.

Second, an institution would not have to return immediately an excess

cash balance if (1) The amount of that excess cash is less than one-

half of 1 percent of its total prior-year drawdowns where such prior

annual drawdowns exceeded $1 million and (2) the institution makes

within 7 calendar days a cash request greater than the amount of its

excess cash. Although the Secretary believes that these excess-cash

thresholds are reasonable, the Secretary seeks comment on the level and

appropriateness of the proposed thresholds.

Finally, because the Secretary expects institutions to establish

procedures that minimize the potential for excess cash, in proposed

Sec. 668.166(b)(3) the Secretary would require an institution to return

immediately any amount of excess cash that the institution would

otherwise be able to maintain under the thresholds discussed above if

the institution routinely maintained excess cash balances at or below

the threshold levels.

The Department has also established a policy of reviewing

institutions to determine where excess cash balances have been

maintained and to seek recovery from those institutions of the losses

to the government caused by having made those funds available to

institutions in advance of their immediate needs. In proposed

Sec. 668.166(c), upon a finding of excess cash, including a finding

that an institution maintained routinely excess cash balances at or

below the threshold levels, the Secretary would require an institution

to reimburse the Department for the costs, as those costs would be

calculated under proposed Sec. 668.166(c)(2), that the government

incurred in making those excess funds available to the institution. In

addition, where the excess cash balances are disproportionately large

to the size of the institution or represent a continuing problem with

the institution's responsibility to administer efficiently the title

IV, HEA programs, the Secretary may initiate a proceeding to fine,

limit, suspend, or terminate the institution's participation in one or

more of those programs under subpart G of this part.

In proposed Sec. 668.166(c)(2), in calculating whether an

institution has excess cash, the Secretary would consider the

institution to have issued a check on the date that check cleared the

institution's bank account, unless the institution demonstrates to the

satisfaction of the Secretary that it issued the check to the student

shortly after the institution wrote that check. Finally, the Secretary

proposes to assess against an institution that maintains excess cash

balances a liability that is equal to the difference between the

earnings those cash balances would have yielded under a Treasury-

derived rate and the actual interest earned on those cash balances.

Executive Order 12866

1. Assessment of Costs and Benefits

These proposed regulations have been reviewed in accordance with

Executive Order 12866. Under the terms of the order the Secretary has

assessed the potential costs and benefits of this regulatory action.

The potential costs associated with the proposed regulations are

those resulting from statutory requirements and those determined by the

Secretary to be necessary for administering this program effectively

and efficiently. Burdens specifically associated with information

collection requirements, if any, are identified and explained elsewhere

in this preamble under the heading Paperwork Reduction Act of 1980.

In assessing the potential costs and benefits--both quantitative

and qualitative--of these proposed regulations, the Secretary has

determined that the benefits of the proposed regulations justify the

costs.

The Secretary has also determined that this regulatory action does

not unduly interfere with State, local, or tribal governments in the

exercise of their governmental functions.

To assist the Department in complying with the specific

requirements of Executive Order 12866, the Secretary invites comment on

whether there may be further opportunities to reduce any potential

costs or increase potential benefits resulting from these proposed

regulations without impeding the effective and efficient administration

of the program.

2. Clarity of the Regulations

Executive Order 12866 requires each agency to write regulations

that are easy to understand.

The Secretary invites comments on how to make these regulations

easier to understand, including answers to questions such as the

following: (1) Are the requirements in the regulations clearly stated?

(2) Do the regulations contain technical terms or other wording that

interferes with their clarity? (3) Does the format of the regulations

(grouping and order of sections, use of headings, paragraphing, etc.)

aid or reduce their clarity? Would the regulations be easier to

understand if they were divided into more (but shorter) sections? (A

``section'' is preceded by the symbol ``Sec. '' and a numbered heading;

for example, 668.161 Scope and purpose.) (4) Is the description of the

proposed regulations in the Supplementary Information section of this

preamble helpful in understanding the proposed regulations? How could

this description be more helpful in making the proposed regulations

easier to understand? (5) What else could the Department do to make the

regulations easier to understand?

A copy of any comments that concern how the Department could make

these proposed regulations easier to understand should be sent to

Stanley M. Cohen, Regulations Quality Officer, U.S. Department of

Education, 600 Independence Avenue, SW., (Room 5121, FB10), Washington,

DC 20202-2241.

Regulatory Flexibility Act Certification

The Secretary certifies that these proposed regulations would not

have a significant economic impact on a substantial number of small

entities. The small entities that would be affected by these

regulations are small institutions of higher education. These

regulations would safeguard Federal funds and reduce potential abuse in

the title IV, HA programs. These changes would not significantly

increase institutions' workloads or costs associated with administering

the title IV, HEA programs. In the case of institutions that are

required to maintain interest-bearing accounts, those institution may

retain interest earnings to offset the costs of maintaining those

accounts. Therefore, these regulations will not have a significant

economic impact on a substantial number of small entities.

Paperwork Reduction Act of 1980

Section 668.164 contains information collection requirements. As

required by the Paperwork Reduction Act of 1980, the Department of

Education will submit a copy of this section to the Office of

Management and Budget (OMB) for its review. (44 U.S.C. 3504(h)).

These proposed regulations contain information collection

requirements regarding the bank account that all participating

institutions must maintain for the deposit of title IV, HEA program

funds. Specifically, institutions must notify their bank of the

accounts into which they deposit Federal funds and must maintain a

record of that notice in their recordkeeping system. In addition,

institutions that draw down more than $1 million in title IV, HEA

program funds must deposit those funds in interest-bearing accounts and

keep records for any interest earned on those funds. Institutions may

retain annually interest earnings on title IV, HEA program funds for an

amount up to $250, must keep records for the amount retained, and must

return to the Department any interest earnings greater than the amount

retained. The Department needs and uses this information to determine

whether institutions have complied with these requirements.

For approximately 8500 institutions, a one-time public reporting

burden for this collection of information is estimated at 5610 hours

for institutions to notify banks of the accounts that contain title IV,

HEA program funds and maintain a record of that notice in their

recordkeeping system. In addition, the annual public reporting burden

for this collection of information is estimated at 4250 hours for those

institutions to account for the interest earned on title IV, HEA

program funds and return to the Federal government any interest

earnings in excess of $250.

Organizations and individuals desiring to submit comments on the

information collection requirements should direct them to the Office of

Information and Regulatory Affairs, OMB, Room 3002, New Executive

Office Building, Washington, DC 20503; Attention: Daniel J. Chenok.

Invitation to Comment

Interested persons are invited to submit comments and

recommendations regarding these proposed regulations.

All comments submitted in response to these proposed regulations

will be available for public inspection, during and after the comment

period, in Room 4318, Regional Office Building 3, 7th and D Streets,

SW., Washington, DC, between the hours of 8:30 a.m. and 4 p.m., Monday

through Friday of each week except Federal holidays.

Assessment of Educational Impact

The Secretary particularly requests comments on whether the

proposed regulations in this document would require transmission of

information that is being gathered by or is available from any other

agency or authority in the United States.

List of Subjects in 34 CFR Part 668

Administrative practice and procedure, Colleges and universities,

Consumer protection, Education, Grant programs--education, Loan

programs--education, Reporting and recordkeeping requirements, Student

aid.

(Catalog of Federal Domestic Assistance Number: 84.007 Federal

Supplemental Education Opportunity Grant Program; 84.032 Federal

Family Educational Loan Program; 84.032 Federal PLUS Program; 84.032

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 Federal 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 Program has not been assigned.)

Dated: September 15, 1994.

Richard W. Riley,

Secretary of Education.

The Secretary proposes to amend Part 668 of title 34 of the Code of

Federal Regulations as follows:

PART 668--STUDENT ASSISTANCE GENERAL PROVISIONS

1. The authority citation for Part 668 continues to read as

follows:

Authority: 20 U.S.C. 1085, 1088, 1091, 1092, 1094, 1099c, and

1141, unless otherwise noted.

2. The Table of Contents of Part 668 is amended by adding subpart K

to read as follows:

Subpart K--Cash Management

668.161 Scope and purpose.

668.162 Definitions.

668.163 Requesting funds.

668.164 Maintaining funds.

668.165 Disbursing funds.

668.166 Excess cash.

Sec. 668.18 [Removed]

3. Section 668.18 is removed and reserved.

4. Subpart K is added to Part 668 to read as follows:

Subpart K--Cash Management

Sec. 668.161 Scope and purpose.

(a) General. (1) This subpart establishes uniform rules and

procedures under which a participating institution requests, maintains,

disburses, and otherwise manages funds that the institution receives

under any title IV, HEA program. An institution must also follow rules

and procedures for managing title IV, HEA program funds under each

program in which it participates.

(2) For purposes of this subpart, the title IV, HEA programs

include only the Federal Pell Grant, PAS, FSEOG, Federal Perkins Loan,

FWS, Direct Loan, and FFEL programs.

(3) The rules and procedures that apply to an institution under

this subpart also apply to a third-party servicer.

(b) Federal interest in title IV, HEA program funds. Funds received

by an institution under the title IV, HEA programs are held in trust

for the intended student beneficiaries and the Secretary. Except for

funds received by an institution for administering those programs, the

institution, as a trustee of Federal funds, may not use or hypothecate

(i.e., use as collateral) title IV, HEA program funds for any other

purpose.

(Authority: 20 U.S.C. 1094)

Sec. 668.162 Definitions.

The following definitions apply to terms used in this subpart:

Check: A negotiable demand draft or warrant.

Credit an account: To post a payment of funds to an account

maintained for a student by an institution.

Day: A calendar day unless otherwise specified.

Disburse: To make a payment of title IV, HEA program funds, or

deliver the proceeds of a loan under the FFEL programs, to or on behalf

of a student by--

(1) Crediting the student's account at the institution;

(2) Issuing a check or cash to--

(i) The student; or

(ii) In the case of a parent borrower under the Direct Loan or FFEL

programs, the student's parent; or

(3) Initiating an electronic funds transfer to a bank account

designated by the student, or in the case of a parent borrower under

the Direct Loan or FFEL programs, to a bank account designated by the

parent.

Drawdown: A process whereby an institution requests and receives

Federal funds. The phrase ``draw down'' is used as a verb form of this

word.

Issue checks: To release, distribute, or make available checks to

students or parents.

Period of enrollment: (1) With respect to the Direct Loan Program,

a period of enrollment as defined in 34 CFR 685.102;

(2) With respect to the FFEL Program, a period of enrollment as

defined in 34 CFR 682.200.

Request for cash: A solicitation for cash that is completed and

submitted in accordance with procedures contained in the Recipient's

Guide for the Department of Education Payment Management System. This

guide is published by the Department of Education, 600 Independence

Avenue, SW., Room 3321, FB10, Washington, DC 20202-4331, and contains

the procedures institutions use to request, report, and account for

Federal funds.

(Authority: 20 U.S.C. 1094)

Sec. 668.163 Requesting funds.

(a) General. The Secretary pays an institution in advance, or by

reimbursement, for the institution to disburse title IV, HEA program

funds, other than FFEL program funds, to students who qualify to

receive those funds.

(b) Advance payment method. (1) Under the advance payment method,

the Secretary accepts an institution's request for cash and transfers

electronically the amount requested into a bank account designated by

the institution.

(2) An institution's request for cash must not exceed the amount of

funds the institution needs immediately to make disbursements to

students. The institution must make the disbursements as soon as

administratively feasible, but no later than 3 business days following

the date the institution received those funds.

(c) Reimbursement payment method. (1) To receive payment of title

IV, HEA program funds under the reimbursement method, an institution

must first make disbursements to eligible students before it submits a

request for cash.

(2) The amount of the institution's request for cash may not exceed

the amount of the actual disbursements the institution made to students

included in that request.

(3) The Secretary may require the institution to submit

documentation that each student included in the request was eligible to

receive, and received, payment for the title IV, HEA program funds for

which the institution is seeking reimbursement.

(4) The Secretary approves the amount of the institution's request

and transfers electronically that amount into a bank account designated

by the institution if the Secretary determines that the institution--

(i) Determined properly the eligibility of each student for title

IV, HEA program funds;

(ii) Made disbursements for the correct amounts of title IV, HEA

program funds to the students included in its request; and

(iii) Submitted any documentation required under paragraph (c)(3)

of this section.

(Authority: 20 U.S.C. 1094)

Sec. 668.164 Maintaining funds.

(a) General. (1) Other than for funds an institution receives under

the FFEL programs, an institution must maintain an account at a bank

into which the Secretary transfers or the institution deposits Federal

funds that the institution receives from the title IV, HEA programs.

Except as provided in paragraph (c) of this section, an institution is

not required to open or maintain a separate account for depositing

Federal funds.

(2) An institution must notify the bank in which it deposits

Federal funds of the account into which those funds are deposited by--

(i) Ensuring that the name of the account discloses clearly that

Federal funds are deposited into that account; and

(ii) Notifying the bank of the account into which the institution

deposits Federal funds.

(3) The institution must retain in its recordkeeping system a

record of the notice required under paragraph (a)(2) of this section.

(b) Interest-bearing account. (1) Except as provided in paragraph

(b)(2) of this section, for any award year, an institution must ensure

that the account into which it deposits Federal funds is an interest-

bearing account that is federally insured, if the institution, during

the prior award year, drew down a total amount greater than $1 million

from the title IV, HEA programs.

(2) For any award year, an institution that participates in the

Federal Perkins Loan Program must deposit Federal Perkins Loan Program

funds in--

(i) An interest-bearing account that is--

(A) Federally insured; or

(B) Secured by collateral of value reasonably equivalent to the

amount of funds in the account; or

(ii) An investment account consisting predominantly of low-risk

income-producing securities, such as obligations issued or guaranteed

by the United States.

(3) Except as provided in paragraphs (b)(3) (i) and (ii) of this

section, an institution must remit at least annually to the Secretary

the interest earned on title IV, HEA program funds maintained in an

interest-bearing account.

(i) Pursuant to 34 CFR part 674, an institution must retain for the

purposes of the Federal Perkins Loan Program all interest or investment

revenue earned on Federal Perkins Loan Program funds maintained in an

interest-bearing or investment account.

(ii) Other than interest or investment revenue earned on Federal

Perkins Loan Program funds, an institution may retain for

administrative expense up to $250 per year of the interest earned on

title IV, HEA program funds maintained in an interest-bearing account.

(c) Separate account. The Secretary may require an institution to

maintain title IV, HEA program funds in a separate bank account that

contains no other funds if the Secretary determines that--

(1) The institution's accounting and internal control systems do

not--

(i) Identify the cash balances of title IV, HEA program funds

maintained in the institution's bank account as readily as if those

funds were maintained for each program in a separate account; or

(ii) Identify adequately the interest or investment revenue earned

on title IV, HEA program funds maintained in its bank account;

(2) The institution's financial records--

(i) Are not maintained on a current basis;

(ii) Do not reflect accurately all title IV, HEA program

transactions; or

(iii) Are not reconciled at least monthly; or

(3) The institution has otherwise failed to comply with the

recordkeeping and reporting requirements in subpart B of this part or

in the regulations that govern each title IV, HEA program in which the

institution participates.

(d) Standard of conduct. An institution must exercise the level of

care and diligence required of a fiduciary with regard to depositing

and investing Federal funds.

(Authority: 20 U.S.C. 1094)

Sec. 668.165 Disbursing funds.

(a) Method of payment. (1) An institution must notify a student of

the amount of title IV, HEA program funds the student can expect to

receive and how that amount will be paid.

(2) If the institution chooses to disburse to the student or the

student's parent by initiating an electronic funds transfer to the bank

account designated by the student or parent, as applicable, the

institution must obtain each award year written authorization from the

student or parent, as applicable, to disburse by that method.

(3) An institution must follow the disbursement procedures in 34

CFR 675.16 for paying a student his or her wages under the FWS Program.

(b) Crediting a student's account.--(1) General. An institution may

disburse to a student by crediting the student's account. In crediting

the student's account with title IV, HEA program funds, the institution

may apply those funds only to allowable charges described under

paragraph (b)(3) of this section, except that the institution may not

apply the student's title IV, HEA program funds to any charges the

institution assessed the student in a prior award year.

(2) Student account balances. Except as provided in paragraph

(b)(4) of this section, if the amount of title IV, HEA program funds

the institution applies to a student's account exceeds the amount of

allowable charges, the institution must pay the balance remaining on

the student's account directly to the student as soon as possible but

within the later of--

(i) 7 days after the date that balance occurs;

(ii) 14 days after the first day of classes of the payment period

or period of enrollment, as applicable; or

(iii) 7 days after the date the student rescinds his or her

permission under paragraph (b)(3)(ii) of this section.

(3) Allowable charges. For the purpose of determining a student's

account balance under paragraph (b)(2) of this section, allowable

charges include--

(i) Only--(A) Tuition and fees;

(B) Board, if the student contracts with the institution for board;

and

(C) Room, if the student contracts with the institution for room;

and

(ii) Other cost-of-attendance charges, as provided under section

472 of the HEA, for which the institution obtains the student's

permission. The institution must obtain from the student each award

year permission to use his or her title IV, HEA program funds to pay

for these cost-of-attendance charges. The institution--

(A) May not require the student to grant that permission; and

(B) Must allow the student to rescind that permission at any time.

(4) Holding student funds. An institution, as a fiduciary for the

benefit of a student, may hold student funds from the title IV, HEA

programs in excess of institutional charges included in paragraph

(b)(3) of this section, if the student requests in writing that the

institution retain those excess funds to assist the student in managing

his or her funds for an award year. The institution must maintain these

funds in a separate account established solely for the purpose of

holding excess student funds and may not commingle these funds with

other funds or use these funds for any other purpose.

(c) Early payments. (1) An institution may not make a payment to a

student for a payment period or period of enrollment, as applicable,

until the student is enrolled for classes for that period.

(2) Except as provided in paragraph (c)(3) of this section, the

earliest an institution may pay directly, or credit the account of, an

enrolled student is 10 days before the first day of a payment period or

period of enrollment, as applicable.

(3) Pursuant to 34 CFR 682.604(c) and 34 CFR 685.303(b)(4), if a

student is enrolled in the first year of an undergraduate program of

study and the student has not previously received an FFEL or Direct

Loan Program loan, the institution may not release to the student for

endorsement the first installment of his or her FFEL or Direct Loan

Program loan, as applicable, until 30 days after the first day of the

student's classes.

(Authority: 20 U.S.C. 1094)

Sec. 668.166 Excess cash.

(a) General. The Secretary considers excess cash to be any amount

of title IV, HEA program funds, other than FFEL or Federal Perkins Loan

Program funds, that an institution does not disburse to students by the

end of the 3d business day following the date the institution received

those funds. Except as provided in paragraph (b) of this section, an

institution must return promptly to the Secretary any amount of excess

cash in its account.

(b) Excess cash tolerances. If an institution draws down title IV,

HEA program funds in excess of its immediate cash needs, the

institution may maintain the excess cash in its account only if--

(1) The amount of that excess cash is less than $5,000; or

(2)(i) In the award year preceding that drawdown, the institution

drew down more than $1 million of title IV, HEA program funds, and the

amount of that excess cash is less than one-half of 1 percent of its

total prior-year drawdowns; and

(ii) The institution makes within 7 days a cash request greater

than the amount of its excess cash; and

(3) The institution does not maintain routinely in its account the

excess cash balances described in paragraph (b)(1) or (b)(2) of this

section.

(c) Consequences for maintaining excess cash balances. (1) If the

Secretary finds that an institution maintains in its account excess

cash balances greater than those allowed under paragraph (b) of this

section or maintains routinely excess cash balances allowed under

paragraph (b) of this section, the Secretary--

(i) As provided in paragraph (c)(2) of this section, requires the

institution to reimburse the Secretary for the costs the Secretary

deems to have incurred in making those excess funds available to the

institution; and

(ii) May initiate a proceeding to fine, limit, suspend, or

terminate the institution's participation in one or more title IV, HEA

programs under subpart G of this part.

(2) For the purposes of this section, upon a finding that an

institution has maintained excess cash, the Secretary--

(i) Considers the institution to have issued a check to a student

on the date that the check cleared the institution's bank account,

unless the institution demonstrates to the satisfaction of the

Secretary that it issued the check shortly after the institution wrote

the check; and

(ii) Calculates, or requires the institution to calculate, a

liability for maintaining excess cash balances in accordance with

procedures established by the Secretary. Under those procedures, the

Secretary assesses a liability that is equal to the difference between

the earnings that the excess cash balances would have yielded if

invested under the applicable current value of funds rate and the

actual interest earned on those balances. The current value of funds

rate is an annual percentage rate, published in a Treasury Financial

Manual (TFM) bulletin, that reflects the current value of funds to the

Department of the Treasury based on certain investment rates. The

current value of funds rate is computed each year by averaging

investment rates for the 12-month period ending every September. The

TFM bulletin is published annually by the Department of the Treasury.

Each annual bulletin identifies the current value of funds rate and the

effective date of that rate.

(Authority: 20 U.S.C. 1094)

[FR Doc. 94-24115 Filed 9-28-94; 8:45 am]

BILLING CODE 4000-01-P