# 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 > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A94-29324 ## Record - **Collection:** Federal Register - **Document type:** Uncategorized Document - **Published:** December 1, 1994 ## Text 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. ----------------------------------------------------------------------- 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] BILLING CODE 4000-01-P --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A94-29324. Public record. Not legal advice.