Institutional Eligibility; Student Assistance General Provisions; Federal Family Education Loan Programs; Final Rule DEPARTMENT OF EDUCATION

SUMMARY: The Secretary amends the Institutional Eligibility

regulations, the Student Assistance General Provisions regulations, and

the Federal Family Education Loan (FFEL) Program regulations to further

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 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.

EFFECTIVE DATE: These regulations take effect on July 1, 1995, with the

exception of Sec. 668.9(b), which is effective as of July 1, 1994.

However, affected parties do not have to comply with the information

collection requirements in Secs. 668.3, 668.8, 668.15, 668.16, 668.22,

and 668.23 until the Department of Education publishes in the Federal

Register the control numbers assigned by the Office of Management and

Budget (OMB) to these information collection requirements. Publication

of the control numbers notifies the public that OMB has approved these

information collection requirements under the Paperwork Reduction Act

of 1980.

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

Department of Education, 600 Independence Avenue, S.W. (Regional Office

Building 3, Room 4318), Washington, D.C. 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: On April 29, 1994 the Secretary published

interim final regulations (denominated final regulations) amending the

Student Assistance General Provisions regulations and the regulations

for the Federal Family Education Loan Programs and the Federal Pell

Grant Program (59 FR 22348). These regulations became effective on July

1, 1994. At the time these final regulations were published, the

Secretary requested additional public comment on whether further

changes in the regulations were warranted. A notice correcting the

regulations and extending the comment period until July 28, 1994 was

published on July 7, 1994 (59 FR 34964).

Based on the comments received, the Secretary is making further

changes in the regulations. These changes will take effect July 1,

1995. The Secretary also received comments on other provisions of the

regulations and may make further changes in the regulations based on

these comments. However, if the Secretary determines that additional

changes are necessary, these future changes would not become effective

before July 1, 1996.

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.

The April 29, 1994 final regulations included a discussion of the

major issues which will not be repeated here. The following list

summarizes those issues and identifies the pages of the preamble to the

April 29, 1994 final regulations on which a discussion of those issues

can be found:

The Secretary clarified the terms used in the statutory definition

of academic year (pages 22351 and 22361-22363);

The Secretary added 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 (pages 22364-22365);

The Secretary amended the 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 included

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 added further provisions to evaluate

the quality of short-term programs. The Secretary also amended the

provisions for English as a second language programs (pages 22351-22352

and 22365-22368);

The Secretary added 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 added procedures to codify new statutory

provisions governing provisional certification procedures for

participation in a Title IV, HEA program (pages 22352-22353 and 22368-

22374);

The Secretary amended 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

added provisions to amend the regulations governing program

participation agreements (pages 22353 and 22374-22377);

The Secretary made significant changes to the section governing the

evaluation of an institution's financial responsibility. The Secretary

strengthened the factors used to evaluate an institution's financial

responsibility to reflect statutory changes (pages 22353-22354 and

22378-22383);

The Secretary strengthened and expanded the standards of

administrative capability for participating institutions, addressing

areas previously not regulated or for which there were only guidelines

(pages 22354 and 22383-22391);

The Secretary amended the provisions governing default reduction

measures to reflect statutory changes made by the Amendments of 1992

and current departmental practices (pages 22355 and 22391-22394);

The Secretary clarified the terms used in the statutory definition

of a fair and equitable refund policy (pages 22355-22359 and 22394-

22401);

The Secretary implemented the statutory requirement that

institutions have annual compliance audits (pages 22359 and 22401-

22403);

The Secretary expanded the factors of financial responsibility of

an institution to take into consideration substantial control over both

institutions and third-party servicers (page 22381);

The Secretary implemented annual audit requirements for third-party

servicers as necessary to implement statutory provisions under the

Amendments of 1992 (pages 22401-22403);

The Secretary amended the regulations to require a third-party

servicer to notify any institution under whose contract the third-party

servicer is assessed a liability and any institution that receives the

same services for which a liability was assessed, of the assessment of

the liability against the servicer (page 22408);

The Secretary created 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 is 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 22405-22407);

The Secretary amended the regulations to apply against a third-

party servicer the sanctions under subpart G of the Student Assistance

General Provisions for any violation of a Title IV, HEA program

requirement (page 22408);

The Secretary amended the regulations to apply fiduciary standards

to third-party servicers so that a third-party servicer is required to

act at all times with the competency necessary to qualify as a

fiduciary (pages 22408-22409);

The Secretary amended the regulations 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 22415);

The Secretary added a new section to codify Federal requirements

for third-party servicers that contract with lenders or guaranty

agencies. A third-party servicer is 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 implements statutory authority to require that a

third-party servicer must have performed an annual audit of the

servicer's administration of a lender's or guaranty agency's

participation in the FFEL programs (pages 22415-22416); and

The Secretary amended 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

(pages 22416-22417).

Substantive Changes to the Final Regulations

PART 668--STUDENT ASSISTANCE GENERAL PROVISIONS

Subpart A--General

Section 668.2 General Definitions

Academic Year

In the April 29, 1994 final regulations, the Secretary addressed 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. A modification was 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. In response to public comment,

the Secretary has amended the definition of an academic year 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 12 hours of regularly scheduled instruction,

examinations, or preparation for examinations occurs. A corresponding

change has been made to the definition of an eligible program in

Sec. 668.8(b)(3)(ii). Third-party Servicer.

In response to public comment, the definition of third-party

servicer has been amended to specifically exclude the function of

providing computer services or software. This change merely codifies

the Secretary's determination in the preamble to the April 29, 1994

final regulations, that the function of providing computer services or

software is simply a technological means to assist in carrying out

certain administrative functions that are already included in the

definition third-party servicer under this part.

In response to public comment, the definition of third-party

servicer has been modified to expressly exclude employees of an

institution. For purposes of determining which individuals are

employees of an institution, with respect to administering any aspect

of an institution's participation in the Title IV, HEA programs, the

regulations now specify that an employee is an individual that works on

a full-time, part-time, or temporary basis at the institution; performs

all required duties that are relevant to the administration of the

institution's participation in the Title IV, HEA programs on site at

the institution under the supervision of the institution; is paid as an

individual directly by the institution; is not employed by or

associated with a third-party servicer; and is not a third-party

servicer for any other institution.

Section 668.3 Reductions in the Length of an Academic Year.

In the April 29, 1994 final regulations, the Secretary promulgated

regulations 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. In response to

public comment the Secretary has amended Sec. 668.3(c) to clarify that

an institution may apply for a longterm reduction in the length of an

academic year if it wishes to continue operating with a reduced

academic year on a longterm basis. An institution's other option would

be to ask for a temporary reduction in the length of an academic year

while the institution changes to at least a 30 week academic year. The

Secretary notes that Sec. 668.3(c)(2) requires an institution that is

granted a longterm reduction in the length of an academic year to

reapply to the Secretary in order to continue the reduction whenever

the institution is required to apply to continue to participate in a

Title IV, HEA program.

The April 29, 1994 final regulations require that an institution

applying for a transitional or longterm reduction in the length of an

academic year must demonstrate that the institution has awarded,

disbursed, and delivered Title IV, HEA program funds in accordance with

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. In response to public comment, the Secretary has

added Sec. 668.3(d) to specify that an institution may demonstrate

compliance with this requirement by making arrangements that are

satisfactory to the Secretary to repay any overawards that resulted

from the improper awarding, disbursing, or delivering of Title IV, HEA

program funds.

Section 668.8 Eligible Program

English as a Second Language (ESL)

In response to public comment, the Secretary has removed

Sec. 668.8(j)(2) that required an institution to assess each student at

the end of an ESL program to substantiate that the student has attained

adequate proficiency in written and spoken English to use already

existing knowledge, training, or skills.

Undergraduate Educational Program in Credit Hours.

In response to public comment, the clock-hour/credit-hour

conversion regulations have been amended to reinstate the exemption

from the clock-hour/credit-hour conversion formula for programs of at

least two academic years in length that lead to an equivalent degree,

as determined by the Secretary. A similar change has been made for

programs offered by an institution that are fully creditable toward

that institution's equivalent degree, as determined by the Secretary.

Section 668.9 Relationship Between Clock Hours and Semester,

Trimester, or Quarter Hours in Calculating Title IV, HEA Program

Assistance

On October 20, 1994, Pub. L. 103-382 was signed by the President of

the United States. Pub. L. 103-382 amends the HEA to specify that

public or private nonprofit hospital-based diploma schools of nursing

are exempt from any regulations promulgated by the Department

concerning the relationship between clock hours and semester,

trimester, or quarter hours in calculating student grant, loan, or work

assistance under Title IV of the HEA. Accordingly, this section is

amended to provide for that exemption. This provision took effect on

July 1, 1994.

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

Programs

Section 668.12 Application Procedures

In response to public comment, the Secretary has revised

Sec. 668.12(b) to no longer automatically require an institution to

apply to the Secretary for a certification that the institution

continues to meet the standards for participation in the Title IV, HEA

programs if the institution adds an additional location that offers 100

percent of a program. The regulations have been revised to require that

if an institution adds an additional location that offers 100 percent

of a program, the institution is required to notify the Secretary in

accordance with 34 CFR 600.30. If the Secretary determines that the

addition of the location may impair an institution's administrative

capacity or financial strength, the Secretary may require the

institution to apply to the Secretary for a certification that the

institution continues to meet the standards for participation in the

Title IV, HEA programs.

Section 668.15 Factors of Financial Responsibility

In response to public comment, the Secretary has revised the cash

reserve requirement to provide that an institution will be deemed to

have sufficient cash reserves to make refunds if the institution

demonstrates that it meets the factors of financial responsibility in

Sec. 668.15 and demonstrates that it has paid refunds in a timely

manner over a two-year period. If the institution does not demonstrate

financial responsibility, the institution will have to post a letter of

credit in accordance with existing regulations. If the institution did

not demonstrate timely payment of refunds, the institution will have to

post a letter of credit equal to 25 percent of the Title IV refunds it

was required to make over the past year.

Based upon the change in requirements for the cash reserve related

to refund payments set out in 668.15, the Secretary has amended

Secs. 668.15(b)(7)(i)(A) and (8)(i)(B) to remove the reference to the

cash reserve fund in the delineation of items that would be included in

the list of institutional assets for the acid test analysis.

The Secretary has also amended the language in 668.15(b)(7)(i)(B)

to clarify that the determination of an institution's financial

responsibility depends, in part, upon an analysis of the relative size

of an institution's net operating losses over the prior two year

period. This clarification is being made to reflect the discussion on

59 FR 22382 of the April 29 final regulations, where the Secretary

explained that an analysis of an institution's operating losses was

made to determine if the losses in either or both of the institution's

two most recently completed fiscal years in sum total more than ten

percent of the institution's total net worth at the beginning of the

first year in the two year period.

The Secretary has amended Sec. 668.16(d) to delineate items that

the Secretary will consider in determining whether a State tuition

recovery fund is an acceptable substitute for the federal cash reserve

requirement.

Section 668.16 Standards of Administrative Capability

In response to public comment, the Secretary has modified the

provisions governing satisfactory academic progress in Sec. 668.16(e)

to provide clarification.

In response to public comment, the Secretary has revised

Sec. 668.16(l) that required that, to be administratively capable, an

institution was required to meet the 33 percent withdrawal rate

specified in the regulations. This provision is now applicable only to

institutions that seek to participate in a Title IV, HEA program for

the first time (``new'' schools). The Secretary has also changed the

withdrawal date provision to require institutions to report their

withdrawal rates for an award year time period, rather than an academic

year time period.

Section 668.22 Institutional Refunds and Repayments

Section 668.22(a)(1) has been amended to clarify that the

requirement that an institution have a fair and equitable refund policy

under which the institution makes a refund of certain charges to a

student who received Title IV, HEA program assistance, includes any

student whose parent received a Federal Direct PLUS loan on behalf of

the student. In addition, Sec. 668.22(i) has been amended to clarify

that ``financial aid'' includes Federal Direct PLUS loans received on

the student's behalf.

In response to public comment, changes have been made to remove

language that would have required an institution to treat a student on

a leave of absence as a withdrawal for purposes of this section.

Language has been removed from Secs. 668.22(a)(1)(ii), (e)(1)(i), and

(g)(2)(iv) of the April 29, 1994 final regulations to reflect this

change. Section 668.22(j)(1)(ii) has been amended to define the

withdrawal date for a student who does not return to the institution at

the expiration of an approved leave of absence or takes a leave of

absence that is not approved, as the student's last recorded date of

class attendance as documented by the institution. Section 668.22(j)(2)

has been added to specify that a leave of absence is approved for

purposes of this section if no other leave of absence has been granted

within a twelve-month period, the leave of absence does not exceed 60

days, the student makes a written request to be granted the leave of

absence, and the leave of absence does not involve additional charges

by the institution to the student. Section 668.22(j)(4)(iii)(A) has

been amended to require that an institution pay a refund that is due to

a student who does not return to the institution at the expiration of

an approved leave of absence, within 30 days of the date of expiration

of the leave of absence. Section 668.22(j)(4)(iii)(B) has been added to

require that an institution pay a refund that is due to a student who

is taking an unapproved leave of absence, within 30 days after the

student's last recorded date of class attendance as documented by the

institution.

In response to public comment, Sec. 668.22(b)(1)(iv)(A) has been

amended to reflect that the Secretary has removed Appendix A to this

part, Standards for Acceptable Refund Policies by Participating

Institutions, and replaced it with the Federal refund calculation

described in new Sec. 668.22(d).

Sections 668.22(c)(2)(ii) and 668.22(g)(2)(ii)(B) permit an

institution to exclude allowable late disbursements of loans made under

the Federal Direct Student Loan Program from a student's scheduled cash

payment. These sections have been amended to clarify that late

disbursements of loans made under the Federal Direct Student Loan

Program must be made in accordance with 34 CFR 685.303(d) of the

Federal Direct Student Loan Program regulations.

In response to public comment, Sec. 668.22(e)(i) has been amended

to define the minimum ``period of enrollment for which the student has

been charged'' as the semester, trimester, quarter, or other academic

term in the case of an educational program that is measured in credit

hours or clock hours and uses semesters, trimesters, quarters, or other

academic terms. Section 668.22(e)(ii) has been amended to define the

minimum ``period of enrollment for which the student has been charged''

in the case of an educational program that is measured in credit hours

or clock hours and does not use terms and is longer than or equal to

the academic year in length, as the greater of the payment period or

one-half of the academic year. Section 668.22(e)(ii) is also amended to

define the minimum ``period of enrollment for which the student has

been charged'' in the case of an educational program that is measured

in credit hours or clock hours and does not use terms and is shorter

than the academic year in length, as the length of the educational

program.

Section 668.22(f)(1)(ii), (f)(2)(i), (g)(3)(ii), (h)(1), (h)(2)(ii)

and (h)(2)(v) have been amended to clarify that, for purposes of this

section an institution is not required to determine whether a student

has received an overpayment and, therefore, is not required to return

any amount of a repayment, for noninstitutional costs for Federal

Direct Stafford, or Federal Direct PLUS program funds. This is

consistent with requirements for Federal Work Study (FWS), Federal

Stafford loan, Federal PLUS, and Federal SLS program funds.

In response to public comment, Sec. 668.22(g)(3)(iii)(B) has been

added to provide that an institution does not have to pay a refund if

the institution demonstrates that the amount of a refund would be $25

or less, provided that the institution has obtained written

authorization from the student in the enrollment agreement to retain

any amount of the refund that would be allocated to the Title IV, HEA

loan programs.

Consistent with the allocation order for the return of unsubsidized

and subsidized Federal Stafford loans, Sec. 668.22(h)(1)(v) has been

added and Sec. 668.22(h)(1)(vi) has been amended to clarify that an

institution must allocate a refund to eliminate outstanding balances on

unsubsidized Federal Direct Stafford loans received by the student

before allocating any portion of the refund to eliminate outstanding

balances on subsidized Federal Direct Stafford loans received by the

student.

Section 668.22(j)(3) has been amended to clarify that this

paragraph specifies the timely determination of withdrawal for students

who drop out of an institution. It is unnecessary to specify the timely

determination of a student's withdrawal in the case of students who

officially withdraw, are expelled, or take an unapproved leave of

absence, because the institution has either been informed of the

withdrawal, or has taken action to withdraw the student. Further, the

Secretary would expect an institution to be aware that a student has

failed to return from an approved leave of absence on the day that the

student is scheduled to return to the institution.

In order to provide further guidance on the refund process, the

Secretary has included flow charts that demonstrate the basic

procedures for determining which refund policy to use and general

guidance on how to calculate refunds. These flow charts are located in

a new Appendix A to this part (Flow Charts for Procedures for

Calculating Refunds Under Sec. 668.22).

Section 668.23 Audits, Records, and Examinations

References to a foreign institution have been removed from this

section to clarify that an institution, as that term is used throughout

the regulations, includes a foreign institution, as defined in 34 CFR

600.52, unless otherwise specified.

In response to public comment, Sec. 668.23(c)(1)(i) and (iii) have

been amended to specify that a third-party servicer's annual compliance

audit must meet the compliance audit standards for institutions. This

change reflects the Secretary's determination that a third-party

servicer, as an agent of an institution, must be examined with the same

standards that are applied to institutions.

The Secretary is making a technical change to Sec. 668.23(c)(1)(iv)

and (d) to specify that the U.S. General Accounting Office's

publication concerning general standards and standards for compliance

audits is now published under the title: Government Auditing Standards.

In response to public comment, a foreign institution's first audit

report is only required to cover the two most recently concluded award

years in which the foreign institution participated in the Title IV,

HEA programs, unless otherwise specified by the Secretary. If a foreign

institution has been participating in the Title IV, HEA programs for

less than two award years, the foreign institution's first audit report

must cover the entire period of time since the foreign institution

began to participate in the Title IV, HEA programs. This change to the

final regulations that were published on April 29, 1994, reduces the

burden that is placed upon a foreign institution that has been

participating in the Title IV, HEA programs for a long time. A new

Sec. 668.23(c)(2)(i)(B) incorporates this change.

In response to public comment, Sec. 668.23(c)(3) has been revised

to require that an institution's or third-party servicer's annual

compliance audit must be based upon the award year and submitted to the

Department of Education within six months after the end of the

institution's or third-party servicer's fiscal year that ends on or

after the most recently concluded award year for which the audit is

performed. A corresponding change has also been made to new

Sec. 668.23(c)(2)(i)(B) and to Sec. 668.23(c)(2)(ii).

In response to public comment, Sec. 668.23(h)(1)(v), which required

an institution to document a Title IV, HEA program recipient's

placement in a job, if the institution had a placement service and the

student used that service, has been removed. In addition,

Sec. 668.23(h)(2) (i) and (ii), which require an institution to

establish and maintain records regarding the admission requirements and

educational qualifications of each regular student the institution

admits into an eligible program, have been combined under

Sec. 668.23(h)(2) to simplify the regulations.

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

Section 668.81 Scope and Special Definitions

Under the State Postsecondary Review Program (SPRP) authorized

under Part H-1 of Title IV of the HEA, a State Postsecondary Review

Entity (SPRE) reviews institutions referred to a State to determine if

the referred institutions meet applicable State standards. If a SPRE

determines, after affording an institution the opportunity to contest

that determination, that an institution should no longer participate in

the Title IV, HEA programs because it violates state standards, it

notifies the Secretary of that determination. Under 34 CFR 667.26(b)(2)

of SPRP regulations, the institution is not allowed to appeal that

termination determination to the Secretary.

Upon receipt of that notice, the Secretary immediately terminates

the institution's participation in the Title IV, HEA programs.

Accordingly, Sec. 668.81 is amended to clarify that Subpart G of Part

668 does not apply to terminations under the SPRP.

Subpart H--Appeal Procedures for Audit Determinations and Program

Review Determinations

Section 668.116 Hearing

The Secretary has also made a typographical correction to

668.116(e)(1)(vi) to reflect that institutions and third party

servicers have up to 30 days following the filing of a request for

review of an audit determination or a program review determination to

file certain other records and materials to be considered in

conjunction with their request. The April 29, 1994 final regulations

contained a typographical error that defined this period as ``3'' days

rather than the ``30'' days established for such documentary

submissions.

PART 682--FEDERAL FAMILY EDUCATION LOAN PROGRAMS

Subpart D--Guaranty Agency Programs

Section 682.413 Remedial Actions

The April 29, 1994 regulations applied the remedial actions of this

section to a third-party servicer that contracts with a lender or

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

FFEL programs. However, the final regulations did not specify that a

third-party servicer was entitled to an opportunity to be heard prior

to the assessment of any remedial actions that the Secretary deems are

appropriate to the alleged violation. Accordingly, Sec. 682.413(e)(1)

is amended to provide third-party servicers that contract with lenders

or guaranty agencies with an opportunity to present evidence or other

information as to why the remedial action should not be levied against

the servicer. This change provides due process protection for third-

party servicers that contract with lenders or guaranty agencies.

Analysis of Comments and Changes

In response to the Secretary's invitation in the April 29, 1994

final regulations, 706 parties submitted comments. An analysis of the

comments that have resulted in changes to the final regulations

follows.

Major issues are grouped according to subject, with appropriate

sections of the regulations referenced in parenthesis. Other

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 (unless the Secretary

believes it is necessary to do so.)

PART 668--STUDENT ASSISTANCE GENERAL PROVISIONS

Subpart A--General

Section 668.2 General definitions

Academic Year

Comments: Eighty-seven commenters commented on the Secretary's

definition of a week of instructional time for purposes of the

definition of an academic year and a week of instruction for purposes

of the definition of an eligible program in Sec. 668.8. A few

commenters asked for clarification on the implementation of the five-

day rule. One commenter suggested that the Secretary clarify the

definition of a week of instruction, because a strict reading of the

language implies that an institution would not be able to count as a

week of instruction any week in which there was not a full five days of

instruction due to a holiday, teacher workshop day, etc. Some

commenters were concerned that this provision would require their

students to make-up time for Federal holidays. One commenter observed

that given that there are approximately 12 Federal holidays per year,

even a nine-month program which meets five days per week would not be

deemed to have 30 weeks of instruction under the current definition of

an academic year. One commenter expressed concern that its institution

would have to eliminate a monthly inservice, during which meetings,

tutoring sessions, and professional lectures are conducted. Another

commenter stated that the State of Maryland would not permit them to

reduce the number of hours per day in order to add a fifth day of

class. The institution was concerned that under this provision, its

students who attend their weekend program would be ineligible for Title

IV, HEA program assistance. Another commenter requested that the

Secretary define a day of instruction, examination, or preparation.

Many commenters were concerned that requiring students to attend

classes at least five days per week if the students are attending

educational programs measured in credit hours without semesters,

trimesters, or quarters, would create time and economic hardships. The

commenters said the schedules of these programs are tailored to meet

the needs of non-traditional students who have family and work

obligations which require flexible school schedules. Many commenters

believed that under this provision, students would encounter decreased

wages and increased child care costs if they were required to spend

extra days in class. Some commenters stated that this rule would only

contribute to student absenteeism. Other commenters argued that this

provision would work as a disincentive for some students to attend

these programs and would serve as an agent in cutting off equal access

to students who cannot attend classes five days a week. Some commenters

feared that this rule would have a substantially negative impact on

enrollment at their institutions. One commenter stated that he

specifically chose his program of study because it allowed flexibility

in attending classes and retaining his job, and this provision would

prohibit him and many other students from pursuing their education and

employment opportunities. Some commenters maintained that students who

travel to institutions for intensified weekend programs would be

severely impacted by this provision, as they would incur greater

transportation and lodging costs. Some commenters viewed the provision

as discriminatory, as it would limit educational access for some

students. One of the commenters observed that traditional education is

not effective in low-income, single-parent households. A few commenters

believed that the Secretary did not take into account the rationale for

the use of non-standard terms. These institutions offer more starts

with less students so that staff can better assist students with

placement upon completion of the program.

Some commenters remarked that while the current definition

addresses the required minimum of days per week, it disregards the

number of hours per day. Many commenters felt that the Secretary should

focus on the amount of daily instructional time rather than the number

of days per week spent in the classroom. The commenters questioned the

relationship between the number of days a student attends classes and

the quality of a program, especially if the regulation does not

recognize the length of time a student spends in class per day. One

commenter suggested that the Secretary define its 30-week academic year

as any period of at least 30 chronological weeks, i.e., 210 days, in

which at least 720 clock hours of instruction is scheduled to occur.

This methodology translates to requiring scheduled attendance of at

least 24 hours of attendance per week for a full-time student and is

consistent with the Department's long-standing definition of full-time

status. The commenter noted that given that non-fixed term institutions

frequently have weekly or bi-weekly starts which could make it

difficult for auditors to determine exactly where vacations and/or

other activities not related to class preparation might fall, this

proposal is more easily audited since the program reviewer or auditor

would simply need to look at the program curriculum to determine the

total number of classroom hours of instruction within the period. The

commenter maintained that this proposed change is consistent with the

Department's historical definition of full-time status, is easier to

audit, satisfies current clock-hour/credit-hour conversion

requirements, and is less administratively burdensome than the

definition in the final rule. One commenter believed the effective date

and the timeframe allowed for institutions to comply with this

regulation was too stringent. The commenter felt that institutions and

students should be given sufficient time to rearrange their schedules

based on the changes necessitated by this requirement.

Discussion: The Secretary would like to clarify the Department's

interpretation of the five-day rule under the regulations in effect for

the 1994-95 award year as it applies to programs which measure progress

in credit hours but do not use standard terms (semesters, trimesters,

or quarters). A proprietary institution of higher education or a

postsecondary vocational institution must, to be eligible, provide an

eligible program, as defined by Sec. 668.8(d) of the Student Assistance

General Provisions regulations. Section 668.8(d) provides for three

types of eligible programs for these institutions which require a

program to have a specified number of weeks of instruction (see

Sec. 668.8(d) (1), (2), and (3)). In addition, each participating

institution is subject to a definition of an academic year in which a

full-time student (with respect to an undergraduate course of study),

during a minimum of 30 weeks of instructional time, must complete a

specified amount of work.

For purposes of these definitions of an eligible program and an

academic year, for all educational programs measured in credit hours

without standard terms (semesters, trimesters, or quarters), a ``week

of instruction'' and a ``week of instructional time'' must include at

least five days of instruction, examinations, or preparation for

examinations within a consecutive seven-day period, as opposed to the

required one day of instruction, examinations, or preparation for

examinations per seven day period for all other programs.

The five-day rule in effect requires an institution to demonstrate

that certain programs and academic years for those programs have not

only a minimum number of weeks, but also a minimum number of days. For

example, in order for a program to meet the eligible program definition

that requires at least 600 clock hours, 16 semester or trimester hours

or 24 quarter hours of instruction, examinations, or preparation for

examinations offered during a minimum of 15 weeks, the program must

meet for a minimum of 15 weeks over which a minimum of 75 days of

instruction, examinations, or preparation for examinations occur (five

days of instruction, examinations, or preparation for examinations for

15 weeks).

An institution that wants to set its program to be only 15 weeks

long would therefore have to meet an average of five days per week for

the 15 week period in order for the program to be eligible. An

institution with a program that meets less frequently than five days a

week would have to meet enough weeks to provide 75 days of instruction,

examinations, or preparation for examinations. For example, a program

meeting three times a week would have to be 25 weeks long in order to

be eligible under this provision.

This same approach is used to determine an institution's academic

year. An institution that wants to set its academic year to be only 30

weeks long would have to meet an average of five days per week for the

30 week period. An institution with a program that meets less

frequently than five days a week would have to meet enough weeks to

provide 150 days of instruction, examinations, or preparation for

examinations (30 weeks x five days per week) in order to have a program

offered over a full academic year. For example, a program that meets

four times a week would have a full academic year of approximately 38

weeks (37 weeks x four days per week (plus an additional 2 days) = 150

days of instruction, examinations, or preparation for examinations). An

institution has the option of pro rating Title IV, HEA program aid

disbursements if it chooses to offer an eligible program over a period

of time less than an full academic year.

The Secretary believes that this interpretation addresses many of

the concerns of the commenters, as it does not require an institution

to restructure a program to schedule five days of classes per week or a

student to be in attendance five days per week. This interpretation

allows an institution to establish a class schedule that meets the

needs of its student population, while ensuring that the student is

provided with a sufficient amount of education. The Secretary does not

specify what constitutes a day of instruction, examination, or

preparation for examination. However, the Secretary would expect an

institution to be able to demonstrate that the amount of instruction,

examinations, or preparation for examinations offered or required is

reasonable and necessary for completion of the program.

The Secretary agrees with the commenters who noted that it would be

more appropriate for the current definitions of a week of instructional

time and a week of instruction to take into account the hours of

education offered to students each week, rather than the days of

education offered each week. In particular, the Secretary agrees with

the commenter who suggested that the Secretary define an academic year

in a manner that relates to the amount of work that a full-time student

is expected to perform over this period. To this end, the Secretary has

decided to modify the definition of an academic year and an eligible

program beginning with the 1995-96 award year to require that, for

educational programs using credit hours, but not using a semester,

trimester, or quarter system, a week of instructional time (and a week

of instruction) is any week in which at least 12 hours of regularly

scheduled instruction, examinations, or preparation for examinations

occurs. The Secretary believes that a minimum number of hours, as

opposed to a minimum number of days per week, will permit even greater

flexibility to institutions that seek to provide education to

nontraditional students. The Secretary believes that 12 hours per week

is a reasonable measure, since full-time students are expected to carry

a minimum of 12 semester or quarter hours per academic term in an

educational program using a semester, trimester, or quarter system.

Thus, full-time students enrolled in such programs are generally

assumed to be in class attendance at least 12 hours per week, and this

hourly requirement has been adopted to replace the five day rule to

measure program eligibility. This provision is to be implemented in the

same manner as the five-day rule provision. For example, in order for a

program to meet the eligible program definition that requires at least

600 clock hours, 16 semester or trimester hours or 24 quarter hours of

instruction, examinations, or preparation for examinations offered

during a minimum of 15 weeks, the program must meet for a minimum of 15

weeks over which a minimum of 180 hours of instruction, examinations,

or preparation for examinations occur (12 hours of instruction,

examinations, or preparation for examinations per week for 15 weeks).

An institution that wants to set its program to be only 15 weeks long

would therefore have to meet an average of 12 hours per week for the 15

week period in order for the program to be eligible. An institution

with a program that meets less frequently than 12 hours per week would

have to meet enough weeks to provide 180 hours of instruction,

examinations, or preparation for examinations. For example, a program

meeting 6 hours per week would have to be 30 weeks long in order to be

eligible under this provision.

Because neither the current five-day rule nor the 12-hour per week

provision requires an institution to offer instruction, examinations,

or preparation for examinations on specific days, an institution may

not include a holiday for these calculations unless regularly scheduled

instruction, examinations, or preparation for examinations occurs on

that day.

Because the interpretation detailed above does not require an

institution to restructure a program to meet 5 days per week, the

Secretary does not agree that it was necessary to delay implementation

of this requirement.

Changes: The definition of an academic year has been amended 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 12 hours of regularly scheduled

instruction, examinations, or preparation for examinations occurs. A

corresponding change has been made to the definition of an eligible

program in Sec. 668.8(b)(3)(ii).

Comments: One commenter observed that many external degree and

adult learning programs are trying to reduce the number of days spent

in the classroom. One commenter requested that the Secretary utilize

the diversity and plurality of the education system by recognizing the

amount of time the student spends in different educational settings.

One commenter remarked that although instruction does not include

periods of orientation or counseling, that is the time when some

schools perform their required entrance loan counseling.

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. Orientation programs and counseling 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: Some commenters were confused as to the specific abuses

that the Secretary is attempting to curb with the five-day rule. A few

commenters disagreed with the Secretary's rationale that credit hour

non-term programs are more susceptible to abuse than a traditional

academic program. Many of the commenters believed that the 30-week

academic year and the clock-hour/credit-hour conversion provisions have

adequately dealt with this situation. One commenter requests that the

Secretary demonstrate how it is possible to abuse the current

definition and still meet the requirements for clock-to-credit-hour

conversions. Several commenters believed that this provision is

unnecessary, as the abuses that the Secretary is trying to curb with

this rule are already addressed by other existing provisions (for

example: certification gatekeeping functions contained in the HEA;

State requirements which specify hours of instruction or academic

calendars which consider class attendance on a daily or weekly basis;

accrediting agencies which are required to look at the relationship

between tuition and program length as it relates specifically to

vocational training; and the SPRE standards). The commenters feel that

the public would be better served by relying on existing regulations

relating to program length, rather than requiring five days of

instruction per week. A few commenters did not understand why its

program met the program contact hours requirements of its accrediting

agency, yet did not comply with the Department's regulations. One

commenter requested clarification of the Secretary's policy of

requiring accreditation of an institution for oversight, but not

accepting verification by these accrediting agencies that an

institution's programs are educationally sound.

Some of the commenters noted that this provision was not addressed

in the February 28, 1994 notice of proposed rulemaking or during

negotiated rulemaking and there was no opportunity to comment on this

provision until publication of the final rule. Some commenters argued

that the Department is exceeding its statutory authority, as Congress

did not define this provision during reauthorization. One of these

commenters believed there was no indication in the proposed rule that

non-standard term programs would be singled out for discriminatory

treatment in the definition of an academic year. The commenter

understood that although the Secretary indicated he was concerned about

assuring no opportunities for abuse by these programs, he made that

statement in the context of the possible need to establish a standard

workload for a full-time student; not in the context of making changes

to the definition of an academic year and an eligible program. Many of

the commenters believed that this provision is prejudicial against

credit hour institutions without terms, and suggested that the

Secretary apply the same definition of a week of instruction to all

institutions. One commenter was concerned that the regulation treats

programs that have a term, but a term that is not a semester, trimester

or quarter, the same as ``nonterm'' programs. Another commenter felt

that the interests of the four-year institutions were better

represented than the nonterm institutions which would be more impacted

by this provision. One commenter noted that the Secretary has made an

exception for programs that lead to associate, bachelor, or

professional degrees, but not for nondegree programs.

Discussion: As stated in the February 28, 1994 NPRM and the April

29, 1994 final regulations, the Secretary is correcting an abuse of the

definition of an academic year whereby an institution that has programs

that are measured in credit hours without standard 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 believes that provisions

that address this area of abuse are appropriate in the regulations to

prevent institutions from establishing elongated instructional

schedules that do not require an appropriate workload throughout that

period for a full-time student. Institutions offering credit hour

programs without standard terms have more flexibility in shifting the

workload requirements for their programs over an indefinite period than

do clock hour programs or credit hour standard term programs. The

Secretary believes that it is appropriate to establish minimum

instructional periods that must be used for students attending these

institutions. No corresponding changes need to be made where students

are already required to receive a minimum amount of clock hours of

training per week to be full-time students, or where the institution

has fixed standard terms.

It is the Secretary's responsibility, and not an institution's

accrediting agency, to utilize the definitions of an academic year and

an eligible program in the HEA to ensure that appropriate amounts of

Title IV, HEA program funds are disbursed to students. The Secretary

does not believe that other provisions of the HEA or of the regulations

address the specific area of abuse that this provision addresses.

Although the clock-hour/credit-hour provision provides some protection

against course structuring where an insufficient quantity of

instruction is offered to support the academic credits assigned to the

program, it does not prevent an institution from stretching the length

of an educational program to conform to the minimum number of weeks

required without offering an appropriate quantity of instruction during

each of those weeks. Further, the Secretary notes that there are

programs that must meet the statutory minimum number of weeks under the

academic year and eligible program definitions that are not subject to

the clock-hour/credit-hour regulations. For example, a training program

in which each course is fully acceptable toward the institution's

associate degree would be exempt from the clock-hour/credit-hour

provision.

The Secretary notes that the February 28, 1994 NPRM 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.

Rather than changing the proposed definition of full-time student to

require measurement of student workloads, the Secretary believes it is

more beneficial to stem abuse in this area by modifying the definitions

of an academic year and an eligible program to require a minimum amount

of instruction per week for institutions that offer credit hour

programs without terms.

The Secretary notes that the statute defines an academic year in

terms of weeks of instructional time and certain eligible programs in

terms of weeks. The statute does not apply these terms to the

definitions of eligible programs that qualify an institution as an

institution of higher education for purposes of the Title IV, HEA

programs. For the reasons stated above, the Secretary believes it is

necessary to define these terms in a manner that will protect Title IV,

HEA program funds.

Changes: None.

Third-Party Servicer

Comments: Five commenters suggested, for the purposes of 34 CFR

part 668, that the definition of third-party servicer in this section

should only identify those functions relating to third-party servicers

that contract with institutions (as opposed to those third-party

servicers that contract with lenders and guaranty agencies) to provide

third-party servicers and institutions a clear understanding of which

provisions are applicable. The five commenters also suggested that the

definition of third-party servicer should be limited to those

activities that an institution is required to perform under its

participation agreement with the Secretary. These commenters believed

that such a limitation would result in services such as consulting,

training, computer services, ability to benefit test publishers, and

legal advice not being covered by these regulations. The five

commenters recommended clarifying that administration of participation

is limited to what is specified in the institution's participation

agreement with the Secretary.

Discussion: The Secretary does not believe that additional

clarification of the definition of third-party servicer is necessary in

the form recommended by the commenters. Section 481(f) of the HEA

specifies that a third-party servicer is an individual, State, or

private, profit or nonprofit organization that enters into a contract

with an eligible institution to administer, through either manual or

automated processing, any aspect of the institution's participation in

any Title IV, HEA program. A third-party servicer that contracts with

an eligible institution to administer any aspect of the institution's

participation in the Title IV, HEA programs is required to follow the

provisions in 34 CFR part 668 that are applicable to third-party

servicers. Under the program participation agreement that an

institution signs to participate in the Title IV, HEA programs, the

institution specifically agrees to abide by all rules and regulations

pertaining to Title IV of the HEA. Therefore, the suggestion to limit

the scope of the definition of third-party servicer to what is required

under a program participation agreement would not narrow the scope of

the definition of third-party servicer, and could result in confusion

over the definition of third-party servicer.

Changes: None.

Comments: Five commenters contended that the function of processing

student financial aid applications was ambiguous and needed further

clarification or else should be removed. The commenters argued that the

Free Application for Federal Student Aid (FAFSA) is sent to the central

processor or Multiple Data Entry Processor (MDE) and the function

therefore should not be covered by the regulations. In addition, the

commenters recommended that if the Secretary kept the language, that

processing student financial aid applications should be clarified to

exclude non-Federal financial aid applications.

Five commenters recommended that the function of determining

student eligibility and related activities should not include ``related

activities.'' The commenters argued that related activities was too

ambiguous a term and was highly subjective.

Five commenters recommended clarifying the function of certifying

loan applications to not include guaranty agency or lender electronic

processing of loan applications because, the commenters contended,

these entities merely use data provided by an institution.

Five commenters were concerned that escrow agents, as that term is

used pursuant to 34 CFR 682.408, would be considered to be third-party

servicers under the definition of third-party servicer in 34 CFR part

668. The commenters recommended that the Secretary specifically exclude

the function that escrow agents perform from the list of functions that

the Secretary does not consider administration of the Title IV, HEA

programs because, the commenters contended, an escrow agent disburses

funds for a lender under the FFEL programs and not for an institution.

In addition, the commenters argued that the function of receiving,

disbursing, or delivering Title IV, HEA program funds should include

clarification that disbursements of funds are those received by the

institution from the Secretary or lender.

One commenter argued that the definition of a third-party servicer

should include an attorney that is carrying out litigation activities

on Title IV, HEA program loans. Two commenters recommended that a

dollar threshold be established so as not to preclude services by local

attorneys on a small number of accounts. Three commenters argued that

attorneys should be excluded from the definition of a third-party

servicer. The commenters pointed out that if attorneys are covered by

these regulations that conflicts may arise between these regulations

and other Federal and State rules and regulations governing the conduct

of attorneys.

Five commenters recommended excluding data exchange functions from

the list of functions that the Secretary does not consider

administration of the Title IV, HEA programs. The commenters believed,

for example, that the Student Loan Clearinghouse, which the commenters

stated received and consolidated student enrollment data, should not be

considered a third-party servicer because the company merely

consolidates data for institutions, lenders, and guaranty agencies.

Eight commenters supported the Secretary's decision to not include

computer services and software providers from the list of functions

that the Secretary considers to constitute administration of the Title

IV, HEA programs. Six of the commenters requested that the Secretary

specifically exclude these services in the regulations. One commenter

believed that the function of providing industry-specific software or

service packages should be included in the list of functions that the

Secretary considers to constitute administration of participation in

the Title IV, HEA programs because flaws in these programs could result

in huge liabilities for institutions using the software. However, the

commenter also believed that computer software packages that are

modifiable by the user should not be covered by the regulations.

One commenter recommended that alternate Electronic Data Exchange

(EDE) destination points that serve only as an electronic conduit from

the Central Processing System to an institution should be excluded from

the definition of third-party servicer because this type of activity is

not a function of administering an institution's participation in the

Title IV, HEA programs.

Discussion: The Secretary does not agree with those commenters who

recommended removing the function of processing financial aid

applications. The Secretary believes that processing financial aid

applications is of fundamental importance to the proper delivery of

program funds authorized under Title IV of the HEA, and third-party

servicers contracting to perform this type of administration of the

Title IV, HEA programs must be held accountable for any violations

caused by the servicer. The Secretary also believes that the definition

of third-party servicer is sufficiently clear as applying only to the

function of processing financial aid applications required by the

Federal government for determinations by an institution of student

eligibility under the Title IV, HEA programs.

The Secretary does not agree with those commenters that recommended

modifying the function of determining student eligibility and related

activities to exclude ``related activities.'' The statute defines the

functions of a third-party servicer as administration of any aspect of

an institution's participation in any Title IV, HEA program. Since

there was no contention among commenters that determining student

eligibility was not a third-party servicer function and because the

statutory definition of third-party servicer is sufficiently broad, the

Secretary believes that the inclusion of ``related activities,'' such

as reviewing documents submitted as a result of student verification,

assists public understanding that a related function of determining

student eligibility is a third-party servicer activity and avoids the

possibility of third-party servicers attempting to avoid the

requirements of these regulations.

The Secretary agrees with commenters that the function of

certifying loan applications by an institution or its third-party

servicer should not include guaranty agency or lender electronic

processing of loan applications. However, the Secretary does not

believe that a change to the regulatory language is warranted because

guaranty agency and lender involvement in the certification of loan

applications under the FFEL programs is a routine practice of these

entities and is monitored under the FFEL programs. The Secretary does

not consider a guaranty agency or lender that electronically processes

loan applications for the FFEL programs and performs its assigned role

in the programs that the guaranty agency or lender participates in to

be considered a third-party servicer of an institution under these

regulations.

The Secretary does not agree with commenters that the function of

an escrow agent, as that term is used pursuant to 34 CFR 682.408,

should be added to the list of functions that the Secretary does not

consider to be an administration of an institution's participation in

the Title IV, HEA programs. Nor does the Secretary believe that the

function of receiving, disbursing, or delivering Title IV, HEA program

funds should be clarified to only include disbursements of funds that

are received by the institution from the Secretary or lender. The

Secretary believes that commenters have inadvertently misread the

definition of third-party servicer under 34 CFR part 668 as including

the functions of an escrow agent under 34 CFR 682.408. Under the

definition of third-party servicer in 34 CFR part 668, a third-party

servicer is an individual or a State or private, profit or nonprofit

organization that enters into a contract with an eligible institution

to administer, through either manual or automated processing, any

aspect of the institution's participation in any Title IV, HEA program.

Because an escrow agent under 34 CFR 682.408 contracts with an eligible

lender or guaranty agency to administer aspects of the lender's or

guaranty agency's FFEL programs and does not contract with an eligible

institution, an escrow agent is a third-party servicer of a lender or

guaranty agency and not of an institution and is considered to be a

third-party servicer under the definition of third-party servicer in 34

CFR part 682.

The Secretary generally agrees with those commenters who believed

that attorneys should not be covered by the definition of a third-party

servicer under these regulations. However, as noted in the discussion

of comments in the final regulations published in the Federal Register

on April 29, 1994, the Secretary, in promulgating the definition of

third-party servicer, applied the definition to a list of functions

relating to the administration of the Title IV, HEA programs, and

therefore is not regulating or excluding distinct entities by their

identity but rather the activities that individuals or organizations

perform in contracting with institutions. Provision of legal advice or

litigation activities are not included in these functions. However, it

is possible that an attorney would be considered to be a third-party

servicer under these regulations if the activity of the attorney,

performed on behalf of an institution, constitutes administration of

the Title IV, HEA programs. It is not appropriate to state that

attorneys are never considered third-party servicers as that would

permit services to escape oversight simply by being provided under

attorney signatures or by non-attorneys working for attorneys or their

law firms.

With respect to those commenters who recommended establishing a

dollar threshold to exclude local attorneys providing services on a

small number of accounts, the Secretary does not believe that such a

limitation is justifiable in the face of the statutory definition of

third-party servicer. The statute does not permit the Secretary to

promulgate a monetary threshold for administration of Title IV, HEA

program funds to determine whether or not an individual or organization

is a third-party servicer administering those funds.

The Secretary disagrees with those commenters who recommended

specifically excluding data exchange functions under the list of

activities that the Secretary does not consider administration of the

Title IV, HEA programs. The Secretary believes that data exchange is an

overly broad term that encompasses a wide variety of services such as

processing raw student eligibility data, determining completion rates,

or transmission of prepared data. With such an encompassing reach, the

Secretary cannot support excluding all data exchange from the oversight

of third-party servicers by the Secretary that is afforded by these

regulations.

The Secretary agrees with those commenters who supported the

Secretary's decision to exclude computer software or service providers

from the list of activities that the Secretary considers to constitute

administration of an institution's participation in the Title IV, HEA

programs. As explained in the discussion of comments in the final

regulations that were published in the Federal Register on April 29,

1994, the Secretary believes that the function of providing computer

software or services is simply a technological means to assist in

carrying out certain administrative functions that are already included

in the definition of third-party servicer in 34 CFR part 668. The

Secretary also agrees with the commenters who believed that the

function of providing computer software or services should be

specifically excluded from the definition of third-party servicer in

the list of functions that the Secretary does not consider to

constitute administration of an institution's participation in the

Title IV, HEA programs. Because the Secretary has already provided

explanation in the discussion of comments in the final regulations

published on April 29, 1994, in the Federal Register, the Secretary

believes that it is appropriate to provide that exclusion in the

regulations.

With respect to the commenter who recommended that alternate EDE

destination points be excluded from the definition of third-party

servicer in these regulations, the Secretary does not agree with the

comment. It is the experience of the Secretary that alternate EDE

destination points use the data that institutions provide to assist in

the administration of the institution's participation in the Title IV,

HEA programs. Alternate EDE destination points provide institutions

with assurances that the data relayed from the institution to the

alternate EDE destination point will be provided to the Central

Processor without error. Therefore, it is the position of the Secretary

that such a service should be under the oversight of these regulations

since relaying electronic information to the Central Processor is an

important function in the processing of Federal student financial

assistance claims.

Changes: A change has been made. The definition of third-party

servicer is amended to specifically exclude the function of providing

computer software or services from what the Secretary considers to

constitute the administration of an institution's participation in the

Title IV, HEA programs.

Comments: Two commenters believed that temporary employees employed

on-site at a campus under the complete supervision of an institution's

financial aid administrator (FAA) to assist in the administration of an

institution's participation in the Title IV, HEA program should not be

considered to be a third-party servicer. Two commenters believed that

``moonlighting'' FAAs who contract with other institutions to assist in

administering those institutions' participation in the Title IV, HEA

program should not be considered to fall within the scope of the

definition of third-party servicer. Another commenter recommended that

individuals taking on small consulting activities should not be subject

to the same stringent requirements as corporate consulting firms that

manage financial aid offices for several institutions. Three commenters

were concerned that employment contracts would fall within the scope of

the definition of a third-party servicer thereby making employees that

administer an institution's participation in the Title IV, HEA programs

third-party servicers.

Discussion: The Secretary agrees with those commenters that

believed that individuals employed on a temporary basis should not be

considered to be third-party servicers. The Secretary recognizes that

individuals who work full-time as financial aid administrators at one

institution often moonlight and provide valuable assistance at other

institutions during busy periods of the award year. The Secretary

believes that these individuals can appropriately be considered as

employees even if they are not paid as a regular salaried or hourly

employee of the institution.

With respect to employees hired pursuant to specific employment

contracts, the Secretary does not believe that such contracts trigger

the third-party servicer requirements. The Secretary never intended

that individuals employed by an institution in a capacity that involves

the administration of any aspect of an institution's participation in

the Title IV, HEA programs would be considered to be a third-party

servicer. The Secretary, is concerned however, that a third-party

servicer not be designated as an employee simply to avoid the

requirements of these regulations. The Secretary, therefore, considers

an individual engaged on a temporary basis to be an employee if the

person performs all required duties that are relevant to the

administration of the institution's participation in the Title IV, HEA

programs on site at the institution under the institution's

supervision, is paid directly by the institution, and is not employed

by or associated with a third-party servicer and is not engaged as a

third-party servicer at another institution. This language is not

intended to enable individuals who perform services for multiple

institutions during an award year to avoid being considered a third-

party servicer. The Secretary will in the future consider whether

further regulation is required if the employee designation is abused.

Changes: Changes have been made. The definition of third-party

servicer has been amended to clarify that employees of an institution

are not considered to be third-party servicers. An individual is

considered an employee of the institution if the individual works on a

full-time, part-time, or temporary basis at the institution; performs

all duties on site at the institution under the supervision of the

institution; is paid as an individual directly by the institution; is

not employed by or otherwise associated with a third-party servicer;

and is not a third-party servicer for any other institution.

Section 668.3 Reductions in the Length of an Academic Year.

Comments: Four commenters asked the Secretary to clarify that on-

going reductions, as opposed to transitional reductions, in the minimum

length of an academic year are permitted. One commenter questioned when

the two-year period began for transitional reductions in the minimum

length of an academic year. One commenter did not understand how an

institution could 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, and also meet the

requirement that an institution must have an academic year that is less

than 30 weeks on the effective date of the regulations in order to

obtain a transitional reduction. One commenter urged the Department to

remove the requirement that an institution 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. Another commenter did not believe that Congress or the Department

intended to force institutions to prove retroactively that they had a

30-week academic year prior to publication of the regulations. The

commenter noted that there was no way for an institution to ``make

amends'' if the institution was not previously in compliance.

One commenter was pleased that the Secretary had clarified

preliminary requirements for institutions requesting a reduction in the

minimum length of an academic year. The commenter further commended the

Secretary for providing that currently participating institutions may

be granted a temporary reduction for a period not to exceed two years,

if the institution demonstrates a commitment to change to a 30 week

academic year. The commenter felt that it would be beneficial for the

Secretary to provide examples of what ``unique conditions'' the

Secretary would look for when evaluating an institution's request for a

longterm reduction. One commenter felt that the Secretary should

provide guidance regarding the basis for a denial of a reduction

request. Specifically, the commenter questioned whether the Secretary

will abide by the decision of the accrediting agency that the academic

quality of the institution is satisfactory, or if and when he will

contravene such a determination.

Discussion: The Secretary would like to clarify that there are two

types of minimum academic year reductions for which an institution may

apply. The first type is a transitional waiver. An institution may ask

for a temporary reduction in the length of an academic year while the

institution changes to a 30 week academic year. This transitional

reduction may not exceed two years from the effective date of the April

29, 1994 final regulations (July 1, 1994). The second type is a

longterm waiver. An institution may apply for a longterm reduction in

the length of an academic year if it wishes to continue operating with

a reduced academic year on a longterm basis. The Secretary notes,

however, that Sec. 668.3(c)(2) states that an institution that is

granted a longterm waiver must reapply to the Secretary for a reduction

each time the institution is required to apply to continue to

participate in a Title IV, HEA program.

The Secretary notes that it is not inconsistent to require an

institution to 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, and also meet the

requirement that an institution must have an academic year that is less

than 30 weeks on the effective date of the regulations. An institution

is permitted to have an academic year of less than 30 weeks, but may

not make full payment of Title IV, HEA program funds. However, unless

and until the institution is granted a reduction in accordance with

these regulations, the institution must pro rate the amount of Title

IV, HEA program assistance awarded to students in attendance based on

the definition of an academic year found in section 481(d) of the HEA.

The Secretary believes that it is appropriate to require that an

institution applying for a reduction in the length of an academic year

demonstrate that the institution has awarded, disbursed, and delivered

Title IV, HEA program funds in accordance with 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.

As the statute clearly states that an institution may not be granted a

reduction in the minimum length of academic year unless the institution

applies to the Secretary for a reduction, and the Secretary grants a

reduction, the Secretary expects that institutions with academic years

of less than 30 weeks that have not been granted a reduction have been

properly pro rating Title IV, HEA program assistance. The Secretary

believes institutions must have made a good faith effort to comply with

the requirements of the statute. The Secretary would like to clarify

that an institution that is ineligible for a reduction because the

institution did not properly award, disburse, or deliver Title IV, HEA

program funds in the past may be eligible for a reduction if the

institution makes arrangements that are satisfactory to the Secretary

to repay any overawards that resulted from the improper awarding,

disbursing, or delivering of Title IV, HEA program funds. The

Secretary's experience to date has been that this liability amount has

been insignificant.

In determining what constitutes ``unique circumstances'' that would

justify the Secretary granting a longterm reduction, the Secretary may

look at information such as whether an educational program has

historically provided instruction in a non-traditional manner for less

than 30 weeks in previous academic years and cost reduction to

students. Upon further consideration, the Secretary has decided that

program placement rates, completion rates or other educational outcomes

may also be evaluated as part of the Secretary's determination. Other

factors 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.

The statute provides that a reduction may be granted by the

Secretary for good cause on a case-by-case basis. Therefore, the

Secretary, and not an institution's accrediting agency, is charged with

ensuring that reductions in the academic year are granted in a manner

that protects Title IV, HEA program funds. Although the Secretary

agrees that approval by an institution's nationally recognized

accrediting agency or State body that authorizes the institution to

provide postsecondary programs should be considered as a factor in

determining good cause for granting a reduction, the Secretary does not

believe that such approval on its own is sufficient reason for granting

an institution's request, as such an approval will most likely not

include all areas that the Secretary will look at to determine that a

reduction is warranted. 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.

Changes: Section 668.3(c) has been amended to clarify that an

institution may apply for a longterm reduction in the length of an

academic year if it wishes to continue operating with a reduced

academic year on a longterm basis. Section 668.3(d) has been added to

specify that an institution may demonstrate compliance with this

requirement by making arrangements that are satisfactory to the

Secretary to repay any overawards that resulted from the improper

awarding, disbursing, or delivering of Title IV, HEA program funds.

Section 668.8 Eligible Program

English as a Second Language

Comments: Many commenters requested the elimination of the

requirement that institutions test students at the conclusion of

English-as-a-Second-Language (ESL) programs to substantiate their

proficiency in English, and that schools only admit students who

``need'' such training. Commenters suggested that the Department lacks

the authority to require that institutions test program completers in

order to evaluate what they have learned or to dictate institutional

admissions policies. Furthermore, a number of commenters asserted that

they did not believe that the Department had grounds for limiting

student aid eligibility for individuals in ESL programs to Federal Pell

Grants only, as stipulated in the regulations.

Discussion: Upon further consideration, the Secretary agrees that

the assessment of whether an ESL program is providing adequate

instruction in English to allow a student to use already existing

knowledge, training, or skills should be left to an institution's

accrediting agency. Although findings from the Department of

Education's Inspector General have revealed more abuses in these

programs historically, the Secretary will defer regulating in this area

for now to provide the accrediting agencies an opportunity to address

this problem. The Secretary notes that an institution is still required

to document its determination that ESL instruction is necessary to

enable each student enrolled in its ESL program to use already existing

knowledge, training, or skills. The Secretary notes that section

401(c)(2) of the HEA limits the eligibility of these ESL programs to

the Federal Pell Grant Program. A student may receive other Title IV,

HEA program assistance for ESL coursework that is part of a larger

eligible program.

Changes: Section 668.8(j)(2) has been removed from the regulations.

Undergraduate Educational Program in Credit Hours

Comments: Five commenters requested that the Secretary put back

into the clock-hour/credit-hour conversion regulations the provision

that allows the Secretary to determine if a degree is an equivalent

degree and therefore exempt from the requirements of the clock-hour/

credit-hour conversion formula. Two of the commenters believed that

programs offered at institutions accredited by the Association of

Advanced Rabbinical and Talmudic Schools, which in some States lead to

the First Talmudic degree rather than a baccalaureate degree, is a

clear example of an equivalent degree and therefore should be exempted

from the clock-hour/credit-hour conversion requirements. Four

commenters suggested that the Secretary consider factors such as the

length of the program or acceptance as equivalent to the baccalaureate

degree for purposes of licensure by a State agency when determining if

a degree is in fact an equivalent degree.

Two commenters were concerned about the impact of the clock-hour/

credit-hour conversion regulations on hospital-based diploma nursing

programs that do not lead to a degree. The commenters believed that it

was unfair to reduce Federal financial assistance to students who were

enrolled at a hospital-based diploma school of nursing but were taking

a substantial number of credits at a local university or community

college. The two commenters requested that the Secretary allow programs

that offer equivalent credentials to be exempted from the clock-hour/

credit-hour conversion requirements.

One commenter requested that the Secretary allow an undergraduate

program offered over at least two years to be exempted from the clock-

hour/credit-hour conversion regulations if the program was equivalent

to an associate degree, as defined under paragraph (b) of this section.

Discussion: The Secretary agrees with those commenters who

requested that the Secretary reinsert the provision (previously removed

from the clock-hour/credit-hour conversion regulations in the April 29,

1994 final regulations) that an institution offering an undergraduate

educational program measured in credit hours and at least two academic

years in duration 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. Since publication of the final regulations on April

29, 1994, the Secretary has encountered at least one instance of a

degree that the Secretary considers to be an equivalent degree to a

baccalaureate degree. Given this additional information, the Secretary

believes that it is necessary to reinsert the ``equivalent degree as

determined by the Secretary'' language back into the clock-hour/credit-

hour conversion regulations so as not to penalize those institutions

that offer the equivalent degree.

With respect to those commenters who were concerned about the

impact of the clock-hour/credit-hour conversion regulations on

hospital-based diploma schools of nursing and who suggested inserting

``equivalent credential'' into the regulations to exclude these types

of programs, the Secretary believes that the issue has been resolved.

Pub. L. 103-382, which was signed by the President on October 20, 1994,

amends the HEA to specify that public or private nonprofit hospital-

based diploma schools of nursing programs are exempt from the clock-

hour/credit-hour conversion regulations as of July 1, 1994. The

Secretary has incorporated this statutory exemption into new

Sec. 668.9(b) (see discussion in the preamble for Sec. 668.9 under

significant changes to the final regulations). Because there is now a

statutory exemption for hospital-based diploma schools of nursing, the

Secretary sees no reason to provide a broad-based exclusion for non-

degree programs and therefore does not believe it to be appropriate to

exclude programs that lead to an equivalent credential.

The Secretary disagrees with the commenter who specifically

recommended excluding programs that are the ``equivalent of an

associate degree'' as defined under Sec. 668.8(b), from the

requirements of the clock-hour/credit-hour conversion regulations. The

Secretary believes that under the definition of the ``equivalent of an

associate degree,'' associate degree programs are already exempt from

the requirements of the clock-hour/credit-hour conversion regulations,

provided that the associate degree program is at least two academic

years of study. Furthermore, a two academic year program that is

acceptable for full credit towards a bachelor's degree is also exempted

from the clock-hour/credit-hour conversion requirements, provided that

the bachelor's degree program is offered at the same institution that

provides the two academic year program.

Changes: Changes have been made. The Secretary is amending

Sec. 668.8(k) (1) and (2) to exempt a program from the clock-hour/

credit-hour conversion requirements if the program is an equivalent

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

program is fully acceptable for credit toward the institution's

equivalent degree.

Comments: One commenter asked if there were any clock-hour/credit-

hour conversion requirements for programs offered in number of courses,

rather than in credit hours.

Discussion: Institutions that participate in the Title IV, HEA

programs must measure their programs in clock hours or in credit hours.

Changes: None.

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

Section 668.12 Application procedures

Comments: There were a number of comments on this section. Many

commenters suggested that the requirement that an entire institution

must be recertified if the institution proposes to establish a branch

campus or an additional location that will offer 100 percent of an

educational program off site be deleted. Institutions expressed their

concern that this provision would act as a disincentive for

institutions to agree to offer programs at employer sites and would

therefore be at odds with the Administration's efforts to increase

education and training collaboration between institutions and

employers. Some commenters suggested that this provision be revised to

exclude programs offered by degree-granting institutions.

Discussion: The Secretary agrees that not all institutions that add

an additional location that offers 100 percent of a program need to be

required to be recertified. However, the Secretary has determined

through experience that the addition of a branch campus or other

location that offers a complete educational program can have a major

impact on the financial status of the whole institution and the ability

of the whole institution to administer the Title IV, HEA programs. For

many years, the Secretary has required institutions that seek to add a

location at which a complete educational program is offered to undergo

a certification review so that the Secretary could ascertain whether

the institution has the financial resources and sufficient

administrative capability to support another location.

Therefore, the Secretary has removed the requirement that an

institution must apply to the Secretary for a certification that the

institution continues to meet the standards for participation in the

Title IV, HEA programs if the institution adds an additional location

that offers 100 percent of a program. However, the Secretary requires

the institution to notify the Secretary of the addition of such a

location (as institutions that add an additional location that offers

at least 50 percent of an educational program are currently required to

do) if the institution wishes to have the location included in the

institution's participation in a Title IV, HEA program. The Secretary

puts institutions on notice that they may be required to file a

complete recertification application if the Secretary determines that

the addition of the location might impair an institution's

administrative capacity or financial strength.

Commenters that discussed employer-sponsored training programs

seemed not to understand that if institutions contract with employers

to provide training programs at the work-site or some other off-campus

location, that the employer is paying for the cost of training, and

that no Title IV, HEA program funds are involved, there is no need for

the institution to notify the Secretary.

Changes: Section 668.12 has been revised to no longer require an

institution to apply to the Secretary for a certification that the

institution continues to meet the standards for participation in the

Title IV, HEA programs if the institution adds an additional location

that offers 100 percent of a program. Section 668.12 has been further

revised to require that, if an institution adds an additional location

that offers 100 percent of a program, the institution is required to

notify the Secretary in accordance with 34 CFR 600.30. The current

regulations already provide that the institution may be required to

file a complete recertification application if the Secretary deems it

necessary.

Section 668.15 Factors of Financial Responsibility

General Standards of Financial Responsibility Cash Reserve

Comments: Many commenters believed that requiring an institution to

maintain a cash reserve fund equal to at least 25 percent of the total

dollar amount of refunds paid by the institution in the previous fiscal

year would not protect students or the Federal government if the

institution failed or went bankrupt. The commenters opined that in a

bankruptcy proceeding the disposition of any balance in the cash

reserve fund would fall under the jurisdiction of a Federal bankruptcy

court and therefore would not be available immediately to students or

to the government. Furthermore, some commenters indicated that because

an institution would have unrestricted access to cash reserve funds the

cash assets held in such funds are potentially at risk due to the

possibility of preferential transfer or fraudulent conveyance by an

owner in advance of a bankruptcy proceeding.

Many other commenters believed that the cash reserve fund

requirement was unnecessary in view of all the other requirements that

an institution must now satisfy to demonstrate that it is financially

responsible. The commenters contended that this requirement would place

an ``undue burden'' on an institution and could prevent the institution

from otherwise meeting other financial responsibility standards or even

cause the institution to become financially unstable. Moreover, based

on the new criteria for calculating a refund under the ``fair and

equitable'' refund provisions, the commenters were concerned that the

amount of the cash reserve could grow significantly in a short period

of time and would thus place an increasing and on-going financial

burden on the institution. Some of these commenters, and other

commenters, urged the Secretary to reduce the amount of the required

reserve from 25 percent to either 10 percent or an amount that would be

necessary for the institution to be able to make refunds for a 30-day

period. Another commenter suggested that the Secretary impose the cash

reserve requirement only on an institution that does not satisfy all

other financial responsibility standards; or, require that the

institution maintain, temporarily, a cash reserve fund until the

institution is able to provide, to the Secretary, an irrevocable letter

of credit.

Other commenters believed that the cash reserve requirement would

adversely affect an institution's ability to maintain its educational

standards because capital that would traditionally be available to the

institution for reinvestment in the institution or otherwise used to

support the institution's educational services and facilities would now

have to be wastefully set aside in a reserve fund. The commenters

suggested that the Secretary restructure the requirement to allow an

institution to mitigate or eliminate its cash reserve if the

institution could demonstrate set levels of reinvestment in its

business through capital acquisition. At a minimum, the commenters

urged the Secretary to allow an institution to provide a bond or letter

of credit in lieu of the cash reserve fund requirement.

One commenter believed that the separate fund provision of this

requirement would be particularly troublesome because it would impose

accounting, reporting, and management burdens that would not be

warranted for all institutions. The commenter recommended that the

Secretary provide an alternative method under which an institution

could prove that it met all the requirements of this section.

Specifically, the commenter suggested that the Secretary allow an

institution that issues debt in the public debt markets and achieves an

``investment grade'' credit rating on that debt issue with a nationally

recognized debt rating service to establish that it is financially

responsible in this manner.

Still other commenters believed that the Secretary was imposing an

unreasonable financial burden on an institution that participates in a

State tuition recovery program. The commenters noted that since the

Secretary has not approved any State tuition recovery funds, an

institution that would otherwise be exempt from the cash reserve

requirement would have to continue to contribute to the State's fund

and would, for identical reasons, be required to maintain for Federal

purposes a cash reserve fund. These commenters urged the Secretary to

grant relief to institutions by acting expeditiously to approve State

tuition recovery programs.

One commenter noted that the term ``refunds'', as used in this

section, could mean tuition refunds, institutional refunds, or any

disbursements made to students. The commenter suggested that the

Secretary clarify the meaning of the term so that an institution may

calculate correctly the amount of its required cash reserve.

A number of commenters contended that the requirement to maintain

the cash reserve fund in a bank account or in the form of short-term

securities was unnecessary and restrictive. One of these commenters

believed that the Secretary should exempt from the separate cash-

reserve fund requirement an institution that had sufficient

unrestricted funds to pay required refunds. Other commenters urged the

Secretary to allow an institution to maintain its cash reserve in a

money market fund or in other Federal government securities with

maturities of one year or less.

A few commenters believed that the establishment of a cash reserve

fund could be a problem for public institutions located in a State that

controls directly the receipt and disbursement of funds. The commenters

noted that those institutions may not have the authority under State

law to establish a cash reserve fund. Another commenter noted that many

public university systems operate under a pooled treasury concept.

Under that scheme, the three-month U.S. Treasury notes that could be

used to satisfy the cash reserve fund requirement would not be

earmarked to one campus. Consequently, the commenter recommended that

instead of requiring each campus to calculate the amount of a reserve

fund and maintain that fund, the Secretary should revise the

regulations to allow a public university system to (1) calculate the

amount of the reserve fund based on the total refunds of all system

campuses and, (2) maintain one consolidated reserve fund for all the

system's campuses.

Discussion: Under section 498(c)(6) of the HEA, the Secretary is

charged with establishing requirements to ensure that an institution

maintains sufficient cash reserves to pay required refunds. The

Secretary believes that an institution's ability to make required

refunds is enhanced by requiring the institution to reserve a portion

of the cash it receives from students in advance of providing

educational services. In this regard, the Secretary established the

cash-reserve-fund requirement on the premise that if an institution, at

the beginning of its fiscal year, reserved a reasonable amount of cash

of an amount based on a percentage of the institution's historical

refund experience, the institution would have sufficient cash reserves

to make refunds to students. However, the Secretary is convinced that

many points made by the commenters are valid, and that a performance-

based approach will better accomplish the statutory requirements and

the Secretary's objectives.

Under this performance-based approach, the Secretary would consider

an institution to have satisfied the statutory requirement, that the

institution maintained sufficient cash reserves to make required

refunds, if for two consecutive years (1) the institution demonstrates,

to the satisfaction of the Secretary, that it has made all required

refunds to students in a timely manner, and (2) that it has met or

exceeded all of the financial responsibility standards in

Sec. 668.15(b) in both of its last two consecutive fiscal years. An

institution that demonstrates that it satisfies these criteria provides

reasonable assurance to the Secretary that the institution will

continue to make required refunds in a timely manner. Moreover, the

Secretary believes that such an institution is not likely to close

precipitously because the institution will have demonstrated over a

period of time that it is financially responsible. Along the same

lines, the Secretary acknowledges that there is little, if any, risk

associated with an institution that has its liabilities backed by the

full faith and credit of a State, or by an equivalent governmental

entity, and therefore considers such an institution to have sufficient

cash reserves to make required refunds.

Conversely, the Secretary believes that the risk of precipitous

closure increases significantly for an institution that is unable, or

unwilling, to make required refunds in a timely manner, or that fails

to meet the financial responsibility standards. Therefore, upon a

finding by the Secretary, or an independent auditor engaged in the

performance of a financial or compliance audit, or a SPRE, or a State

licensing authority, that the institution failed to make required

refunds in a timely manner, or failed to satisfy the standards of

financial responsibility under Sec. 668.15(b) in either of the

institution's last two complete fiscal years, the Secretary shall

require the institution to submit to the Secretary an irrevocable

letter of credit equal to at least 25 percent of the total amount of

refunds the institution made, or should have made, during the

institution's last complete fiscal year. This irrevocable letter of

credit requirement may be satisfied in conjunction with any letter of

credit that may be required under Sec. 668.13(d)(1) or

Sec. 668.15(d)(2). The Secretary may, in his sole discretion, require

that two or more letters of credit be established separately with

common expiration dates or combined into a single letter of credit.

In establishing this performance-based requirement, the Secretary

considered carefully the points made by the commenters who noted that

the reserve-fund requirement would provide little, if any, protection

to students in the event that an institution went bankrupt, and the

commenters who argued that it was unnecessary or counter-productive to

require an institution that otherwise satisfies its financial and

fiduciary responsibilities to maintain a reserve fund. The Secretary

believes that by applying the letter of credit provision only to non-

performing institutions, this requirement provides the necessary

incentive for institutions to make, and to continue to make, refunds in

a timely manner, provides reasonable assurance that the Secretary will

be able to make refunds to students in the event that an institution

closes precipitously, and at the same time relieves the burden on

performing institutions.

The Secretary notes that since this requirement will not take

effect until July 1, 1995, an institution must continue to comply with

the current 25 percent cash-reserve requirement until that date.

Therefore, in response to public comment and further review, the

Secretary wishes to clarify the following issues. First, with respect

to calculating the amount of the cash reserve, the term ``refunds''

includes only refunds of title IV, HEA program funds. Second, an

institution may borrow cash from its reserve fund but only when this is

necessary for the institution to comply with the requirement that it

make timely refunds. If an institution uses the reserve fund for this

reason, the Secretary will consider the institution to be in compliance

with the requirement in Sec. 668.15(b)(5)(i) if the institution

demonstrates that it maintained an average monthly fund balance in its

cash reserve fund that was at least equal to the amount of the required

cash reserve. Lastly, because an institution must demonstrate its

compliance with the reserve-fund requirement by providing the required

information in a note to its audited financial statement, the

institution may, in lieu of establishing a separate cash-reserve fund

for each of its locations, establish a single cash-reserve fund that

represents the institution's combined refund exposure for all

locations. To enable the Secretary to make a determination regarding an

institution's compliance with this provision, the refund experience and

cash reserve requirement for each eligible and participating

institution shall be disclosed separately in the required footnote.

Changes: Section 668.15(b)(5) is amended to require that,

institutions not coming within the performance-based exception set out

in Sec. 668.15(d)(1), must submit to the Secretary an irrevocable

letter of credit, that is acceptable and payable to the Secretary, for

an amount equal to at least 25 percent of the total amount of title IV,

HEA program refunds the institution made, or should have made, during

the institution's last complete fiscal year.

In addition, the Secretary makes the following conforming changes

to Sec. 668.15(d), Exceptions to the general standards of financial

responsibility. First, the Secretary amends Sec. 668.15(d)(1) to exempt

from the requirement to submit an irrevocable letter of credit, an

institution that (1) has its liabilities backed by the full faith and

credit of a State, or equivalent governmental entity, or (2) any

institution that has, for both of its two latest consecutive fiscal

years demonstrated, to the satisfaction of the Secretary, with the

support of an audited financial statement submitted in accordance with

Sec. 668.15(e) and Sec. 668.23(c), that it has made all of its required

title IV, HEA program refunds in accordance with the ``timely payment''

provisions in Sec. 668.22(j)(4), and has for both of those years met or

exceeded the standards of financial responsibility under

Sec. 668.15(b). Second, in Sec. 668.15(d) the Secretary determines an

institution's compliance with the two-consecutive-year performance

requirement by evaluating (1) the institution's compliance audit

reports and audited financial statements covering that 2-year period,

and (2) any untimely refund findings during that two-year period from a

program review, a SPRE, other State agency or an independent auditor.

This section also requires the institution to have met the standards of

financial responsibility under Sec. 668.15(b) for the 2-year period. If

an institution is cited by an auditor for a condition that would no

longer permit it to use the exemption in 668.15(d)(1), the institution

must notify the Secretary of that fact within 30 days of receiving such

notice from its auditor, and must take immediate steps to secure the

required letter of credit.

The Secretary has made a conforming change to Secs. 668.15(b)

(7)(i)(A) and (8)(i)(B) by removing the reference to the cash reserve

fund in the delineation of items that would be included in the list of

institutional assets for the acid test analysis.

Acid Test Ratio

Comments: A number of commenters agreed with the Secretary's

decision to exclude from the calculation of the acid test ratio

uncollateralized receivables from owners and related parties.

Several commenters argued that the use of an acid test ratio, as

more of a test of liquidity than of assets, was contrary to

Congressional intent.

Other commenters believed that the acid test ratio was defined too

narrowly in the regulations to include as current assets only cash,

cash equivalents, and current accounts receivables. The commenters

noted that generally the acid test ratio is defined as current assets

less inventory divided by current liabilities. Such a definition would

allow other current assets not included in the regulatory definition to

be used in calculating the acid test ratio. However, the commenters

opined that an acid test ratio, regardless of how it is calculated, is

inappropriate and therefore not applicable to the education training

industry. The commenters argued that the short-term liquidity

requirements imposed by the acid test ratio would force an institution

to delay making capital investments to the detriment of its students.

To make a better assessment of the financial performance and stability

of an institution, some of the commenters suggested that the Secretary

should evaluate the significance of the ratio in view of other

financial indicators such as operating losses, negative equity, or

commercial loan defaults. Other commenters suggested that in view of

the new institutional oversight provisions under Part H of the HEA the

Secretary should adopt for these regulations the previous 1:1 current

ratio requirement. A few other commenters urged the Secretary to remove

the acid test ratio requirement because they believed that the new

audit requirements would provide safeguards sufficient to ensure that

an institution could meet its liabilities and remain operational. Still

other commenters suggested that if an institution failed to meet the

acid test ratio requirement, the Secretary should merely refer the

institution to the State for review under the provisions of the State

Postsecondary Review Program. Yet another commenter urged the Secretary

to adopt as a satisfactory measure of liquidity the acid test ratio of

between 0.5 to 0.75:1 suggested by the American Institute of Certified

Public Accountants (AICPA).

One commenter believed strongly that the Secretary should not allow

an institution to include accounts receivable on the asset side of the

acid test ratio because the receivables could not be readily

liquidated.

A few commenters believed that for purposes of calculating the acid

test ratio an institution should not be able to consider as a cash

equivalent the cash reserve under Sec. 668.15(b)(5). The commenters

noted that the cash reserve would be a restricted fund (i.e., used only

for the payment of refunds) and therefore would not be available to pay

the general debts of the institution. Thus, the commenters contended

that if the Secretary allowed institutions to include the cash reserve

as a current asset an otherwise insolvent institution might be able to

satisfy the acid test requirement. Another commenter agreed with the

provision that cash reserves should be included in the acid test ratio

but believed that the provision should be expanded to read as follows:

``Reserve funds created in accordance with Sec. 668.15(b)(5) may be

included as cash equivalents in calculating the institution's acid test

ratio.'' Still other commenters suggested that fixed assets, prepaid

expenses, and inventory be included in calculating the ratio.

One commenter noted that an institution could be financially stable

despite its failure to meet the 1:1 acid test ratio requirement. The

commenter opined that an auditor would be in the best position to

determine whether an institution was financially stable and suggested

that the Secretary require the auditor to make that determination based

on guidance issued by the AICPA regarding an auditor's responsibility

for determining an institution's ability to continue as a going

concern. The commenter suggested that in lieu of the acid test ratio

the Secretary should require an auditor to make a ``going concern''

determination and hold the auditor responsible for applying the AICPA

guidelines in making that determination.

Discussion: Section 498(c)(2) of the HEA directs the Secretary to

prescribe criteria with respect to operating losses, net worth and

assets-to-liabilities ratios to determine that an institution is

financially responsible. The Secretary maintains that the acid test

ratio is an appropriate measure of financial responsibility for an

educational institution because it provides a reliable measure of an

institution's ability to meet current obligations as they come due.

Because, in general, financial obligations must be satisfied in cash,

the Secretary has chosen an acid test ratio, because it relies only on

those assets that have the highest probability of conversion into cash.

The Secretary has chosen to exclude less liquid items such as

inventory, related party receivables, and prepaid or deferred items for

the following reasons: (1) As a provider of services, an educational

institution does not, in general, acquire and maintain significant

inventories of saleable products. Accordingly, for most educational

institutions, the exclusion of inventory from any calculation yields a

value that is not significantly different from one that would be

obtained if such inventories were included. Furthermore, because of

difficulties associated with the valuation of inventories, and the

existence of differing methodologies of accounting for inventories and,

because a distressed liquidation of inventory items by an institution

in financial difficulty may result in the realization of only a portion

of their actual value, comparability of inventory values among

institutions is extremely difficult. The Secretary, in seeking a fair

basis of comparison that is applicable to all institutions, chose to

exclude inventories from any calculation of liquidity;

(2) Related party receivables that are uncollateralized represent

unsecured claims on the assets of other businesses or individuals the

repayment of which is substantially at the discretion of the

controlling individual or business entity. While in many cases these

assets are accounted for as demand notes and hence they are

appropriately classified as current, they are in fact repayable at the

discretion of the controlling individual, and the Secretary has seen

institutions close for financial reasons without having demanded such

repayments from related parties. Because the Secretary cannot

reasonably determine the probability that such claims will be paid, the

Secretary believes that he is justified in excluding these items from

any calculation of liquidity; and

(3) In general, prepaid items and deferrals represent past outflows

of cash that may provide future economic benefits to an institution.

Because the realization of these assets depends in large part on the

continued existence of the educational institution, the Secretary

believes it is appropriate to exclude these items when evaluating an

institution at a fixed point in time.

The Secretary believes that a minimum ratio of at least cash and

current accounts receivable to all current liabilities is an

appropriate measure of an institution's ability to meet all of its

financial obligations. While many have argued that unearned tuition

liabilities do not represent financial claims on the assets of an

institution, and therefore should be excluded, the Secretary would

argue that unearned tuition liabilities are more accurately

characterized as cash collected from students in advance of providing

educational services. As these funds are not yet earned by the

institution, the Secretary believes that it is appropriate to require

that an institution have adequate liquid resources on hand to provide

refunds to students that withdraw or to fund a teachout should the

institution close at other than the end of an academic period.

Furthermore, while the Secretary concedes that such claims are not

direct financial claims comparable to a fixed debt they represent

obligations to perform a service. The performance of that service will

incur liabilities or the liquidation of assets over the next operating

period. Since a substantial portion of the unearned tuition income that

flows into an institution's revenue accounts is immediately expended to

provide for such things as instructor's salaries, rent, utilities and

other operational expenses, only a portion of unearned tuition

liabilities are ultimately realized as profit by the institution. It is

the Secretary's belief that a financially responsible institution

should be able to finance continuing operations out of earnings

retained as a result of past profits and not from the cash prepayments

of students who have yet to receive any educational benefit.

The Secretary believes that, for the most part, institutions that

make significant capital expenditures that are expected to benefit the

institution in future periods will finance those expenditures with

long-term financing arrangements. Accordingly, the Secretary believes

that capital acquisitions to the extent that they are externally

financed or funded from long-term sources of funds would not

significantly impact the acid test ratio. The Secretary recognizes that

a number of institutions incur significant expenses associated with

marketing and advertising and that many institutions refer to these

operating expenses as capitalized costs, often including these past

expenses as a current asset on the institution's balance sheet. The

Secretary believes that these costs are more appropriately

characterized as operating expenses and does not recognize such

capitalized assets in the acid test calculation.

Contrary to the opinion expressed in the comment, the AICPA does

not establish standards with respect to performance indicators such as

the acid test ratio.

While the Secretary does not agree that fixed assets should be

included in the calculation of the acid test ratio because such assets

are considerably less liquid than those that are included in the ratio

calculation, the Secretary does consider the institution's total

financial circumstances in determining an institution's compliance with

Federal financial responsibility standards. The Secretary includes in

his calculation of tangible net worth all the assets of an institution

to the extent that the value of these assets exceeds the institution's

liabilities after adjusting for intangible assets.

Changes: See conforming changes made as a result of comments on the

cash reserve requirement.

Exceptions to the General Standards of Financial Responsibility

Comments: One commenter was concerned that an institution that

participated in an inadequate State tuition recovery fund would be able

to avoid the more rigorous requirement in Sec. 668.15(b) under which

the institution would need to maintain in a separate fund a cash

reserve equal to at least 25% of the total dollar amount of refunds

paid by the institution in the previous fiscal year. The commenter

suggested specific criteria that the Secretary should consider in

determining the adequacy of a State's tuition recovery fund.

Specifically, the commenter suggested that in assessing a State's fund

the Secretary should consider (1) the maximum fund level, (2) the

current fund balance, (3) the amount of annual assessments collected by

the fund, (4) the amount of claims paid out by the fund, (5) the

authority of the fund administrator to levy against institutions

participating in the fund additional assessments and the

administrator's history of levying and collecting additional

assessments, (6) the fund's history of paying claims, including the

percentage of claims paid, (7) the compliance by an institution (or

institutions) with the fund's assessment and payment requirements and,

(8) whether students at an institution have received their refund

payments from the fund instead of from the institution. Furthermore,

the commenter urged the Secretary to exempt an institution from the 25%

cash reserve requirement only if the Secretary concluded from the

criteria identified above that a State would be able to pay all claims

made against the fund.

A few commenters questioned the authority of the Secretary to

determine the acceptability of a State's tuition recovery fund. These

commenters argued that since the statute mandated the use of State

tuition recovery funds the Secretary should merely require a State to

certify that its fund would be able to pay required refunds to students

for institutions that closed precipitously. In addition, regardless of

the Secretary's authority in this matter, the commenters believed

strongly that if the Secretary approves State tuition recovery funds on

a State-by-State basis, in determining whether to approve a State's

fund the Secretary should consider the State's entire plan for dealing

with closed institutions, including provisions for teach-outs.

Many other commenters urged the Secretary to approve existing State

tuition recovery funds, or give presumptive approval to those funds,

because of the reasons identified in the discussion regarding the 25%

cash reserve requirement.

Discussion: Section 498(c)(6) of the HEA provides that an

institution may be granted an exemption from the cash reserve

requirement if it participates in a state tuition recovery fund that is

acceptable to the Secretary. At this time the Secretary is evaluating

possible standards that can be used for determining the acceptability

of a State's tuition recovery fund. While no definitive criteria have

yet been established, the Secretary has determined that three specific

criteria will be examined in the design and operation of a State's

tuition recovery to determine whether it is acceptable in lieu of the

other cash reserve requirements.

The Secretary does not intend to grant presumptive approval to any

state tuition recovery fund, but instead will examine applications from

states on a case-by-case basis. In evaluating an application from a

State for a blanket approval of its tuition recovery fund to exempt its

participating schools from the federal cash reserve requirements, the

Secretary will consider the extent to which the state tuition recovery

fund: 1) provides refunds to both in-state and out of state students,

2) makes all refunds in accordance with the refund payment procedures

in Sec. 668.22(h), 3) provides a reliable mechanism for the State to

replenish a fund should any claims arise that deplete the funds assets.

Changes: Section 668.15(d)(1)(ii) has been amended to delineate the

items that the Secretary will consider in determining whether a State

tuition recovery fund is an acceptable substitute for the federal cash

reserve requirement. The Secretary may also consider other factors

presented in an individual state application on a case by case basis.

See also conforming changes made as a result of comments on the cash

reserve requirement.

Section 668.16 Standards of Administrative Capability

Comments: One commenter suggested that as a factor in the

determination of a designated individual's ability to administer the

Title IV, HEA programs at an institution, the Department should mandate

that a capable individual must not have defaulted on a Federal or State

loan.

Discussion: The Secretary has no evidence that any notable

percentage of these individuals has defaulted on a Federal or State

loan. Furthermore, the Secretary believes that it would be extremely

burdensome for an institution to adequately screen applicable employees

to ensure that none of them had defaulted on a Federal or State loan or

grant.

Changes: None.

Comments: Six commenters supported the Secretary's use of third-

party servicers in determining whether or not an institution has an

adequate number of qualified personnel on hand in determining whether

or not an institution is administratively capable.

Discussion: The Secretary is pleased to have been able to make this

change in the final regulation as a result of public comment on the

February 28, 1994 NPRM.

Changes: None.

Comments: Several commenters suggested that the prohibition on

having different family members perform the two functions of

authorizing payments and disbursing or delivering funds is onerous,

particularly in a small, family-run institution. These commenters

requested that smaller institutions be exempted from this provision.

Discussion: This standard was strengthened to provide additional

deterrence to collusion, which is a major problem at institutions that

engage in fraud and at many institutions that fail to make refunds. The

strengthened language also gives the Secretary added, needed authority

to terminate institutions that engage in collusion.

The Secretary understands the concern of small family-run

institutions that arranging for someone outside the family to perform

one of these tasks may be burdensome. However, at very small

institutions not meeting this standard, the compliance audit would

probably report that there are insufficient internal controls unless

the procedures to use additional staff were followed.

Changes: None.

Comments: A number of commenters suggested that the requirement

that an institution does not meet the administrative capability

standards if it does not have satisfactory academic progress standards

of 150 percent of the time it takes to complete a program bears no

logical relationship to the standards of administrative capability and

therefore, should be deleted.

Discussion: Because students are required by Title IV of the HEA to

maintain satisfactory progress to receive Title IV, HEA program

assistance, it is logical that an institution's ability to administer

Title IV, HEA programs must be judged, in part, on the existence and

implementation of an adequate satisfactory progress policy.

Furthermore, the general requirements that a school have a satisfactory

academic progress policy have been a part of the administrative

capability standards in the general provisions regulations for many

years.

In order to maintain the integrity of the Title IV, HEA programs,

the Secretary does not believe that Title IV, HEA program assistance

should be provided beyond the point at which a student can reasonably

be expected to complete his or her education. The Secretary believes

that this regulation achieves this objective.

Change: None.

Comments: A number of commenters felt that the Department is wrong

in justifying this policy of satisfactory academic progress on the

grounds that a similar period will be used to calculate completion

rates under the Student-Right-to-Know Act, since the latter is a

consumer information statute that does not address student aid

eligibility. Furthermore, the Student-Right-to-Know Act applies only to

first-time, full-time degree seeking students while the satisfactory

academic progress standards would apply to all Title IV students.

Discussion: The Secretary was not trying to justify the

satisfactory academic progress policy based on the Student-Right-to-

Know Act. The Secretary was merely pointing out that the Student-Right-

to-Know Act also uses the concept of a full-time undergraduate student

completing a program in no more than 150 percent of the published

length of the educational program.

Changes: None.

Comments: A number of commenters opposed the minimal satisfactory

academic progress standards set by the Department on the basis that

they would discriminate against minority and disabled students. Many

commenters suggested that the imposition of the 150 percent timeframe

does not provide traditional students between the ages of 18 and 24

much leeway to change programmatic decisions. Furthermore, several

commenters suggested that the regulation should provide for a phase-in

of the standard, because if it is not phased-in over time, many

students will have entered postsecondary education under one assumption

about timeframes for completion only to have these assumptions changed

sometime during their educational career. The commenters felt that for

many students, it will not be possible or practical to change these

timeframes and it would be unfair to hold them to any new standard.

A few commenters believed that the satisfactory academic progress

provisions were confusing and overly burdensome.

Discussion: Section 668.16(e)(3) modifies earlier regulations which

provided that an institution must establish a maximum timeframe in

which the student must complete his or her educational objective, by

providing that the maximum timeframe can be no longer than 150 percent

of the published length of the educational program. The 150 percent can

be calculated using credit hours, clock hours, terms, academic years,

or any other reasonable measure. For example, a school with an

undergraduate program consisting of 120 credit hours may have a policy

that includes a provision requiring a student to complete the program

within 180 credit hours. Such a policy would not only provide a

traditional student attending full-time 6 years to complete a 4-year

program, but also easily accommodate most non-traditional students

because the use of credit hours as the measure allows for less than

full-time attendance as well as non-consecutive enrollments.

The Secretary recognizes that these requirements may create a

hardship for some students who were maintaining progress under the

institution's old policy but do not meet the requirements of the new

policy. However, Sec. 668.16(e)(3)(vii) requires each institution to

have procedures for students to appeal determinations that they are not

making satisfactory progress, and an institution may consider as part

of a student's appeal whether mitigating circumstances are present that

would justify payment to an otherwise-ineligible student. With such a

determination that mitigating circumstances are present, a student who

otherwise would fail one or more tests of the institution's

satisfactory progress standards could still be eligible for payment for

the increment of education used to measure satisfactory academic

progress under Sec. 668.16(e)(3)(ii).

For student appeals under the institution's satisfactory academic

progress standards for aid disbursed during the 1994-95 award year, a

student who met the institution's standards prior to July 1, 1994, but

does not meet the new satisfactory progress standards might be awarded

an additional disbursement for the increment of education used to

measure satisfactory academic progress under Sec. 668.16(e)(3)(ii) if

such a disbursement would permit the student to complete the program

during that period.

An institution must determine and document each student's

eligibility for an extension of eligibility due to a mitigating

circumstance on an individual basis. An institution cannot routinely

grant every applicable student an extension of eligibility as a means

to circumvent the 150 percent provision.

The Secretary has recognized the need to clarify and simplify the

provisions related to satisfactory academic progress. While this

section has been rewritten in an effort to meet these goals, the

underlying policies as provided for in the April 29, 1994 final

regulations have not been altered.

Changes: Section 668.16(e) has been amended to clarify that the

satisfactory academic progress standards of this section are for

purposes of determining student eligibility for Title IV, HEA program

assistance and does not apply to non-Title IV students. The Secretary

has removed the requirement that an institution's standards are

considered to be reasonable if the standards conform with the standards

of satisfactory progress of the institution's nationally recognized

accrediting agency if the agency has those standards. Section

668.16(e)(2) has been amended to clarify which required elements of an

institution's standards are qualitative and which are quantitative.

Section 668.16(e)(2)(ii)(A) has been amended to clarify that the

maximum timeframe in which a student must complete his or her

educational program must be, for an undergraduate program, no longer

than 150 percent of the published length of the educational program

measured in academic years, terms, credit hours, or clock hours.

Section 668.16(e)(4) has been amended to clarify that the Secretary

considers an institution's satisfactory academic progress standards to

be reasonable if the standards provide for a determination at the end

of each increment by the institution as to whether the student has met

the qualitative and quantitative components of the standards instead of

a determination that the student has successfully completed the

appropriate percentage or amount of work according to the established

schedule. Section 668.16(e)(6) has been amended to clarify that the

Secretary considers an institution's satisfactory academic progress

standards to be reasonable if the standards provide specific procedures

for a student to re-establish that he or she is maintaining

satisfactory progress rather than for a reinstatement of a student's

aid.

Comments: A large number of commenters stated that an institution's

default rates are not indicative of an institution's administrative

capability. Many commenters argued that the proposal to use Federal

Stafford Loan and Federal SLS program default rates as a criterion of

administrative capability went beyond the statute and Congressional

intent.

Other commenters asserted that the use of default rates is unfair

to institutions with small numbers of students. These commenters

suggested that institutions with small number of students either be

exempt from using default rates as an indicator of administrative

capability or that these institutions be given the opportunity of

withdrawing from certain programs rather than being penalized for

participation in high-risk programs.

Discussion: The Secretary points out that the use of default rates

as a determining factor in the evaluation of an institution's

administrative capability is not new. The Secretary does not agree with

those commenters who assert that default rates are not indicative of

administrative capability.

Changes: None.

Comments: Many commenters suggested that the requirement that an

institution with an annual withdrawal rate of more than 33 percent does

not demonstrate administrative capability be eliminated. Some of these

commenters asserted that use of a 33 percent withdrawal rate as an

absolute standard would result in discrimination against high-risk

minority students, reducing opportunities available to them. Commenters

also asserted that this standard would adversely affect community

colleges that enroll a significantly large number of adult,

nontraditional students, many of whom exit and return to the

institution several times during their academic careers, or transfer to

other institutions. Another commenter noted that institutions located

near military bases, where transfers of personnel are routine, could

experience high withdrawals of students. Most of these commenters

recommended that this provision be eliminated.

Several commenters suggested that this provision duplicates efforts

by the SPREs and should, therefore, be eliminated.

Discussion: Because SPREs must establish withdrawal rates that are

applicable to institutions that are referred to the SPRE, the Secretary

agrees with the commenters that this provision duplicates efforts by

the SPREs. However, the Secretary believes that the use of a withdrawal

rate standard to evaluate whether an institution should be permitted to

begin participation in a Title IV, HEA program is essential to

effective gatekeeping for the Title IV, HEA programs. Therefore, the

Secretary has revised the withdrawal rate requirement to make it

applicable only to institutions that seek initial participation in a

Title IV, HEA program.

The Secretary does not accept the argument of some commenters that

withdrawal rates are not an appropriate measure of administrative

capability. On the contrary, the Secretary finds that withdrawal rates

are a clear measure of administrative capability as they are a function

of overall institutional performance and the information and support

services that an institution provides to its students and prospective

students.

The Secretary expects that an institution that has good admissions

procedures and administers the ability-to-benefit provisions properly

will have a lower withdrawal rate than one which admits students who

cannot benefit from the program either because they lack the academic

ability or because they do not receive adequate support services. An

institution that provides proper disclosures, such as the institutional

and financial assistance information required to be provided to

students and prospective students under subpart D of these regulations,

and in the case of an institution that advertises job placement rates

as a means of attracting students, data concerning graduation and

employment, and applicable State licensing requirements, as required in

the program participation agreement in Sec. 668.14(b)(10), will be

providing information necessary for prospective students to make

informed decisions. The Secretary believes that if prospective students

receive adequate and accurate information, they will drop out of an

institution in lesser numbers. Further, if an institution provides the

financial aid counseling required in Sec. 668.16(h), the Secretary

expects that students are not likely to withdraw because of a lack of

understanding about the financial resources available to them.

The Secretary notes further that students who withdraw may be

eligible for a refund, especially now that more stringent refund

policies have been set forth in these regulations at Sec. 668.22. Were

an institution to have a high withdrawal rate, it follows that an

institution might experience difficulty complying with the refund

requirement. The Secretary also believes withdrawal rates are related

to default rates in the FFEL and Federal Perkins Loan programs in that

students who withdraw are more likely to default.

The Secretary also believes it is more appropriate to measure an

institution's withdrawal rate on an award year time period, rather than

an academic year time period. The Secretary notes that other enrollment

information that an institution is required to report to the

Department, such as the number of correspondence students, incarcerated

students, and ability-to-benefit students, is all reported for an award

year. This change will allow an institution that seeks initial

participation in a Title IV, HEA program to report withdrawal rate

information in a manner consistent with this other enrollment

information.

The regulations currently provide that an institution does not

count as a withdrawal any student who was entitled to and received in a

timely manner in accordance with Sec. 668.22, a refund of 100 percent

of tuition and fees under the institution's refund policy. Because the

withdrawal rate provision will now only apply to institutions that seek

initial participation in a Title IV, HEA program and, therefore, have

not been required to make refunds in accordance with Sec. 668.22, the

Secretary has removed the requirement that the refund must be made in a

timely manner in accordance with Sec. 668.22.

Changes: Section 668.16(l) has been revised to require that an

institution that seeks initial participation in a Title IV, HEA program

must have a withdrawal rate less than or equal to 33 percent in order

to be administratively capable. Section 668.16(l) has been further

revised to require that an institution calculate its withdrawal rate

for an award year. Section 668.16(l) has been further revised to remove

the requirement that a refund must be made in a timely manner in

accordance with Sec. 668.22.

Comments: One commenter objected to the elimination of

Sec. 668.16(l) as proposed in the February 28, 1994 NPRM in which the

Department proposed to require that institutions provide certain types

of information to students.

Discussion: The Secretary continues to believe that providing

adequate and accurate information to students and prospective students,

so they can make informed decisions, is a function of proper

administration of the Title IV, HEA programs. However, this requirement

is covered in the section on the Program Participation Agreement,

Sec. 668.14, and therefore is being removed from the administrative

capability standards section.

Changes: None.

Comments: One commenter objected to the elimination of

Sec. 668.16(m) as proposed in the February 28, 1994 NPRM in which the

Department would have required that institutions have advertising,

promotion, and recruitment practices that reflected the content and

objectives of the programs offered by the institution.

Discussion: While the Secretary continues to believe that

advertising, promotion and recruitment practices that reflect the

content and objectives of educational programs accurately is a critical

aspect of the proper administration of the Title IV, HEA programs, the

Secretary also recognizes that accrediting agencies and SPREs will

address these practices and agrees with those commenters who

recommended that these proposed requirements not be included in the

final regulations.

Changes: None.

Section 668.22 Institutional Refunds and Repayments

General

Comments: Close to 200 commenters requested that the Secretary

simplify the refund requirements of this section. Many of the

commenters suggested that the Secretary merely repeat the language of

the statute. These commenters believed that using only the language of

the statute will provide institutions with the necessary flexibility to

administer the statute in the most reasonable and efficient manner.

Fifty-nine commenters pointed out that the area of refunds has

traditionally been left to institutions for self-regulation and it

should remain that way. One hundred commenters felt that the complexity

of the refund provisions will promote noncompliance. Five commenters

contended that these refund requirements will cause institutions to

lose income. The commenters felt that, as a result, an institution will

be forced to reduce operating expenses by reducing employees, supplies,

equipment, training, etc., and/or significantly increase tuition. Five

commenters noted that this provision does not take into account that

contracts with instructors based on full-class attendance have already

been made. Sixteen commenters felt that the provisions of this section

will place too great a financial and administrative burden on

institutions. Six commenters felt that as a result of the financial

burden, institutions will not be able to meet the standards set out in

Sec. 668.15, Factors of financial responsibility. Eight commenters felt

that the effective date of these provisions should be delayed because

of the complexity and severe impact of these provisions.

Discussion: The Secretary understands the commenters' frustrations

with the intricacies of the refund provisions of this section. The

Secretary has sought to simplify the refund procedures to reduce

administrative burdens and make changes that will reduce financial

burdens on institutions. However, the Secretary notes that the

Department is committed to reducing the widespread fraud and abuse

associated with the making of refunds. Any suggested changes that would

reduce administrative and financial burdens on institutions while

continuing to provide the level of protection to which the Department

is committed, were given serious consideration. The Secretary continues

to welcome suggested amendments to these regulations that will achieve

these goals. To this end, the Secretary does not believe that merely

repeating the language of section 484B of the HEA in regulations would

provide sufficient safeguards to Title IV, HEA program funds.

Further, because of this commitment to the reduction of fraud and

abuse, the Secretary does not believe it is in the best interest of the

student or the Title IV, HEA programs to delay implementation of the

refund provisions of the April 29, 1994 final regulations. The

Secretary understands that institutions may inadvertently make mistakes

in their implementation of the provisions of this section and whenever

possible the Secretary will take into consideration whether an

institution that has calculated refunds improperly has, nonetheless,

made a good faith effort to comply. In determining whether

administrative sanctions will be pursued against an institution that

has failed to pay refunds in accordance with the regulations, the

Secretary will examine whether such an institution can demonstrate a

good faith effort to comply with the provisions of this section, or

whether the institution sought to avoid its responsibilities for

properly making refunds by ignoring the calculations required by

regulation. An institution must demonstrate that it has made a

reasonable attempt to implement the refund provisions based on all

information available at the time.

Changes: See changes to specific refund sections below.

Comments: Four commenters stated that it is sufficient that the

SPREs are charged with setting standards for student refunds that are

in compliance with the HEA. Four commenters contended that the

provisions of this section are often in conflict with established State

policies which have been based on a thorough and realistic analysis of

the needs and interests of the State. One commenter felt that the

regulation of refunds should not be used to curb abuse at institutions.

The commenter felt that other gatekeeping functions will address fraud

and abuse.

Discussion: The HEA has specifically charged the Secretary with

oversight in the area of refunds, and the Secretary therefore has the

primary responsibility for determining whether refunds are paid timely

and in accordance with Federal requirements. Although an institution's

SPRE or other State agency may have certain concerns about an

institution's refund practices, the Secretary has the primary

responsibility for establishing refund requirements that will ensure

the protection of the Title IV, HEA programs.

Changes: None.

Comments: Three commenters noted problems with the law on refunds

and urged the Secretary to support changes to the law that will lead to

a coherent and consistent Federal policy on refunds. Two commenters

suggested that all institutions be required to use one refund policy.

Two commenters suggested the use of the pro rata refund policy for all

Title IV, HEA program assistance recipients. One commenter suggested

that an institution should owe a 100 percent refund to a student who

withdraws within the first two weeks, with the percentage of the refund

decreasing by 10 percent each week thereafter until the sixth week. No

refund would be due after this time. The commenter felt that this would

give a student a sufficient amount of time to assess the institution

without penalizing the institution. One commenter recommended that all

institutions use terms to award aid. An institution would retain zero

percent of institutional charges for a student who withdraws in the

first week of the program. The amount the institution could retain

would then increase by 10 percent increments each week for the next

seven weeks. No refund would be required after that point. The

commenter suggested that a student who attends at least one day in a

seven-day period would be counted as having attended a full week. The

institution would determine the percentage contribution of all sources

of funds to institutional charges at the time the student is awarded

aid. The commenter suggested that the institution use these percentages

to determine the amount that the institution will retain from each

source of funds. One commenter suggested that only institutions with

high withdrawal rates or with excessively high tuition be required to

calculate refunds under the pro rata refund provisions.

Discussion: The Secretary notes that the specific changes suggested

by these commenters would require changes in the law. The Secretary

agrees that certain changes in the law on refunds may be desirable and

is willing to work with members of the community to achieve legislation

that is coherent, consistent, and effective.

Changes: None.

Comments: One commenter suggested that the Secretary not require

institutions to pay refunds to students who withdraw for reasons

outside of the control of the institution, for example, those who

withdraw for purely personal reasons. Likewise, one commenter felt that

the pro rata refund provisions should be limited only to those students

who officially notify the institution of their withdrawal, since most

students are old enough to be held legally accountable for the

contractual agreements made during admission to the institution. One

commenter recommended that the term ``drops out'' be replaced with the

term ``officially withdraws'' since it is unduly burdensome to require

an institution to determine the date on which a student has

unofficially dropped out.

Discussion: The Secretary believes that the HEA makes clear that

students who withdraw from an institution for whatever reason are

entitled to any refund owed in accordance with the law and applicable

regulations.

Changes: None.

Comments: Nine commenters felt that it would be impossible to

explain these refund policies to students. One commenter supported the

requirement that an institution provide a clear and conspicuous written

statement of its refund policy to students and prospective students.

Discussion: The Secretary believes that information on how a

student's refund would be calculated should he or she withdraw from the

institution is vital to a student's assessment of whether to enroll or

continue enrollment at an institution. Therefore, an institution must

provide the information necessary for a student to make an informed and

valid assessment. The Secretary does not believe it is unreasonable to

expect an institution to provide reasonable examples of common refund

situations applicable to the average student population, and answer any

questions on this material, should a student request such information.

The Secretary believes that the simplifications made to the refund

section in response to public comment will make it easier for an

institution to explain the refund policies to a student.

Changes: See specific changes to the refund sections.

Fair and Equitable Refund Policy

Comments: Thirteen commenters felt it is very burdensome to require

an institution to calculate a student's refund under three refund

policies. Eight commenters suggested that an institution be allowed to

determine the refund that is generally the most generous (for example,

with the use of charts that show the refund due based on the number of

weeks remaining) and use it for all students who withdraw. One

commenter supported the requirement that an institution calculate every

student's refund under each applicable policy for comparison purposes.

Discussion: The Secretary continues to assert that the individual

calculation of all possible refunds for each withdrawing student is the

only possible means by which an institution can determine which refund

calculation provides the largest amount, as required by law. Further,

the Secretary notes that it would be difficult for an institution to

determine that one particular policy always provided the most generous

refund as refund amounts vary based on the unpaid amount of an

individual student's scheduled cash payment.

The Secretary understands that institutions would prefer a simple

predetermined chart or other reference aid that would enable them to

complete a refund calculation without doing a student-by-student

analysis. However, several variable items must always be examined. For

example, the institution generally is required to determine the amount

of funds it has earned under its enrollment contract with the student,

and then return the unearned funds using the allocation priorities set

out in Sec. 668.22(h). In some cases, the institution may only have

earned the funds under the contract that were allocated to be paid by

the student (i.e., the funds remaining under the contract after the

unearned portion has been returned). In this situation, whether the

institution gets to keep any of the funds for this student already in

its possession will depend solely upon whether the student has already

paid his or her share of the contract price. For these calculations,

even though the institution might be able to develop a chart showing

what has been earned under the enrollment contract during the refund

period, a student-by-student calculation must also be made to determine

whether the student has already paid his or her share of the contract

that the institution has earned. Different variables are present in the

pro rata refund calculation that require student-by-student

determinations, because the amount of the refund is reduced by the

amount of any unpaid charges on the enrollment contract at the time of

withdrawal. For this reason, some degree of student-by-student analysis

would be required for every refund calculated under these regulations.

The Secretary would like to clarify the process of determining

which refund policies to use when calculating a refund for a student.

For a first-time student who withdraws on or before the 60 percent

point in time in the period of enrollment for which the student has

been charged, an institution must: (1) Calculate a refund under the pro

rata refund calculation; (2) Compare this refund amount with refunds

calculated under applicable State law and in accordance with the

institution's accrediting agency's policy, if any. If either the State

policy or the accrediting agency policy does not exist, the institution

would compare the pro rata refund amount with the refund amount

calculated under the remaining policy. For example, if no accrediting

agency refund policy exists, the institution would compare the pro rata

refund amount with the refund calculated in accordance with the State

refund policy; (3) If there is no State refund policy and no

accrediting agency policy (i.e., nothing with which to compare the pro

rata refund amount), use the pro rata refund amount as the student's

refund. (An institution is never required to use the refund calculation

under Appendix A, Standards for Acceptable Refund Policies by

Participating Institutions, for a first-time student who withdraws on

or before the 60 percent point in time in the period of enrollment for

which the student has been charged. [As discussed later, the Federal

refund calculation will replace Appendix A, Standards for Acceptable

Refund Policies by Participating Institutions, for the 1995-96 award

year and beyond.])

For a continuing student (the pro rata refund policy does not

apply), an institution must: (1) Compare refunds calculated under

applicable State law and in accordance with the institution's

accrediting agency's policy, if any. If one of these policies does not

exist, the institution would use the remaining policy to arrive at the

refund amount. No other refund calculation is necessary. (2) If there

is no State refund policy and no accrediting agency refund policy, then

(and only then) must the institution compare refunds calculated in

accordance with Appendix A, Standards for Acceptable Refund Policies by

Participating Institutions, [the Federal refund calculation for the

1995-96 award year and beyond] and the institution's refund policy.

Changes: None.

Comments: Two commenters contended that it was inaccurate to refer

to accrediting agency standards that are approved by the Secretary as

the Secretary will not be approving the refund standards of accrediting

agencies.

Discussion: The Secretary would like to clarify that an accrediting

agency must have its refund policy approved by the Secretary before an

institution may use an accrediting agency's refund policy to calculate

a student's refund under the requirements of this section. In approving

an accrediting agency's policy, the Secretary will look at factors such

as whether the accrediting agency's specific refund standards: require

an institution to make a refund of unearned tuition, fees, room and

board, and other charges to a student who received Title IV, HEA

program assistance, or whose parent received a Federal PLUS loan or

Federal Direct PLUS loan on behalf of the student, if the student

withdraws from the institution; include standards that specify the

percentage of funds that will be refunded to a student (or retained by

the institution) specific to the point in time that the student

withdraws from the institution; and address the treatment of all

charges specified in the law.

Changes: None.

Comments: One commenter requested that an institution be permitted

to exclude administrative fees from refunds calculated under policies

other than the pro rata refund policy.

Discussion: The Secretary notes that current regulations do not

prohibit a State, accrediting agency, or institution (if the

institution is comparing its own policy with a refund under Appendix A,

Standards for Acceptable Refund Policies by Participating Institutions,

[the Federal refund calculation for the 1995-96 award year and beyond])

from developing refund policies that permit institutions to exclude

administrative fees. The Secretary does not plan to regulate in this

area unless necessary to stem abuse. The Secretary notes that the

Federal refund calculation also permits an institution to exclude an

administrative fee from the calculation of the refund. The Federal

refund policy is discussed in the section of Analysis of Comments and

Changes that addresses comments received on Appendix A, Standards for

Acceptable Refund Policies by Participating Institutions.

Changes: None.

Pro Rata Refund

Comments: Two commenters supported the required calculation of pro

rata refunds for students who withdraw on or before the 60 percent

point in time in the period of enrollment for which the student has

been charged. One commenter felt that permitting institutions to

subtract any unpaid institutional charges from the initial pro rata

refund amount is unfair since it encourages students to withhold

payment of the unpaid charges.

Discussion: The Secretary notes that the statutory definition of a

pro rata refund calls for the subtraction of unpaid charges from the

calculated refund amount. The Secretary agrees that the statutory

subtraction o

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