Student Assistance General Provisions; Federal Perkins Loan Program; Federal Supplemental Educational Opportunity Grant Program; Federal Work-Study Program; Federal Family Educational Loan Programs; Federal Pell Grant Program; Final Rule

34 CFR Parts 668, 674, 675, 676, 682, and 690

RIN: 1840-AC13

Student Assistance General Provisions; Federal Perkins Loan

Program; Federal Supplemental Educational Opportunity Grant Program;

Federal Work-Study Program; Federal Family Educational Loan Programs;

Federal Pell Grant Program

AGENCY: Department of Education.

ACTION: Final regulations.

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SUMMARY: These regulations govern the management of funds an

institution receives under the Federal Pell Grant, Federal Supplemental

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

Federal Perkins Loan, Federal Family Education Loan (FFEL), William D.

Ford Federal Direct Loan (Direct Loan), and Presidential Access

Scholarship (PAS) programs authorized by title IV of the Higher

Education Act of 1965, as amended (title IV, HEA programs). The

Secretary amends the Student Assistance General Provisions regulations

by revising subpart B and adding a new subpart K and by making

conforming revisions in other title IV, HEA program regulations. The

purpose of the regulations is to promote sound cash management

practices by institutions that participate in the title IV, HEA

programs by strengthening and making uniform the cash management rules

for these programs. In so doing, the Secretary expects to reduce the

cost to the Federal government of making title IV, HEA program funds

available to students and institutions under these programs.

EFFECTIVE DATE: These regulations take effect on July 1, 1995. and

apply to the 1995-96 and subsequent years. However, affected parties do

not have to comply with the information collection requirements in

Sec. 668.164(a) until the Department of Education publishes in the

Federal Register the control number assigned by the Office of

Management and Budget (OMB) to these information collection

requirements. Publication of the control number notifies the public

that OMB has approved these information collection requirements under

the Paperwork Reduction Act of 1980.

FOR FURTHER INFORMATION CONTACT: John Kolotos or Kim Goto, U.S.

Department of Education, 600 Independence Avenue, S.W., Room 4318,

Regional Office Building 3, Washington, D.C. 20202-5244. Telephone

(202) 708-7888. Individuals who use a telecommunications device for the

deaf (TDD) may call the Federal Information Relay Service at 1-800-877-

8339 between 8 a.m. and 8 p.m., Eastern time, Monday through Friday.

SUPPLEMENTARY INFORMATION: On September 29, 1994, the Secretary

published a Notice of Proposed Rulemaking (NPRM) for part 668 in the

Federal Register (59 FR 49766). The NPRM included a discussion of the

major issues surrounding the proposed changes which will not be

repeated here. The following list summarizes those issues and

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

of those issues can be found:

The Secretary proposed to define the scope and purpose of subpart K

to be the promotion of sound cash management practices by institutions

and third-party servicers, and the minimizing of the financing costs to

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

to students and institutions (page 49766);

The Secretary proposed to define the term disburse to encompass all

the methods by which an institution pays title IV, HEA program funds to

a student or parent (page 49766);

The Secretary proposed to define the term issue checks to include

any means by which an institution pays a student or parent by check

(page 49767);

The Secretary proposed to codify existing policy and practice under

which the Secretary provides title IV, HEA program funds, other than

FFEL program funds, to institutions (page 49767);

The Secretary proposed to consolidate and amend several

requirements of the Federal Perkins Loan Program, the FWS Program, the

FSEOG Program, the Federal Pell Grant Program, and requirements

proposed for the Direct Loan Program regulations regarding the account

into which an institution deposits and otherwise maintains Federal

funds (pages 49767-49768);

The Secretary proposed to consolidate and amend several

requirements of the Federal Perkins Loan Program, the FWS Program, the

FSEOG Program, the Federal Pell Grant Program, and requirements

proposed for the Direct Loan Program regulations under which an

institution disburses title IV, HEA program funds to eligible students

(pages 49768-49769); and

The Secretary proposed to define excess cash as any amount of title

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

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

the third business day following the date the institution received

those funds (pages 49769-49770).

In addition to changes to the Student Assistance General Provisions

regulations, to eliminate conflicting requirements between program

regulations the Secretary publishes conforming amendments to the

appropriate sections of the Federal Pell Grant, FSEOG, FWS, Federal

Perkins Loan and FFEL program regulations. The Secretary identifies

those sections as follows:

Federal Perkins Loan Program, 34 CFR 674.16 and 674.19;

FSEOG, 34 CFR 676.16 and 676.19;

FWS, 34 CFR 675.19;

Federal Family Educational Loan Programs, 34 CFR 682.603 and 682.604;

Federal Pell Grant Program, 34 CFR 690.78 and 690.81.

The Secretary publishes conforming amendments to the Direct Loan

Program regulations as part of the final regulations for that program.

These regulations establish for the first time uniform rules and

procedures that an institution must follow in requesting, maintaining,

disbursing, and otherwise managing title IV, HEA program funds. In

establishing these rules and procedures, the Secretary seeks to achieve

an appropriate balance between the needs of an institution in

administering with integrity these programs, the institution's

obligation to provide program funds to students in a timely manner, and

the Federal interest in the use and disposition of program funds. The

Secretary recognizes however that many institutions manage Federal

funds soundly and efficiently, albeit somewhat differently from what

these rules require. The Secretary does not intend for these rules to

dissuade those institutions from continuing sound cash management

practices; rather the Secretary believes that these rules will enhance

those institutions' practices as well as establish a performance

benchmark for all institutions. In this regard, the Secretary will

assess the impact of these regulations on students and institutions and

propose new rules, as may be appropriate, in response to that

assessment.

Substantive Changes to the NPRM

The following discussion reflects substantive changes made to the

NPRM in the final regulations. The provisions are discussed in the

order in which they appear in the proposed rules.

Section 668.161 Scope and Purpose

In response to public comment, the Secretary revises this section

to include the following objectives: (1) to promote sound cash

management practices by institutions, (2) to minimize the financing

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

program funds to students and institutions, and (3) to minimize the

costs that accrue to students under the title IV, HEA loan programs.

Section 668.162 Definitions

The definition of issue checks has been revised to clarify that an

institution issues a check by mailing the check, or notifying the

student or parent expeditiously that the check is available on demand

for immediate pickup.

Section 668.163 Requesting funds

The final regulations require that in certifying a loan application

under Sec. 682.603, an institution may not request from a lender the

loan proceeds for a student borrower earlier than 13 days before the

student's period of enrollment. This provision applies only to

borrowers who are not subject to the delayed disbursement provisions in

Sec. 682.604(c)(5) and where FFEL program funds are transferred by a

lender to an institution via EFT or master check. The 13-day timeframe

was chosen to be consistent with the number of days that an institution

may request and disburse funds that it receives from the Secretary by

EFT under all of the other title IV, HEA programs. The Secretary adds

this provision to minimize the interest costs incurred by a borrower

during the period in which the borrower does not benefit from the

receipt of those loan funds.

Section 668.164 Maintaining funds

The section is revised to require that the institution must comply

with one of the following provisions: (1) that it notify the bank of

its accounts that contain Federal funds and retain a record of that

notice in its files, or (2) that the institution ensure that the name

of the account discloses clearly that Federal funds are maintained in

that account. The proposed rules required that an institution would

have to comply with both provisions. The change was made in response to

public comment and the Secretary's belief that either of the proposed

requirements in connection with the filing of a UCC-1 statement will

provide that Federal funds are safeguarded adequately.

In response to public comment, the final regulations allow an

institution to maintain an interest-bearing account under the same

provisions that apply to interest-bearing accounts under the Federal

Perkins Loan Program.

The final regulations have raised the threshold for requiring an

interest-bearing account to $3 million. These regulations also clarify

that any institution may maintain an interest-bearing account.

Under the final regulations, an institution which demonstrates that

it will not earn more than $250 in interest on holding Title IV, HEA

program funds is not required to maintain an interest-bearing account

regardless of the amount of its prior-year drawdowns. In addition, an

institution that did not earn $250 in interest on the funds it

maintained in an interest-bearing account in the prior award year, is

not required to maintain that account in the current award year.

Section 668.165 Disbursing funds

The final regulations have been revised to require that an

institution must notify a student or parent of the amount of title IV,

HEA program funds the student can expect to receive, and how and when

those funds will be paid.

The final regulations clarify that an institution must determine if

the amount of title IV, HEA program funds that the institution applies

to a student's account exceeds the amount of allowable institutional

charges, and based on that determination provide any balance to the

student within specified timeframes.

In response to public comment, the Secretary has extended the

timeframes within which an institution must disburse any student credit

balance, and has provided for a phase-in of this provision. For the

1995-96 award year, an institution must pay that balance directly to

the student as soon as possible, but within 21 days of the later of:

the date that balance occurs; the first day of classes of a payment

period or period of enrollment, as applicable; or the date the student

rescinds his or her authorization under Sec. 668.165(d). For students

enrolled at the institution on or after July 1, 1996, the credit

balance must be paid as soon as possible, but within 14 days after the

later of the events stated above.

The final regulations provide that an institution must obtain a

student's or parent's authorization to (1) disburse title IV, HEA

program funds via EFT; (2) apply title IV, HEA program funds to other

charges; and (3) hold excess student funds. In obtaining authorization

for any of these activities, an institution may not require the student

or parent to provide that authorization, and must allow the student or

parent to rescind that permission at any time. In addition, the

institution must provide an annual notice to the student that explains

in a plain and conspicuous manner the provisions regarding the

student's authorization, including an explanation regarding any

interest that the institution earns on the student's funds and whether

the institution will provide that interest to the student.

If a student authorizes the institution to hold excess funds on his

or her behalf, and the institution chooses to hold those funds, the

institution must identify the student and the amount of the funds the

institution holds for that student in a subsidiary ledger account

designated for this purpose; and maintain, at all times, cash in its

bank account for an amount equal to the amount of the funds the

institution holds for the student. The institution may also retain any

interest earned on the student's funds while the institution is holding

those funds. An institution may not hold excess student funds if the

Secretary determines that the institution does not meet the standards

of financial responsibility under Sec. 668.15.

Section 668.166 Excess cash.

In response to public comment, the final regulations have increased

the allowable excess cash tolerances to three percent of the

institution's total prior-year drawdowns during a period of peak

enrollment; and for any other period, one percent of the total prior-

year drawdowns. The Secretary has removed the proposed minimum excess

cash balance of $5,000 provision based on the increase in the allowable

percentages.

Analysis of Comments and Changes

In response to the Secretary's invitation in the NPRM,

approximately 110 parties submitted comments on the proposed

regulations. An analysis of the comments and of the changes in the

regulations since publication are published as an appendix to these

regulations. 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.

Executive Order 12866

These regulations have been reviewed in accordance with Executive

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

the potential costs and benefits of this regulatory action.

The potential costs associated with the regulations are those

resulting from statutory requirements and those determined by the

Secretary to be necessary for administering the title IV, HEA programs

effectively and efficiently. Burdens specifically associated with

information collection requirements, if any, are identified and

explained elsewhere in this preamble under the heading Paperwork

Reduction Act of 1980.

In assessing the potential costs and benefits--both quantitative

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

that the benefits of the regulations justify the costs.

The Secretary has also determined that this regulatory action does

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

exercise of their governmental functions.

Paperwork Reduction Act of 1980

Section 668.164(a) contains information collection requirements. As

required by the Paperwork Reduction Act of 1980, the U.S. Department of

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

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

The final regulations contain information collection requirements

regarding the bank account that all participating institutions must

maintain for the deposit of title IV, HEA program funds. Specifically,

institutions must (1) notify their bank of the accounts that contain

Federal funds and maintain a record of that notice in their

recordkeeping system, and (2) file with the appropriate State or

municipal government entity a UCC-1 statement disclosing the accounts

that contain Federal funds and keep a copy of that statement in their

files. In addition, institutions that draw down more than $3 million in

title IV, HEA program funds must maintain those funds in an interest-

bearing account and keep records for any interest earned on those

funds. Institutions may retain annually interest earning on title IV,

HEA program funds for an amount up to $250, must keep records for the

amount retained, and return to the Department any interest earnings

greater than the amount retained. The Department needs and uses this

information to determine whether institutions have complied with these

requirements.

For approximately 8,500 institutions, a one-time public reporting

burden for this collection of information is estimated at (1) 2,833

hours for institutions to notify banks of the accounts that contain

title IV, HEA program funds and maintain a record of that notice in

their recordkeeping system, and (2) 8,500 hours for institutions to

file a UCC-1 statement with the appropriate State or municipal

government entity disclosing the accounts that contain Federal funds

and keep a copy of that statement in their files. In addition, for

approximately 757 institutions, the annual public reporting burden for

this collection of information is estimated at 379 hours for those

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

program funds and return to the Federal government any interest

earnings in excess of $250.

Organizations and individuals desiring to submit comments on the

information collection requirements should direct them to the Office of

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

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

Assessment of Educational Impact

In the NPRM published on September 29, 1994, the Secretary

requested comment on whether the proposed regulations in this document

would require transmission of information that is being gathered by or

is available from any other agency or authority of the United States.

Based on the response to the proposed rules on its own review, the

Department has determined that the regulations in this document do not

require transmission of information that is being gathered by or is

available from any other agency or authority of the United States.

List of Subjects

34 CFR 668

Administrative practice and procedure, Colleges and universities,

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

programs--education, Reporting and recordkeeping requirements, Student

aid.

34 CFR Parts 674, 675, and 676

Education loan programs--education, Student aid.

34 CFR Part 682

Administrative practice and procedure, Colleges and universities,

Loan programs--education, Reporting and recordkeeping requirements,

Student aid, Vocational education.

34 CFR Part 690

Education of disadvantaged, Grant programs--education, Reporting

and recordkeeping requirements, Student aid.

Dated: November 23, 1994.

Richard W. Riley,

Secretary of Education.

(Catalog of Federal Domestic Assistance Number: 84.007 Federal

Supplemental Education Opportunity Grant Program; 84.032 Federal

Family Educational Loan Program; 84.032 Federal PLUS Program; 84.032

Federal Supplemental Loans for Students Program; 84.033 Federal

Work-Study Program; 84.038 Federal Perkins Loan Program; 84.063

Federal Pell Grant Program; 84.069 Federal State Student Incentive

Grant Program; 84.268 Federal Direct Student Loan Program; and

84.272 National Early Intervention Scholarship and Partnership

Program. Catalog of Federal Domestic Assistance Number for the

Presidential Access Scholarship Program has not been assigned.)

The Secretary amends Parts 668, 674, 675, 676, 682, and 690 of

Title 34 of the Code of Federal Regulations as follows:

PART 668--STUDENT ASSISTANCE GENERAL PROVISIONS

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

follows:

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

1141, unless otherwise noted.

Sec. 668.18 [Removed and Reserved]

2. Section 668.18 is removed and reserved.

3. A new subpart K is added to Part 668 to read as follows:

Subpart K--Cash Management

668.161 Scope and purpose.

668.162 Definitions.

668.163 Requesting funds.

668.164 Maintaining funds.

668.165 Disbursing funds.

668.166 Excess cash.

SUBPART K--CASH MANAGEMENT

Sec. 668.161 Scope and purpose.

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

procedures under which a participating institution requests, maintains,

disburses, and otherwise manages funds the institution receives under

any title IV, HEA program. The purpose of this subpart is to--

(i) Promote sound cash management of title IV, HEA program funds by

an institution;

(ii) Minimize the financing costs to the Federal government of

making title IV, HEA program funds available to a student or an

institution; and

(iii) Minimize costs that accrue to a student under a title IV, HEA

loan program.

(2) An institution must follow additional rules and procedures for

managing title IV, HEA program funds under each program in which it

participates.

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

this subpart also apply to a third-party servicer.

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

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

FWS, Direct Loan, and FFEL programs.

(b) Federal interest in title IV, HEA program funds. Except for the

funds received by an institution for administrative expenses, funds

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

trust for the intended student beneficiaries and the Secretary. The

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

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

purpose.

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

Sec. 668.162 Definitions.

The following definitions apply to terms used in this subpart:

Check: A negotiable demand draft or warrant.

Credit an account: To post a payment of funds to a student's

account.

Day: A calendar day unless otherwise specified.

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

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

of a student--

(1) Directly by--

(i) Check or other means payable to and requiring the endorsement

or certification of the student, or in the case of a parent borrower

under the Direct Loan or FFEL programs, the student's parent;

(ii) Initiating an electronic funds transfer (EFT) to a bank

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

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

the parent; or

(iii) Dispensing cash for which an institution obtains a signed

receipt from the student; or

(2) By crediting the student's account.

Drawdown: A process whereby an institution requests and receives

title IV, HEA program funds.

Issue checks: To release, distribute, or make available a check

by--

(1) Mailing the check to a student or parent; or

(2) Notifying the student or parent expeditiously that the check is

available on demand for immediate pickup.

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

a period of enrollment as defined in Sec. 685.102;

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

defined in Sec. 682.200.

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

submitted in accordance with procedures contained in the Recipient's

Guide for the Department of Education Payment Management System. This

guide is published by the Department of Education, 600 Independence

Avenue, S.W., Room 3321, Federal Office Building 10, Washington, D.C.

20202-4331, and contains the procedures institutions use to request,

report, and account for Federal funds.

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

Sec. 668.163 Requesting funds

(a) General. (1) The Secretary pays an institution in advance, or

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

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

receive those funds.

(2) Advance payment method. (i) Under the advance payment method

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

electronically the amount requested into a bank account designated by

the institution.

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

of funds the institution needs immediately to make disbursements to

students. The institution must make the disbursements as soon as

administratively feasible but no later than three business days

following the date the institution received those funds.

(3) Reimbursement payment method. (i) To receive payment of title

IV, HEA program funds under the reimbursement method an institution

must first make disbursements to eligible students before it submits a

request for cash.

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

exceed the amount of the actual disbursements the institution made to

students included in that request.

(iii) The Secretary may require the institution to submit

documentation that each student included in the request was eligible to

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

which the institution is seeking reimbursement. The Secretary considers

that an institution has made payments to those students if the

institution has either credited the students' accounts or paid the

students directly with its own funds.

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

and transfers electronically that amount into a bank account designated

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

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

IV, HEA program funds;

(B) Made payments for the correct amounts of title IV, HEA program

funds to the students included in its request; and

(C) Submitted any documentation required under paragraph

(a)(3)(iii) of this section.

(b) Receiving FFEL Program funds. In certifying a loan application

under Sec. 682.603 for a borrower who is not subject to the delayed

disbursement provisions in Sec. 682.604(c)(5), an institution may not

request that a lender provide by EFT or master check the loan proceeds

for that borrower earlier than 13 days before the first day of a

student's period of enrollment.

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

Sec. 668.164 Maintaining funds

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

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

meets the requirements under paragraphs (b) or (c) of this section into

which the Secretary transfers or the institution deposits Federal funds

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

as provided in paragraph (e) of this section, an institution is not

required to maintain a separate account for title IV, HEA program

funds.

(2)(i) An institution must--

(A) Notify the bank of the accounts that contain Federal funds and

retain a record of that notice in its recordkeeping system; or

(B) Ensure that the name of the account discloses clearly that

Federal funds are maintained in that account; and

(ii) File with the appropriate State or municipal government entity

a UCC-1 statement disclosing that the account contains federal funds

and maintain a copy of that statement in its records.

(b) Interest-bearing account. (1) Notwithstanding any other

requirements in this section, an institution that participates in the

Federal Perkins Loan Program must maintain--

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

(A) Federally insured; or

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

amount of title IV, HEA program funds in the account; or

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

income-producing securities, such as obligations issued or guaranteed

by the United States.

(2) Except as provided in paragraph (c) of this section, for any

award year, an institution must maintain an account that meets the

requirements in paragraphs (b)(1)(i) or (ii) of this section. If an

institution maintains Federal funds in an investment account as

provided in paragraph (b)(1)(ii) of this section, the institution must

maintain sufficient liquidity in that account to make required

disbursements to students.

(c) Non-interest-bearing account. (1) For any award year, an

institution is not required to maintain an interest-bearing account

if--

(i) In the prior award year, the institution drew down less than $3

million from the title IV, HEA programs;

(ii) For the total amount of title IV, HEA program funds that the

institution drew down in the prior award year and maintained in an

interest-bearing account, the institution earned less than $250 in

interest on those funds; or

(iii) For the total amount of title IV, HEA program funds that the

institution draws down during the award year, the institution

demonstrates by its cash management practices that it would not earn

over $250 in interest by maintaining those funds in an interest-bearing

account.

(2) An institution's non-interest-bearing account must be--

(i) Federally insured; or

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

amount of title IV, HEA program funds in the account.

(d) Interest earnings. Except as provided in paragraphs (d)(1) and

(2) of this section, an institution must remit at least annually to the

Secretary the interest or investment revenue earned on title IV, HEA

program funds maintained in an interest-bearing or investment account.

(1) Pursuant to 34 CFR Part 674, an institution must retain for the

purposes of the Federal Perkins Loan Program all interest or investment

revenue earned on Federal Perkins Loan Program funds maintained in an

interest-bearing or investment account.

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

Perkins Loan Program funds, an institution may retain for

administrative expense up to $250 per year of the interest or

investment revenue earned on title IV, HEA program funds maintained in

an interest-bearing or investment account.

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

maintain title IV, HEA program funds, including the funds an

institution maintains for purposes of the Federal Perkins Loan Program,

in a separate bank account that contains no other funds if the

Secretary determines that-

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

not--

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

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

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

(ii) Identify adequately the interest or investment revenue earned

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

(2) The institution's financial records--

(i) Are not maintained on a current basis;

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

transactions; or

(iii) Are not reconciled at least monthly; or

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

recordkeeping and reporting requirements in subpart B of this part or

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

institution participates.

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

care and diligence required of a fiduciary with regard to maintaining

and investing Federal funds.

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

Sec. 668.165 Disbursing funds.

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

the student's parent of the amount of title IV, HEA program funds the

student can expect to receive, and how and when those funds will be

paid.

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

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

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

institution must obtain authorization from the student or parent, as

applicable, to disburse by that method.

(3) An institution must follow the disbursement procedures in

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

Program.

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

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

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

may apply those funds only to allowable charges described under

paragraph (b)(4) of this section, except that the institution may not

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

institution assessed the student in a prior award year or period of

enrollment. An institution must provide written notification

expeditiously to a student or parent, as applicable, that the

institution has credited the student's account with Direct Loan or FFEL

program funds.

(2) Student account balances. Unless otherwise authorized, by a

student, whenever an institution applies title IV, HEA program funds to

a student's account and determines that an amount of those funds

exceeds, or exceeded, the amount of allowable charges the institution

assesses the student, the institution must pay that balance directly to

the student as soon as possible but--

(i) For students enrolled at the institution at any time during the

period beginning July 1, 1995 and ending June 30, 1996, within 21 days

of the later of--

(A) The date that balance occurs;

(B) The first day of classes of a payment period or period of

enrollment, as applicable; or

(C) The date the student rescinds his or her authorization under

paragraph (d) of this section; and

(ii) For students enrolled at the institution on or after July 1,

1996, within 14 days of the later of the events described in paragraph

(b)(2)(i) (A), (B), or (C) of this section.

(3) Allowable charges. For the purposes of this section, allowable

charges include--

(i) Tuition and fees;

(ii) Board, if the student contracts with the institution for

board;

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

and

(iv) If an institution obtains the student's or parent's

authorization under paragraph (d) of this section--

(A) Other cost-of-attendance charges, as provided under section 472

of the HEA, included in that authorization; and

(B) Other institutional charges that a student incurs at his or her

discretion.

(4) Holding student funds. (i) Except as provided in paragraph

(b)(4)(ii) of this section, an institution, as a fiduciary for the

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

programs in excess of institutional charges included in paragraph

(b)(3) of this section, if the student authorizes the institution to

retain the excess funds to assist the student in managing those funds.

If an institution chooses to hold excess student funds, the

institution--

(A) Must identify the student and the amount of the funds the

institution holds for that student in a subsidiary ledger account

designated for that purpose;

(B) Must maintain, at all times, cash in its bank account for an

amount at least equal to the amount of the funds the institution holds

for the student; and

(C) May retain any interest earned on the student's funds.

(ii) If the Secretary determines that an institution has failed to

meet the standards of financial responsibility under Sec. 668.15, an

institution may not hold a student's excess funds for this purpose.

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

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

until the student is enrolled for classes for that period.

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

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

enrolled student is 10 days before--

(i) The first day of a payment period or period of enrollment, as

applicable; and

(ii) For second and subsequent disbursements of loan funds under

the Direct Loan and FFEL programs, the first day of a semester, term,

or other period of enrollment for which that disbursement is intended.

(3) Pursuant to Sec. 682.604(c) and Sec. 685.303(b)(4), if a

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

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

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

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

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

student's classes.

(d) Student authorization. (1) An institution must obtain from a

student or parent, as applicable, written authorization allowing the

institution to--

(i) Disburse title IV, HEA program funds by initiating an

electronic funds transfer as provided in paragraph (b)(2) of this

section;

(ii) Use the student's or parent's title IV, HEA program funds to

pay for other charges as provided in paragraph (b)(3)(iv) of this

section; or

(iii) Hold excess student funds under paragraph (c) of this

section.

(2) In obtaining authorization for any of these activities, an

institution--

(i) May not require the student or parent to provide that

authorization; and

(ii) Must allow the student or parent to rescind that authorization

at any time.

(3) The authorization granted to an institution is valid for the

award year or period of enrollment in which the institution obtains

that authorization. The Secretary considers that initial authorization

to continue to be valid provided that the institution notifies the

student or parent of the provisions regarding the student's or parent's

current authorization prior to conducting any of the activities that

require that authorization for any subsequent award year or period of

enrollment. The institution's notice to the student or parent must--

(i) In a plain and conspicuous manner, explain those provisions,

including an explanation regarding any interest that the institution

earns on the student's funds and whether the institution will provide

that interest to the student; and

(ii) Provide the student or parent with the opportunity to cancel

or modify those provisions.

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

Sec. 668.166 Excess cash.

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

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

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

end of the third business day following the date the institution

received those funds. Except as provided in paragraph (b) of this

section, an institution must return promptly to the Secretary any

amount of excess cash in its account.

(b) Excess cash tolerances. (1) If an institution draws down title

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

institution may maintain the excess cash balance in the account the

institution established under Sec. 668.164 only if--

(i) In the award year preceding that drawdown, the amount of that

excess cash balance is less than--

(A) For a period of peak enrollment at the institution during which

that drawdown occurs, three percent of its total prior-year drawdowns;

or

(B) For any other period, one percent of its total prior-year

drawdowns; and

(ii) Within the next seven days, the institution eliminates its

excess cash balance by disbursing title IV, HEA program funds to

students for at least the amount of that balance.

(2) For the purposes of this section, a period of peak enrollment

at an institution occurs when at least 25 percent of the institution's

students start classes during a given 30-day period. For any award

year, an institution calculates the percentage of students who started

classes during a given 30-day period by--

(i) For the prior award year in which the 30-day period began,

determining the number of students who started classes during that

period;

(ii) Determining the total number of students who started classes

during the entire award year used in paragraph (b)(2)(i) of this

section;

(iii) Dividing the number of students in paragraph (b)(2)(i) of

this section by the number of students in paragraph (b)(2)(ii) of this

section; and

(iv) Multiplying the result obtained in paragraph (b)(2)(iii) of

this section by 100.

(3) For the purpose of determining the total amount of title IV,

HEA program funds under paragraph (b)(1)(i) of this section, an

institution that participates in the Direct Loan Program may include,

for the latest year for which the Secretary has complete data, the

total amount of loans guaranteed under the FFEL Program for students

attending the institution during that year.

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

Secretary finds that an institution maintains in its account excess

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

section, the Secretary--

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

institution to reimburse the Secretary for the costs the Secretary

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

institution; and

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

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

programs under subpart G of this part.

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

institution has maintained excess cash, the Secretary--

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

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

unless the institution demonstrates to the satisfaction of the

Secretary that it issued the check shortly after the institution wrote

the check; and

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

liability for maintaining excess cash balances in accordance with

procedures established by the Secretary. Under those procedures, the

Secretary assesses a liability that is equal to the difference between

the earnings that the excess cash balances would have yielded if

invested under the applicable current value of funds rate and the

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

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

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

Department of Treasury based on certain investment rates. The current

value of funds rate is computed each year by averaging investment rates

for the 12-month period ending every September. The TFM bulletin is

published annually by the Department of Treasury. Each annual bulletin

identifies the current value of funds rate and the effective date of

that rate.

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

PART 674--FEDERAL PERKINS LOAN PROGRAM

1. The authority citation for part 674 continues to read as

follows:

Authority: 20 U.S.C. 1087aa-1087hh and 20 U.S.C. 421-429, unless

otherwise noted.

2. Section 674.16 is amended by revising paragraph (d) and by

revising paragraph (e) to read as follows:

Sec. 674.16 Making and disbursing loans.

* * * * *

(d) The institution shall disburse funds to a student or the

student's account in accordance with the provisions of Sec. 668.165.

(e) The institution shall advance funds to a student in accordance

with the provisions of Sec. 668.165.

* * * * *

3. Section 674.19 is amended by revising paragraph (b) to read as

follows:

Sec. 674.19 Fiscal procedures and records.

* * * * *

(b) Account for Perkins Loan Fund. An institution shall maintain

the funds it receives under this part in accordance with the

requirements in Sec. 668.164.

* * * * *

PART 675--FEDERAL WORK-STUDY PROGRAM

1. The authority citation for part 675 continues to read as

follows:

Authority: 42 U.S.C. 2571-2756b, unless otherwise noted.

2. Section 675.19 is amended by revising paragraph (a)(3) to read

as follows:

Sec. 675.19 Fiscal procedures and records.

(a) * * *

(3) An institution shall maintain funds received under this part in

accordance with the requirements in Sec. 668.164.

* * * * *

PART 676--FEDERAL SUPPLEMENTAL EDUCATIONAL OPPORTUNITY GRANT

PROGRAM

1. The authority citation for part 676 continues to read as

follows:

Authority: 20 U.S.C. 1070b-1070b-3, unless otherwise noted.

2. Section 676.16 is amended by removing paragraph (d),

redesignating paragraphs (e), (f), (g), and (h) as paragraphs (d), (e),

(f), and (g) respectively, and revising paragraph (c) to read as

follows:

Sec. 676.16 Payment of an SEOG.

* * * * *

(c) An institution shall disburse funds to a student or the

student's account in accordance with the provisions in Sec. 668.165.

* * * * *

Sec. 676.19 [Amended]

3. Section 676.19 is amended by revising paragraph (a)(2) to read

as follows:

* * * * *

(a) * * *

(2) An institution shall maintain funds received under this part in

accordance with the requirements in Sec. 668.164.

* * * * *

PART 682--FEDERAL FAMILY EDUCATION LOAN (FFEL) PROGRAM

1. The authority citation for Part 682 continues to read as

follows:

Authority: 20 U.S.C. 1071 to 1087-2, unless otherwise noted.

2. Section 682.603 is amended by revising paragraph (h) to read as

follows:

Sec. 682.603 Certification by a participating school in connection

with a loan application.

* * * * *

(h) Pursuant to paragraph (b)(5) of this section, a school may not

request the disbursement of loan proceeds--

(1) For a FFEL loan disbursed by EFT or by master check to a

borrower who is not subject to paragraph (h)(2) of this section,

earlier than the 13th day before the first day of the student's period

of enrollment; and

(2) For a borrower who is enrolled in the first year of an

undergraduate program of study and who has not previously received a

Stafford or SLS loan, earlier than the 24th day of the student's period

of enrollment.

3. Section 682.604 is amended by revising paragraph (c)(2)(ii)(B);

by revising paragraph (c)(3)(ii); by revising paragraphs (d)(1)(i) and

(ii)(A); and by revising the last sentence of paragraph (d)(1)(ii)(B)

to read as follows.

Sec. 682.604 Processing the borrower's loan proceeds and counseling

borrowers.

* * * * *

(c) * * *

(2) * * *

(ii) * * *

(B) Obtain the student borrower's endorsement on the check, endorse

the check on its own behalf and, after the student has registered,

credit the student's account, in accordance with paragraph (d)(1) of

this section, and deliver the remaining loan proceeds to the student,

as specified in Sec. 668.165(b)(2).

(3) * * *

(ii) Credit the student's account in accordance with paragraph

(d)(1) of this section, notify the student or parent borrower in

writing that it has so credited that account, and deliver to the

student or parent borrower the remaining loan proceeds, subject to

paragraph (d)(2) of this section, not later than--

(A) In the case of a PLUS loan, 45 days after the school's receipt

of the funds; and

(B) In the case of a Stafford loan, the timeframe specified in

668.165(b)(2).

* * * * *

(d) * * *

(1)(i) For purposes of paragraphs (c)(2)(ii)(B) and (c)(3)(ii) of

this section, a school may not credit a registered student's account

earlier than the period specified in Sec. 668.165(c)(2).

(ii)(A) The school may credit a registered student's account with

only those loan proceeds covering costs specified in

Sec. 668.165(b)(2).

(B) * * * The school shall maintain these funds, as provided in

Sec. 668.165(b)(4).

* * * * *

PART 690--FEDERAL PELL GRANT PROGRAM

1. The authority citation for part 690 continues to read as

follows:

Authority: 20 U.S.C. 1070a through 1070a-6, unless otherwise

noted.

2. Section 690.78 is amended by revising paragraph (a), and by

removing paragraph (b), by redesignating paragraphs (c) and (d) as

paragraphs (b) and (c), respectively, and by revising redesignated

paragraph (c)(1) to read as follows:

Sec. 690.78 Method of disbursement--by check or credit to a student's

account.

(a) An institution shall disburse funds to a student or the

student's account in accordance with the provisions in Sec. 668.165.

* * * * *

(c)(1) An institution that intends to pay a student directly must

notify the student in accordance with Sec. 668.165(a).

* * * * *

3. Section 690.81 is amended by revising paragraph (b) to read as

follows:

Sec. 690.81 Fiscal control and fund accounting procedures.

* * * * *

(b) An institution shall maintain funds received under this part in

accordance with the requirements in Sec. 668.164.

* * * * *

Appendix--Analysis of Comments and Changes

(Note: This appendix will not be codified in the Code of Federal

Regulations.)

Section 668.161 Scope and Purpose

Comments: Many commenters supported the Secretary's decision to

consolidate, codify, and make uniform the cash management policies and

procedures under which an institution requests, maintains, and

disburses title IV, HEA program funds. A few commenters believed that

the proposed consolidation of cash management policies and procedures

would create confusion rather than clarify those policies and

procedures because the consolidation was incomplete. Some of these

commenters suggested that to facilitate an institution's compliance

with all of the cash management policies and procedures, the Secretary

should reference in final regulations the other unconsolidated policies

and procedures contained in each of the title IV, HEA program

regulations.

Commenters writing on behalf of student legal services

organizations supported the Secretary's stated goals, but urged the

Secretary to incorporate in final regulations the following additional

goals:

(1) The promotion of program integrity; and

(2) The mitigation of costs that accrue to a student when title IV,

HEA program loan funds are held by an institution and not made

available timely to borrowers.

Discussion: As noted in the NPRM and discussed more fully under the

heading SUPPLEMENTARY INFORMATION, the Secretary has amended each of

the title IV, HEA program regulations to conform with the rules and

procedures under these regulations. Although the Secretary agrees that

it is preferable to consolidate and make uniform all of the cash

management rules and procedures now contained in the title IV, HEA

program regulations, the Secretary chose to consolidate and make

uniform the requirements only in those areas where there is much

commonality among all the title IV, HEA programs. The Secretary notes

that other cash management provisions pertain mostly to the areas of

fiscal control, accounting and program reporting requirements.

The Secretary believes that the commenter's first goal, to promote

program integrity, is accomplished by these regulations. The Secretary

agrees to incorporate the second goal suggested by the last commenters,

to minimize the costs that accrue to students under the title IV, HEA

loan programs, because this goal is in keeping with the Secretary's

stated objective of promoting sound cash management practices.

Moreover, this goal is consonant with an institution's fiduciary

responsibility to hold in trust for the benefit of a student or the

Secretary any funds the institution receives under the title IV, HEA

programs.

Changes: Section 668.161(a) is revised to (1) articulate the

objectives stated by the Secretary in the NPRM that the purpose of

these regulations is to promote sound cash management practices by

institutions and to minimize the financing costs to the Federal

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

and institutions, and (2) include the objective suggested by the

commenters--to minimize the costs that accrue to students under the

title IV, HEA loan programs.

Section 668.162 Definitions

Credit an Account

Comments: Several commenters supported the proposed definition for

crediting an account. A few commenters urged the Secretary to clarify

in final regulations that listing a student's ``estimated financial

assistance'' on his or her bill is not the same as crediting the

student's account. One commenter suggested that the Secretary clarify

the meaning of the term ``account'' in each section where that term is

used. One commenter believed this definition should indicate that the

payment of title IV, HEA program funds is considered to be credited to

the student's account only after the funds have been drawn down.

Discussion: An institution may disburse funds to a student by

crediting his or her account. In the context of these regulations, a

student's account may be any recordkeeping system that an institution

uses to post institutional charges and payments of title IV, HEA

program funds. Unless an institution has posted a payment to the

student's account the institution's bill to the student may merely

indicate his or her ``estimated financial assistance.'' Similarly, with

respect to the issue presented by the last commenter, for an

institution that establishes a receivable for a student's title IV, HEA

program funds by making an accounting entry for those funds, the

Secretary considers the disbursement to occur on the date that the

institution makes the payment or credits the student's account with the

title IV, HEA program funds that the institution drew down or will draw

down for that purpose.

Changes: None.

Issue Checks

Comments: Commenters writing on behalf of student legal services

organizations contend that it has been common for certain institutions

to write checks but not deliver, or deliver belatedly, those checks to

students. The commenters expressed concern that the proposed definition

of issue checks leaves leeway for an unscrupulous institution to delay

delivery of the check to a student. The commenters suggested that at

the very least the Secretary should in the preamble to the final

regulations clarify the meaning of the phrase ``release, distribute, or

make available'' to mean that an institution must mail a check to a

student or notify the student by some expeditious means that the check

is available and may be picked up immediately by the student.

One commenter recommended that the Secretary provide guidance

relating to the use of the term issue checks as that term is used in

the excess cash section of these regulations.

Discussion: The Secretary considers a check to be issued if it is

released, distributed, or made available along the lines suggested by

the commenters. The reader is referred to the discussion under the

heading Excess cash for more information regarding the term issue

checks.

Changes: The definition of issue checks is clarified to provide

that an institution issues a check by (1) mailing the check to a

student or parent, or (2) notifying the student or parent expeditiously

that the check is available on demand for immediate pickup.

Section 668.163 Requesting Funds

Comments: One commenter requested that the Secretary specify in

final regulations the requirements for institutions that draw down

title IV, HEA program funds through FEDWIRE. Two commenters questioned

the reliability of the ACH/EFT (Automated Clearing House/Electronic

Funds Transfer) payment system.

A few commenters believed that the 3-day immediate need standard

would be onerous and unworkable in view of the excess cash provisions

in Sec. 668.166 under which the Secretary considers an institution to

have issued a check on the date the check cleared the institution's

bank account. These commenters argued that a five-day immediate-need

standard would be more reasonable because an institution has no control

over when a student cashes his or her check. Another commenter

suggested a 15-day immediate-need standard.

One commenter requested clarification regarding the concept of

immediate need with respect to making draws against the Federal capital

contributions (FCC) for the Federal Perkins Loan Program.

In view of the use of electronic funds transfers (EFT) under which

a student borrower would not be required to endorse a loan check,

commenters representing student legal services organizations urged the

Secretary to establish disbursement procedures that would ensure that a

student has adequate control over his or her student aid funds. The

commenters were concerned that a borrower not incur excessive interest

charges for the time that an institution used his or her loan proceeds,

particularly with regard to unsubsidized loans.

Discussion: Under current departmental procedures, an institution

that draws down funds through FEDWIRE must use those funds within one

business day following its receipt of those funds. The Secretary wishes

to clarify that under these regulations an institution must disburse

title IV, HEA program funds within three business days following the

date that the institution received the funds, regardless of whether the

institution drew down those funds through FEDWIRE or under the ACH/EFT

system. In addition, the Secretary reiterates that the Department is

able to transfer funds electronically to an institution quickly and

reliably.

The Secretary disagrees with the commenters who suggested extending

the three-day immediate-need standard to five or 15 days to allow for

the clearance of checks. The clearance pattern of checks issued by an

institution has no bearing on an institution's determination of its

immediate cash needs. Under the immediate-need concept, an institution

draws down only that amount of cash that it needs to make disbursements

to students within a specified time. As long as an institution makes

the disbursements within that time, including making disbursements by

issuing checks properly, the institution has satisfied the immediate-

need standard regardless of when its students cashed the checks after

receiving the checks. The reader is referred to the discussion under

the heading Excess cash for more information regarding the issuance of

checks.

The Secretary wishes to make clear that the concept of immediate

need also applies to draws of Federal capital under the Federal Perkins

Loan Program. Thus, before making a draw of Federal capital an

institution must determine whether the cash in its Federal Perkins Loan

Fund is sufficient to meet its immediate loan disbursement and

administrative needs. The Secretary recognizes that this may be

difficult for an institution to accomplish because student loan

repayments, the cost of collection activities, and the cost of other

administrative actions affect the amount of cash in the Fund.

Nevertheless, an institution must view its allocation of Federal

capital as it views its authorizations for other title IV, HEA programs

and make draws on that allocation only to meet its immediate Federal

Perkins Loan cash needs.

Finally, the Secretary agrees that borrowers should not incur

unnecessary interest costs on loan funds, particularly during the

periods that those funds are held or otherwise used by an institution.

If a lender provides by EFT or mastercheck loan funds to an institution

well ahead of the time that the institution needs the funds to make

disbursements to loan borrowers, an institution may earn and retain

interest on those funds. Under the unsubsidized loan programs, a

borrower incurs interest costs from the date the lender disbursed the

funds to the institution even though the borrower does not benefit from

that early disbursement until he or she receives those loan funds.

Changes: Section 668.163 is revised to provide that under

Sec. 682.603, in certifying a loan application for a borrower who is

not subject to the delayed disbursement provisions in

Sec. 682.604(c)(5), an institution may not request that a lender

provide by EFT or master check the loan proceeds for the borrower

earlier than 13 days before the first day of a student's period of

enrollment. The Secretary adds this provision to minimize the interest

costs incurred by a borrower during the period in which the borrower

does not benefit from the receipt of loan funds. The selection of 13

days is consistent with the number of days that an institution may

request and disburse funds that it receives from the Secretary by EFT

under all of the other title IV, HEA programs.

Comments: Several commenters urged the Secretary to specify in

final regulations the criteria the Secretary considers in determining

whether to place an institution on the reimbursement payment method,

and to detail the procedures under which (1) an institution may appeal

the Secretary's determination, and (2) the Secretary approves an

institution's reimbursement request, including the length of time the

Secretary takes in approving all or part of that request.

Discussion: The Secretary places an institution on the

reimbursement payment method when the Secretary determines that there

is a heightened need to monitor Federal funds or when other reasons

exist to recover program liabilities through administrative offset. The

Secretary has sole discretion in making that determination and makes

that determination on a case-by-case basis. In addition, the Secretary

reserves the authority to require an institution to submit any

documentation the Secretary deems appropriate in determining whether to

approve an institution's reimbursement request.

Changes: None.

Section 668.164 Maintaining Funds.

Comments: For the following reasons commenters writing on behalf of

institutions and higher education organizations suggested that the

Secretary adopt the current Federal Perkins Loan program bank account

provisions under which an institution is required to either notify its

bank of the accounts that contain Federal funds or ensure that the name

of the account discloses clearly that Federal funds are deposited into

that account. First, the commenters noted that existing State laws may

prevent some public institutions from complying with the requirement

that the word ``Federal'' be included in the name of their bank

accounts. Second, the commenters believed that either of the proposed

requirements would be adequate for Federal purposes.

Another commenter believed that both requirements were necessary to

safeguard adequately against the possibility of erroneous levies on an

institution's account.

A few commenters urged the Secretary to explain the purpose of the

proposed requirement.

Discussion: In proposing that an institution comply with both of

these requirements, the Secretary sought to safeguard Federal funds by

alerting potential creditors of the institution that Federal funds are

contained in the institution's bank account. In the past, some

institutions have used Federal funds to secure credit or obtain a loan

by misrepresenting to a creditor that the funds in their Federal

accounts were the institutions' own funds.

In view of the public comment, the Secretary believes the goal of

safeguarding Federal funds is equally accomplished by providing that an

institution comply with either of the proposed measures provided that

the institution also files with the appropriate State or municipal

government entity a UCC-1 statement disclosing that the account

contains Federal funds. An institution may satisfy the requirement of

notifying its bank of the accounts that contain Federal funds by

submitting to the bank a copy of the UCC-1 statement that the

institution files with the appropriate State or municipal government

entity.

Changes: Section 668.164(a)(2) is revised to provide that an

institution (1) may either notify its bank of the accounts that contain

Federal funds or ensure that the name of the account discloses clearly

that Federal funds are maintained in that account, and (2) except as

may be prohibited by State law, must file with the appropriate State or

municipal government entity aP UCC-1 form.

Comments: A few commenters writing on behalf of institutions and

higher education organizations opined that the interest-bearing account

requirements would not only prohibit an institution from commingling

Federal funds with funds the institution maintains in higher-paying

investment accounts but would also force an institution to establish

separate accounts for Perkins and non-Perkins related funds. The

commenters believed that for an institution to comply with the proposed

requirements, the institution would have to establish a vast array of

parallel FDIC accounts that would increase greatly the costs of

maintaining Federal funds while only marginally reducing the Federal

risk. Therefore these commenters, as well as other commenters,

suggested that the Secretary include as an option the current Perkins

loan requirements under which an institution may maintain Federal funds

in an investment account that consists predominately of low-risk income

producing securities.

Commenters writing on behalf of business officers stated that most

colleges and universities pool their operating funds in a single

investment account that is often not a federally insured bank account

because (1) the amounts involved far exceed FDIC insurance limits, and

(2) the rate of return is much higher on investment opportunities. In

addition, these commenters believed that the Secretary should allow an

institution that commingles Federal funds with its own funds in a

pooled investment account to allocate to the various fund components

the interest or investment revenue earned on the pooled funds, instead

of requiring the institution to determine the actual interest earned on

the Federal-funds component. Further, the commenters opined that an

institution would be forced to establish a separate account for title

IV, HEA program funds because it will be difficult for the institution

to comply with the entire set of proposed requirements that its bank

account contain the word ``Federal'', that it be federally insured, and

that the institution be able to account for the actual interest earned

on Federal funds if those funds are commingled with the institution's

own funds. Moreover, these commenters argued that an institution that

uses only its own funds to make disbursements to students prior to

drawing down the equivalent amount of title IV, HEA program funds

should not have to comply with these requirements because the funds

that the institution ultimately draws down lose their ``character'' as

Federal funds when they are received by the institution.

Still other commenters recommended the Federal Perkins Loan Program

investment account option, arguing that Federal funds maintained in

such an account would provide the Secretary greater security than if

the funds were maintained in an FDIC account. The Federal funds would,

in effect, be secured by no-risk U.S. Treasury obligations.

One commenter suggested that after one year the Secretary revisit

the interest-bearing account provisions to determine if the cost to

institutions of carrying out these provisions justify the stated

savings to the government and whether the $250 administrative cost

allowance is sufficient to cover the costs to institutions of carrying

out these provisions. A few other commenters believed that the $250

allowance was too low to cover an institution's administrative expenses

and suggested that the Secretary allow an institution to maintain up to

one percent of the interest calculated on its annual drawdowns or 15

percent of the interest earned. One commenter believed that the

proposed allowance would be sufficient to absorb bank fees because most

institutions would be able to avoid monthly service charges by

informing their banks that the interest-bearing account contained

Federal funds.

A few commenters agreed with the proposed requirement that an

institution maintain a interest-bearing account where the institution's

prior year draws of Federal funds exceeded $1 million. Other commenters

believed that the proposed threshold was too low and would impose

financial and administrative burdens on small institutions or on

institutions that draw down title IV, HEA program funds only after

making disbursements to students. These commenters suggested that the

Secretary raise the threshold or establish another measurement for

requiring institutions to maintain interest-bearing accounts, such as

average monthly account balances.

Discussion: The Secretary acknowledges that while the interest

earned on title IV, HEA program funds maintained in investment accounts

will offset to a greater degree the costs to the Federal government of

making the funds available than if the funds were maintained in an

interest-bearing account, the Secretary believes that the investment-

account-interest benefit is of secondary importance. In proposing the

requirement that an institution maintain a Federally insured interest-

bearing account, the Secretary intended primarily to ensure the safety

and liquidity of the title IV, HEA program funds maintained temporarily

in that account. The Secretary believes strongly that an institution

must not place in jeopardy title IV, HEA program funds by maintaining

the funds in high-risk, albeit high-yielding, investment accounts--

program funds must only be drawn down pending immediate disbursement to

students. However, the Secretary finds compelling the argument that

Federal funds maintained in a low-risk investment account secured by

U.S. Treasury obligations will provide greater security than if the

funds were maintained in a Federally insured bank account, provided

that an institution maintains sufficient liquidity in that investment

account to make required disbursements to students.

The Secretary wishes to clarify that an institution is not required

to maintain more than one Federally insured bank account. In addition,

regarding the issue of determining the interest earned on title IV, HEA

programs where those funds are commingled with an institution's own

funds, the Secretary believes than an institution should be able to

account adequately for the interest earned on the Federal amounts.

The Secretary disagrees with the commenters who argued that an

institution should not be required to comply with the bank account

requirements if an institution uses it's own funds to make title IV,HEA

program disbursements to students and only draws down the equivalent

amount of program funds to replenish its own funds. An institution's

Federal bank account is the repository for title IV, HEA program funds

and must be so designated for the institution to receive program funds

from the Secretary. In addition, an institution must maintain a Federal

account to make deposits of title IV, HEA program funds (for example, a

deposit of title IV, HEA program funds made by the institution for a

refund of institutional charges).

With regard to the comments regarding the one million dollar

threshold requirement, the Secretary agrees that it may not be cost-

effective to require small institutions, or institutions that have a

practice of drawing down title IV, HEA programs funds only after making

disbursements to students, to maintain interest-bearing accounts.

Finally, the Secretary believes that the $250 administrative allowance

is sufficient to offset an institution's costs of maintaining an

interest-bearing account.

Changes: Section 668.164(b) is revised to provide the following.

First, an institution may maintain an interest-bearing account in

accordance with the current requirements under the Federal Perkins Loan

Program. Second, the Secretary has raised the interest-bearing-account

threshold requirement from one million dollars to three million

dollars. Third, an institution that maintained in the prior award year

Federal funds in an interest-bearing account is not required to

maintain the interest-bearing account in the current award year if the

institution did not earn $250 in interest on the funds maintained in

that account in the prior award year. Finally, an institution that

demonstrates by its cash management practices that it will not earn

more than $250 in interest on title IV, HEA program funds is not

required to maintain an interest-bearing account regardless of the

amount of its prior-year drawdowns.

As noted under the heading SUPPLEMENTARY INFORMATION, the Secretary

establishes these interest-bearing-account provisions as performance

benchmarks for all institutions. However, the Secretary remains

interested in (1) the process by which institutions draw down Federal

funds and time within which the funds must be disbursed to students,

(2) the maintenance of the funds in interest-bearing accounts, and (3)

the use of the funds by an institution while the funds are pending

disbursement to students. The Secretary will assess the impact and

effectiveness of these provisions and propose new rules, if

appropriate, in response to that assessment.

Comments: Several commenters supported the proposed provisions

under which the Secretary could require an institution to maintain a

separate account for title IV, HEA program funds if the Secretary found

that the institution did not account adequately for the receipt,

disbursement, or use of those funds.

Commenters writing on behalf of student legal services

organizations urged the Secretary to require certain institutions to

maintain a separate account for title IV, HEA program funds for the

following reasons. First, the separate account requirement is purely

within the Secretary's discretion. Second, as proposed, the requirement

places the onus on the Secretary to act affirmatively to require the

separate account. The commenters believe that given the Department's

scarce resources for enforcement actions and absent a requirement that

an institution establish a separate Federal bank account, Federal and

student funds would be placed in jeopardy unnecessarily. The commenters

contend there has been a longstanding and persistent problem at certain

institutions caused by commingling Federal funds with operating

revenues. The commenters maintained that these institutions fail to pay

loan refunds due students and otherwise use Federal funds for other

purposes. The commenters cite U.S. v. Kammer, 1 F. 3d 1161 (11th Cir.

1993) as an example that courts have been reluctant to find culpable

such failures by institutions so long as the Department permitted title

IV, HEA program funds to be commingled with institutional funds. In

addition, the commenters believed that the accounting effort involved

for the Department to untangle such commingled funds would be

staggering. For these reasons, the commenters feel strongly that the

Secretary should exercise his discretion and require an institution to

maintain a separate bank account for title IV, HEA program funds,

except in cases where the institution has adequate accounting

procedures and a demonstrated track record of making student refunds

and has otherwise used Federal funds for their intended purposes.

Moreover, the commenters argue that the situation presented when a

student withdraws and is owed a refund is analogous to the situation

where an institution holds excess funds for the benefit of the student,

as in proposed Sec. 685.303(c) and Sec. 668.165(b)(4), because under

both situations an institution is responsible and liable for those

funds. The commenters note that under those proposed regulations, the

Secretary requires an institution to maintain excess student funds in a

separate bank account.

Discussion: The Secretary has carefully considered the

recommendations made by these commenters, but has decided to adopt the

structure in the proposed regulations that will not require initially

that an institution establish separate accounts for title IV, HEA

program funds. Although the Secretary believes that in most instances

sound financial management practices will lead an institution to

establish such separate accounts, the Secretary will not require this

so long as an institution is able to meet its cash management and

accounting obligations under the regulations. The Secretary also notes

that the court case identified by the commenters encompassed many more

fact-specific issues concerning whether and under what circumstances a

showing could be made that an institution had willfully converted

student refunds. In the U.S. v. Kammer case cited by the commenters,

the Court concluded that the institution's obligation to pay refunds

out of its operating funds made it difficult to distinguish between the

institution's inability to pay refunds due to financial hardship and a

deliberate decision by the institution to misappropriate those funds.

The Secretary notes that this analysis is not directly relevant to the

question of whether federal funds must initially be placed into a

separate bank account, but focuses instead on the institution's conduct

in conjunction with its financial operations.

The Secretary wishes to assure the commenters that the Secretary

will take appropriate enforcement actions and require an institution

that does not account, disburse, or use Federal funds properly to

maintain a separate account for those funds.

Changes: None.

Section 668.165 Disbursing Funds

Comments Regarding the Method of Payment

Many commenters recommended that the Secretary modify the proposed

EFT payment provisions, under which an institution would need to obtain

each award year written authorization from a student or parent to

disburse title IV, HEA program funds by that method, by providing that

once an institution obtained that authorization, the institution would

be required only to provide annual notices to the student or parent to

continue to use that initial authorization to make EFT payments in

future award years. Still other commenters suggested that the one-time

authorization stay in effect until it was cancelled or modified by the

student or parent.

Many commenters believed that the requirement that an institution

obtain from a student each award year permission to credit his or her

account for other cost-of-attendance charges is administratively

burdensome and unnecessary because the student may at any time withdraw

that permission.

Several commenters believed that the Secretary should allow an

institution that obtains permission from the student or parent to apply

a student's current title IV, HEA program funds to any outstanding

institutional charges.

Discussion: The Secretary agrees that a one-time authorization is

adequate, provided that the notice suggested by the first commenters

explains in a plain and conspicuous manner the provisions for which a

student is granting his or her authorization. The Secretary further

agrees to allow the one-time authorization for all circumstances where

the institution seeks to obtain a student's permission to perform an

activity on behalf of the student.

In addition, the Secretary notes that under both the FFEL and

Direct Loan programs an institution must notify a student or the

student's parent, in writing, that the institution has credited the

student's account. This requirement was established in those programs

because a significant amount of time may elapse between the time a

borrower signs a promissory note or other document authorizing the

transfer of loan funds and the time the funds are applied to the

student's account. The Secretary believes that a borrower is entitled

to a written disclosure of the date on which the student's account is

credited.

Changes: Section 668.165 is revised to include a new paragraph (d)

that provides the procedures under which an institution obtains a

student's authorization to (1) disburse title IV, HEA program funds to

a student, or parent, by initiating an electronic funds transfer, (2)

apply a student's title IV, HEA program funds to other charges, or (3)

hold excess student funds.

Under these procedures, the institution notice to the student must

explain in plain and conspicuous manner the provisions regarding the

student's or parent's authorization, including an explanation regarding

any interest that the institution earns on the student's funds and

whether the institution will provide that interest to the student

including an explanation regarding any interest that the institution

earns on the student's funds and whether the institution will provide

that interest to the student.including an explanation regarding any

interest that the institution earns on the student's funds and whether

the institution will provide that interest to the student. In addition

the notice must provide the student or parent with the opportunity to

cancel or modify those provisions.

Also, Sec. 668.165(a) is revised to provide that an institution

must notify a student or parent of the amount of title IV, HEA program

funds the student can expect to receive, and how and when those funds

will be paid.

Comments Regarding Crediting a Student's Account and Allowable

Charges

Commenters writing on behalf of business officers believed that the

proposed requirements for crediting a student's account assume that

institutions have in place elaborate and very detailed accounting

systems that enable institutions to analyze the various type of charges

and sources of funds posted to student accounts. The commenters contend

that most institutions have fairly simple accounting systems where

charges are merely posted and payments credited--these systems are not

designed to track or to ensure that selected revenue sources are

applied to discrete charges. The commenters note that while existing

provisions require that an institution may credit a student's account

with his or her Federal Pell Grant award only for tuition and fees and

room and board charges, those provisions do not present a problem to

institutions because the amount of the student's Federal Pell Grant

program award seldom exceeds the charges to which it is applied.

However, extending the Federal Pell Grant program requirement to all

title IV, HEA programs, as proposed, would pose great difficulties for

institutions. Therefore, the commenters suggested that the Secretary

delete the references to the ``application of funds'' in proposed

Sec. 668.165(b)(1), and replace those references with the term ``use

the funds.'' The commenters believe that this substitution would

clarify that the Secretary did not intend to require institutions to

track funding sources on an individual basis to determine which dollars

would be applied to specific institutional charges or which dollars

would be become part of a student's credit balance.

A few commenters argued that if the a student's total title IV, HEA

program awards were less than the allowable charges assessed by the

institution, then any balance on the student's account could result

only from crediting the student's account with non-Federal funds.

Therefore, the commenters concluded that an institution would not be

subject to the proposed credit balance provisions because the student's

balance would consists solely of non-title IV, HEA program funds. One

commenter recommended that the Secretary establish a credit balance

threshold of $200. Under that recommendation, an institution would not

have to meet the proposed timeframes for student credit balances less

than that amount.

Several commenters objected strongly to the proposed definition of

allowable charges, under which an institution may apply a student's

title IV, HEA program funds only to tuition and fees, and room and

board charges unless the institution obtains a student's permission to

apply his or her program funds to other cost-of-attendance charges.

These commenters argued that it will require costly and unnecessary

overhauls to institutions' existing computer and billing systems to

account for the application of title IV, HEA program funds to these

charges and saw no reason why an institution should be precluded from

crediting a student's account without his or her permission for charges

that were originally used to determine the student's cost of

attendance. Consequently, the commenters suggested that the Secretary

maintain the current policy which specifies the charges, such as fines

and other non-educational costs, are not allowable.

Other commenters argued that the practical effect of the proposed

provisions regarding student consent and allowable charges would be to

require institutions to obtain from each student every year written

consent to apply the students' title IV, HEA program funds to a wider

range of student debts represented in the institution billing system.

The commenters maintained that in addition to the burden associated

with obtaining this consent, students who decline or, more frequently,

neglect to provide such consent will most likely experience disruption

in the delivery of their aid awards. The commenters argue that the

Secretary's rationale for adopting the Federal Pell Grant program rules

overlooks the fact that the dollar amounts of the Federal Pell Grant

are so small that they seldom exceed the total of tuition and fees and

room and board at most institutions. Consequently, credit balances

associated with Federal Pell Grant awards are extremely rare.

Therefore, the commenters recommended that the Secretary permit

institutions to apply title IV, HEA program funds to cost-of-attendance

charges as currently allowed under the FFEL and campus-based programs,

and impose the proposed restriction on those institutions that charge

students for goods and services inappropriately or that withhold

student funds inappropriately.

Several commenters noted that under their institutional policies

and procedures, a student who has an outstanding balance is allowed to

register for an upcoming semester but only with the understanding that

his or her title IV, HEA program funds will be used to pay for the

outstanding charges. One of these commenters was concerned that the

proposed restriction on prior year charges would not only preclude a

student from registering until the student paid those charges, but also

prohibit a student from charging books in the University book store. A

few other commenters believed that it should be the institution's

prerogative to determine how to apply payments on a student's account.

A few commenters believed strongly that if a student authorizes an

institution to charge him or her for other allowable charges, the

institution should be allowed to charge the student for personal and

other costs that were included in the ``miscellaneous cost'' component

of the student's cost of attendance, including fines.

One commenter noted that at his institution a non-payment of

tuition and other cost-of-attendance charges would result in a block or

hold on a student's registration for the following term. Therefore, the

commenter argued that it would be irresponsible to allow the student to

first take title IV, HEA program funds and use them for non-educational

purposes before first assuring that the direct costs of education are

paid. The commenter opined that the proposed rule, by requiring

permission and allowing the student to rescind that permission at any

time, would inadvertently encourage ``walkers'', i.e., students who get

money and walk or leave.

Several commenters recommended that the restriction on prior year

charges, as proposed in Sec. 668.165(b)(1), be amended to provide that

an institution may not apply the funds that a student is eligible to

receive from a title IV, HEA program to any charges the institution

assessed the student if those charges were not included in the period

of the cost of attendance used by the institution to calculate the

student's eligibility for that title IV, HEA program.

Other commenters urged the Secretary to allow institutions to apply

any current year's award balance remaining, after application of all

current charges, to allowable and prior year charges and other cost-of-

attendance charges without seeking the student's permission in advance.

The commenters argue that the administrative overhead required to issue

checks to students for current year balances, only to bill them for

outstanding prior year and other cost-of-attendance charges, does not

seem defensible, especially when the students cannot be allowed to

return to school with outstanding balances from any prior period or

source.

Discussion: The Secretary notes that under the Federal Pell Grant

and Direct Loan programs an institution may credit a student's account

only for tuition and fees and room and board charges. The Secretary

further notes that the restriction on crediting funds to specific

charges is statutory (see: sections 401(e) and 455(j) of the HEA) and

cannot be changed by the Secretary in regulations. However, as a matter

of policy that is in keeping with the statutory provisions that an

institution may not retain excess student funds, and based on the

presumption that an institution pays those excess funds to a student in

a timely manner, the Secretary allows an institution to apply the total

amount of these program funds to a student's account. Otherwise, if an

institution draws down the total amount of the student's funds, within

three days the institution would have to credit the student's account

only for the amount of the specified charges and write a check to, or

otherwise pay, the student for the amount in excess of those charges.

In addition, the Secretary does not require that an institution track

the title IV, HEA program funds it applies to a student's account to

determine (1) that the funds are used to pay for specific charges, or

(2) which funds are in excess of statutory-specific charges. Rather, an

institution determines that funds are due to a student if the amount of

a student's title IV, HEA program funds exceeds the amount of the

specified charges. The institution makes this determination whenever it

applies title IV, HEA program funds to the student's account. Although

the Secretary proposed policy changes relating to allowable charges and

timeframes for paying a student excess funds, the Secretary did not

change this concept of applying funds to a student's account. The

Secretary recognizes that the statutory restriction on crediting a

student's account with Federal Pell Grant Program funds did not pose

difficulties for many institutions because the amount of the student

award was less than the amount of tuition and fees and room and board

charges. However, because the same statutory restrictions apply to

Direct Loan Program funds, the Secretary believes that this will no

longer be the case when institutions credit a student's account with

those loan funds.

With regard to the comments concerning the rationale for limiting

the application of title IV, HEA program funds to charges for tuition

and fees, and room and board, the Secretary believes that these charges

constitute the bulk of the costs that a student is likely to incur at

most institutions, and notes that an institution may apply a student's

title IV, HEA program funds to those charges without obtaining the

student's authorization. Moreover, the Secretary believes that a

student should have control over program funds in excess of direct

institutional charges--the student uses these funds at his or her

discretion to pay for other-cost-of-attendance and other miscellaneous

institutional charges. Thus, if a student wishes to charge books and

supplies at the institution's book store, the student will grant the

proper authorization to the institution. Alternatively, the student may

decide to purchase those books and supplies elsewhere. Further, the

Secretary believes that students are serious about their education and

thus are not likely to jeopardize their standing at an institution by

failing to pay past due bills.

The Secretary agrees that it may be burdensome for some

institutions to obtain a student's authorization to apply his or her

title IV, HEA program funds to other charges and, as discussed

previously in this section, the Secretary has taken steps to reduce

this burden by removing the proposed requirement that an institution

obtain that authorization every award year. The Secretary also agrees

that it may be administratively burdensome for some institutions to

determine if a student's title IV, HEA program funds exceed allowable

charges whenever those program funds are applied to the student's

account. The Secretary notes, however, that an institution may mitigate

this burden by (1) making an initial determination that the amount of

title IV, HEA program funds that the institution will apply to the

student's account during a semester, term, or other enrollment period

will not exceed the amount of allowable charges the institution

assesses the student for that semester, term, or other enrollment

period, (2) obtaining the student's authorization to apply program

funds to other charges, or (3) paying a student any credit balance

within the specified timeframes.

Changes: Section 668.165(b)(2) is revised to clarify that funds are

due a student if the amount of a student's title IV, HEA program funds

exceed the amount of allowable charges. In addition, Sec. 668.165(b)(4)

is revised to include as allowable charges other institutional charges

that a student incurs at his or her discretion, provided that an

institution has obtained the student's authorization to credit his or

her account for those charges.

Comments Regarding the Proposed Timeframes

Several commenters agreed with the proposal that an institution

must pay a student directly any balance remaining on his or her account

within the later of (1) 7 days after that balance occurs, (2) 14 days

after the first day of classes, or (3) 7 days after the student

rescinds his or her permission regarding the charges for which the

institution may debit the student's account.

One commenter concurred with the Secretary that some institutions

maintain for long periods, and use for their own purposes, title IV,

HEA program funds in excess of allowable institutional charges. The

commenter suggested that those institutions be identified in the

Secretary's review of annual compliance audits and penalized

accordingly for their non-compliance with Federal regulations.

A number of other commenters argued that the 7-day requirements for

paying a student his or her credit balance are unreasonable and

burdensome in view of the time it takes for an institution to review,

authorize, and write a check. These commenters suggested that the

Secretary adopt the proposed 14-day requirement for all credit balance

circumstances.

Other commenters agreed with the Secretary that institutions should

be required to pay a student the balance on his or her account in a

timely manner. However, the commenters argued that since the deadline

date for adding classes occurs after the second week of classes for

most institutions, the Secretary should allow institutions to pay a

student his or her balance no later than 14 days after the

institution's deadline date for adding classes, and not 14 days after

the start of classes. A few other commenters suggested the 14-day add-

period deadline date but suggested that the Secretary also require that

all credit balance refunds be paid to students no later than 30 days

after the first day of classes. Still other commenters suggested a

variety of timeframes ranging from 7 days to 45 days.

A few commenters noted that the add/drop period is a matter of

academic policy that is not determined by an institution's business

office and therefore should not be affected by Federal cash management

rules.

Several commenters noted that some State institutions do not have

check writing authority and must follow procedures imposed by the State

for requesting checks for students. Some of these commenters

recommended that the Secretary allow a State institution 14 days after

its add/drop period to pay a student his or her credit balance. In

addition, the commenters recommended that the Secretary specify in

final regulations that a student must notify an institution in writing

if he or she wishes to rescind permission previously granted to the

institution to apply title IV, HEA program funds to other cost-of-

attendance charges.

One commenter noted that some institutions employ procedures under

which credit balance checks are mailed to most students on or around

the first day of classes. If a student does not receive a check through

that mailing the student may request payment and the institution pays

the student almost immediately by means of an ``on-demand'' check

process. If a student does not request payment, the institution mails a

check to the student at the end of the month. Therefore, the commenter

recommended that the Secretary amend the proposed Sec. 668.265(b)(2) to

provide that an institution must pay ``or otherwise make available''

the balance remaining on the student's account. Similarly, several

other commenters suggested that, absent a request from a student, the

Secretary should allow an institution to hold the student's credit

balance, but be required to pay the student within 7 days after the

student makes that request.

The commenters representing student legal services organizations

supported the Secretary's 7-14-7 day credit balance requirements, but

urged the Secretary to specify in final regulations that, with respect

to loan proceeds, the credit balance payment must be made by check or

other means that requires the borrower's endorsement or certification.

In addition, in view of the use of electronic funds transfers (EFT)

under which a student borrower would not be required to endorse a loan

check, these commenters urged the Secretary to establish disbursement

procedures that would ensure that (1) a student does not incur a loan

liability that he or she does not understand or mean to incur, and (2)

a student's aid funds in excess of tuition and fees be paid promptly to

the student by an institution.

Discussion: The Secretary thanks the commenters for responding to

the Secretary's request for comment regarding the proposed credit-

balance timeframes. While the Secretary believes strongly that an

institution has an obligation to pay a student any funds in excess of

institutional charges as soon as possible, in view of the public

comment regarding all of the requirements for applying title IV, HEA

program funds to a student's account, the Secretary has decided to

phase-in over a 2-year period the following requirements. For the award

year in which these regulations take effect, July 1, 1995 to June 30,

1996, when an institution applies title IV, HEA program funds to a

student's account and determines that any amount of those funds exceeds

allowable charges, the institution must pay a student that balance

within 21 days of the later of (1) the date that excess balance occurs,

(2) the first day of classes of a payment period or period of

enrollment, or (3) the date the student rescinds his or her

authorization under Sec. 668.165(d). For the award year beginning July

1, 1996 and for subsequent award years, an institution must pay an

excess balance to a student within 14 days of the later of events

described above. The Secretary does not intend for these requirements

to conflict with an institution's academic policies regarding the

length of its add/drop period. Rather, the Secretary is interested only

in assuring that students receive their funds in a timely manner.

Finally, with regard to the comments that the Secretary establish

disbursement procedures that ensure that a student does not unknowingly

or unnecessarily incur a loan liability the Secretary notes that these

regulations require an institution to both notify a student that loan

proceeds have been credited to the student's account and to require

institutions to obtain the student's authorization to apply the

student's loan proceeds to charges other than tuition and fees and room

and board.

Changes: Section 668.165(b) is revised to reflect the timeframes

discussed above.

Comments Regarding Early Payments

A few commenters agreed with the proposed requirement that an

institution may not credit a student's account or pay the student

directly earlier than 10 days before the student starts classes.

Many commenters opposed 10-day early payment requirement on the

grounds that (1) the requirement would disadvantage students who incur

educationally-related costs prior to those 10 days, or (2) institutions

need additional time to prepare bills and to otherwise complete student

registrations. Most of these commenters recommended that the Secretary

retain the current provisions under which an institution may credit a

student's account 21 days before the student starts classes. One of

these commenters noted that the 10-day requirement would be burdensome

for students in study abroad programs.

Discussion: As noted in the discussion under the heading Credit an

account, the crediting of title IV, HEA program funds to a student's

account has no bearing on when an institution bills a student; an

institution's bill to a student may indicate that title IV, HEA program

funds were credited to the student's account or may merely indicate the

expected amounts of those funds. In addition, the Secretary notes a

student who does not contract with the institution for room and board

or other services does not benefit from any additional time that the

institution may have to credit his or her account for these charges or

services.

Changes: None.

Comments Regarding Holding Excess Student Funds

Many commenters opposed the proposed requirement that an

institution maintain a separate account for holding excess student

funds on the grounds that it is unnecessarily burdensome. These

commenters opined that most institutions would not offer this service

to its students if the Secretary does not remove the separate account

requirement.

One commenter suggested an alternative approach under which an

institution would hold excess student funds in a separately-designated

subsidiary account under its general ledger account. The commenter

argued that under this approach, the Secretary could ensure than an

institution would segregate student funds without requiring the

institution to develop new accounting procedures.

Another commenter requested that the Secretary specify in final

regulations that any interest earned on excess student funds accrues to

an institution.

Discussion: Based on public comment and further review, the

Secretary agrees to remove the proposed separate bank account

requirements for holding excess student funds. In proposing that an

institution maintain a separate bank account for excess student funds,

the Secretary sought to ensure that an institution would not use the

funds for its own purposes and thus be unable to provide the funds at

the student's request.

The Secretary agrees to adopt the commenter's approach, but with

some modifications. First, an institution must maintain, at all times,

an amount of cash in its bank account that is equal to the amount it

holds for students. Second, to safeguard the student's funds, the

Secretary prohibits an institution that does not satisfy the standards

of financial responsibility under Sec. 668.15 from holding excess

student funds.

Finally, the Secretary clarifies that an institution is not

required to hold excess student funds and clarifies that any interest

earned on those funds accrues to the institution.

Changes: Section 668.165(b)(4) is revised to provide that if an

institution chooses to hold excess student funds, the institution (1)

must account for those funds in a separately-designated subsidiary

ledger account, (2) must maintain at all times in its bank account an

amount of cash equal to the funds it holds for the student, (3) may

retain any interest earned on the student's funds, and (4) may not hold

excess student funds if the Secretary determines that the institution

does not meet the standards of financial responsibility under

Sec. 668.15.

Section 668.166 Excess Cash

Comments: Several commenters agreed with the proposed excess cash

tolerance requirements under which the Secretary would not require an

institution to return immediately an amount of title IV, HEA program

funds the institution drew down in excess of its immediate needs if

that amount was less than $5,000 or, for an institution that drew down

in the prior year more than one million dollars, one-half of one

percent of those prior year draws. An institution in the latter

category would not be required to return an excess cash balance that

was less that its threshold amount if the institution drew down within

the following seven days an amount greater than that excess cash

balance. Other commenters suggested that the Secretary increase the

$5,000 tolerance to $10,000 or $30,000.

One commenter writing on behalf of a higher education association

believed that the proposed one-half of one percent excess cash

tolerance was too low because any interest earned on such amounts may

not exceed the transaction costs an institution would incur in

returning the excess funds to the Department. For this reason, the

commenter suggested that the threshold be increased to three percent of

prior-year drawdowns. Alternatively, the commenter suggested that the

Secretary either eliminate the percentage threshold or the seven-day

drawdown requirement. Other commenters recommended that the threshold

requirement be set at one percent, two percent or three percent of an

institution's prior year drawdowns, or that institution be allowed

greater flexibility in managing its cash needs during peak enrollment

periods.

A few commenters recommended that the Secretary conduct a survey to

establish a basis for the promulgation of restrictions pertaining to

excess cash thresholds. In the meantime, the commenters suggested that

the Secretary should limit an institution's ability to participate in

the title IV HEA programs if the institution routinely draws down

amounts that are unreasonable. These commenters argued that since any

earnings on idle funds become the property of the Federal government,

the Federal fiscal interest is not at risk, unless an institution uses

those funds for its own gain.

Another commenter suggested that for purposes of calculating excess

cash balances the Secretary should exclude refund amounts if those

refunds were made on a timely basis and disbursed to students within 14

days.

Discussion: Under current Departmental procedures, institutions

must return immediately any amount of excess cash greater than $500. In

proposing the excess cash tolerances, which would increase this amount,

the Secretary intended to reduce administrative burden by providing an

institution more latitude in managing its cash needs without

compromising the objective that the institution establish sound cash

management practices.

The Secretary acknowledged in the preamble to the NPRM that an

institution may not always be able to disburse within three business

days the amount of title IV, HEA program funds that the institution

drew down because of variables beyond its control. Those variables

include the failure of students to start classes as anticipated and

changes in students' anticipated enrollment status. Although an

institution must consider, along with other factors relating to the

institution's student enrollment patterns, the effect of these

variables in determining its immediate cash needs, it follows that the

magnitude of the effect of these variables, in dollars, increases with

the number of students enrolled at the institution.

In response to the comments, the Secretary has modified the

proposed language to permit an institution to maintain in its federal

account for up to seven days an amount of excess funds that is based on

a percentage of the total title IV, HEA program funds that the

institution drew down during the previous award year. The usual

percentage limitation for maintaining excess funds is doubled from the

amount set out in the proposed regulations to one percent, with the

exception that the percentage tolerance may rise from one percent to

three percent during periods of peak enrollment. A peak enrollment

period is defined as any 30-day period during which at least 25 percent

of the institution's students start classes. The Secretary believes

that this increase in acceptable cash levels during peak enrollment

periods will provide the institution with an operating tolerance that

responds to some of the concerns expressed in the comments, while still

ensuring that non-peak cash levels are minimized. Furthermore, the

seven-day time limitation for maintaining these funds in the

institution's account will further the goal of efficient cash

management by requiring that excess funds either be disbursed or

returned. Given the increased permissible cash levels of one percent

for non-peak enrollment periods and three percent for peak enrollment

periods, the Secretary has eliminated the alternative proposed minimum

balance of $5,000. The Secretary has decided instead that the

percentage levels provide a fairer cash standard because they are

responsive to the relative size of the institution and to its specific

cash flow patterns.

Changes: The Secretary has revised the regulations to provide that

an institution may maintain in its Federal account for up to seven days

an amount of excess cash that is less than one percent of the total

title IV, HEA program funds that the institution drew down in the prior

award year, except that the permissible amount of excess cash may

increase to three percent for any 30-day period during which at least

25 percent of the institution's students start classes. The Secretary

has also removed the proposed minimum excess cash balance of $5,000

based upon the increase in the allowable percentages.

Comments: Many commenters objected to the provision under which the

Secretary would consider an institution to have issued a check on the

date the check cleared the institution's account unless the institution

demonstrates to the satisfaction of the Secretary that it issued the

check shortly after the institution wrote the check. The commenters

argued that the Secretary could more reasonably establish that an

institution did not issue checks shortly after it wrote the checks by

examining the clearance pattern of those checks. In addition, the

commenters noted that an institution has no control over how long a

student takes to cash a check. Also, the commenters believed that the

term ``shortly'' was vague, and suggested that the Secretary provide

guidance as to the documentation an institution should maintain to

demonstrate to the Secretary that it issued a check in a timely manner.

Other commenters believed that the provisions allow the Secretary

to impose severe sanctions for minor excess cash violations, and

suggested that the Secretary establish a graduated scale of sanctions

depending on the severity of the violations. The commenters suggest

that the Secretary should provide clear parameters or criteria for

imposing a sanction, including the amount of excess cash and the number

of days the institution maintained the excess cash balances. Moreover,

the commenters contend that it would be inappropriate to impose severe

sanctions for excess cash violations because there would be no harm to

the government--interest that accrues on excess cash balances must be

returned to the government and the institution would derive no benefit

from holding excess cash.

Several commenters requested that the Secretary define the term

``routinely'' as that term is used in this section.

Discussion: The Secretary continues to believe that the proposed

procedures are reasonable, but believes that some further discussion is

needed to explain the circumstances when such an examination would be

made to determine if the institution was properly administering the

cash balances in its federal account. First, as explained in the

regulations, upon a finding of excess cash the Secretary will consider

checks to have been issued to students or, in some cases, to their

parents, on the date that they were written. If a situation occurs

where the Department has identified what appears to be excess cash

levels maintained in an institution's account, one way for the

institution to reduce the cash levels attributed to its account would

be to show that it had promptly issued the checks by mailing them or

making them available for immediate pick-up, and that subsequent delays

by the recipients in processing the checks are responsible for excess

cash that had been attributed to the institution account. The Secretary

believes that this procedure provides the proper incentive to an

institution to monitor its check issuances to reduce delay between

issuance and processing by the recipients, and provides a reasonable

administrative review process where the specific cash management

practices can be examined on a case-by-case basis if a potential

problem is identified.

The Secretary also disagrees with the comments that the proposed

penalties are either unnecessary or excessive given that the excess

cash balances would be kept in interest bearing accounts. First, not

every institution will be required to establish the Federal account as

interest bearing, so there will be instances where no interest earnings

have been made to offset the costs to the government of providing those

funds in advance of the institution's immediate need. Second, the

proposed penalties are designed to reimburse the government for the

interest costs of providing those funds in advance of the institution's

immediate need. For that reason, the penalty is based upon the

calculated interest costs to the government, minus a credit for the

interest earnings on those funds in the institution's account for that

period. The Secretary believes that this is a fair procedure that

balances the needs of both the Department and the institution, while

furthering the policy objective of encouraging sound cash management.

Finally, the Secretary eliminates the proposed language that

prohibited certain excess cash balances within the tolerances given in

the proposed regulations if they were ``routinely'' kept by the

institution.

Changes: Sections 668.166(b) and (c) are revised by removing the

references to the term ``routinely.''

[FR Doc. 94-29324 Filed 11-30-94; 8:45 am]

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