Student Assistance General Provisions and Federal Pell Grant Program

SUMMARY: The Secretary proposes to amend Subparts A and B of the

Student Assistance General Provisions regulations and the Federal Pell

Grant Program regulations to reflect changes made by the Higher

Education Amendments of 1992 and the Higher Education Technical

Amendments of 1993 to the Higher Education Act of 1965, as amended

(HEA). These proposed regulations would seek to improve the efficiency

of Federal student aid programs and, by so doing, to improve their

capacity to enhance opportunities for postsecondary education.

DATES: Comments must be received on or before March 30, 1994.

ADDRESSES: All comments concerning these proposed regulations should be

addressed to Wendy L. Macias, Program Specialist, U.S. Department of

Education, 400 Maryland Avenue, SW. (Regional Office Building 3, room

4318), Washington, DC 20202-5346.

FOR FURTHER INFORMATION CONTACT: Wendy L. Macias. Telephone (202) 708-

7888. Individuals who use a telecommunications device for the deaf

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

877-8339 between 8 a.m. and 6 p.m., Eastern time, Monday through

Friday.

SUPPLEMENTARY INFORMATION: In order to approve a postsecondary

education institution to participate in the student financial

assistance programs authorized by Title IV of the HEA (Title IV, HEA

programs) and many other Federal programs, the Secretary must

determine, in part, that the institution satisfies the statutory

definition of an ``institution of higher education.'' Under the HEA and

other Federal statutes, one element of that definition requires an

eligible institution of higher education to be accredited or

preaccredited by an accrediting agency recognized by the Secretary as a

reliable authority as to the quality of the education or training

provided by the institution. Another element requires an eligible

institution to be legally authorized to provide an educational program

beyond the secondary level in the State in which it is located. Thus,

the statutory definition of an institution of higher education provides

the framework for a shared responsibility among accrediting agencies,

States, and the Federal government to ensure that the ``gate'' to the

Title IV, HEA programs is opened to only those institutions that

provide students with quality education or training worth the time,

energy, and money they invest in it. The three ``gatekeepers'' sharing

this responsibility have traditionally been referred to as ``the

triad.'' While the concept of a triad of entities responsible for

gatekeeping has had a long history, the triad has not always worked as

effectively as it should to ensure educational quality, nor has it

served as an effective deterrent to abuse by institutions participating

in the Title IV, HEA programs. For several years, certain institutions

participating in the Title IV, HEA programs have failed to provide

students with education or training of an acceptable level of quality;

they have also failed to treat students fairly. In addition, they have

failed to meet acceptable standards of financial responsibility and

administrative capability and to adequately protect Title IV, HEA

program funds entrusted to them. The institutions that have engaged in

these abusive practices are not restricted to a particular sector of

higher education. Rather, the abuses have been found in all types of

institutions participating in the Title IV, HEA programs, including

those in the private non-profit and public sectors of higher education

as well as those in the proprietary sector.

At the same time, gatekeeping functions have not been carried out

effectively. For example, some accrediting agencies have not taken

sufficient care to ensure the quality of the education or training

provided by the institutions or programs they accredit or to protect

student interests when they accredit particular institutions or

programs. Moreover, some States have also not taken sufficient care to

ensure the quality of the education or training provided by the

institutions they authorize or license to operate in the State or to

protect student interests. Finally, the Federal government's management

of its responsibilities to determine eligibility and to certify

institutions to participate in the Title IV, HEA programs has not

always been adequate to prevent abusive practices at institutions that

participate in those programs.

Consequently, in the Higher Education Amendments of 1992, Public

Law 102-325, (the Amendments of 1992), Congress provided for a new part

H of Title IV entitled ``Program Integrity Triad.'' Under that part,

States and accrediting agencies are required to assume major new

oversight responsibilities, and States, accrediting associations, and

the Secretary are linked to create a stronger and more coordinated

evaluation of institutions that participate or wish to participate in

the Title IV, HEA programs. The Secretary believes that the most

appropriate approach to this coordinated evaluation of institutions by

the three components of the triad is a complementary one with each

component focusing its evaluation on its obligations within the context

of the HEA. Thus, the focus for accrediting agencies is the quality of

education or training provided by the institutions or programs they

accredit. For States, which already had responsibility for determining

that institutions have the legal authority to operate within the State,

the HEA added a new focus: reviewing institutions that trigger certain

statutory review criteria. The focus of the Secretary's evaluation of

institutions is the administrative and financial capacity of those

institutions to participate in the Title IV, HEA programs.

The statute allocates legal responsibility among the entities that

compose the program integrity triad. While the specific statutory

responsibilities for the three triad entities may overlap, when viewed

as a whole the triad brings together in a coordinated fashion three

different but very important aspects of institutional review. Within

this statutory scheme, the Secretary has sought to assure that the

gatekeeping system operates as efficiently as possible, with maximum

integration among the three triad entities and without unnecessary

burden on postsecondary institutions. In order to assist the Secretary

in designing a final regulation that achieves these goals, the

Secretary specifically requests comment on the following questions:

(1) In several areas, the statute specifically requires each triad

entity to evaluate an institution under the same or similar standards.

For example, a SPRE and an accrediting agency may establish different

standards for evaluating the financial responsibility of an institution

or for evaluating the success of an institution's educational program.

Thus, a reviewed institution would need to satisfy the SPRE's and the

accrediting agency's standards even though those standards address the

same areas. How should final regulations be structured to both reduce

the burden on institutions and enable the triad entities to carry out

effectively their statutory functions?

(2) Should final regulations be more explicit in identifying

levels, characteristics, or definitions for any of the assessment or

review criteria that a triad entity is expected to consider in its

evaluation of an institution?

Subpart 1 of part H creates a new program, the State Postsecondary

Review Program, or SPRP, under which State oversight of institutions

participating in the Title IV, HEA programs is strengthened. Subpart 2

of part H establishes procedures and criteria under which the Secretary

recognizes an accrediting agency as a reliable authority as to the

quality of the education or training offered by institutions that the

agency accredits. Lastly, subpart 3 specifies the procedures the

Secretary uses to determine whether an institution meets the

eligibility requirements and has the administrative capacity and

financial responsibility to administer the Title IV, HEA programs.

On January 24, 1994, the Secretary published in the Federal

Register the NPRMs to implement the SPRP provisions in subpart 1 of

part H of the HEA (59 FR 3604) and the accrediting agency provisions in

subpart 2 of part H of the HEA (59 FR 3578). The Secretary's

publication of this NPRM prior to the publication of final regulations

implementing the SPRP and accreditation provisions provides the

Department of Education an opportunity to coordinate all comments

received on the triad.

The provisions of subpart 3 that pertain to the institutional

eligibility requirements found in 34 CFR part 600 have been addressed

in a Notice of Proposed Rulemaking (NPRM) published in the Federal

Register on February 10, 1994, that proposes changes to 34 CFR part

600. This NPRM addresses those provisions of subpart 3 that pertain to

subparts A and B of 34 CFR part 668. Subpart A contains definitions

applicable to the Title IV, HEA programs. Subpart B contains

requirements for initial and continued participation in the programs.

In particular, the following provisions in this NPRM address provisions

of subpart 3: Proposed Secs. 668.15 and 668.16 delineate the standards

for the evaluation of an institution's financial responsibility and

administrative capability, respectively, as required by section 498(a),

(c), and (d) of the HEA. Proposed Sec. 668.15 also codifies the

definition of persons who exercise substantial control of an

institution found in section 498(e) of the HEA. Proposed Sec. 668.12

addresses the requirements of section 498(b) of the HEA that requires

the Secretary to develop a single application form to be used by

institutions that wish to apply to participate or to continue to

participate in a Title IV, HEA program. Proposed Sec. 668.13 includes

the provisions governing the requirement of financial guarantees from

owners found in section 498(e) of the HEA, addresses the provision that

requires the Secretary to establish a schedule for the expiration of

the approval of institutions to participate in the Title IV, HEA

programs found in section 498(g) of the HEA, and codifies the

provisions governing provisional certification of institutions found in

section 498(h) of the HEA. Pursuant to sections 498(g) and (h) of the

HEA, proposed Sec. 668.26 delineates the date that an institution's

period of participation would end, when the institution's period of

participation expires, or the institution's provisional certification

is revoked.

The Amendments of 1992 amended the HEA in several areas relating to

the participation of institutions in the Title IV, HEA programs. The

Student Assistance General Provisions regulations contain requirements

that are common to educational institutions that participate in the

Title IV, HEA programs. The following list summarizes the major issues

in this NPRM.

Each participating institution is subject to a new

statutory definition of an academic year in which a full-time student

(with respect to an undergraduate course of study), during a minimum

30-week period, must complete: At institutions that measure program

length in credit hours, at least 24 semester or trimester hours or 36

quarter hours; or at institutions that measure program length in clock

hours, at least 900 clock hours. Section 668.2 proposes to clarify the

terms used in the statutory definition of academic year.

The statute now mandates the definition of an eligible

program for proprietary institutions of higher education and

postsecondary vocational institutions, including ``short-term''

programs (at least 300 but less than 600 clock hours) that would be

eligible for the FFEL programs only. The statute requires that these

programs must have completion and placement rates of at least 70

percent, measured in accordance with regulations. Section 668.8

proposes methodologies for those measurements. The Secretary eventually

may propose a single methodology (based on comments on this NPRM,

regulations to implement the Student Right-to-Know Act, and other

NPRMs) to be used wherever appropriate in regulations for the Title IV,

HEA programs. In accordance with the statute, this NPRM contains

further provisions to evaluate the quality of these programs,

specifically a requirement proposed by the Secretary that a program may

not exceed by more than 50 percent the minimum number of clock hours

required by the State for training in the recognized occupation for

which the program prepares students, and a requirement that a program

be in existence for at least one year before applying for eligibility

under these criteria.

This NPRM proposes to add two new sections to codify

procedures with regard to applications to participate initially or to

continue to participate in a Title IV, HEA program (proposed

Sec. 668.12) and procedures by which the Secretary certifies that an

institution meets the standards in subpart B of these regulations and

accordingly may participate in a Title IV, HEA program (proposed

Sec. 668.13). Proposed Sec. 668.13 also includes proposed procedures

whereby the Secretary codifies new statutory provisions governing

provisional certification procedures for participation in a Title IV,

HEA program. Provisional certification permits the Secretary to allow

an institution that otherwise would not qualify to participate in a

Title IV, HEA program to participate on a limited basis. The

institution is subject to shorter periods of participation than a fully

certified institution and does not have the right to the extensive

appeal proceedings under subpart G of the Student Assistance General

Provisions if the Secretary revokes the institution's provisional

certification. Instead, as proposed by the Secretary in this NPRM, the

institution would be offered a modified appeal. Further, an institution

that is provisionally certified may be monitored more closely to the

extent that the Secretary believes the institution warrants a greater

degree of oversight.

Section 668.14 proposes to amend the regulations governing

program participation agreements to include numerous new provisions

added by the Amendments of 1992 and provisions previously prescribed by

the HEA but not specifically spelled out in the regulations. This

section also includes provisions proposed by the Secretary. This NPRM

proposes to implement statutory requirements regarding disclosure of

revenues and expenses for institutions that offer athletically related

student aid. This NPRM would also address statutory requirements

concerning incentive payments based directly or indirectly on success

in securing enrollments or financial aid.

This NPRM proposes significant changes to Sec. 668.15

(currently Sec. 668.13) the section governing the evaluation of an

institution's financial responsibility. The NPRM proposes to strengthen

the factors used to evaluate an institution's financial responsibility

and to reflect statutory changes, including the provision that requires

that any standards developed for the determination of an institution's

financial responsibility take into account any differences in

accounting principles between for-profit and nonprofit institutions.

For example, this NPRM proposes to require a for-profit institution to

have a ratio of current assets to current liabilities of 1.25:1 and a

nonprofit institution to have a ratio of current assets to current

liabilities of 1:1. As the statute requires the establishment of cash

reserves sufficient to ensure repayment of any required refunds, the

NPRM also proposes to require each institution to maintain a minimum

cash reserve of at least 10 percent of the institution's total deferred

tuition income at the end of the institution's most recent fiscal year.

This NPRM proposes, in Sec. 668.16 (currently Secs. 668.14

and 668.15) to strengthen and expand the standards of administrative

capability for participating institutions, addressing areas previously

not regulated or for which there were only guidelines, such as: The

maximum time frame allowed in the standards for satisfactory academic

progress for completion of a student's educational program and the

expansion of standards to include those general areas that will be

reviewed by State postsecondary review entities (SPREs). The SPRE

review areas are included because these areas may have a significant

bearing on an institution's administrative capability and thus should

be considered as the Secretary reviews the administrative capability of

an institution.

However, the NPRM does solicit comments on whether these additional

proposed standards should be implemented across the board or be made

applicable only to institutions that meet specific criteria or

thresholds, e.g., institutions with short-term programs and

institutions with a history of administrative problems. For example,

this section of the NPRM includes the proposed requirement that an

institution that offers a vocational program of less than two years in

length that prepares students to enter recognized occupations must

demonstrate that the borrower's increased annual expected earnings,

based on completion of the training, will exceed the annual amount of

Title IV, HEA program assistance received for the programs.

The provisions in proposed Sec. 668.17 (currently

Sec. 668.15) governing default reduction measures reflect statutory

changes made by the Amendments of 1992 and current departmental

practices. The provisions in the Technical Amendments of 1993 that

address institutional appeals of cohort default rates are not included

in this NPRM and will be addressed separately.

As mandated by statute, all participating institutions are

required to implement a fair and equitable refund policy. This

statutory provision is similar to the requirement for fair and

equitable refunds prescribed by the FFEL program regulations for

institutions that participate in the FFEL programs. Section 668.22

proposes to clarify the terms used in the statutory definition of a

fair and equitable refund policy. The NPRM also proposes to mandate a

refund policy (Appendix A) that an institution must use to calculate a

student's refund if the student is not entitled to a pro rata refund

and an institution's State and accrediting agency do not have specific

refund standards. In addition, because of a new statutory provision

that specifies the order of return of refunds to the Title IV, HEA

programs and other sources of aid without regard to the amount of aid

received from State or private sources, this NPRM proposes to remove

the fraction that is currently used to determine the portion of the

refund attributable to the Title IV, HEA programs and that attributable

to other sources of aid.

In accordance with the statute, institutions will now be

required to have compliance audits every year rather than every two

years, as required by current regulations. Section 668.23 proposes to

allow institutions that do not pose a great financial risk to the Title

IV, HEA programs (i.e., institutions that received less than $100,000

in total annual funding under the Title IV, HEA programs or have not

had deficiencies identified in their most recently submitted audit

reports) to submit audits biennially. Further, under this proposal, an

institution would not be required to submit a compliance audit for any

year in which the total Title IV, HEA program funds it received were

less than $25,000. This section also proposes to extend audit

requirements to foreign institutions.

This NPRM also contains a proposed change to the Federal Pell Grant

Program regulations. This NPRM proposes to implement section 487(c)(7)

of the HEA that provides that an institution may offset the amount of

Title IV, HEA program disbursements against liabilities or may receive

reimbursement from the Department for those amounts if, in the course

of any audit conducted after December 31, 1988, the Department

discovers or is informed of any Title IV, HEA program assistance

(specifically, Federal Pell Grant Program funds) that an institution

has provided to its students in accordance with program requirements,

but the institution has not previously received credit or reimbursement

for these disbursements. Although this provision relates directly to

the Federal Pell Grant Program and is proposed to be included in the

Federal Pell Grant Program regulations, it is contained in Part G of

the HEA and is subject to the negotiated rulemaking process explained

below. Therefore, it has been included in this NPRM instead of the

Federal Pell Grant Program NPRM, which was not subject to the

negotiated rulemaking process.

Under new section 492 of the HEA, these proposed changes are

subject to the negotiated rulemaking process, which includes a

requirement for the Secretary to convene regional meetings to obtain

public involvement in the development of proposed regulations.

Accordingly, issues related to these proposed changes were discussed in

meetings held in September 1992 in New York City; San Francisco;

Atlanta; and Kansas City, Missouri. At these meetings, the Secretary

provided the attendees with a list of issues to be addressed in these

proposed regulations. A summary of the responses of the attendees is

contained in the Appendix to this preamble.

Groups that attended the regional meetings nominated individuals to

participate in the regulation negotiations. The Secretary selected

regulation negotiators from the names nominated and chose negotiators

to reflect all the groups that participate in the Title IV, HEA

programs, such as students, student financial aid administrators, and

various types of eligible institutions.

These proposed regulations also address statutory changes required

by the Higher Education Technical Amendments of 1993, Public Law 103-

208 (the Technical Amendments of 1993). Those areas affected by the

Technical Amendments of 1993 are identified in the discussion of

regulatory changes. The Secretary notes that the statutory changes

required by the Technical Amendments of 1993 are not subject to the

negotiated rulemaking process of section 492 of the HEA.

Regulatory Changes

In accordance with section 492(b) of the HEA, the Secretary

prepared draft proposed regulations and negotiated the provisions of

that draft with negotiators. The great majority of the proposed changes

do not reflect consensus reached at the negotiations (as consensus was

rarely obtained). The Secretary has identified in the discussion of

changes the areas where consensus was reached.

The following discussion reflects proposed significant changes to

the existing Student Assistance General Provisions regulations and the

Federal Pell Grant Program regulations. Proposed changes are discussed

in the order in which they appear in the proposed regulatory text. If a

provision applied to more than one section or is included in more than

one section, it is discussed the first time it appears with an

appropriate reference to its other appearances.

Subpart A--General

Section 668.1 Scope

The Secretary proposes to revise this section to remove vocational

school from the list of what the term institution includes, because

vocational schools are no longer eligible institutions under the HEA.

The Secretary proposes to revise this section to reflect a listing of

currently existing Title IV, HEA programs that would be subject to part

668. Programs added to the list would include the National Early

Intervention Scholarship and Partnership, Presidential Access

Scholarship, and Federal Direct Student Loan programs. The Income

Contingent Loan Program, which no longer exists, would be removed from

the list. These revisions reflect statutory changes made to the HEA by

the Amendments of 1992.

Section 668.2 General Definitions

This section includes definitions proposed in NPRMs published on

October 4, 1993 (58 FR 51716), and on February 17, 1994 (in part II)

(59 FR 8044). Those definitions are: designated department official,

initiating official, output document, show-cause official, and third-

party servicer. The Secretary will not repeat the discussion of those

definitions here.

The Secretary proposes to remove the definitions of Award year,

Regular student, and State, because they would be included in 34 CFR

part 600, governing institutional eligibility under the HEA. The

Secretary proposed to move these definitions to 34 CFR Part 600 in the

NPRM published on February 10, 1994 (59 FR 6446).

The Secretary is proposing technical changes to clarify the

definitions of the current Title IV, HEA programs and to add

definitions of the newly authorized Title IV, HEA programs to conform

with statutory changes and for consistency with terminology used in the

individual program regulations. The Secretary also proposes to make

technical changes in the definitions of Independent student, to reflect

statutory changes, and Enrolled, Valid student aid report, and Valid

institutional student information report for consistency with other

program regulations. The Secretary would move the definition of

Participating institution from Sec. 668.81 to this section.

The Secretary is proposing to add or amend the following

definitions:

Academic Year

Section 481(d)(2) of the HEA provides a definition of academic year

to be used for all the Title IV, HEA programs. The statute specifies

that in an academic year, a full-time student is expected to complete

at least twenty-four semester or trimester hours or thirty-six quarter

hours at an institution that measures program length in credit hours,

or at least nine hundred clock hours at an institution that measures

program length in clock hours. The definition delineates not only the

minimum amount of work that a full-time student enrolled in an

undergraduate educational program is expected to complete during an

academic year, but also the minimum period of time over which the work

in any educational program must be completed.

The Technical Amendments of 1993 specify that this provision is

only applicable with respect to an undergraduate course of study. The

Secretary expects that institutions would continue to use their own

academic standards, within the framework of current program

regulations, to determine the amount of work full-time graduate and

professional students are expected to complete over a minimum of thirty

weeks of instruction.

The minimum time period specified is thirty weeks of instructional

time. The Technical Amendments of 1993 further amended section 481 of

the HEA definition of academic year to provide that the Secretary may

reduce, for good cause on a case-by-case basis, the 30-week minimum to

not less than 26 weeks of instructional time in the case of an

institution of higher education that provides a 2-year or 4-year

program of instruction for which it awards an associate or

baccalaureate degree. The Secretary has been unable to determine a

definition of ``good cause'' that would justify using this authority.

In addition, the Secretary is concerned that regulatory standards for

those reductions would encourage many institutions to seek that

treatment routinely and this implementation would result in the

inequitable treatment of Federal student aid recipients from

institution to institution. Further, the Secretary is concerned that

widespread implementation would result in increased costs to the Title

IV, HEA programs. Therefore, the Secretary has not proposed specific

criteria to implement this technical amendment at this time. The

Secretary requests comments on a definition of ``good cause'' and ways

of implementing this provision through regulations that address the

Secretary's concerns.

The Secretary has determined that the terms used in the definition

of academic year must be clarified if the definition is to be well-

understood and applied consistently. In determining what constitutes

the 30-week period, the Secretary would count the period that begins on

the first day of classes and ends on the last day of classes or

examinations. For example, if an institution's first day of classes

begins on a Tuesday, the first week of the academic year would begin on

that Tuesday and end the following Monday. The institution would not

begin counting with the Sunday preceding the first day of classes.

The Secretary proposes that, for purposes of this definition, a

week would be a consecutive seven-day period, as opposed to a five-day

or six-day school week or seven individual days that are spread out

over more than one calendar week. This approach would facilitate

counting and readily accommodate institutions that start and end on

different days of the week.

For purposes of this definition, a week of instructional time would

be any week in which at least one day of regularly scheduled

instruction, examinations, or preparation for examination occurs. The

Secretary recognizes that there may be certain weeks during an academic

year during which fewer than five days of instruction occur. An

institution should not be prohibited from counting those weeks in its

30-week period, provided at least one day of regularly scheduled

classes occurs in each of those weeks. Further, this proposal would

accommodate innovative educational programs such as those offered only

on weekends or condensed schedules. At the same time, the proposal does

not open the door to abuse, because regardless of the number of days of

study that occur in any week, an institution must still provide enough

instruction for a full-time student to be able to earn the minimum

number of credit or clock hours needed to meet the definition. Finally,

the Secretary would make clear that an institution cannot count, as

instructional time, periods consisting purely of noninstructional

activities, such as orientation, counseling, or vacations.

It should be noted that because the statute specifies both the

amount of work expected to be completed and the minimum timeframe for

an academic year for use in the Title IV, HEA programs, an institution

might need to prorate or adjust Title IV, HEA program assistance for

its students. For example, if the span of time from the first scheduled

class at the beginning of the school year until the last examination at

the end of the school year (excluding any weeks that consist

exclusively of vacation time and all other activities not directly

related to instruction, preparation for examinations or examinations)

is twenty-five weeks, the institution would need to make adjustments in

accordance with individual program regulations. Because summer sessions

generally would not be long enough to constitute the equivalent of a

complete semester or quarter, as they are under various current program

regulations, Title IV, HEA program funds awarded for summer sessions

would need to be adjusted to reflect the lengths of the sessions. A

comprehensive discussion of the potential effect of this new definition

of academic year on Federal Pell Grant calculations may be found in the

NPRM on the Federal Pell Grant Program to be published shortly.

Full-Time Student

The Secretary believes it is necessary to have a definition of

full-time student that is applicable to all Title IV, HEA programs. A

definition of full-time student is needed because the definition of

academic year is based, in part, on the workload of a full-time

student, and because the term is used elsewhere for other purposes in

part 668. The Secretary has proposed a definition of full-time student

that would be based on a slightly modified definition found in the

Federal Pell Grant and the campus-based program regulations. This

definition also would incorporate parts of the definition of full-time

student found in the FFEL program regulations.

Generally, the Secretary proposes to define a full-time student as

an enrolled student who is carrying a full-time academic workload

(other than by correspondence) as determined by the institution under a

standard applicable to all students enrolled in a particular

educational program. In determining a student's workload, an

institution would be permitted to include combinations of courses,

work, research, or special studies that the institution considers

sufficient to classify the student as a full-time student. Under this

proposal, for an undergraduate student, an institution's minimum

standard must equal or exceed: (1) 12 semester hours or 12 quarter

hours per academic term in an educational program using a semester,

trimester, or quarter system; (2) 24 semester hours or 36 quarter hours

per academic year for an educational program using credit hours but not

using a semester, trimester, or quarter system (or the prorated

equivalent for a program of less than one academic year); or (3) 24

clock hours per week for an educational program using clock hours.

This definition also provides for a method for determining full-

time status for students enrolled in an educational program using both

credit and clock hours. In order to evaluate the combined workload of

the student, an institution could determine full-time status based on

the sum of the proportionate workload carried in terms of credit hours

and the proportionate workload carried in terms of clock hours.

Further, an undergraduate student could be considered a full-time

student if he or she undertakes a series of courses or seminars that

equals at least 12 semester hours or 12 quarter hours in a maximum of

18 weeks. For cooperative education programs, an undergraduate student

could be considered a full-time student if the work portion of a

cooperative education program in which the amount of work performed is

equivalent to the academic workload of a full-time student.

The Secretary is particularly interested in establishing a minimum

standard for a full-time academic workload for students who receive

funds under the FFEL programs. Currently, for the purpose of those

programs, an institution determines what a full-time academic workload

is for these students. The Secretary recognizes that, because no

minimum requirement for an academic workload of a full-time student

exists under the FFEL programs, there is the potential for abuse of

FFEL program funds through the use of the definition of an academic

year. For example, an institution might have educational programs that

are measured in credit hours and do not use academic terms. The

institution could claim that it offers a full academic year's worth of

work over a thirty-week period by giving a full-time student a small

amount of instruction, which the institution claims to be equivalent to

24 semester or 36 quarter hours. This situation would result in the

receipt of an inordinately large amount of FFEL program funds for the

amount of work actually accomplished. The Secretary requests comments

on whether, to further address this potential abuse, he should also

establish a weekly minimum full-time workload for educational programs

that are measured in credit hours but do not use academic terms.

Undergraduate Student

The Secretary proposes to add a definition of undergraduate student

to this section. Because the proposed definition of a full-time student

makes reference to an undergraduate student and because the term

undergraduate student is used in other places in part 668, the

Secretary believes it is now necessary to define undergraduate student

in this part. The proposed definition is the definition currently found

in the Federal Pell Grant and campus-based program regulations. The

Secretary proposes to define an undergraduate student as a student

enrolled in an undergraduate educational program at an institution who

has not earned a baccalaureate or first professional degree. The

student would have to be enrolled in an undergraduate educational

program that usually does not exceed 4 academic years, or a 4- to 5-

academic-year program designed to lead to a first degree. A student

enrolled in a program of any other length would be considered an

undergraduate student for only the first four academic years of that

program.

Section 668.8 Eligible Program

Admission Requirements

These proposed regulations would remove the current provisions in

Sec. 668.8(a)(1) (i) through (iv), which govern the educational

qualifications of persons admitted into an eligible program. These

qualifications are appropriately addressed in 34 CFR 600.4 through

600.6, which govern the types of institutions that may be eligible to

apply to participate in HEA programs. The educational qualifications of

eligible students under the Title IV, HEA programs are also addressed

in Sec. 668.7(a) (3) and (b). Therefore, these provisions are no longer

needed for purposes of defining an eligible program. Note that other

provisions governing the admission requirements needed for certain

educational programs to qualify as an eligible program are discussed

further below.

Definitions

These regulations would clarify a number of the terms used to

determine an eligible program. Proposed Sec. 668.8(b)(1) would define

the equivalent of an associate degree as either an associate degree, or

the successful completion of at least a two-year program that is

acceptable for full credit toward a bachelor's degree and qualifies a

student for admission into the third year of a bachelor's degree

program. This definition is needed because educational programs offered

by a proprietary institution of higher education or a postsecondary

vocational institution may qualify as eligible programs depending, in

part, on whether the programs admit students with the equivalent of an

associate degree (see the discussion on minimum program lengths). The

definition is based on the provision in section 1201(a)(3) of the HEA

that qualifies institutions offering 2-year transfer programs for

institutional eligibility.

For the same reason (that the terms are needed to establish the

eligibility of programs offered by proprietary institutions of higher

education and postsecondary vocational institutions-- see the

discussion on minimum program lengths) the Secretary proposes to define

week and week of instruction. For consistency, these terms would be the

same as those proposed to be used in Sec. 668.2 for the definition of

academic year. The terms are discussed in detail there.

It is important to note that short-term programs (those offering

less than 600 clock hours) that are eligible under current regulations

because they met the definition of vocational school that used to be in

section 435 of the HEA, will cease to be eligible when the final

regulations governing programs become effective, unless those short-

term programs are able to satisfy these regulations. Short-term

programs that were not offered or were not eligible before July 23,

1992 can only become eligible when final regulations become effective.

Minimum Program Length

The proposed regulations would also add requirements regarding the

minimum length of an eligible program. Under section 481(b) of the HEA,

a proprietary institution of higher education or a postsecondary

vocational institution must, to be eligible, provide an eligible

program, as defined in section 481(e) of the HEA. Proposed

Sec. 668.8(d) would implement that definition. The proposed definition

would supplant the current regulatory definition of a six-month

training program in 34 CFR 600.2.

Section 481(e) of the HEA provides for three types of eligible

programs. The first type of eligible program is one that must provide

at least 600 clock hours, 16 semester or trimester hours or 24 quarter

hours of instruction offered during a minimum of 15 weeks. The program

must provide undergraduate training that prepares a student for gainful

employment in a recognized occupation. The program may admit as regular

students persons who have not completed the equivalent of an associate

degree.

The second type of eligible program is one that must provide at

least 300 clock hours, 8 semester hours, or 12 quarter hours of

instruction offered during a minimum of 10 weeks. The program must

provide training that prepares a student for gainful employment in a

recognized occupation and be a graduate or professional program or

admit as regular students only persons who have completed the

equivalent of an associate degree. For the first time, this type of

program may qualify for purposes of all Title IV, HEA programs, not

just the FFEL programs, as under current regulations.

The third type of eligible program would qualify for the FFEL

programs only. It must provide at least 300 but less than 600 clock

hours of instruction offered during a minimum of 10 weeks. The program

must provide undergraduate training that prepares a student for gainful

employment in a recognized occupation, and admit as regular students

some persons who have not completed the equivalent of an associate

degree. This type of program must also satisfy regulations of the

Secretary governing placement rates, completion rates, and other

criteria. These rates and criteria are discussed below.

Qualitative Factors

Section 481(e)(2) of the HEA requires the third type of eligible

program to have a verified completion rate of at least 70 percent and a

verified placement rate of at least 70 percent in accordance with the

Secretary's regulations and to meet other criteria specified by the

Secretary in regulations. Proposed Sec. 668.8(e) would implement these

provisions. Proposed Sec. 668.8(e)(2) would require an institution to

substantiate the calculation of its completion and placement rates by

having its independent auditor who prepares its compliance audit report

under Sec. 668.23 verify the accuracy of the calculations. The

Secretary believes that the auditor's assurance of these calculations

would be a reliable independent substantiation. The Secretary also

believes it is practical for an auditor to check this information,

inasmuch as he or she is already on site to perform the institution's

required compliance audit.

Section 668.8 would include formulas in paragraphs (f) and (g) for

calculating the appropriate completion and placement rates. The

Secretary believes a single methodology is desired, and invites

comments in this area. The Secretary notes that an NPRM implementing

the Student Right-to-Know provisions in section 485(a) of the HEA,

which addressed the calculation of completion or graduation rates, was

published in the Federal Register on July 10, 1992 (57 FR 30826). The

Secretary will be publishing a second NPRM for implementation of the

Student Right-to-Know provisions shortly after publication of this NPRM

to further address this calculation. The Secretary would also like to

know if any proposals relative to the Student Right-to-Know Act

regarding graduation and completion rate calculations should be used

instead of the methods proposed here. The proposed formulas would be

based on the following:

Award Year

All calculations would be based on enrollments, completions, and

placements during an award year. Thus, an applicable completion or

placement rate would be the rate as it existed at the end of a

particular award year.

Calculation of Completion Rate

(1) An institution would base its calculation on the number of

regular students who were enrolled in the program during the award

year. The rate calculation is based on regular students because those

students by definition intend to complete a program. The Secretary

believes that inclusion of other students would not provide an accurate

picture of the institution's completion rate.

(2) The institution would subtract from the number of regular

students the number of those students who, during that award year,

withdrew from, dropped out of, or were expelled from the program and

were entitled to and actually received in a timely manner in accordance

with Sec. 668.22(i)(3) a refund of 100 percent of their tuition and

fees (less any permitted administrative fee) under the institution's

refund policy. The Secretary believes that the inclusion of students

who have received a 100 percent refund at an institution would unduly

penalize the institution because these students would not have

participated in the academic component of an institution's program.

These students are excluded from the calculation because there would

not be a loss of Title IV, HEA program funds to the Department of

Education if the institution has refunded all tuition and fees.

(3) The institution would subtract the number of students who were

enrolled in the program at the end of that award year.

(4) The institution would determine the number of regular students

who, during that award year, received the degree, certificate or other

recognized education credential awarded for successfully completing the

program.

(5) The institution would divide the number determined in item (4)

by the total obtained under item (3) of this section.

This proposed methodology instructs institutions to subtract from

the denominator all students who were enrolled in the program at the

end of the award year without regard to any time frame established for

the completion of the program. In view of the fact that the Secretary

is addressing the effect of the expectation that a student complete a

program in a reasonable period of time on the calculation of completion

rates in the forthcoming NPRM concerning the Student Right-to-Know

provisions in section 485(a) of the HEA, the Secretary particularly

invites comment on whether that expectation should also be considered

in the calculation under this section.

Calculation of Placement Rate

(1) An institution would determine the number of students who,

during the award year, received the degree, certificate, or other

recognized educational credential awarded for successfully completing

the program. The Secretary believes it would not be fair or accurate to

include in the placement rate calculation those students who have not

yet completed the program.

(2) The institution would subtract from the number of students

described in item (1) the number of those students who were employed by

the institution either before or after their receipt of the degree,

certificate, or other recognized educational credential. The Secretary

believes that excluding employees of the institution will help curb

abuse by those schools who may hire their own students in order to

increase placement rates. The Secretary specifically requests comment

on whether there are methods of distinguishing legitimate hiring by an

institution of its graduates or students from hiring simply to improve

the results of a placement rate calculation.

(3) Of the total obtained under item (2), the institution would

determine the number of students who, within 180 days of the day they

received their degree, certificate, or other recognized education

credential, obtained gainful employment in the recognized occupation

for which they were trained or in a related comparable recognized

occupation and, on the date of this calculation, are employed or have

been employed for at least 13 weeks following receipt of the credential

from the institution.

The Secretary believes that only students who have been placed

within 180 days should be counted in the calculation. The Secretary

proposes 180 days because it is consistent with the maximum period of

time that a payment on a student's loan under the FFEL loan program may

be deferred. These FFEL deferments include provisions for deferments

for periods of unemployment. The Secretary considers this time frame to

be adequate and reasonable, and provides ample time for an institution

to place a student.

The proposed regulation allows an institution to include in its

placement rate a student who is placed in a recognized occupation which

is comparable and related to the occupation for which the student has

been trained. For instance, if a student were trained as an auto

mechanic, he could be included in the placement rate calculation if he

were placed as a boat mechanic. However, if a student completed a

retail sales management program, he could not be included in the

calculation if he were placed as a counterman at a fast food

establishment.

To be included in the placement rate, a student must have been

employed for at least 13 weeks following graduation from the

institution. The Secretary believes that this requirement will help

stem abuse by institutions that may arrange to have students hired for

short term jobs in order to boost placement rates. The proposed 13-week

period is consistent with the period of time a student must be employed

to be counted in the calculation of an institution's placement rate

under the procedures delineated in current Sec. 668.15(g) for the

appeal of an institution's loss of participation due to an unacceptable

cohort default rate.

As stated above, for purposes of this calculation, a student has up

to 180 days after he or she receives his or her degree, certificate, or

other recognized education credential to obtain gainful employment and

then must be employed for at least 13 weeks following receipt of the

credential from the institution. The Secretary understands that,

because of the total length of time allowed for obtaining and

maintaining employment, an institution's calculations may not

accurately reflect placement results for programs that are offered in

the latter half of the award year. The Secretary specifically requests

comments on ways to address this issue.

(4) The institution would divide the number of students determined

in item (3) of this section by the total obtained under item (2).

The institution must maintain documentation that each student

described in item (3) above, obtained gainful employment in an

occupation for which he or she was trained or in a related occupation.

Examples of satisfactory documentation of a student's gainful

employment include, but are not limited to--

A written statement from the student's employer;

Signed copies of State or Federal income tax forms; and

Written evidence of payments of Social Security taxes.

The Secretary believes that requiring institutions to collect this

data will help curb abuse by institutions that may overstate their

placement rates in order to achieve and maintain eligibility for short-

term programs. Furthermore, to further avoid potential abuse, the

Secretary proposes that in certifying the accuracy of an institution's

placement rate, as required under Sec. 668.8(e)(2), the institution's

auditor should review the above types of documentation collected by the

institution to verify each student's inclusion in the placement rate

calculation.

The statute provides that the Secretary may prescribe other

regulations to determine the quality of these programs. Under proposed

Sec. 668.8(e)(1)(iii), to be eligible, programs less than 600 clock

hours in length may not exceed by more than 50 percent the minimum

number of clock hours required for training in the recognized

occupation for which the program prepares students, as established by

the State in which the program is offered, if the State has established

such a requirement. For example, if a State requires security guard

students to complete only 300 clock hours of training, a security guard

program in that state will not be eligible if it exceeds 450 clock

hours. The Secretary believes this regulation will help curb abuse of

the programs by preventing institutions from providing unnecessary

training to students in order to receive additional Title IV, HEA

program funds.

Proposed Sec. 668.8(e)(1)(iv) requires that to be eligible,

programs less than 600 clock hours must have been in existence for at

least one full year. The Secretary believes that this time frame is

necessary so programs may demonstrate the appropriate completion and

placement rates. Institutions will be required under 34 CFR 600 to

apply for eligibility of these programs after the one-year requirement

is satisfied.

English as a Second Language

In addition to the elements already in place in the current

regulations regarding English as a Second Language (ESL) programs,

Sec. 668.8(j)(2) proposes that in order for an ESL program to be

eligible, the institution must test each student at the end of the

program to substantiate that the student has attained adequate

proficiency in written and spoken English to use already existing

knowledge, training or skills. The institution will also be required to

identify the test it gives to the students and the basis for the

judgment that the student has attained the adequate proficiency. This

proposal, based on California law, was suggested during the negotiation

process as a method to stem abuse by institutions which offer ESL

programs. As established by the current regulations, ESL programs which

qualify as eligible programs are eligible for purposes of the Federal

Pell Grant program only. This provision remains unchanged.

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

Section 668.12 Application Procedures

The Secretary proposes to add a new Sec. 668.12 to codify the

Secretary's current practices with regard to applications to

participate or to continue to participate in a Title IV, HEA program.

This section also would include proposed procedures whereby the

Secretary codifies new statutory provisions governing applications to

participate or to continue to participate in a Title IV, HEA program.

Section 498(b) of the HEA requires the Secretary to develop a

single application form to be used by an institution that wishes to

apply to participate or to continue to participate in a Title IV, HEA

program. The statute requires that this form provide for the collection

of various information and documentation. First, the form must require

an institution to provide sufficient information and documentation to

determine that the requirements of institutional eligibility,

accreditation, and the capability of the institution are met.

Second, the form must require an institution to describe the

relationship between a main campus of an institution and all of its

branches. In particular, the form must require an institution to

include a description of the student aid processing that is performed

by the main campus and that which is performed at its branches. Third,

the form must require an institution to describe all third-party

servicers of the institution and supply a copy of any contract with a

third-party servicer. Finally, the form must require an institution to

provide any other information that the Secretary determines will ensure

compliance with Title IV, HEA program requirements with respect to

eligibility, accreditation, administrative capability and financial

responsibility.

Currently, the Department of Education uses a single application

form that addresses both institutional eligibility requirements (as

found in 34 CFR part 600) and the standards for certification of

administrative capability and financial responsibility. In recent

years, although institutions filed a single application form, they

received separate notifications of action from the Department: an

institutional eligibility notice and a certification letter. This

created confusion because some institutions misinterpreted the

institutional eligibility notice also to be the notice informing the

institution that it met the requirements for ``certification'' and that

the institution was now able to participate in a Title IV, HEA program.

In order to reduce confusion, the Secretary is now combining these

notices of ``institutional eligibility'' and ``certification'', issuing

one ``Institutional Approval Notice'' to an institution that meets the

institutional eligibility and certification requirements. The

Institutional Approval Notice advises the institution that it is an

eligible institution, and is approved to participate in the Title IV,

HEA programs listed in the Notice and indicated in the institution's

program participation agreement. The effective date of approval, which

is specified in the Institutional Approval Notice, is the date that the

Secretary signs the institution's program participation agreement.

Under current practice, an institution that wishes to participate

in a Title IV, HEA program for the first time must first apply to the

Secretary for a certification that the institution meets the standards

for participation found in Subpart B of these regulations. A currently

participating institution must apply to the Secretary for a

certification that the institution continues to meet these standards

under a number of conditions.

First, the institution must apply for certification if the

Secretary requests the institution to apply. The Secretary reserves the

right to require a participating institution to apply at any time if

the Secretary is concerned about the institution's continued

participation in a Title IV, HEA program. Currently, the Secretary

exercises this authority only rarely, and generally when the Secretary

receives reliable information that could affect the institution's

eligibility under 34 CFR part 600 or the institution's financial

responsibility or administrative capability under subpart B of these

regulations. For example, if the Secretary receives information that an

institution that does not grant degrees has received authorization from

its State and accrediting agency to award degrees, the Secretary would

require the institution to apply under 34 CFR part 600 to determine

whether the institution satisfies the definition for a different type

of institution and therefore might be eligible to apply to participate

in HEA programs for which the institution earlier was not qualified. At

the same time, the Secretary requires the institution to apply for

recertification under this subpart. Similarly, if the Secretary

receives reliable information that could affect whether an institution

meets the factors of financial responsibility in this subpart, the

Secretary requires the institution to apply for recertification. The

Secretary does not intend to exercise this authority more frequently

than under current practice.

Second, a participating institution must apply for certification if

the institution wishes to include in its participation a branch campus

(as that term would be defined in 34 CFR part 600) or another location

that offers 100 percent of an educational program. Adding a branch

campus or additional location that offers 100 percent of an educational

program can have a great effect on the ability of an institution to

continue to participate in the Title IV, HEA programs. The Secretary

considers it is appropriate to scrutinize the effect of such an

addition. In particular, the Secretary believes it is necessary to

examine whether the institution has the financial resources and the

administrative capability necessary to support such an addition.

A number of circumstances that could affect an institution's

participation in a Title IV, HEA program do not, under the Secretary's

current practice, require the institution automatically to apply for

recertification under subpart B of these regulations. Instead, these

circumstances require the institution to notify the Secretary, and, if

necessary, provide specified information about the circumstances. These

circumstances parallel many of those described in 34 CFR part 600

requiring the institution to notify the Secretary of changes that could

affect the institution's eligibility. Based on that notification and

information, the Secretary determines whether the institution must

apply for recertification. If the institution need not apply, the

Secretary notifies the institution under the provisions of 34 CFR

600.30 that the institution continues to be eligible and participating.

If the Secretary needs further information to make that determination,

the Secretary requests additional information from the institution or

requires the institution to apply for recertification. These procedures

apply to the following circumstances: (1) A change in name, address, or

location of the institution or one of the institution's locations; and

(2) the inclusion in an institution's participation of a location that

offers less than 100 percent but at least 50 percent of an educational

program. In making the determination that the institution must apply

for approval, the Secretary takes into account the institution's

ability to provide adequately education or training at the location,

including such factors as the percentage of an educational program

offered at the location and the financial and administrative capability

of the institution.

Under current practice and under these proposed regulations, a

participating institution that wishes to include in its participation a

location that offers less than 50 percent of an educational program

need not provide any notification or application to the Secretary,

unless the Secretary so requests.

Third, a participating institution must apply for certification if

the institution wishes to continue to participate in a Title IV, HEA

program following a change in ownership that results in a change in

control. The regulations governing institutional eligibility (34 CFR

part 600) contain the requirements governing institutions that change

ownership resulting in a change of control.

New section 498(g) of the HEA requires the Secretary to establish a

schedule for the expiration of the approval of institutions to

participate in the Title IV, HEA programs. Once this schedule is in

place, each program participation agreement will have a specific

expiration date. To continue participating in the Title IV, HEA

programs beyond the expiration date of its program participation

agreement, an institution will need to apply for and be granted

approval for continued participation. The Secretary will notify an

institution well in advance of the expiration date of the institution's

program participation agreement that the institution must apply for and

be granted continued participation. If an institution does not apply

for or is not granted approval for continued participation by the

expiration date of the institution's program participation agreement,

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

expire on that expiration date. In this case, the Secretary may choose

to provisionally certify the institution. Provisional certification

will be addressed in more detail later in this discussion.

The proposed regulations would specify that an institution that

applies for participation in any Title IV, HEA program must apply on

the form prescribed by the Secretary and provide all information and

documentation requested by the Secretary. The Secretary would like to

clarify that an institution may be asked to supply additional

information in support of its application after its initial submission.

This does not represent a change from current procedures.

Section 668.13 Certification Procedures

Currently, the Secretary informally refers to the procedures by

which the Secretary certifies that an institution meets the standards

in subpart B of these regulations and accordingly may participate in a

Title IV, HEA program as the ``certification procedures.'' The

Secretary proposes to add a new Sec. 668.13 to codify these procedures.

This section also would include proposed procedures whereby the

Secretary codifies new statutory provisions governing certification and

provisional certification procedures for participation in a Title IV,

HEA program.

Clearly, an institution may not be certified unless the institution

is eligible under the provisions of 34 CFR part 600. Further, this

section would make clear that an institution could be certified only if

the institution meets all the applicable standards for participation in

subpart B of these regulations.

Finally, because the requirement that each time an institution

seeks to begin to participate in a Title IV, HEA program the specified

individuals must complete ``precertification training'' provided by or

approved by the Secretary is a certification requirement, the Secretary

proposes to move this requirement from the current Sec. 668.12

(Institutional participation agreement) to this section. The Secretary

proposes to amend this requirement to clarify that an institution

subject to this training requirement may not begin participation until

the individuals have completed the training. Under current regulations,

the Secretary specifies that an institution may request an on-site

review (instead of electing to use the precertification training

procedures) before beginning its participation.

In accordance with section 498(g) of the HEA, the Secretary

proposes to delineate the period for which an institution may

participate in a Title IV, HEA program. Generally, this period is the

maximum of four years permitted by the HEA; however, the Secretary may

specify a shorter period as the Secretary deems necessary.

Section 498(h) of the HEA permits the Secretary to provisionally

certify an institution to participate in a Title IV, HEA program in a

number of circumstances. Provisional certification permits the

Secretary to allow an institution that otherwise would not qualify to

participate in a Title IV, HEA program to participate. However, because

such an institution cannot meet all the requirements for ``full''

certification, the institution's participation would be limited. For

example, an institution that is provisionally certified could be

monitored more closely to the extent that the Secretary believes the

institution warrants a greater degree of oversight. Further, in

accordance with the statute, an institution that is provisionally

certified is subject to shorter periods of participation than a fully

certified institution. The Secretary notes that these limitations may

vary, within the limits of the statute, to address the specific

circumstances of the institution. Finally, under the terms of

provisional certification, an institution will not have the right to a

formal appeal under subpart G of this part if the Secretary revokes the

institution's provisional certification; instead, the Secretary

proposes to offer the institution a modified appeal. These limitations

are addressed in more detail later in this discussion.

Under section 498(h) of the HEA, the Secretary may provisionally

certify an institution that: (1) Applies for initial participation in

any Title IV, HEA program; (2) has its administrative capability or

financial responsibility determined by the Secretary for the first

time; (3) undergoes a change of ownership; (4) seeks to renew its

certification and jeopardizes its ability to perform its financial

responsibilities by not meeting the factors of financial responsibility

or standards of administrative capability in proposed Secs. 668.15 and

668.16 (and whose participation has been limited or suspended under

subpart G of this part, or voluntarily enters into provisional

certification); or (5) is a participating institution that was

accredited or preaccredited by a nationally recognized accrediting

agency on the day before the Secretary withdrew recognition of that

agency. In addition, the Secretary is proposing to add, to the list of

institutions that may be provisionally certified, an institution that

allowed its specified period of participation to expire without

reapplying and qualifying for participation in time.

The Secretary intends to use provisional certification as a

mechanism for monitoring an institution that has not previously

participated or one that has changed ownership, until it has time to

establish a track record. In keeping with current practice, the

Secretary does not intend to certify any initial applicant until it has

successfully completed a period of provisional certification. Because

many of the requirements for certification cannot be met until an

institution has participated in the Title IV, HEA programs for a period

of time, an initially participating institution would still have the

opportunity to participate while establishing a record that

demonstrates compliance with all of the proposed current standards for

participation. The Secretary notes that certain factors of financial

responsibility and administrative capability, such as requirements

governing the appropriate handling of Title IV, HEA program funds and

timely submission of required audits and other reports, cannot be

judged until an institution has Title IV, HEA program funds to

administer. In these cases, instead of certifying that an institution

meets all the standards of subpart B, the Secretary certifies that an

institution has demonstrated that it meets all the standards it can

currently and that it will be able to meet all the standards in subpart

B to qualify it for full certification within a period of time

specified by the Secretary. Such an institution will receive a modified

program participation agreement. For the same reasons, the Secretary

also intends to use provisional certification for all institutions that

undergo a change of ownership. Provisional certification would permit

them to participate in Title IV, HEA programs while demonstrating over

time that they can meet the standards for participation under the new

ownership.

In addition, the HEA provides that the Secretary may use

provisional certification for institutions that are currently

participating who will have their financial responsibility and

administrative capability determined for the first time. Some

institutions have been participating in the Title IV, HEA programs

since before the establishment of the financial responsibility and

administrative capability standards, and have never undergone a

certification review. These institutions may be allowed the time

necessary to establish that they can remedy any deficiencies found and

meet the standards for participation.

Finally, under the provisions of the Technical Amendments of 1993,

the Secretary may provisionally certify a participating institution

that is undergoing a certification review if the Secretary believes

that the institution is in a financial or administrative position that

could jeopardize the institution's ability to perform its financial

responsibilities under its program participation agreement. The

Secretary may provisionally certify an institution under this provision

if the institution's participation has been limited or suspended under

subpart G of this part, or voluntarily enters into provisional

certification. Thus, the Secretary proposes to use provisional

certification as a probationary period for some participating

institutions, if the Secretary determines that the institutions are

capable of meeting the standards for full certification by the end of

that period. For example, the Secretary might find that an institution

applying for recertification on its own fails to meet one of the

standards in proposed Sec. 668.15. If the Secretary determines that the

failure could jeopardize the institution's ability to meet its

financial responsibilities, such as the payment of refunds, the

Secretary would provisionally certify the institution.

Finally, the Secretary proposes to use provisional certification

for institutions that seek a renewal of participation in a Title IV,

HEA program after the expiration of a prior period of participation in

that program. The Secretary will examine the reasons for the lapse in

participation to determine if additional safeguards are necessary for

the institution to demonstrate that it is capable of resuming its

participation in the Title IV, HEA programs.

The Secretary does not intend to certify an institution

provisionally if the institution does not meet the financial

responsibility standards, unless the institution provides the Secretary

with certain additional financial guarantees of its ability to continue

operating. The Secretary believes that additional financial guarantees

are necessary in that situation to ensure that funds may be available

to repay liabilities or to pay required refunds that could arise under

the Title IV, HEA programs. The Secretary generally does not intend to

certify an institution provisionally if the institution does not meet

the general standards of financial responsibility or the exceptions to

the general standards of financial responsibility under proposed

Sec. 668.15(d) unless the institution meets three additional

conditions. First, the institution would have to demonstrate to the

satisfaction of the Secretary that it has sufficient financial and

administrative resources to participate in the Title IV, HEA programs

under a funding arrangement other than the Department of Educations's

standard advance funding arrangement. For example, the institution

could be funded through an escrow arrangement where an approved third

party controls the institution's access to Title IV, HEA program funds.

The Secretary believes that it is necessary for the Department of

Education to have the added control over Title IV, HEA program funds

provided by an escrow arrangement. Second, the institution would have

to submit to the Secretary a letter of credit payable to the Secretary

equal to not less than 10 percent of the Title IV, HEA program funds

received by the institution during the last complete award year for

which figures are available; the Secretary believes that 10 percent of

an institution's Title IV, HEA program funds is the minimum necessary

to ensure repayment of liabilities that may be identified during the

institution's period of provisional certification. Further, the

Secretary believes that the amount of Title IV, HEA program funds

received by an institution during the last complete award year for

which figures are available provides the most accurate indication of

the amount of Title IV, HEA program funds the institution will use in

the next award year. Third, the institution would have to demonstrate

that it has met all of its financial obligations during the preceding

two award years, including (but not limited to) the payment of required

refunds and repayments to the Secretary for liabilities and debts

incurred in programs administered by the Secretary. The Secretary

believes that an institution that could meet this proposed standard has

established a track record for meeting its financial obligations.

The Secretary notes that an institution that is applying for

initial participation in the Title IV, HEA programs could not satisfy

the proposed requirement that the institution submit to the Secretary a

letter of credit payable to the Secretary equal to not less than 10

percent of the Title IV, HEA program funds received by the institution

during the last complete award year for which figures are available

because the institution would not have received any Title IV, HEA

program funds during the last award year. The Secretary requests

comments on a comparable way to determine the amount of a letter of

credit for an institution that is applying for initial participation in

the Title IV, HEA programs.

The Secretary also would impose additional conditions on any

institution that has not been considered financially responsible under

proposed Sec. 668.15 at any time within the past five years, or if the

institution is not considered financially responsible for one of the

following reasons (as delineated in Sec. 668.15(c)(2)): (1) The

institution has been limited, suspended, terminated or entered into a

settlement agreement to resolve such an action by the Secretary or a

guaranty agency within the preceding five years; (2) the institution

had an audit finding during its two most recent audits, or a program

review finding during its two most recent program reviews, that

resulted in the institution's being required to repay an amount greater

than five percent of the Title IV, HEA funds that the institution

received for any award year covered by the audit or the program review;

or (3) the institution failed to address satisfactorily any compliance

problems identified in program review or audit reports based upon a

final decision of the Secretary.

An institution in these categories could only be provisionally

certified if, in addition to meeting whatever conditions the Secretary

might reasonably require of a provisionally certified institution, the

institution satisfied one of the following conditions. First, the

institution, or one or more persons or entities that the Secretary

determines to exercise substantial control over the institution, or

both, would have to submit to the Secretary financial guarantees in an

amount determined by the Secretary to be sufficient to satisfy the

institution's potential liabilities arising from the institution's

participation in the Title IV, HEA programs. Second, one or more

persons or entities that the Secretary determines to exercise

substantial control over the institution would have to agree to be

jointly or severally liable for any liabilities arising from the

institution's participation in the Title IV, HEA programs and any civil

and criminal monetary penalties authorized under Title IV of the HEA.

The law permits the Secretary to impose these conditions on these

institutions; the Secretary is announcing that he would always impose

them, because these circumstances are indicative that extra protection

is needed for the institution and their students to be permitted to

benefit from the use of Title IV, HEA program funds.

Generally, provisional certification may be granted for a period of

no longer than three award years. In accordance with section 498(h) of

the HEA, an institution that is applying for initial participation may

be provisionally certified for a period of no longer than one award

year. A participating institution that was accredited or preaccredited

by a nationally recognized accrediting agency on the day before the

Secretary withdrew the Secretary's recognition of that agency may be

provisionally certified for no longer than 18 months after the date

that the Secretary withdrew that recognition. The Secretary has the

authority to specify a shorter period of provisional certification, as

necessary.

In accordance with section 498(h) of the HEA, the Secretary may

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

any time before the end of a period of provisional certification, if

the Secretary determines that the institution is unable to meet its

responsibilities under its program participation agreement. If the

Secretary makes that determination, the Secretary would notify the

institution of the determination by mail, unless the Secretary chooses

more expeditious means, and revocation would take effect on date that

notice is mailed. The institution would have to adhere to the

requirements of proposed Sec. 668.26 which describes the consequences

of revocation.

Under the terms of the provisional certification, the institution

does not have the right to a formal appeal under subpart G of this part

before the revocation takes effect. However, the Secretary proposes to

allow the institution to submit a written request to reconsider the

revocation within 20 days of the institution's receipt of the

Secretary's notice, after the revocation takes effect. The

institution's request for reconsideration would have to include written

evidence that the revocation is unwarranted.

If the Secretary decides that the revocation is unwarranted, the

institution's provisional certification would be reinstated in

accordance with the time, terms, and conditions set out in the

institution's original provisional certification. If, after

consideration of the institution's submission, the Secretary denies the

institution's request, the institution would not be permitted to

reapply for participation in the Title IV, HEA programs before at least

18 months after the revocation or the expiration of any debarment or

suspension of the institution, whichever is later. Generally, an

institution whose participation has been terminated because the

institution's provisional certification was revoked would be able to

apply for reinstatement after 18 months. However, a debarment or

suspension under E.O. 12549 or the FAR can last 3 or more years. This

change would eliminate any doubt that a debarred or suspended

institution may apply for reinstatement of the institution's

participation during the period of a debarment or suspension. The

Secretary will not accept any application by a debarred or suspended

institution until the debarment or suspension has expired or been

removed.

Section 668.14 Program Participation Agreement.

The Secretary proposes to redesignate Sec. 668.12 as Sec. 668.14.

This section includes provisions dealing with third-party servicers

that were proposed in the NPRM published on February 17, 1994 (in part

II). The Secretary will not repeat the discussion of those provisions

here.

Current regulations governing program participation agreements

state only the basic terms of participation in the Title IV, HEA

programs and the purpose and scope of the agreement between the

Secretary and individual institutions. All of the specific provisions

of the program participation agreement that are listed in section

487(a) of the HEA are not restated in the regulations. Instead, all the

specific statutory provisions are included in the actual agreement

signed between the Secretary and individual institutions. The Secretary

proposes to revise this section of the regulations to include not only

the new provisions of program participation agreements added by the

Amendments of 1992, but also those provisions previously prescribed by

the HEA but not specifically spelled out in this section. The Secretary

will specify which proposed changes have been made to this section as a

result of the Amendments of 1992 to distinguish them from the

provisions that the Secretary proposes to add that already existed

under the HEA, but have not been codified in regulations.

The additional provisions of program participation agreements

enumerated in the HEA, as well as other changes the Secretary is

proposing in order to clarify what the agreements cover and to reflect

new procedures and statutory language, are described below.

By providing a comprehensive list of the provisions of the basic

program participation agreement in one section, thus making reference

to all the provisions more convenient, the Secretary hopes to

facilitate institutions' understanding of their responsibilities with

respect to initial and continued participation in the Title IV, HEA

programs.

The Secretary proposes to clarify the scope of the program

participation agreement. By signing a program participation agreement,

an institution indicates it understands that its initial or continued

participation in the Title IV, HEA programs is contingent on compliance

with the Student Assistance General Provisions regulations, the

regulations of the specific Title IV, HEA programs in which the

institution participates, and any additional requirements specific to

that institution that the Secretary requires the institution to meet.

Further, the Secretary proposes to make clear the long-standing

practice that the program participation agreement applies to each

branch or other additional location of the institution that meets the

applicable requirements of the Student Assistance General Provisions,

unless the Secretary specifies otherwise.

The Secretary proposes to specify that by entering into a program

participation agreement the institution agrees to comply not only with

statutory and regulatory requirements, but also with any special

arrangement, agreement, or limitation. The proposed expansion of this

provision is necessary to make it clear that if it is to participate in

a Title IV, HEA program, an institution must adhere not only to those

requirements listed in the statute and regulations, but to any

conditions of provisional certification, any limitation imposed on the

institution to which the institution has agreed, or any other special

arrangement that the institution makes pursuant to statutory or

regulatory authority under Title IV of the HEA. The Secretary also

believes it is necessary to clarify the Secretary's longstanding

interpretation that to begin or continue to participate in a Title IV,

HEA program, an institution must comply with each requirement

applicable to that program, not just selected provisions.

The Secretary proposes to add a clause specifically requiring that

institutions that receive Title IV, HEA program funds under an advance

payment method must time their requests for funds to meet immediate

programs needs. The Secretary finds that this addition is necessary

because, in the absence of this specifically stated requirement, too

many institutions have drawn down funds in excess of immediate need,

thereby adding unnecessarily to the Federal debt by causing the

Treasury to incur interest costs on funds given to institutions that

were not required to meet immediate needs.

The Amendments of 1992, as clarified by the Technical Amendments of

1993, has removed the requirement that an institution may not request

from or charge any student a fee for processing or handling the Federal

Student Assistance Report, to conform with other statutory provisions

of the Amendments of 1992 that eliminated previous references to that

report. The Secretary would remove the corresponding regulatory

language from this section. No change has been made to the general

requirement that an institution may not request from or charge any

student a fee for processing or handling any application, form, or data

required to determine a student's eligibility for, and amount of, Title

IV, HEA program assistance.

In accordance with the HEA, an institution must establish and

maintain necessary administrative and fiscal procedures and records to

ensure proper and efficient administration of Title IV, HEA program

funds that the institution receives from the Secretary or from

students. Further, the Amendments of 1992 require that the institution

provide, upon request and in a timely manner, information relating to

its administrative capability and financial responsibility of the

institution to the Secretary, the appropriate State postsecondary

review entity designated under Part H of Title IV of the HEA, any

applicable guaranty agency under the FFEL programs, and the

institution's accrediting agency or agencies. The Secretary proposes to

add to this list of agencies the institution's State agency with legal

jurisdiction over the institution and, where appropriate, the State

agency recognized by the Secretary for the approval of public

postsecondary education as an alternative to accreditation or

preaccreditation. The Secretary believes that it is important that

these agencies also have access to information regarding an

institution's financial responsibility and administrative capability.

The HEA requires that an institution must agree to comply with the

Secretary's regulations governing financial responsibility and

administrative capability. Thus, the Secretary would specify that the

institution must agree to comply with proposed-to-be-redesignated

Secs. 668.15 and 668.16.

The HEA requires that an institution must submit reports, as

directed by the Secretary, to the Secretary, or, as appropriate,

holders of student loans under the Title IV, HEA programs, containing

information required to administer the Title IV, HEA programs. The

Secretary considers this provision to be self-explanatory and proposes

to add this statutory requirement to the regulations without

substantive modifications.

The HEA requires that an institution may not provide any statement

to a student or certification to a lender under the FFEL programs that

qualifies a student for loans in excess of the annual and aggregate

limits for which the student is eligible for in accordance with

statutory requirements. The Secretary proposes to extend this

requirement to include unsubsidized Federal Stafford loans.

The HEA requires that an institution must comply with the consumer

information requirements in subpart D of these regulations. The

Secretary considers this provision to be self-explanatory and proposes

to add this statutory requirement to the regulations without

substantive modifications.

The HEA requires that an institution that advertises job placement

rates as a means of procuring enrollment must make available to

prospective students data necessary to substantiate the truthfulness of

the advertisement. In addition, the Amendments of 1992 require that an

institution make available to prospective students the relevant State

licensing requirements for any job for which an institution's

educational program is designed to prepare prospective students. The

HEA also requires that an institution must inform all eligible

borrowers under the FFEL programs of their eligibility for and the

availability of State grant assistance. The Secretary considers this

provision to be self-explanatory and proposes to add this statutory

requirement to the regulations without substantive modifications.

In order to streamline these regulations, the Secretary proposes to

list in one place in this section all the certifications that an

institution must make to participate in a Title IV, HEA program. The

institution would have to agree in its program participation agreement

to provide these certifications. These certifications include the

following: (1) That the institution has in operation a drug abuse

prevention program accessible to any of the institution's officers,

employees, and students; and (2) establishment of a campus security

policy and disclosure requirements as required by section 485(f) of the

HEA. The Secretary considers this provision to be self-explanatory and

proposes to add this statutory requirement to the regulations without

substantive modifications.

The HEA requires that an institution make available to students who

receive Title IV, HEA program aid based on their ability to benefit

from the training offered a program proven successful in assisting

those students to obtain the recognized equivalent of a high school

diploma. The Secretary considers this provision to be self-explanatory

and proposes to add this statutory requirement to the regulations

without substantive modifications.

The Amendments of 1992 require an institution to agree that it will

not deny any form of Federal financial aid to any eligible student

solely on the grounds that the student is participating in a program of

study abroad approved for credit by the institution. The Secretary

considers this provision to be self-explanatory and proposes to add

this statutory requirement to the regulations without substantive

modifications.

The Amendments of 1992 require that as a condition for

participation any institution seeking to participate for the first time

in the Federal Stafford Loan, Federal PLUS, and Federal SLS programs

and any institution participating in those loan programs that changes

ownership resulting in a change of control or changes its status as a

main campus, branch campus, or an additional location, develop and

implement for two years a default management plan. The Secretary

proposes to allow institutions to develop and implement, or submit if

required by the Secretary, a default management plan developed in

accordance with the default reduction measures described in appendix D

of current regulations to meet this requirement.

The Amendments of 1992 require that an institution must acknowledge

the authority of the Secretary, guaranty agencies and lenders as

defined in 34 CFR part 682, nationally recognized accrediting agencies,

the Secretary of Veterans Affairs, and State postsecondary review

entities designated under subpart 1 of part H of Title IV of the HEA,

to share with each other any information pertaining to the

institution's eligibility for or participation in the Title IV, HEA

programs, or any information on fraud and abuse. The Secretary proposes

to add to this list of agencies the institution's State agency with

legal jurisdiction over the institution and, where appropriate, the

State agency recognized by the Secretary for the approval of public

postsecondary education as an alternative to accreditation or

preaccreditation.

The statutory provision that governs the effect of fraud and

criminal conduct by individuals, agencies, or organizations affiliated

with an institution was discussed in the NPRM published on February 17,

1994 (in part II) that deals with third-party servicers.

The Amendments of 1992 require that an institution must timely and

satisfactorily complete any survey conducted as a part of the

Integrated Postsecondary Education Data System (IPEDS), or other

Federal data collection effort on postsecondary institutions. The

Secretary considers this provision to be self-explanatory and proposes

to add this statutory requirement to the regulations without

substantive modifications.

The Amendments of 1992 spell out the requirements imposed on

participating institutions that offer athletically related student aid.

In order to participate in a Title IV, HEA program, an institution that

offers athletically related student aid must compile annually and have

audited independently at least every 3 years, data on the revenues

derived by the institution from and expenses made by the institution

for the institution's intercollegiate athletics activities. This

compilation must include data on total revenues and total expenses,

revenues and expenses attributable to football, revenues and expenses

attributable to men's basketball, revenues and expenses attributable to

women's basketball, revenues and expenses attributable to all other

men's sports combined, and revenues and expenses attributable to all

other women's sports combined. The compilation must also include data

on the total revenues and operating expenses of the institution. The

institution is required to prepare the compilation within 6 months

after the end of the institution's fiscal year. The institution must

make the compilation and, where allowable by State law, the required

audits, available for inspection by the Secretary and the public.

For purposes of this compilation, the Amendments of 1992 define

revenues from intercollegiate athletics activities allocable to a sport

to include without limitation gate receipts, broadcast revenues,

appearance guarantees and options, concessions, and advertising.

Revenues such as student activities fees or alumni contributions not

allocable to a sport must be included in the calculation of total

revenues only. The Amendments of 1992 define expenses for

intercollegiate athletics activities allocable to a sport to include

without limitation grants-in-aid, salaries, travel, equipment, and

supplies. Expenses such as general and administrative overhead that are

not allocable to a sport must be included in the calculation of total

expenses only. Generally, the Secretary is proposing to restate the

language of the statute in the regulations. However, the Secretary

proposes changes to conform with the NCAA's 1989 Financial Audit

Guidelines. In addition to the statutory definition of what is included

in revenues from intercollegiate athletics activities allocable to a

sport, the Secretary proposes to specify that other conference

distributions in addition to broadcast revenues would also be included.

The Secretary also proposes to specify that revenues such as investment

interest income that are not allocable to a sport would be included in

the calculation of total revenues only.

The Amendments of 1992 provide that an institution may not impose

any penalty on any student because of the student's inability to meet

his or her financial obligations to the institution as a result of the

delayed disbursement of a title IV, HEA program loan due to compliance

with statutory and regulatory requirements for the Title IV, HEA

programs, or delays attributable to the institution. The statute

specifies that those prohibited penalties include the assessment of

late fees, the denial of access to classes, libraries, or other

institutional facilities, or the requirement that the student borrow

additional funds. The Secretary proposes to clarify that the

restriction that institutions may not require a student to borrow

additional funds would apply only to funds for which interest or other

charges are assessed. Therefore, this provision would not apply to any

interest-free loans that the institution might require the student to

borrow until other sources of aid are available.

The Amendments of 1992 provide that an institution may not provide

any commission, bonus, or other incentive payment based directly or

indirectly on success in securing enrollments or financial aid to any

persons or entities engaged in any student recruiting or admission

activities. An institution also may not provide such an incentive

payment to any persons or entities engaged in making decisions

regarding the awarding of student financial assistance. The statute

specifies that this requirement does not apply to the recruitment of

foreign students residing in foreign countries who are not eligible to

receive Federal student assistance. The Secretary proposes to extend

this provision to require that institutions also may not contract with

entities that improperly provide, any commission, bonus, or other

incentive payment as delineated in the statute. The Secretary believes

that this provision is necessary to implement more rigid restrictions

than were seen in the past on the practices of ``commissioned

salespersons.'' The Secretary proposes to repeat the language of the

statute with the addition of this change. The Secretary believes it is

clear that this statutory requirement places rigid restrictions on the

practice of recruitment, admission activities, and the awarding of

student financial assistance.

The Secretary is aware that some institutions pay incentives to

recruiters or admissions office employees based on the success of those

persons in enrolling students, provided that the enrolled students

maintain satisfactory progress for and remain enrolled in the

institution for a specified period of time. The Secretary considers

this practice, which commonly is referred to as an incentive based on

``retention,'' to be an example of an activity that is prohibited by

the statute.

During the negotiated rulemaking sessions, the Secretary's

negotiator requested further examples of prohibited activities. A non-

Federal negotiator offered the following examples that the Secretary

believes are not permitted by the statute. (1) An institution might

offer payments or gifts to students for referring other prospective

students for admission to the institution. (2) An institution might

offer payments or gifts to students on the condition that persons whom

the students referred to the institution were actually admitted and

remained enrolled in the institution for a specified period of time.

(3) An institution might present gifts to alumni, such as coffee mugs,

sporting events tickets, or contributions in their name for referring

students to the institution for admission. (4) An institution might pay

bonuses to Directors of Admissions (or other management personnel)

based on the number of enrollments received during a particular

academic year or the number of students who, after enrolling, remained

at the institution until all financial aid had been received. The

Secretary specifically requests comments on these examples and others

that might serve as useful guidelines in these regulations.

The Amendments of 1992 require that an institution comply with

applicable requirements established by all members of the ``triad'';

i.e., the Secretary, State postsecondary review entities, and

nationally recognized accrediting agencies pursuant to part H of title

IV of the HEA. The Secretary considers this provision to be self-

explanatory and proposes to add this statutory requirement to the

regulations without substantive modifications.

The Amendments of 1992 require that an institution comply with the

institutional refund policy established in accordance with Sec. 668.22.

The Secretary considers this provision to be self-explanatory and

proposes to add this statutory requirement to the regulations without

substantive modifications.

Finally, in addition to the statutory requirements for program

participation agreements, an institution would have to agree to be

liable for all improperly spent or unspent funds received under the

title IV, HEA programs, including funds administered by a third-party

servicer, and refunds that the institution or its servicer may be

required to make. This provision was proposed and discussed in the NPRM

published on February 17, 1994 (in part II) that deals with third-party

servicers.

The Amendments of 1992 and the Technical Amendments of 1993 amended

the HEA to require that an institution that has a change in ownership

resulting in a change in control reestablish institutional eligibility

and undergo a certification review before it may participate in any

title IV, HEA programs. Therefore, the Secretary is proposing to remove

the provision in current regulations that permitted the new

participation agreement of an institution that changed ownership to be

effective on the date of the change of ownership. Instead, under the

proposed regulations, the program participation agreement of an

institution that changes ownership would be effective on the date that

the Secretary signs the agreement, just as any other new program

participation agreement would.

The Secretary proposes to specify that a program participation

agreement expires if the institution's participation ends because: (1)

The institution closes or stops providing educational programs for a

reason other than a normal vacation period or a natural disaster that

directly affects the institution or the institution's students; (2) the

institution loses its institutional eligibility under 34 CFR part 600;

(3) the institution's period of participation, as specified under

Sec. 668.13, expires (that is, the four-year limit on participation,

the limits on participation established pursuant to provisional

certification, or shorter periods established by the Secretary), or the

institution's provisional certification is revoked under Sec. 668.13;

(4) the Secretary determines under Sec. 668.13(c) that the institution

that is applying for certification has jeopardized its ability to

perform its financial responsibilities by not meeting the factors of

financial responsibility under Sec. 668.15 or the standards of

administrative capability under Sec. 668.16 (in the case of an

institution whose participation has been limited or suspended under

subpart G of this part, or voluntarily enters into provisional

certification); or (5) the Secretary receives a notice from the

appropriate SPRE that the institution's participation should be

withdrawn.

These provisions would conform to the provisions in proposed

Sec. 668.26 governing the end of an institution's participation in a

title IV, HEA program. The first of these circumstances listed above is

purely a clarification of existing practice. The last three describe

circumstances mandated by the change made to the HEA by the Amendments

of 1992.

Section 668.15 Factors of Financial Responsibility

The Secretary proposes to redesignate Sec. 668.13 as Sec. 668.15.

This section includes provisions dealing with third-party servicers

that were proposed in the NPRM published on February 17, 1994 (in part

II). The Secretary will not repeat the discussion of those provisions

here. However, this third-party servicer NPRM proposed to apply the

general standards of financial responsibility that are proposed in this

NPRM to third-party servicers that contract with lenders or guaranty

agencies to administer any aspect of the title IV, HEA programs.

General

Section 487 of the HEA requires the Secretary to develop

regulations to determine the financial responsibility of an institution

as a part of the Secretary's determination that an institution is able

to participate in a title IV, HEA program. Section 498 of the HEA

mandates some of the standards that the Secretary must use in making a

determination of financial responsibility. In general, section 498 of

the HEA adopted, with modifications, the standards used by the

Secretary in current Sec. 668.13 of the Student Assistance General

Provisions regulations. The Secretary proposes to require an

institution to demonstrate that it is financially responsible under the

proposed requirements in this section.

General Standards of Financial Responsibility

In paragraph (b) of proposed Sec. 668.15, the Secretary would list

general standards of financial responsibility. The first six standards

are applicable to all institutions. Section 498(c)(1) of the HEA

specifies that an institution's financial responsibility must be

determined based on whether the institution is able to provide the

services that the institution claims to provide, to provide

administrative resources necessary to comply with Title IV, HEA program

requirements, and to meet all of the institution's financial

obligations, including refunds and liabilities and debts incurred in

programs administered by the Secretary. These standards were adopted

from current regulations and the Secretary proposes to continue to use

them unchanged.

The Secretary proposes to add to the list of proposed financial

responsibility requirements for all institutions the requirement that

an institution be current on any debt service payments. An institution

normally has variable costs that fluctuate to meet the demand created

by increasing or decreasing volume in those costs such as those for

educational supplies and expenses and instructor salaries associated

with educating an increasing or decreasing number of students. Debt

service represents a fixed cost, such as mortgage or lease payments, to

the institution that generally does not fluctuate with that volume.

Thus, in a situation in which an institution is experiencing a decline

in revenue due to a decrease in new enrollments, debt service would

remain unchanged. The institution's flexibility to deal financially

with the decline is reduced because management typically is unable to

adjust the amount of payment for debt service without the consent of

the creditor to whom the debt is owed. This situation places some

degree of control outside the institution and beyond the scope of

management's ability to deal with a deteriorating situation by reducing

costs. Furthermore, a failure to meet debt service payments might

precipitate collective action on the part of creditors to place the

institution in an involuntary liquidation situation under Federal

bankruptcy laws.

Alternatively, a growing institution usually must take on more debt

to fund its operations. Should the growth fail to continue, the

institution might be unable to service the increasing debt service

associated with its expansion. Thus, the Secretary believes an

institution's failure to remain current on its debt service payments

would be a strong indicator of the institution's inability to meet its

financial obligations.

Section 498(c)(5) of the HEA provides that the Secretary must

establish requirements for an institution to maintain sufficient cash

reserves to ensure repayment of any required refunds. Section 498(c)(5)

of the HEA also provides for an exemption to this requirement which is

discussed below under exceptions to the general standards of financial

responsibility. The Secretary proposes to require an institution to

maintain, at all times, a minimum cash reserve of at least 10 percent

of the institution's total deferred tuition income at the end of the

institution's most recent fiscal year for repayment of refunds. The

cash reserve would have to be maintained in a cash reserve account and

would have to consist of cash or cash equivalents, as those terms are

defined in accordance with generally acceptable accounting principles.

The Secretary believes that it would be unreasonable and unduly

burdensome to require an institution to calculate the percentage of its

cash reserve on a continual basis. Accordingly, the Secretary would

require an institution to determine its total deferred income at the

end of the institution's fiscal year and calculate the percentage based

on that total. Once that percentage is determined, the institution

would have to maintain that amount of cash reserve at all times until a

new calculation is performed at the end of the institution's subsequent

fiscal year. The calculation would be based on the institution's total

deferred tuition income because deferred tuition income is an indicator

of the value of services that the institution will provide for the

coming year. The Secretary requests comment on a comparable way to

determine the appropriate level for the cash reserve.

Ten percent of this amount represents roughly the equivalent of a

month's worth of an institution's revenue. The Secretary considers this

amount a reasonable amount for an institution to have available to pay

refunds in the event of the institution's precipitous closure.

Generally, under this proposal, an institution would demonstrate its

compliance with this provision once a year with the submission of the

institution's audited financial statements. However, because an

institution would be expected to maintain this cash reserve at all

times, the Secretary would reserve the right to evaluate an

institution's compliance with the requirement at any time. Finally, the

proposal to allow cash equivalents to be included in the cash reserve

is consistent with generally accepted accounting principles.

Finally, the Secretary proposes that, in order to be financially

responsible, an institution must not have as part of its audit report

for its most recently completed fiscal year any of the following.

First, the institution's audit would not contain a statement by the

accountant acknowledging substantial doubt about the institution's

ability to continue operating as a going concern. A ``going concern''

statement is a professional opinion rendered by an independent

certified public accountant, commenting on the institution's unstable

financial condition and informing the reader of the possibility that

the institution may not survive the coming fiscal year. Although such a

``going concern'' statement is rarely issued, its presence attests to a

concern held by the auditor that the institution's ability to continue

operating is uncertain. The Secretary believes that if an auditor,

after close examination of the institution's operations, concludes that

such a statement is warranted, this is cause for the Department to

protect its interest in the Title IV, HEA program funds administered by

the institution by requiring the institution to be subject to the

appropriate remedies for establishing financial responsibility, or to

be subject to provisional certification or the proceedings in subpart G

of these regulations.

Second, the institution's audit could not contain a finding of

unauthorized use of donor restricted net assets to meet current

operating expenses. Unauthorized use of donor restricted net assets is

a violation of the restrictions placed on donations by the donor. Any

donor-restricted funds are placed in an endowment fund to be used for

specific purposes, such as providing scholarships. Donor restricted net

assets are most commonly found at nonprofit institutions. The Secretary

believes that if this money is transferred to current funds or total

net assets for current operating expenses, this is not only an

indication of extremely impaired cash flow, but also a violation of an

institution's responsibility as a fiduciary of Title IV, HEA program

funds.

Third, the institution's audit could not contain a disclaimed or

adverse opinion by the accountant. A disclaimed or adverse opinion is

an indicator that the auditor is unable to perform a complete audit of

the institution with the assurance that the audit presents a reliable

presentation of the institution's financial condition. An audit

submitted with such a disclaimer or limitation would cause the

institution's financial report to be rejected by the Secretary. Such a

statement in the auditor's report is an indication that the financial

statement was not prepared in accordance with generally accepted

accounting principles as required in current regulations.

The statute authorizes the Secretary to prescribe criteria for

evaluating operating losses, net worth, asset to liabilities ratios and

operating fund deficits. The Secretary's goal in developing these

proposed regulations is to ensure that institutions are capable to

operate as a fiduciary of Federal funds based on a sufficient financial

base to properly provide education and meet the institution's financial

obligations. The Secretary, therefore, proposes to amend the current

factors of financial responsibility section to establish new financial

responsibility standards as a means of further refining the above

requirements.

The Secretary proposes that, as in the past, failure to meet any

one of the factors may result in initiation of an administrative

proceeding to limit, suspend, fine or terminate an institution. Because

some of these proposed factors are more stringent than those currently

found in the regulations, the Secretary recognizes that an institution

may need a sufficient period of time to adjust its operations in order

to come into compliance with these proposed factors, if they are

adopted. Under this proposal, the Secretary may provisionally certify

institutions that did not meet these proposed standards to provide them

with this additional period of time to comply, provided that the

institution shows that it would have met the current standards.

The Technical Amendments of 1993 require the Secretary to take into

account an institution's total financial circumstances in making a

determination of an institution's financial responsibility. The

Secretary believes that these proposed factors evaluate, both directly

and indirectly, the overall soundness of an institution's financial

condition for the period covered by its audited financial statements

and, therefore, take into account an institution's total financial

condition as required by the Technical Amendments of 1993.

The Technical Amendments of 1993 require that criteria developed

for the determination of an institution's financial responsibility take

into account any differences in generally accepted accounting

principles, including required financial statements, that are

applicable to for-profit and nonprofit institutions. Therefore, in

addition to general standards that all institutions would be required

to meet, the Secretary has proposed standards applicable specifically

to for-profit, nonprofit, and public institutions that the Secretary

believes indicate an equal level of financial responsibility. At the

suggestion of some of the negotiators, the proposed specific standards

of financial responsibility have been organized by type of institution;

i.e., for-profit, nonprofit, and public.

Due to differences in legal and reporting entity, mission, and

accounting format for nonprofit entities and for profit-seeking

entities, there are differing tests of financial responsibility to be

applied. Evaluating a nonprofit entity's overall financial condition is

more complicated because there is no commonly accepted standard of

acceptable financial condition. Generally, a measure of an

institution's financial condition is a measure of an institution's

solvency, or the ability of an institution to adequately cover its

expenditures with revenues. In determining an institution's financial

condition, the Secretary believes it is necessary to look at the

institution's short-term solvency and long-term solvency, which is the

ability of an institution to support an adequate level of services over

the long run, withstanding economic disruption and meeting changing

demands for services.

With accounting for for-profit entities, analysis of financial

statements provides an understanding of an institution's financial

condition through comparisons of key financial ratios that measure the

institution's ability to remain solvent while continuing to provide

educational services at acceptable levels. Examination of financial

information from nonprofit entities requires a review of other

organizational factors that measure the ability of the institution to

provide educational services using a larger and more complex source of

funds. It is therefore necessary to differentiate the standards that

are applicable to profit-seeking entities from the standards that are

applicable to nonprofit entities.

The Secretary will first address the specific standards for for-

profit institutions.

The Secretary proposes to require that a for-profit institution

have, at the end of its latest fiscal year, a ratio of current assets

to current liabilities of at least 1.25:1. One commonly used means of

determining whether or not the institution has sufficient short-term

solvency is use of the ratio of current assets to current liabilities.

For the past fourteen years the Department has used a current assets to

current liabilities ratio of at least 1:1 as an indicator of financial

responsibility. This means that the institution has current assets at

least equal to their current liabilities. In theory, this would

indicate that an institution has sufficient resources to handle not

only debt service, but also other liabilities for at least the coming

fiscal year. The higher the amount of assets, the better the liquidity

position of the institution and, therefore, the better the institution

will be able to handle unforeseen economic conditions. The Secretary

believes that the current 1:1 benchmark offers little or no indication

of adequate short-term solvency. A 1.25:1 benchmark has, therefore,

been proposed for for-profit institutions. Cash is now required to be a

component. The Secretary believes that the proposed increase in current

assets will help to ensure that institutions have sufficient resources

to provide worthwhile education and training.

The Secretary is proposing a higher ratio of current assets to

current liabilities ratio for for-profit institutions than for

nonprofit institutions. The Secretary believes that a higher current

ratio is necessary for for-profit institutions because they will be

less likely, in the event of hampered liquidity, to draw on fund-

raising as a source of cash. This rationale is discussed later as part

of the discussion of the proposed ratio of current assets to current

liabilities for nonprofit institutions.

The Secretary proposes to exclude from the calculation of this

ratio for for-profit institutions, uncollateralized loans receivable

from owners and related parties. Uncollateralized related party loans

are loans that have been made to affiliates, officers, or employees and

have not been secured by tangible assets. In accordance with Accounting

Research Bulletin 43 (ARB43), chapter 3A, paragraph 6, the concept of

current assets contemplates the exclusion from that classification of

such resources as ``* * * (c) receivables arising from unusual

transactions (such as the sale of capital assets, or loans or advances

to affiliates, officers, or employees) that are not expected to be

received within twelve (12) months''. In the event that certain

financial statements present these types of loans on the balance sheet,

they will be disregarded by the Secretary in computation of the current

ratio.

Further, because the proposed cash reserve requirement may cause a

portion of the institution's cash reserves to be classified as a

restricted asset, which would, under generally accepted accounting

principles, be excluded from classification as current assets, the

Secretary's proposal specifies that, for for-profit institutions, the

cash reserves may be included in the institution's current assets in

calculating the institution's current assets to current liabilities

ratio. The Secretary believes that it is appropriate to permit for-

profit institutions to treat the cash reserves as current assets

because the funds are held for the benefit of the students, and

inclusion of those amounts toward demonstrating a 1.25:1 current ratio

still leaves the institution with sufficient unrestricted assets to pay

all current expenses.

The Secretary proposes that a for-profit institution is financially

responsible if it has not had operating losses over both of its two

latest fiscal years that cause an operating loss exceeding 10 percent

of the institution's previous year's tangible net worth for its latest

fiscal year. While it may not be unusual for an institution to record a

loss in any fiscal year, this loss is not harmful so long as the loss

is not excessive, is not indicative of a deteriorating trend in the

institution's financial condition, and the institution otherwise meets

the factors substantiating its financial strength. The Secretary

proposes to define an operating loss, for purposes of these provisions,

as total net income minus extraordinary gains or losses, income or

losses from discontinued operations, prior period adjustments, and the

cumulative effect of changes in accounting principle, estimate, or

reporting entity. The Secretary proposes that the calculation of

tangible net worth shall exclude all assets defined as intangible in

accordance with generally accepted accounting principles. The Secretary

believes this standard will measure whether a profit-seeking entity is

operating from current cash flow to the extent possible. The aggregate

residual effect of these activities on the organization's individual

net assets is represented, along with any interfund transfers that may

have taken place during the period.

The Secretary proposes that a for-profit institution is financially

responsible if it had, for its latest fiscal year, a positive tangible

net worth. The Secretary proposes that, for purposes of this section, a

positive tangible net worth occurs when the institution's tangible

assets exceed its liabilities. Further, the Secretary proposes that the

calculation of tangible net worth shall exclude all assets defined as

intangible in accordance with generally accepted accounting principles.

In applying this proposed standard, the Secretary could consider the

effect of extraordinary gains or losses resulting from unusual and

infrequent events, and could take into consideration the cumulative

effect of changes in accounting principle, estimate or reporting entity

to the extent that such a change results in a more accurate

representation of the institution's financial position in accordance

with generally accepted accounting principles. For the past fourteen

years, the Department has had a standard for net worth that states that

an institution is not financially responsible if it has a deficit net

worth (i.e., the institution's liabilities exceed its assets.), a

measure of long-term solvency. Therefore, an institution with a net

worth of zero meets this current requirement. The proposed change from

penalizing a deficit net worth to requiring a positive net worth is

only a technical change in form that should affect few, if any

institutions.

By excluding all assets classified as intangible, all assets such

as goodwill, organization costs, and covenants-not-to-compete, which

have little market value in the determination of an institution's

overall solvency will be eliminated in the calculation of net worth. In

purchasing a business, the new owner pays an amount and allocates the

market value to individual tangible assets in order to prepare

financial statements. After applying the proper market value to the

various assets, any residual amount that appears on the institution's

balance sheet as goodwill, organization costs, or covenant-not-to-

compete, is classified as an intangible asset.

It is the Secretary's intent to identify those institutions that do

not have sufficient capital assets. For example, businesses that

operate on month-to-month leases with minimum capital actually invested

in the business are a potential risk to students, and ultimately to the

taxpayers in terms of possible collapse and bailout. In these cases

loans to students are often automatically discharged in accordance with

provisions in the HEA. Preventing institutions that have no real assets

from participating in the programs should enhance the gatekeeping

process.

In the case of nonprofit institutions, the Secretary has developed

standards in accordance with Statement of Financial Accounting

Standards No. 117 (FAS 117) that was issued in June 1993 by the

Financial Accounting Standards Board (FASB). FAS 117 altered the

reporting format for not-for-profit organizations after the negotiated

rulemaking process was already well underway. FAS 117 is effective for

annual financial statements issued for fiscal years beginning after

December 15, 1994, except for organizations with less than $5 million

in total assets and less than $1 million in annual expenses. For those

organizations, the Statement is effective for fiscal years beginning

after December 15, 1995 with earlier application encouraged.

The Secretary proposes to require a nonprofit institution to

prepare a classified statement of financial position in accordance with

generally accepted accounting principles to provide the Secretary with

the financial information necessary to determine the institution's

financial responsibility under these proposed regulations. The

Secretary proposes that, alternatively, a nonprofit institution could

provide this information as footnotes to the audit. Although FAS 117

does not require a nonprofit institution to submit a classified

statement of financial position prior to published implementation

dates, it does not prohibit the institution from doing so. The

Secretary notes that a financial statement that is not classified is

not structured to provide the financial information necessary for the

Secretary to determine an institution's compliance with these proposed

regulations; however, the information could be included as footnotes to

the audit.

The Secretary proposes that a nonprofit institution is not

financially responsible if it cannot demonstrate, at the end of its

latest fiscal year, a ratio of current assets to current liabilities of

at least 1:1. The Secretary proposes to not permit a nonprofit

institution to include the cash reserves in the institution's current

assets. The Secretary believes that, because the proposed current

assets to current liabilities ratio for a nonprofit institution is 1:1,

if the institution used designated reserve funds to meet this ratio,

there would be no assurance of solvency.

The importance of a higher current ratio for for-profit

institutions lies in the fact that they are not as likely to be able to

draw on fund raising as a source of cash in the event of hampered

liquidity because donors are less likely to contribute funds to a for-

profit institution where those contributions would not be tax

deductible. Many nonprofit institutions have sufficient support in the

community and from friends and alumni who are willing to donate to the

institution. The cash intake of for-profit institutions is therefore

limited to cash generated through profitability, whereas nonprofit

institutions have an additional source of cash. Endowments, even when

restricted to functions such as providing scholarships, are awarded and

may be taken into cash from operations. Consistent profitable

operations result in a better liquidity position for for-profit

institutions, whereas consistent profitable operations are not

necessary for a nonprofit to remain viable. In addition, it is inherent

in a nonprofit institution that its final cash position not reflect a

profit. In the nonprofit industry, the financial manager has limited

authority. The financial manager may make recommendations, but the

ultimate authority lies with the governing board. There is, therefore,

less control in the hands of financial managers and a corresponding

decrease in their ability to control a liquidity situation.

Lack of liquidity means that the institution is unable to service

its current debt. This can lead to the forced sale of long-term

investments and assets. To the owners of an institution, a lack of

liquidity will mean reduced profitability or it may mean loss of

control or loss of the entire capital investment. To creditors of the

enterprise, it means slow collection of principal and interest due or

even loss of the amounts due them. Students of these institutions can

also be affected by a short-term poor financial condition. These

effects may take the form of inability of the institution to perform

their contract, inability to make refunds due to students or lenders,

or the loss of supplier relationships. Suppliers are interested in an

institution's liquidity position, and if it is found to be inadequate,

it may cease to do business with the institution.

The Secretary proposes that a nonprofit institution is not

financially responsible if it has had a decrease in total net assets at

the end of its latest fiscal year of such significance that, if

continued, would result in a ratio current assets to current

liabilities of less than 1:1. Under this proposal, the Secretary could

consider the effect of extraordinary gains or losses resulting from

unusual and infrequent events, and could take into consideration the

cumulative effect of a change in accounting principle, estimate or

reporting entity to the extent that such a change results in a more

accurate representation of the institution's financial position in

accordance with generally accepted accounting principles. For purposes

of this proposed analysis, the Secretary could exclude unrealized gains

and losses on investments that have been reported as changes in

unrestricted net assets. The standard was revised to reflect the

changes brought about with the issuance of FASB 117 and in order to

provide parity with the for-profit institutions. The concept of net

worth, as it applies to profit-seeking entities, does not exist for a

not-for-profit entity. Upon implementation of FASB 117, fund accounting

will no longer be used for colleges and universities, but these

entities will adopt a format that is more similar to the format for-

profit entities have been using. The term ``fund balance'' will no

longer apply, but will be replaced by total net assets, divided into

unrestricted, temporarily restricted and permanently restricted assets.

For institutions not required to implement FAS 117 prior to the

effective date of these regulations, the regulations applying to

nonprofits currently found in 34 CFR 668.13(c), ``the institution shall

not have a deficit current unrestricted fund balance'', will remain in

effect until the institution adopts FAS 117.

The Secretary requests comments on whether the Secretary should

determine a nonprofit institution to be financially responsible even if

it does not meet these requirements if the institution has an

acceptable ``bond rating''. The Secretary suggests that a type of

acceptable bond rating may be a current general obligation or general

obligation equivalent debt rating (because such a rating is backed by

the full resources of the institution) by a nationally recognized debt

rating organization, approved by the Secretary, that is at least

investment grade.

The Secretary proposes that a public institution is financially

responsible only if the institution has its liabilities backed by the

full faith and credit of the State, or by an equivalent government. The

Secretary is aware that accounting principles for public institutions

differ from those for for-profit and nonprofit institutions. The

Secretary solicits comments on other acceptable measures of a public

institution's financial responsibility that take the applicable

accounting principles into account.

Past Performance of an Institution or Persons Affiliated With An

Institution

The Secretary proposes to remove from the factors of financial

responsibility the provisions in current Sec. 668.13 (c)(4) and (d)(2)

governing the effect on an institution's financial responsibility of

criminal conduct and fraud involving Federal funds. Those provisions

have been superseded by a similar statutory provision that is addressed

in the discussion on proposed Sec. 668.14 governing program

participation agreements.

Under proposed Sec. 668.15(c)(2), an institution would not be

considered financially responsible, despite meeting all other

requirements of this proposed section, if: (1) The institution has been

limited, suspended, terminated, or entered into a settlement agreement,

to resolve such an action by the Secretary or a guaranty agency within

the preceding five years; (2) the institution had an audit finding

during its two most recent audits, or a program review finding during

its two most recent program reviews, that resulted in the institution's

being required to repay an amount greater than five percent of the

Title IV, HEA funds that the institution received for any award year

covered by the audit or the program review; or (3) the institution

failed to address satisfactorily any compliance problems identified in

program review or audit reports based upon a final decision of the

Secretary.

The consequences of this proposed provision are described more

fully earlier in this preamble in the discussion on provisional

certification. Essentially, institutions that fall into one of these

categories not only would not be considered financially responsible,

but could not be provisionally certified without the submission of

certain financial guarantees or personal assumptions of liability

arising from participation in the Title IV, HEA programs.

Exceptions to the General Standards of Financial Responsibility

The Amendments of 1992, as amended by the Technical Amendments of

1993, provide that the Secretary shall determine an institution to be

financially responsible even though it does not meet certain general

standards of financial responsibility, under various conditions.

Section 498(c)(5)(B) of the HEA provides that the Secretary shall

establish a process whereby an institution is exempt from the cash

reserve requirement if the institution is located in, and is legally

authorized to operate within, a State that has a tuition recovery fund

that ensures that the institution is able to pay all required refunds

and the institution contributes to that tuition recovery fund. The

Secretary proposes that an institution is exempt from the proposed cash

reserve requirement if it meets these conditions; however, the

Secretary proposes to stipulate that a State's tuition recovery fund

must be acceptable to the Secretary. The Secretary would like to ensure

that a State's tuition recovery fund truly has the resources to ensure

payment of all required refunds if necessary. To this end, the

Secretary would expect States to provide as much information as

possible to demonstrate that their tuition recovery fund can pay all

required refunds on behalf of an institution that closed precipitously.

The Secretary invites comment on what specific standards should be used

to measure the acceptability of a State's tuition recovery fund.

Section 498(c)(3) of the HEA provides that an institution is

financially responsible even though it does not meet the other general

standards of financial responsibility, under the following

circumstances. First, an institution that is not financially

responsible under the general standards of financial responsibility

(except the cash reserve requirement) is financially responsible if the

institution submits to the Secretary third-party financial guarantees,

such as performance bonds or letters of credit payable to the

Secretary, that equal not less than one-half of the annual potential

Title IV, HEA program liabilities of the institution. The Secretary

proposes that a letter of credit that is payable to the Secretary and

effective for a period of time as determined by the Secretary would be

the only acceptable type of third-party guarantee for this requirement.

The determination by the Secretary that payment from a third-party

guarantee requires that funds become immediately available to make

refunds or to reimburse the Secretary for debts incurred in the

programs. It has been the Secretary's experience that letters of credit

are the only method by which funds do become immediately available;

however, the Secretary requests comments on other standard forms of

publicly guaranteed security that would provide the same level of

security to the Secretary. The Secretary notes that an institution is

liable for all mishandled Title IV, HEA program funds that it receives.

Further, the Secretary believes that the total Title IV, HEA program

funds received by an institution during the last complete award year is

the best indicator of the amount of Title IV, HEA program assistance

that the institution will receive for the next award year. Therefore,

the Secretary proposes to require an institution to submit a letter of

credit equal to not less than one-half of the Title IV, HEA program

funds received by the institution during the last complete award year

for which figures are available in order to meet this requirement.

Second, the Technical Amendments of 1993 provide that an

institution that is not financially responsible under the general

standards of financial responsibility (except the cash reserve

requirement) is financially responsible if it establishes to the

satisfaction of the Secretary, with the support of a financial

statement audited by an independent certified accountant with generally

accepted accounting standards, that the institution has sufficient

resources to ensure against the precipitous closure of the institution,

including the ability to meet all of its financial obligations,

including refunds of institutional charges and repayments to the

Secretary for liabilities and debts incurred in programs administered

by the Secretary. The Secretary proposes to restate the statute,

modifying it only to propose to require that the financial statement be

submitted in accordance with the proposed requirements for

documentation of financial responsibility that will be discussed later.

The Technical Amendments of 1993 further provide that an

institution is not required to meet the general standards of financial

responsibility (except for the cash reserve requirement) if the

institution is an institution that provides a 2-year or 4-year

educational program for which the institution awards an associate or

baccalaureate degree that demonstrates to the satisfaction of the

Secretary that there is not reasonable doubt as to its continued

solvency and ability to deliver quality educational services, it is

current in its payment of all current liabilities, including student

refunds, repayments to the Secretary, payroll, and payment of trade

creditors and withholding taxes, and it has substantial equity in

school-occupied facilities, the acquisition of which was the direct

cause of its failure to meet the current operating ratio requirement.

The Secretary proposes to restate the statute without modification.

Documentation of Financial Responsibility

Section 498(c)(4) of the HEA provides that the determination of an

institution's financial responsibility be based on an audited and

certified financial statement of the institution or, where appropriate,

its parent corporation, conducted by a qualified independent

organization or person in accordance with standards established by the

American Institute of Certified Public Accountants. The statement must

be submitted to the Secretary when the institution is applying to begin

or continue participation in the Title IV, HEA programs. The statute

further provides that the Secretary may require the submission of

additional audits if the first submission does not establish compliance

with the general standards of financial responsibility. Although

audited financial statements should be rendered in a uniform manner,

there is some leeway with regards to contents of the statements. The

Secretary proposes to require institutions to submit financial

statements on an annual basis within four months after the end of the

institution's fiscal year. The Secretary believes that four months from

the end of an institution's fiscal year is a sufficient period of time

for an institution to submit a financial statement. The Secretary also

clarifies that, upon request, the institution must provide or otherwise

make available the accountant's work papers in order to ensure that all

information relevant to preparing an audited financial statement is

readily available. Institutions are already required to provide access

to such information pursuant to current Sec. 668.23, and the Secretary

proposes to reference that access to records in this proposed section.

The Secretary proposes that an institution may be granted a filing

extension to an institution upon a showing of good cause. The Secretary

intends that this extension would be granted on an infrequent basis, as

the Secretary believes it is imperative to have the financial

information from the institution that most accurately reflects the

current financial situation of the institution.

Section 668.16 Standards of Administrative Capability

The Secretary proposes to redesignate Sec. 668.14 as Sec. 668.16.

In matters not governed by specific provisions, section

487(c)(1)(B) of the HEA provides for the establishment of standards of

administrative capability for participating institutions that include

any matter the Secretary deems necessary for the sound administration

of the Title IV, HEA programs. Section 498(d) of the HEA, which was

added by the Amendments of 1992, authorizes the Secretary to establish

procedures and requirements relating to administrative capability,

including the consideration of past performance of institutions or

individuals in control of those institutions and maintenance of

records. In addition, section 498(d) authorizes the Secretary to

establish other reasonable procedures that will contribute to ensuring

that institutions will be administratively capable.

Given this framework, the Secretary proposes to strengthen and

modify the administrative capability standards in the current

regulations by making significant, substantive changes to the

administrative standards as well as some technical changes; the

significant proposed changes to the current regulations are described

below.

The Secretary proposes to clarify the Secretary's current principle

that an institution must demonstrate that it is capable of meeting each

of the administrative standards in this section to be considered

administratively capable. During negotiated rulemaking, alternatives to

requiring that institutions meet each administrative standard were

discussed. Among the options considered were that the various factors

be ``weighted,'' i.e., the Secretary would identify which factors he

considered to be the most critical and would incur the greatest penalty

if they were not met. Some of the negotiators suggested that the

various factors be used only as indicators of capability; that is, the

Secretary would be required to review each institution that did not

comply with one or more standard to determine the seriousness of

noncompliance. However, the negotiators did not reach consensus on an

approach. Therefore, the Secretary is proposing that to be fully

certified as meeting the standards in this section (as well as the

other standards in Subpart B of these regulations) an institution must

demonstrate that it is administratively capable by meeting all the

administrative standards. An institution that fails to demonstrate

compliance with one or two administrative standards could be certified

provisionally (see the earlier discussion on provisional certification)

if the Secretary were to determine the institution capable of meeting

all the standards within a specific time period and that the

noncompliance did not necessitate taking a stronger sanction such as a

fine, limitation, suspension, or termination proceeding against the

institution.

For example, an initial applicant would not be able to demonstrate

compliance with all standards prior to participation. However, the

Secretary expects such an institution to demonstrate that it is capable

of complying with all the standards. Therefore, the Secretary currently

provisionally certifies an initial applicant if the Secretary

determines that the applicant is capable of meeting the current

standards within a specified period of time. The Secretary will

continue this practice, using any additional standards proposed in this

section if they are adopted in final.

The Secretary proposes to make explicit the requirement that, to be

considered administratively capable, an institution must administer all

the Title IV, HEA programs in which it participates in accordance with

all applicable statutory and regulatory provisions and special

arrangements, agreements, and limitations. This expectation has been

implicit. However, the Secretary believes it is important to lay out

this standard together with all the other administrative standards.

The Secretary proposes to clarify what is meant by a capable

individual who is responsible for administering the Title IV, HEA

programs. It is important for each institution that is currently

participating or seeking to participate in the Title IV, HEA programs

to demonstrate that it has staff who are capable of administering the

programs properly. While obviously a number of factors should be

considered in determining what constitutes ``capable,'' the Secretary

believes that one factor that should be addressed in regulations is

whether a financial aid administrator has been certified by his or her

State to have that capability. This factor would apply in a State that

requires financial aid administrators to be certified. The Secretary

also proposes to consider whether an individual has successfully

completed Title IV, HEA program training that the Secretary has

provided or approved. The Secretary is aware that some professional

organizations provide high caliber training in various aspects of the

administration of the Title IV, HEA programs and wishes to allow for

acceptance of that outside training to meet this requirement in the

future. The Secretary welcomes comments on what elements and safeguards

should be present in an acceptable training program for financial aid

administrators. While adequate experience and training are major

considerations in evaluating compliance with this standard, the

Secretary welcomes suggestions regarding any other appropriate factors

that the Department of Education should take into account in

determining an individual's capability.

The Secretary proposes to clarify the factors that are considered

in determining whether a financial aid office is adequately staffed.

The Secretary proposes to specify that in looking at the amount of

funds administered by the institution, the Secretary would also

consider the number of students who receive any student financial

assistance at the institution as it has a direct bearing on whether an

office is adequately staffed. The Secretary also proposes to add

consideration of the degree of office automation in the financial aid

office. While the Secretary has always considered the extent to which

financial aid processing is automated in assessing the adequacy of

financial aid offices, the Secretary believes it is helpful to

acknowledge specifically in the regulations the bearing the degree of

office automation has on the staffing levels of financial aid offices.

During the negotiated rulemaking sessions, discussions were held

regarding the possible development of specific staffing levels, such as

ratios of financial aid staff to the number of financial aid recipients

at an institution, for determining the adequacy of the financial aid

office of an institution participating in the Title IV, HEA programs

for the first time, an institution that undergoes a change of ownership

resulting in a change of control, and an institution that has exhibited

administrative difficulty with other standards in this section. The

Secretary believes that it is not necessary to prescribe specific

staffing levels for participating institutions that have not

experienced administrative problems. However, the Secretary agreed to

solicit comments on the need for an additional method to assess

staffing levels of other institutions.

An institution participating in the Title IV, HEA programs for the

first time has neither the experience in dealing with large numbers of

financial aid recipients nor a record of administering those programs

that can be evaluated. During discussions at the negotiated rulemaking

session, it was suggested that it might be necessary to prescribe a

specific number of staff for the institution's financial aid office

that could serve as a guide for determining whether the institution can

handle the volume of financial aid applications and funds it expects to

receive. This standard would be required until the Secretary is able to

judge the institution's actual administration of the programs.

Similarly, there is no assurance that an institution that changes

ownership will operate with the same staff and procedures and at the

same level of funding as was the case under the previous ownership.

Thus, that institution's former track record could not be relied upon

to predict its continued administrative capability and there might be a

need to be able to evaluate the adequacy of current or anticipated

staffing levels using specific numbers or ratios, just as the

Department would evaluate those of a new participating institution.

Finally, if an institution has documented problems or indicators of

trouble in administering the Title IV, HEA programs, these problems

could well be caused by inadequate staffing levels in the institution's

financial aid office. Requirements for financial aid staff to be

maintained at specific levels might need to be imposed upon the

institution. To address the problems and administer the Title IV, HEA

programs correctly, it is logical to expect an institution to meet

minimum staffing levels that might be adopted.

The Secretary solicits comments on other ways of measuring staff

adequacy at newly participating institutions, institutions that change

ownership resulting in a change of control and participating

institutions with documented administrative problems as well as any

other categories of institutions that should be subject to requirements

for specific staffing levels. The Secretary further invites comment on

how such considerations as the size of the institution, and the volume

of Title IV, HEA program funds administered by the institution should

determine the number or ratio of financial aid staff that the Secretary

should prescribe. For example, the Secretary wishes to know whether a

reasonable ratio of staff to applicants or recipients can be

established, and, if so, what that ratio might be. The Secretary

understands the difficulty inherent in strict application of a

quantitative formula; nevertheless, concern was expressed at the

negotiated rulemaking sessions about having an adequate basis on which

to make fair, worthwhile, and consistent judgments of administrative

capability. The Secretary recognizes that appropriate staffing levels

must include staff not only in the financial aid office but also in the

business office or other offices within an institution, and that the

use of third-party servicers and office automation have a bearing on

those levels. The Secretary asks commenters to address these factors in

their recommendations.

The Secretary proposes to require that to be considered

administratively capable, an institution have written procedures, or

other written information covering, at a minimum, the nature and

frequency of communication of information among all the offices that

have an impact on the administration of the Title IV, HEA programs and

the responsibilities of various offices with respect to the awarding

and delivery of Title IV, HEA program funds and reports to the

Secretary. The Secretary encourages institutions to have specific

written procedures where possible, preferably in procedural manuals,

for this purpose. However, the Secretary recognizes that some of the

information might be found in catalogs, student or administrative

handbooks, or other sources. The Secretary is proposing to add these

provisions because audits and program reviews of Title IV, HEA programs

administered by institutions have shown that lack of written procedures

in these key areas is frequently a contributing factor to a lack of

proper controls, resulting in overawards and inadequate accounting of

expenditures. To ensure that only eligible students receive funds and

in the correct amount, and that borrowers are tracked accurately and

timely, it is essential that each institution be clear about how and

when pertinent information is transmitted from one office to another.

The proposed addition to the regulations includes examples of the types

of information to be transmitted. Similarly, it is critical that each

office that is responsible for the approval and disbursement or

delivery of Title IV, HEA funds have in writing that office's

responsibilities and reporting requirements.

The Secretary proposes to clarify what constitutes division of the

authorizing and disbursing or delivering functions by adding an

example. In the past, there has been virtually no real separation of

these duties in some institutions; this situation has presented an

opportunity for significant abuse. It is important that two different

individuals authorize and disburse or deliver payment, and that an

individual performing one of these functions not have control over the

work activities of the person or persons performing the other. To guard

against collusion, it is also critical that the individuals not be

members of the same family or exercise substantial control over the

institution through a combined ownership interest in the institution.

The terms substantial control and ownership interest are currently

defined in Sec. 668.13. The Secretary considers two individuals to

exercise substantial control through a ``combined'' ownership interest

if the individuals hold together at least a 25 percent ownership

interest in the institution. Thus, an institution would be precluded

from having one individual with a 10 percent ownership interest who

awards Title IV, HEA program assistance and another individual with a

15 percent ownership interest who disburses the funds. This concept is

designed to allow for those employees who participate to a moderate

degree in a profit-sharing plan to be employed in one of the capacities

described in this provision without having a detrimental impact on the

institution's administrative capability. Finally, the Secretary wishes

to clarify that, under both current regulations and the proposed

regulations, it is acceptable for a check that is to be disbursed or

delivered to a student by another office to pass through the office

that authorizes payment, as long as the office that authorizes payment

does no more than deliver the check to the office responsible for

disbursement or delivery to the student.

The Secretary proposes to make explicit that record-keeping is a

basic standard of administrative capability. Those new institutions

that do not have adequate record-keeping capability would not be

approved to participate in the Title IV, HEA programs. The record-

keeping capability of participating institutions would be evaluated

when the institutions seek renewal of their program participation.

The Secretary proposes to revise the satisfactory progress

standards to require that the maximum time frame for completion of an

undergraduate program be no longer than 150 percent of the published

length of the educational program and that increments of the maximum

time frame not exceed the lesser of one academic year or one-half the

published length of the educational program. The establishment of the

maximum time frame must, as usual, take into account a student's

enrollment status. Thus, an institution that offers a four-year degree

program (as listed in the institution's catalog) would have to

establish a maximum time frame of no more than six years for completion

of the program by a full-time student. The time frame could be

proportionally longer for a half-time student. The Secretary emphasizes

that this requirement would set an upper limit on the period of time

for which a student may receive Title IV, HEA program aid. An

institution would not be required to expel or otherwise remove a

student from the educational program after the expiration of this

maximum time frame (unless, of course, the institution has a similar

requirement for students who do not receive Title IV, HEA program

assistance). The Secretary has a longstanding policy under which 150

percent of the length of an educational program is considered to be a

reasonable period in which a serious student should be able to complete

the program. The Secretary notes that this proposed time frame is also

consistent with proposals made by the NPRM implementing the Student

Right-to-Know provisions in section 485(a) of the HEA (57 FR 30826).

The Secretary does not believe that Title IV, HEA program aid should be

provided beyond the point at which a student can reasonably be expected

to complete his or her educational objective.

The Secretary proposes to expand and clarify the requirements for

reporting information about possible fraud or illegal misconduct

related to the Title IV, HEA programs. The proposed regulations would

eliminate the current provision for an institution to refer suspected

instances of fraud or other criminal misconduct involving Title IV, HEA

program assistance to a State or local law enforcement agency rather

than the Office of Inspector General (OIG), if more appropriate.

Instead, the proposed regulations would require the institution to

notify only the OIG. The proposed regulations would also remove a

related requirement--that the institution report to the OIG, for each

calendar year, all relevant referrals to State or local law enforcement

agencies, as this would no longer be necessary if all referrals were

made directly to the OIG. Upon receipt of the information, the OIG will

notify and work with the appropriate officials to resolve the issue.

The Secretary is proposing to amend this section to streamline the

referral process and reduce the burden of reporting information.

Currently, under this provision governing the reporting of

instances of suspected fraud and criminal misconduct, institutions are

required to report only information regarding applicants for Title IV,

HEA program

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