Student Assistance General Provisions, Federal Perkins Loan Program, Federal Work-Study Program, Federal Supplemental Educational Opportunity Grant Program, Federal Family Education Loan Programs, William D. Ford Federal Direct Loan Program, and Federal Pell Grant Program

SUMMARY: The Secretary proposes to amend the regulations governing the

student financial assistance programs authorized under title IV of the

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

These programs include the campus-based programs (Federal Perkins Loan,

Federal Work-Study (FWS), and Federal Supplemental Opportunity Grant

(FSEOG) programs), the Federal Family Education Loan (FFEL) Programs,

the William D. Ford Federal Direct Loan (Direct Loan) Program, the

Federal Pell Grant Program, the State Student Incentive Grant (SSIG)

Program, and the National Early Intervention Scholarship and

Partnership (NEISP) Program. These proposed regulations further the

implementation of Department of Education (Department) initiatives to

reduce burden and improve program accountability. These proposed

regulations clarify and consolidate current policies and requirements,

make needed changes in the regulatory requirements for the Secretary to

improve the delivery of title IV, HEA program funds to students and

institutions, and further protect students and the Federal interest.

DATES: Comments on the proposed regulations must be received on or

before November 4, 1996.

ADDRESSES: All comments concerning these proposed regulations should be

addressed to: John Kolotos, U.S. Department of Education, P.O. Box

23272, Washington, D.C. 20026-3272. Comments may also be sent to

[email protected] through the Internet.

To ensure that public comments have maximum effect in developing

the final regulations, the Department urges that each comment clearly

identify the specific section or sections of the regulations that the

comment addresses and that comments to those sections be in the same

order as the proposed regulations.

Comments that concern information collection requirements must be

sent to the Office of Management and Budget at the address listed in

the Paperwork Reduction Act of 1995 section of the preamble. A copy of

those comments may also be sent to the Department representative named

above.

FOR FURTHER INFORMATION CONTACT:

1. For Project EASI (Easy Access for Students and Institutions):

Fred Sellers, U.S. Department of Education, 600 Independence Avenue,

S.W., Regional Office Building 3, Room 3045, Washington, D.C. 20202.

Telephone: (202) 708-4607.

2. For the Student Assistance General Provisions: John Kolotos or

Rachael Sternberg, U.S. Department of Education, 600 Independence

Avenue, S.W., Regional Office Building 3, Room 3053, Washington, D.C.

20202. Telephone: (202) 708-7888.

3. For the Federal Perkins Loan Program: Sylvia Ross, U.S.

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

Building 3, Room 3053, Washington, D.C. 20202. Telephone: (202) 708-

8242.

4. For the Federal Pell Grant, FWS, and FSEOG programs: Kathy

Gause, U.S. Department of Education, 600 Independence Avenue, S.W.,

Regional Office Building 3, Room 3053, Washington, D.C. 20202.

Telephone: (202) 708-4690.

5. For the FFEL Programs: Patsy Beavan, U.S. Department of

Education, 600 Independence Avenue, S.W., Regional Office Building 3,

Room 3053, Washington, D.C. 20202. Telephone: (202) 708-8242.

6. For the Direct Loan Program: Rachel Edelstein, U.S. Department

of Education, 600 Independence Avenue, S.W., Regional Office Building

3, Room 3053, Washington, D.C. 20202. Telephone: (202) 708-9406.

Individuals who use a telecommunications device for the deaf (TDD)

may call the Federal information Relay Service (FIRS) at 1-800-877-8339

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

Friday.

SUPPLEMENTARY INFORMATION:

Background

The Secretary is proposing to amend the Student Assistance General

Provisions regulations which apply to all of the title IV, HEA programs

and the regulations for the Federal Pell Grant, Federal Perkins Loan,

FWS, FSEOG, FFEL, and Direct Loan programs. The Secretary is proposing

to amend these regulations to further the implementation of several

major initiatives within the U.S. Department of Education (Department).

These initiatives include: (1) Project EASI; (2) the President's

Regulatory Reform Initiative; and (3) improved program accountability

to protect students and the Federal interest. In most instances the

proposed changes support more than one of these initiatives.

Project EASI

Project EASI is an initiative of the Secretary to pursue a

collaborative effort among a diverse group of government, business, and

educational leaders to reengineer the postsecondary student aid

delivery system to meet the needs of its primary customers, the

students and their families. The reengineered delivery system will meet

these needs by providing an integrated system to facilitate the ability

of students and their families to plan for postsecondary education,

choose among postsecondary educational programs and institutions, and

finance their choices. This integrated system will be available for all

users of the delivery system including not only students and their

families but also institutions, State agencies, and others. Project

EASI will also reduce delivery system costs to all participants, reduce

burden including regulatory burden, reduce fraud and system

vulnerability, and enhance management capabilities of the Department

and other users of the system including institutions and States.

The following key elements will be part of a reengineered student

aid delivery system:

Each student will have his or her individual student

account. The individual student account will contain all the student's

data in the system, and all activity in the system concerning the

student would be processed through his or her individual student

account. Individual student accounts, thus, will be the basis for

integrating the delivery system.

A student will be able to provide current information to,

and receive current information from, all system users through his or

her individual account.

The data in the individual student accounts will reflect

standardized data definitions for all system users, and data reported

using common reporting records.

The delivery system will not be program-specific; it could

be used to deliver funding under any student assistance program.

To the extent practicable, the delivery system will use

advanced technology to automate data processing and will be a paperless

system.

[[Page 49875]]

Strict security, such as encryption and controlled access

to the data, will be designed as part of the system.

Additional information, including a more detailed description of

Project EASI, can be found at http://easi.ed.gov on the Project EASI

World Wide Web home page.

Regulatory Reform Initiative

These proposed regulations also include provisions to implement

further the President's March 4, 1995 directive to every Federal agency

to reduce regulatory and paperwork burden and to eliminate or revise

those regulations that are outdated or otherwise in need of reform.

Improved Program Accountability

The Secretary is also proposing provisions in these regulations to

improve program accountability. The Secretary believes that the

financial aid community can build on recent improvements in program

management to assure the best use of Federal funds provided under the

title IV, HEA programs.

Major Changes Supporting Departmental Initiatives

In most instances the proposed regulations support more than one of

the three Departmental initiatives, i.e., Project EASI, regulatory

reform, and improved accountability. The major proposed changes and the

initiative or initiatives that each change supports include the

following:

The adoption of a uniform definition of payment period

for all the title IV, HEA programs as proposed in Sec. 668.4. (Project

EASI, regulatory reform)

The provision that an institution use electronic services

that the Secretary provides on a substantially free basis as a new

standard of administrative capability as proposed in Sec. 668.16(o).

(Project EASI, improved accountability)

The restructuring and clarification of the provisions

under subpart K, Cash Management, of the Student Assistance General

Provisions regulations. (regulatory reform)

The inclusion of a just-in-time payment method as

proposed in Sec. 668.162(c). (Project EASI, improved accountability)

The elimination of the requirement under Sec. 682.207(b)

of the current FFEL Program regulations that an institution maintain a

separate bank account for FFEL Program funds as proposed in

Sec. 668.163(a). (regulatory reform)

The requirement that title IV, HEA program funds be

disbursed on a payment period basis as proposed in Sec. 668.164(c).

(Project EASI, improved accountability)

The consolidation of the individual title IV, HEA program

requirements regarding late disbursements as proposed in

Sec. 668.164(h). (Project EASI, regulatory reform)

The revised student notification requirements as proposed

under Sec. 668.165. (Project EASI, regulatory reform, improved

accountability)

The exemption from the current excess cash requirements

for an institution that receives funds under the just-in-time payment

method as provided in Sec. 668.166(a)(2). (Project EASI, regulatory

reform)

The requirement that an institution disburse FFEL Program

funds within a timeframe comparable to that permitted for disbursing

funds under the other title IV, HEA programs as proposed in

Sec. 668.167(a). (Project EASI, improved accountability)

The requirement that an institution return FFEL Program

funds to a lender if the institution does not disburse those funds

within specified timeframes as proposed in Sec. 668.167(b). (Project

EASI, improved accountability)

The procedures under which the Secretary would monitor

more carefully an institution's administration of the FFEL Programs as

proposed under Sec. 668.167(d) and (e). (improved accountability)

Conforming Changes

The Secretary intends to publish these proposed regulations as

final regulations on or before December 1, 1996. At that time the

Secretary will also amend the appropriate sections of each of the title

IV, HEA program regulations to eliminate any conflicting requirements

between the final regulations and current program regulations and to

otherwise harmonize the requirements in the final regulations with

other title IV, HEA program requirements. As an example of the

necessary conforming changes, the Secretary includes in these proposed

regulations conforming amendments to the campus-based, FFEL, Direct

Loan, and Federal Pell Grant programs that would result from adopting a

uniform definition of the term ``payment period'' for all the title IV,

HEA programs.

Summary of Proposed Changes

Student Assistance General Provisions

The Student Assistance General Provisions regulations, 34 CFR part

668, implement requirements that are common to the title IV, HEA

programs.

Subpart A--General

Section 668.4 Payment Period

For the purpose of simplifying the administration of the title IV,

HEA programs, the Secretary is proposing to simplify the definition of

the term ``payment period'' and apply that definition to all title IV,

HEA programs except the FWS Program. Based upon the simplified common

definition, the Secretary is proposing in Sec. 668.164 that all title

IV, HEA program funds, other than FWS Program funds, be disbursed to

students on a payment period basis. (For the purpose of this

discussion, ``disburse'' includes the delivery of loan proceeds to

students under the FFEL Programs.) This change, in effect, conforms the

regulations to the actual disbursement practices of most institutions.

The Secretary is proposing to base the simplified definition of the

term ``payment period'' on the Federal Pell Grant Program definition

currently in 34 CFR 690.3 of the Federal Pell Grant Program regulations

with modifications.

A. Programs Using Credit Hours With Terms

If a student is enrolled in an eligible program that uses academic

terms and measures progress in credit hours, the payment period is the

academic term. For example, if a program uses semesters, the semester

will be the payment period; if it uses quarters, the quarter will be

the payment period.

B. Programs Using Credit Hours Without Terms and Clock-Hour Programs

The Secretary is modifying the Federal Pell Grant Program

definition by proposing one definition for students enrolled in (1)

eligible programs that measure progress in credit hours but do not use

academic terms; and (2) eligible programs that measure progress in

clock hours regardless of whether they use academic terms. That

definition will be the one currently in effect for programs offered

without terms. Under the current Federal Pell Grant Program definition,

there is a separate definition for clock-hour programs that are offered

in terms, and the Secretary is proposing to eliminate that definition.

Programs that are less than an academic year

For an eligible program using credit hours without terms or clock

hours that is less than a full academic year, the first payment period

will be the period of time needed to complete the first half of that

program as measured in clock or credit hours, and the second payment

period will be the period of time needed

[[Page 49876]]

to complete the remainder of the program. For example, if a program is

800 clock hours, the first payment period would be the period of time

needed for the student to complete 400 clock hours. The second payment

period would begin when the student has completed 400 clock hours.

Programs Equal to an Academic Year or a Multiple of an Academic Year

For an eligible program using credit hours without terms or clock

hours that is a full academic year or a multiple of a full academic

year, for each academic year, the first payment period will be the

period of time needed to complete the first half of the academic year

as measured in clock or credit hours, and the second payment period

will be the period of time needed to complete the remainder of that

academic year. Thus, if the eligible program was 900 clock hours, and

so was its definition of an academic year for the hours component, the

second payment period would begin when the student completed 450 clock

hours.

Programs Greater Than an Academic Year and Remainder is One Half or

Less of an Academic Year

For an eligible program using credit hours without terms or clock

hours that is more than a complete academic year but has a remainder

that is less than another complete academic year, if the remaining

portion of the program is one-half of an academic year or less, the

payment period, after the last complete academic year, will be the

remaining portion of the program. For example, if a program is 1,200

clock hours and its definition of an academic year for the hours

component was 900 clock hours, the program would consist of three

payment periods. The first two payment periods would each be 450 clock

hours and would cover the first academic year of 900 clock hours. The

third payment period will be the remaining portion of the program, 300

clock hours, and would begin when the student completed clock hour 900.

Programs Greater Than an Academic Year and Remainder is Less Than an

Academic Year but Greater Than One Half an Academic Year

If the remaining portion of an eligible program using credit hours

without terms or clock hours is less than a complete academic year but

more than one-half an academic year, there would be two payment periods

for the remaining portion of the program. The first payment period

would be the period of time it would take a student to complete half of

the clock or credit hours in the remaining portion of the program while

the second payment period would be the period of time needed to

complete the program. For example, if a program is 1,500 clock hours

and its definition of an academic year for the hours component is 900

clock hours, the program would consist of four payment periods. The

first two payment periods would each be 450 clock hours and would cover

the first academic year of 900 clock hours. The remaining portion of

the program would consist of 600 clock hours (1500-900=600), and each

payment period in the remaining portion would consist of 300 clock

hours (clock hours 901 to 1,200 and 1,201 to 1,500). The second payment

period of the second academic year would not begin until the student

completed 300 clock hours of the remaining portion of the program. In

contrast, under the current Federal Pell Grant Program definition, the

first payment period of the second academic year would be 450 clock

hours, half the academic year, (clock hours 901 to 1,350), and the

second payment period would be the period needed to complete the

program, 150 clock hours (clock hours 1,351 to 1,500).

The Secretary is proposing this approach because the Secretary

believes that it is important that institutions be allowed to make all

Title IV, HEA program disbursements at the same time and because this

approach accommodates the current disbursement rules of the FFEL and

Direct Loan programs. Currently, under the FFEL and Direct Loan

programs the second disbursement for the remaining portion of a program

in the example of a 1500 clock-hour program is at clock hour 1,201

while under the Federal Pell Grant Program it is at clock hour 1,351.

Under the proposed approach, all second disbursements will be made

earlier than under the current Federal Pell Grant Program approach.

However, as a consequence, because Federal Pell Grant Program awards

are calculated on a payment period basis, this proposal means that the

student's Federal Pell Grant award will be reduced for the third

payment period of the program and increased for the fourth payment

period of the program to reflect that both payment periods in the

second academic year of the program will consist of 300 clock hours

instead of 450 and 150 clock hours.

The Secretary considered continuing to use the current Federal Pell

Grant Program approach for all the title IV, HEA programs. Thus, for

the FFEL and Direct Loan programs the second disbursement of the loan

would be made at clock hour 1351 instead of at clock hour 1201 even

though the two disbursements would be equal unlike the prorated amounts

for the Federal Pell Grant Program. The Secretary requests specific

comments on whether he should adopt the approach in these proposed

regulations or the current Federal Pell Grant Program approach. A more

detailed discussion of the disbursement rules is set forth in the

discussion of proposed Sec. 668.164.

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

Section 668.16 Standards of Administrative Capability Electronic

Services

In order to be considered administratively capable to participate

in the title IV, HEA programs, the Secretary proposes that an

institution participate in the electronic services that the Secretary

provides at no substantial charge to the institution. The Secretary

proposes to identify these electronic services in a notice published in

the Federal Register. The Secretary would consider an institution that

fails to participate in these electronic services not to have the

administrative capability to administer the title IV, HEA programs,

and, thus, that institution's participation in the title IV, HEA

programs may be subject to sanctions such as fines, limitations, and

termination.

The use of electronic services by institutions is essential to

achieving the Project EASI goal of an integrated student aid delivery

system for students and institutions. The Secretary believes that using

electronic services is essential to reducing burden on students and

institutions, simplifying program administration, and improving program

accountability.

The Secretary believes that the savings and benefits that would

result from improved business processes made possible by using

electronic services would more than offset any necessary initial

investments by both the Department and institutions. To achieve these

savings and benefits, it is essential that electronic processes replace

paper processes at both the Department and institutions, wherever

possible. As is currently the case for institutions already using

electronic services provided by the Secretary, an institution would be

able to use software provided by the Secretary or software developed by

the institution, or its vendor, in accordance with specifications

provided by the Secretary. The Secretary also believes that most

institutions already have the necessary equipment to use these

services, and those institutions

[[Page 49877]]

that do not have the equipment would be making an investment that would

improve institutional services at minimal cost. The Secretary

recognizes that using the electronic services provided by the

Department would potentially change many aspects of the business

process at institutions and welcomes specific comment on any and all

aspects of institutions moving into an electronic business process.

Under the proposed rule, the Secretary would determine the

electronic services in which an institution must participate for a

processing year. If this determination adds or otherwise revises the

electronic services in which an institution must participate to be

considered administratively capable, the Secretary would notify

institutions of that determination in the Federal Register. The

Secretary would provide timely notice to institutions in order for them

to make adequate preparations to use these services. Under this process

the Secretary would continue to provide the software, or provide the

specifications for software to be developed by an institution or its

vendor, for an institution to use these electronic services.

The Secretary expects to determine the services that an institution

would use for the 1997-98 award year based, in part, on the funds

available to provide those services to institutions at substantially no

cost. Currently, the Secretary is considering, for the 1997-98 award

year, requiring institutions to participate in the Title IV Wide Area

Network by which student data is transmitted between the Department and

institutions, electronic Institutional Student Information Reports

(ISIRs), the National Student Loan Data System, and the Student

Financial Assistance Bulletin Board System. The Secretary believes that

using these basic services provides institutions with the experiences

necessary to begin developing an expertise in using the electronic

services that the Department provides. This expertise is essential to

the implementation of additional electronic services that the Secretary

expects to use in administering the title IV, HEA programs, such as the

World Wide Web or Internet-based communications. To assist institutions

in acquiring this expertise, the Secretary will be offering basic

training on using the Department's electronic services. Training

sessions are scheduled for October through December 1996, and

additional training sessions may be offered if demand warrants offering

them.

More detailed, readily available information on the Department's

electronic services may be found in the Action Letters on the delivery

system that the Department provides all institutions each award year.

Subpart K--Cash Management

Section 668.161 Scope and Purpose

The Secretary proposes to clarify that for purposes of subpart K,

the term ``parent'' means a parent borrower under the PLUS programs,

and the term ``disburse'' has the same meaning as ``deliver'' loan

proceeds under the FFEL Program regulations.

Section 668.162 Requesting Funds

The Secretary proposes to redesignate Sec. 668.163 of the current

regulations as Sec. 668.162 and to remove Sec. 668.162 of the current

regulations. The Secretary believes that some of the terms defined

under Sec. 668.162 of current regulations should be more fully

explained in the provisions of the proposed regulations where those

terms are used. Accordingly, the Secretary proposes to move to proposed

Sec. 668.164 the concepts of ``disburse'' and ``issue checks,''

relocate under proposed Sec. 668.161 the qualifying definition of

``day,'' and eliminate the remaining definitions.

In proposed Sec. 668.162(a) the Secretary emphasizes that the

Secretary has the sole discretion to determine the method under which

title IV, HEA program funds are provided to an institution.

Under proposed Sec. 668.162(b), the Secretary clarifies that the

Secretary does not automatically accept a request for funds from an

institution under the advance payment method. For example, the

Secretary may reject a request for funds if the amount of the request

exceeds the amount of funds the institution is authorized to draw down

under a title IV, HEA program.

The Secretary proposes under Sec. 668.162(c) the requirements for a

``just-in-time'' payment method. Under the just-in-time payment method,

for each student that an institution determines is eligible for title

IV, HEA program funds, the institution transmits electronically to the

Secretary, within a timeframe established by the Secretary, records

that contain program award information for that student. As part of

those records, the institution would report the date and amount of the

disbursements that it will make to that student or that student's

parent. The timeframe would establish the earliest date on which the

Secretary would accept student records to ensure that the Secretary can

provide title IV, HEA program funds to the institution by the date

reported by the institution for that disbursement. The just-in-time

payment method, thus, provides for reporting information that is no

different than current student-level data that an institution is

reporting; however, it does require an institution to report that

information earlier.

For each record the Secretary accepts for a student or parent, the

Secretary would provide by EFT the corresponding disbursement amount to

the institution on or before the date reported by the institution for

that disbursement. When the institution receives the funds for each

record accepted by the Secretary, the institution would disburse those

funds based on its determination at the time the institution

transmitted that record to the Secretary that the student is eligible

for that disbursement. However, if a student is subsequently not

eligible for the funds that an institution disburses to the student,

the institution must report the adjustment in the funds for which the

student is eligible as is currently required.

As an example of a just-in-time payment, an institution determines

that it expects to credit a student's account with program funds

September 4. For this example, the Secretary establishes a timeframe of

8 days as the time necessary for the Secretary to process a student's

record and to provide to the institution the disbursement amount for

the student no later than the disbursement date. Therefore, on August

27, the institution determines that the student is eligible and

transmits electronically the student's record with the payment

information and expected disbursement date. The Secretary processes and

accepts the student's record, and, not later than September 4, the

Secretary provides by EFT the corresponding disbursement amount for the

student.

The Secretary notes that an institution may make a disbursement to

a student or parent before submitting a record of that disbursement to

the Secretary. If the Secretary accepts that record, the Secretary

would provide by EFT the corresponding disbursement amount to the

institution shortly after receiving that record from the institution.

The institution would be required to report any adjustment to a

previously accepted record within the timeframe established by the

Secretary in a notice published in the Federal Register. The Secretary

expects to require institutions to report adjustments within 30 days of

the date that an institution becomes aware of a change. This timeframe

is similar to the 30-day timeframes

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currently required under the Federal Pell Grant and Direct Loan

programs.

The Secretary believes that the just-in-time payment method is

essential to realizing the benefits of the Project EASI goal of an

integrated delivery system. The just-in-time payment method would

provide the payment information on or very near the actual time of

disbursement. The payment information forms the core of the individual

student account that is the basis for the Project EASI integrated

delivery system. Using the just-in-time payment method, would enable

the delivery system to provide the necessary current information to

students and other participants while reducing burden related to the

reconciliation of payment data. In addition, because the Secretary

would be providing funds based on current student-level data, the

Secretary's ability to monitor the integrity of the programs would be

substantially enhanced. The Secretary expects the advantages of the

just-in-time payment method for students, institutions, and the

Department to increase as further reengineering of the delivery system

is accomplished, additional technological improvements are implemented,

and skills in using these improvements increase.

The Secretary expects to provide Direct Loan Program funds to

institutions that participate in the Direct Loan Program under School

Origination Option 1 and Standard Origination using a just-in-time

payment method beginning in the 1997-98 award year. The Secretary is

also considering providing Federal Pell Grant Program funds using a

just-in-time payment method in the 1998-99 award year. The Secretary

specifically requests comments on this plan.

Section 668.163 Maintaining and Accounting for Funds

The Secretary proposes to redesignate Sec. 668.164 of the current

regulations as Sec. 668.163.

The Secretary proposes under Sec. 668.163(c)(3)(iii) that an

institution not have to maintain in an interest-bearing or investment

account title IV, HEA program funds that the institution receives from

the Secretary under a just-in-time payment method. The Secretary

believes that, because a just-in-time payment method would ensure the

expeditious accounting and disbursement of program funds, little or no

interest would be earned on funds provided to the institution under

that payment method; therefore, there would be no harm to the Federal

fiscal interest as a result. However, the Secretary wishes to make

clear that, regardless of whether an institution receives funds under

the just-in-time payment method, an institution that chooses to

maintain Federal Pell Grant, Direct Loan, FSEOG and FWS program funds

in interest-bearing or investment accounts must remit to the Secretary

any earnings on those funds that exceed $250.

Also, the Secretary proposes to eliminate the provision now in

Sec. 668.164(c)(1)(ii) under which an institution that drew down $3

million or more in title IV, HEA program funds in the prior year does

not have to continue to maintain those funds in an interest-bearing or

investment account if the institution earned $250 or less on those

program funds in that year. The Secretary believes that an institution

must demonstrate that it will not earn $250 in the current year in

order to qualify for the remaining exemption to the interest-bearing

account requirement under this section. However, an institution can

qualify for this exemption by indicating that it did not earn $250 in

interest in the prior award year and by demonstrating that it will

disburse the funds it receives in the current award year in the same

manner as it disbursed funds in the prior award year.

Finally, the Secretary proposes to eliminate the requirement

currently under Sec. 668.164(a) and 34 CFR 682.207(b) that an

institution must maintain a separate bank account for FFEL Program

funds the institution receives from a lender by electronic funds

transfer. The Secretary believes this requirement is no longer needed,

provided that an institution maintains and accounts for those funds in

the same manner required for other funds the institution receives under

the title IV, HEA programs. Accordingly, the Secretary proposes to

restructure the requirements under this section to make clear that for

FFEL Program funds, an institution would be required to comply with the

bank account notification requirements under Sec. 668.163(a), and the

accounting and financial record requirements under Sec. 668.163(d).

However, the Secretary may require a separate account for FFEL Program

funds and for any other title IV, HEA program funds as provided under

Sec. 668.163(b).

Aside from these proposed provisions, the proposed revisions to

Sec. 668.163 are merely intended to clarify current rules.

Section 668.164 Disbursing Funds

The Secretary proposes to redesignate Sec. 668.165 of the current

regulations as Sec. 668.164.

The Secretary proposes to amend this section by restructuring and

clarifying the current provisions, moving into this section the

definition of the term ``disburse'' (currently in Sec. 668.162) and

expanding the scope of that definition, adding a requirement that an

institution disburse all program funds on a payment-period basis, and

consolidating in this section the late disbursement requirements that

are currently in the individual program regulations.

Under proposed Sec. 668.164(a), the Secretary provides that an

institution makes a disbursement of title IV, HEA program funds on the

date the institution credits a student's account at the institution, or

pays the student or parent directly, with (1) Funds received from the

Secretary or a lender or (2) institutional funds used in advance of

receiving title IV, HEA program funds.

The Secretary did not previously include in these rules the

provision that an institution may use its own funds to make program

disbursements but now proposes to include this provision to clarify

that a disbursement occurs when an institution makes the benefits of

title IV, HEA funds constructively available to students. Accordingly,

the Secretary does not consider that a disbursement is made if, solely

for the purpose of preparing a bill for a student, an institution must

credit the student's account at the institution by making a general

ledger entry.

The Secretary is proposing that all title IV, HEA program funds be

disbursed by payment period. As a practical matter, this process should

differ little from the practice of most institutions. However, there

will be some minor changes. Under the current regulations, institutions

that use quarters as academic terms can disburse FFEL or Direct Loan

Program loans to students in two disbursements: half the loan at the

beginning of the first quarter, and the other half at the beginning of

the second quarter. Under the proposed change, such institutions will

have to make three equal disbursements, one for each quarter. Thus, the

disbursement schedule for the loan programs will match the schedule for

the Federal Pell Grant and campus-based programs.

Under the existing disbursement rules applicable to the FFEL,

Direct Loan, and campus-based programs, an institution that measures

progress in clock hours or credit hours without terms has to make at

least two disbursements during an award year or loan period, with the

second disbursement coming after the student completes half the award

year or loan period. However, institutions could determine that a

student reached half an award year or loan period when

[[Page 49879]]

half the number of days in that year or period have elapsed even though

the student did not actually complete half the clock hours or credit

hours in the award year or loan period at that time. The proposed

change will require a student to actually complete the number of clock

or credit hours in that payment period before a second disbursement can

be made. This change makes the disbursement rules more consistent with

the purpose of multiple disbursements.

The following example illustrates this change. A student enrolls in

a 900 clock-hour program that is scheduled to begin on September 1,

1996 and end on April 30, 1997. The student receives grants under the

Federal Pell Grant and FSEOG programs and a loan under the Direct

Subsidized Loan Program. The student may receive a second disbursement

under each program only when the student actually completes 450 clock

hours; the student may not receive a second disbursement on January 1,

1997, the calendar midpoint, unless he or she has completed 450 clock

hours by that date.

In connection with determining whether a student completes the

number of clock hours in a payment period, the Secretary notes that an

institution using clock hours may use ``excused absences'' only under

limited circumstances. For this purpose, ``an excused absence'' is one

that a student does not have to make up. In order to count excused

absences when determining whether a student has completed a payment

period, an institution using clock hours must have a formal written

policy allowing excused absences. Moreover, the maximum number of hours

of excused absences that it may use for that purpose is 10 percent of

the clock hours in that payment period, or a lower number if required

by its State licensing or accrediting agency. Except where an

accrediting agency or State licensing agency sets a more rigorous

standard, the Secretary believes that excused absences of more than 10

percent of the clock hours in a payment period would impair the

educational attainment of a student and, thus, would not make the best

use of Federal funds. For example, if a payment period is 450 clock

hours, unless the institution's State licensing or accrediting agency

requires a lower number, 45 is the maximum number of hours of excused

absences that may be included in determining whether the student

completed that payment period.

The Secretary is proposing to amend the loan disbursement rules to

take into account the statutory requirement that institutions must make

at least two disbursements for a loan period even if the loan period is

only one payment period. Accordingly, the Secretary is proposing to

amend 34 CFR 685.301(b) of the Direct Loan Program regulations and 34

CFR 682.603 and 604 of the FFEL Program regulations to provide

different disbursement rules for loan periods that are one payment

period or less and loan periods that are more than one payment period.

For the former type loan period, an institution will be required to

make two disbursements during the loan period. For loan periods that

are more than one payment period, the institution must disburse loan

proceeds at least once each payment period and each disbursement must

be substantially equal.

Finally, the Secretary notes that an institution can make a second

or subsequent disbursement of loan proceeds to a student if the

institution makes the first loan disbursement to that student on or

after the point in time when it is allowed to make the subsequent

disbursement. For example, a student attends an institution that uses

quarters and applies for a loan during the winter term. The student's

loan period includes the preceding fall quarter as well as the winter

and spring quarters. In such a case, the institution can make one

disbursement in the winter that includes loan proceeds for both the

fall and winter terms. It then can make the final disbursement at the

beginning of the spring quarter.

Under proposed Sec. 668.164 paragraphs (c), (d), and (e), the

Secretary clarifies the current requirements under which an institution

disburses title IV, HEA program funds to a student or parent directly,

the charges for which an institution may credit a student's account at

the institution, and the provisions regarding credit balances.

Section 668.164(e) clarifies that the earliest an institution may

disburse title IV, HEA program funds is the later of 10 days before the

first day of classes of the payment period or the date the student

completed the previous payment period for which he or she received

title IV, HEA program funds. However, a second or subsequent

disbursement of FFEL or Direct Loan funds may not be made until the

later of the date the student completed the previous payment period or

the calendar midpoint of the loan period.

The Secretary proposes to consolidate under Sec. 668.164(g) the

requirements regarding late disbursements that are currently in the

individual program regulations (see 34 CFR 674.16(g), 676.16(e),

682.604(e), 685.303(d), and 690.75(b)). The current regulations allow

an institution to make a disbursement to a student after the student

becomes ineligible because he or she ceases to be enrolled at the

institution or, for purposes of the Direct Loan and FFEL programs,

ceases to be enrolled at least half-time. In addition, the regulations

require that an institution obtain, or the student submit,

documentation establishing the student's eligibility before the student

became ineligible. If an institution obtains the required

documentation, the institution may make a late disbursement.

Under all the title IV, HEA programs, a late disbursement may be

made only if those program funds are used to pay for documented

educational costs that were incurred before the student became

ineligible. This qualification does not mean that the institution must

obtain specific and detailed expenditure documentation from the

student. The institution may develop a policy that it applies to such

cases; for example, all expenses for books and supplies may be

considered to have been incurred by a student who withdraws after the

first two weeks of a term. That policy may also provide that a student

incurs costs related to meals and housing and transportation prorated

to the point in time when he or she leaves school.

The proposed late disbursement rules simplify and make uniform the

regulations by eliminating redundant provisions in the program

regulations but otherwise differ from the current regulations in only

one substantive way. The Secretary proposes that if an institution

chooses to make a late disbursement, it must make that disbursement no

later than 90 days after the student becomes ineligible. The Secretary

believes that 90 days is a reasonable amount of time for an institution

to correct any problems that delayed that disbursement from being made

while the student was eligible.

Section 668.165 Notices and Authorizations

As part of the restructuring of this subpart, the Secretary

proposes to incorporate in this section the student notification

requirements currently under Sec. 668.165(a)(1) and the student

authorization requirements and related provisions currently under

Sec. 668.165 paragraphs (a)(2), (b)(3)(iv), (b)(4), (d), and (e).

Under proposed Sec. 668.165(a)(1), the Secretary would revise in

two ways the existing requirement that an institution notify a student

or, in the case of a PLUS loan, the student's parent, of the amount of

funds that the student or parent can expect to receive and how and when

those funds will be paid.

[[Page 49880]]

First, an institution must provide the notice only to the student but

must include in that notice any PLUS funds that the student's parent

will receive. Second, the notice must indicate for any loans under the

Direct Loan or FFEL Programs whether those loans are subsidized or

unsubsidized.

The Secretary proposes under Sec. 668.165(a)(2) to revise the

requirement that an institution notify expeditiously a student or

parent borrower that the institution has credited the student's account

with Direct Loan, FFEL, or Federal Perkins Loan program funds. Under

the proposed revision, as part of that notice an institution would also

notify the student or parent of the right to cancel that loan or loan

disbursement and the date by which that cancellation request must be

made. The Secretary would allow an institution to provide that notice

in writing or electronically. The Secretary proposes that an

institution would be required to provide the notice (1) No earlier than

10 days before and no later than 10 days after the institution credits

the student's account at the institution with Direct Loan or Federal

Perkins Loan Program funds, or with FFEL Program funds the institution

receives from a lender via EFT or master check, or (2) no earlier than

10 days before and no later than 10 days after the institution

disburses those funds by initiating an electronic funds transfer to the

student's or parent's bank account if the institution subsequently

withdraws funds from that bank account to pay for tuition and fees and

other authorized charges. If, within 14 days after the date the

institution sends that notice, the institution receives a request from

the student or parent to cancel the loan or loan disbursement, the

institution would have to comply with that request and return any loan

funds in accordance with applicable program requirements. If the

institution receives a cancellation request after this 14-day period,

the institution may honor that request. In addition, the institution

would need to inform the student or parent of the outcome of the

request.

The Secretary wishes to make clear that an institution would not

have to provide the proposed notice affording a student or, in the case

of a PLUS loan, the student's parent, the opportunity to refuse the

loan if the institution disburses that loan directly to the student or

parent by issuing a check or releasing a check provided by a lender

under the FFEL Programs. For loan funds disbursed in this manner,

students or parents already have the opportunity to refuse the funds at

the time those loan funds are being disbursed simply by not endorsing

the check or returning the check to the institution or to the lender.

However, for loan funds provided to an institution by the Secretary, or

by a lender via EFT or master check, a student or parent does not have

a similar opportunity to refuse the loans funds if the institution

chooses to disburse those loan funds by crediting the student's

account.

In making this proposal, the Secretary believes that a student or

parent should have the opportunity to refuse loan funds at the time

those funds are being disbursed, regardless of the manner in which loan

funds are provided to an institution, and regardless of the way the

institution chooses to disburse those funds. A student or parent does

not have this opportunity to refuse loan funds under an arrangement

where the institution disburses loan funds by initiating an EFT to the

student's or parent's bank account and subsequently withdraws funds

from that account to pay for tuition and fees or other authorized

charges. The disbursement of loan funds under this arrangement is

analogous to the disbursement of loan funds made by crediting the

student's account at the institution. Therefore, an institution would

be required to provide the proposed notice to a student or parent if

the institution disburses any title IV, HEA program loan funds under

this type of arrangement.

Moreover, the Secretary notes that a student or parent does not

give up his or her right to refuse a loan disbursement at the time that

loan disbursement is made simply because the student or parent

authorized a lender to provide loan funds to an institution via EFT or

authorized the institution to disburse via EFT those loan funds to the

student's or parent's bank account. These authorizations merely enable

the lender or the institution to provide loan funds via an EFT method.

The Secretary proposes to consolidate under Sec. 668.165(b) the

student and parent authorizations now in Sec. 668.165(d). Under the

current rules, if an institution obtains the appropriate authorization,

the institution may use a student's or parent's title IV, HEA program

funds to pay for educational costs incurred by the student (i.e., costs

other than tuition and fees and room and board), hold title IV, HEA

program funds in excess of educational costs, and transfer those funds

electronically to the student's or parent's bank account. The Secretary

does not propose to change any of these activities. Rather, the

Secretary proposes to simplify the process of obtaining an

authorization, and to codify current policy regarding the use of title

IV, HEA program funds under these authorizations.

First, the Secretary proposes to eliminate the requirement

currently in Sec. 668.165(d)(3) under which an institution must notify

annually a student or parent of the provisions contained in an

authorization previously provided to the institution. Under proposed

Sec. 668.165(b)(3), a student or parent may authorize the institution

to perform any of the described activities for the entire period during

which the student is enrolled at the institution. The Secretary

believes that annual notifications are not necessary since a student or

parent may modify or cancel a previously granted authorization at any

time.

Second, with regard to modifying an authorization, the Secretary

clarifies that the modification takes effect on the date the

institution receives a request from a student or parent changing the

current authorization.

Third, with regard to canceling an authorization allowing the

institution to use a student's or parent's title IV, HEA program funds

to pay for incurred educational costs, the Secretary clarifies that the

cancellation is not retroactive; the institution may use title IV, HEA

program funds to pay for previously authorized charges that were

incurred by the student before the institution received a request from

the student or parent canceling that authorization.

Finally, with regard to an authorization allowing the institution

to hold title IV, HEA program funds, the Secretary clarifies that an

institution must pay any remaining balance of those funds to a student

by the end of the loan period for which those funds were intended or by

the end of the last payment period in the award year for which those

funds were awarded.

Section 668.166 Excess Cash

In Sec. 668.166(a)(2), the Secretary proposes to exempt from the

requirements under this section institutions that receive title IV, HEA

program funds from the Secretary under the just-in-time payment method.

The Secretary wishes to make clear that this exemption would apply only

to the title IV, HEA program funds that an institution receives under

the just-in-time payment method. As discussed previously under proposed

Sec. 668.162, an institution that participates under this funding

method would provide to the Secretary student-level payment information

on or very near the actual date of disbursement, substantially

increasing the Secretary's ability to monitor the institution's use of

title IV, HEA program funds. Moreover, unlike

[[Page 49881]]

the manner in which some institutions determine their immediate cash

needs under the advance payment method, an institution under the just-

in-time payment method would be required to make an eligibility

determination for each student before receiving title IV, HEA program

funds for that student. Accordingly, the Secretary is more assured that

the institution will not have excess cash. To the extent that such an

institution has excess cash, the Secretary believes that it would be a

nominal amount caused by minor award adjustments. For these reasons and

the provision that the Secretary would provide new funds only after

deducting any adjustments reported by the institution, the Secretary

believes that excess cash would not be a problem for institutions

participating under the just-in-time payment method.

Section 668.167 FFEL Program Funds

The Secretary proposes to relocate under proposed Sec. 668.167 the

loan certification provision now in Sec. 668.163(b), amend that

provision, and propose new requirements regarding FFEL Program funds

for institutions that are placed on the reimbursement payment method.

Under Sec. 668.167(a), the Secretary proposes to modify the current

requirement that an institution may not request loan funds that a

lender will provide by EFT or master check earlier than 13 days before

the first day of a student's loan period by referencing the student's

payment period instead of the loan period. The Secretary proposes this

modification to correct the omission in the current rules that the 13-

day requirement should apply not only to the first loan disbursement,

but to all subsequent loan disbursements. Thus, in certifying a loan

application, an institution could not request a lender to provide loan

funds earlier than 13 days before each payment period. In addition, the

Secretary clarifies that for first-time, first-year borrowers, an

institution could not request loan funds earlier than 27 days after the

first day of classes of the borrower's first payment period.

In Sec. 668.167(b), the Secretary proposes new timeframes under

which an institution would return FFEL Program funds to a lender.

Currently, an institution has 45 days from the date it receives FFEL

Program funds not only to disburse those funds to eligible students,

but also to pay those students any loan proceeds that remain in their

accounts after those proceeds are disbursed (see 34 CFR 682.604(c)).

This rule was established at a time when lenders provided most FFEL

Program funds by a check payable to the borrower or copayable to the

borrower and the institution and the Secretary believed that 45 days

was a reasonable amount of time for an institution to obtain a

borrower's endorsement on the loan check and to otherwise process that

loan check.

Under the proposed timeframes, an institution would return to a

lender any loan funds that the institution does not disburse to

eligible students within 3 business days after the institution receives

the funds, if those funds are provided by the lender via EFT or master

check. If a lender provides loan funds by a check payable to the

borrower or copayable to the borrower and the institution, and the

institution does not disburse the funds within 30 days after the date

it receives the funds, the institution would need to return these funds

to the lender immediately.

The Secretary proposes these timeframes for several reasons. First,

the Secretary believes there is no reason why an institution that

receives loan funds from a lender via EFT or master check should hold

those funds for up to 45 days and derive any benefits from holding the

funds when the costs of the funds are either subsidized by taxpayers or

paid by student and parent borrowers. Moreover, since EFT and master

check loan funds are immediately negotiable by the institution (unlike

checks, which require the endorsement of the borrower), the Secretary

believes that these loan funds can and should be disbursed within 3

business days, just like any other title IV, HEA program funds. For

loan funds an institution continues to receive from a lender by check,

the Secretary notes that, in total, the proposed 30-day requirement to

disburse those funds, together with the 14-day requirement to pay any

credit balance of those funds, provides essentially the same time (44

days) as the current 45-day rule. The Secretary believes that 30 days

is more than enough time for an institution to provide a student the

loan proceeds, particularly when the borrower is in need of those funds

to pay his or her educational costs.

Second, the Secretary wishes to eliminate the separate timeframes

within which an institution must disburse FFEL Program funds and pay

the student any remaining balance (credit balance) of those funds. As

noted earlier, under the FFEL Program regulations an institution has 45

days to disburse and otherwise pay a student his or her loan funds.

However, the cash management regulations require that once a loan

disbursement is made, the institution must pay any credit balance of

those funds to the student within 14 days. Thus, an institution needs

to monitor its FFEL Program disbursements and payments of credit

balances to ensure that it makes those disbursements and payments

within the earlier of these two different time frames. Under the

proposed rule, an institution would follow the same disbursement and

credit balance time frames for FFEL Program funds that it does for all

other title IV, HEA program funds.

In making this proposal the Secretary realizes that there may be

instances where an institution is unable to make a second or subsequent

disbursement of FFEL Program funds within these timeframes because the

student is very close to completing, but has not yet completed, the

required number of clock or credit hours in a preceding payment period.

For this reason, the Secretary proposes that an institution may delay

returning loan funds to the lender if the institution determines that

the student can complete the required hours within 10 days after the

date that the institution would normally be required to return those

funds. An institution may also delay returning funds to a lender for 30

days after the date the institution would normally be required to

return those funds if the institution is placed on the reimbursement

payment method under proposed Sec. 668.167 (d) or (e).

The Secretary proposes under Sec. 668.167(d) rules and procedures

regarding the disbursement of FFEL Program funds and the certification

of FFEL Program loan applications that are comparable to the rules and

procedures currently in effect for institutions that are placed under

the reimbursement payment method for the other title IV, HEA programs.

In proposed Sec. 668.167(d), an institution that is placed on the

reimbursement payment method may not disburse any FFEL Program funds to

a borrower until the Secretary approves a request from the institution

to make that disbursement to that borrower. The Secretary may also

prohibit the institution from certifying a borrower's loan application

until the Secretary approves a request from the institution to make

that certification for that borrower.

In order for the Secretary to approve a disbursement or

certification request for a borrower, the institution would be required

to submit documentation to the Secretary, or an entity approved by the

Secretary, that shows that the borrower is eligible to receive that

disbursement or certification. The entity approved by

[[Page 49882]]

the Secretary may be a certified public accountant or financial aid

consultant that an institution uses to review its disbursement or

certification requests before those requests are forwarded to the

Secretary. In addition, pending the Secretary's approval of a

disbursement or certification request, the Secretary may take one or

more of the following actions: (1) Prohibit the institution from

endorsing a master check or obtaining a borrower's endorsement of any

loan check, (2) require the institution to maintain loan funds that it

receives from a lender via EFT in a separate bank account that contains

no other funds, and (3) prohibit the institution from certifying a

borrower's loan application.

The Secretary proposes that these rules and procedures apply to an

institution that participates in the FFEL Programs for the same reasons

that the Secretary places an institution on the reimbursement payment

method for the other title IV, HEA programs--to protect students and

the Federal interest in those instances where the Secretary determines

there is a need to strictly monitor an institution's participation in

those programs. Accordingly, where the Secretary determines there is a

need to strictly monitor an institution's participation, but that

institution participates only in the FFEL Programs, precluding the

Secretary from placing the institution under the reimbursement payment

method, the Secretary proposes under Sec. 668.167(e) to apply the rules

and procedures of paragraph (d) of this section to that institution.

The Secretary believes that the proposed approach is the least

complicated and burdensome for all of the parties involved in

administering the FFEL Programs. However, since this proposed approach

is the first time that the Secretary would impose limitations on the

disbursement of FFEL Program funds, or on the certification of FFEL

Program loan applications, the Secretary invites comments on alternate

approaches.

Campus-Based Programs, Federal Family Education Loan Programs, William

D. Ford Federal Direct Loan Program, and Federal Pell Grant Program

Sections 674.2, 675.2, 676.2, 682.200, 685.102, and 690.2 Definitions

The Secretary proposes to amend Secs. 674.2(a), 676.2(a),

682.200(a)(1), 685.102(a)(1), and 690.2(a) of the Federal Perkins Loan,

FSEOG, FFEL, Direct Loan, and Federal Pell Grant program regulations,

respectively, to add a cross-reference to the ``payment period''

definition in Sec. 668.4 discussed below. In the definitions of terms

defined in subpart A of 34 CFR part 668, the Secretary proposes to

include the uniform definition of a payment period in Sec. 668.4 of

these proposed regulations. The Secretary, therefore, proposes to

delete the duplicative definition of a payment period in

Secs. 674.2(b), 676.2(b), and 690.3. The Secretary also proposes to

delete the definition of a payment period in Sec. 675.2(b) as it is not

used in part 675.

Federal Family Education Loan Program and William D. Ford Federal

Direct Loan Program

Sections 682.207, 682.604, and 685.301 Disbursements

The Secretary is proposing to amend the disbursement rules of the

FFEL and Direct Loan programs. The proposed change takes into account

that section 428G of the HEA requires an institution to make at least

two disbursements in a loan period even if the loan period consists of

only one term, e.g., one semester. Accordingly, the Secretary is

proposing to amend 34 CFR part 682.207(c), 682.603(a), and 682.604(c)

of the FFEL Program regulations and 34 CFR part 685.301(b) of the

Direct Loan Program regulations to provide different disbursement rules

for loan periods that consist of one payment period and loan periods

that include more than one payment period. For the former type loan

period, an institution or lender is required to make two disbursements

during the loan period. For loan periods that include more than one

payment period, the institution or lender must disburse loan proceeds

at least once in each payment period. Under each approach, each

disbursement in a loan period must be substantially equal.

Executive Order 12866

1. Assessment of Costs and Benefits

These proposed regulations have been reviewed in accordance with

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

assessed the potential costs and benefits of this regulatory action.

The potential costs associated with the proposed regulations are

those resulting from statutory requirements and those determined by the

Secretary to be necessary for administering these programs effectively

and efficiently. Burdens specifically associated with information

collection requirements, if any, are identified and explained elsewhere

in this preamble under the heading Paperwork Reduction Act of 1995.

In assessing the potential costs and benefits--both quantitative

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

determined that the benefits of the proposed regulations justify the

costs.

The Secretary has also determined that this regulatory action does

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

exercise of their governmental functions.

To assist the Department in complying with the specific

requirements of Executive Order 12866, the Secretary invites comment on

whether there may be further opportunities to reduce any potential

costs or increase potential benefits resulting from these regulations

without impeding the effective and efficient administration of the

programs.

Summary of Potential Costs and Benefits

Potential costs and benefits of these proposed regulations are

discussed elsewhere in this preamble under the following heading:

Initial Regulatory Flexibility Analysis, and in the information stated

previously under Supplementary Information.

2. Clarity of the Regulations

Executive Order 12866 requires each agency to write regulations

that are easy to understand.

The Secretary invites comments on how to make these proposed

regulations easier to understand, including answers to questions such

as the following: (1) Are the requirements in the proposed regulations

clearly stated? (2) Do the regulations contain technical terms or other

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

regulations (groupings and order of sections, use of headings,

paragraphing, etc.) aid or reduce their clarity? Would the regulations

be easier to understand if they were divided into more (but shorter)

sections? (A ``section'' is preceded by the symbol ``Sec. '' and a

numbered heading, for example, Sec. 668.4 Payment period.) (4) Is the

description of the regulations in the ``Supplementary Information''

section of the preamble helpful in understanding the regulations? How

could this description be more helpful in making the regulations easier

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

regulations easier to understand?

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

these proposed regulations easier to understand should be sent to

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

Education, 600 Independence Avenue, S.W., (Room

[[Page 49883]]

5121, FB-10), Washington, D.C. 20202-2241.

3. Initial Regulatory Flexibility Analysis

The Secretary has determined that some small entities are likely to

experience economic impacts from these proposed regulations,

specifically with respect to the proposal to require institutions that

participate in the FFEL Program and that are on the reimbursement

payment method for the Federal Pell Grant, Federal Perkins Loan, FSEOG,

or Direct Loan program, or for which the Secretary determines there is

a need to strictly monitor FFEL funds, to submit documentation from

existing sources to the Secretary or approved entity, that supports the

certification of FFEL applications or supports intended disbursements

of FFEL program funds to eligible borrowers. A more detailed

explanation of these proposed changes in Sec. 668.167 can be found

elsewhere in this preamble under the heading Summary of Proposed

Changes. In accordance with the Regulatory Flexibility Act (RFA), an

Initial Regulatory Flexibility Analysis (IRFA) of the economic impact

on small entities has been performed. A summary of the IRFA appears

below.

Description of the Objectives of, and Legal Basis for, the Proposed

Rule

The Secretary proposes that these rules and procedures apply to an

institution that participates in the FFEL Programs for the same reasons

that the Secretary places an institution on the reimbursement payment

method for the other title IV, HEA programs: to protect students and

the Federal interest in the title IV, HEA programs in those instances

where the Secretary determines there is a need to strictly monitor an

institution's participation in those programs. These rules would also

apply to those institutions that participate in only the FFEL Programs.

The Secretary has a responsibility in managing the title IV, HEA

programs to ensure that only eligible students, and parents in the case

of PLUS funds, receive title IV, HEA program funds, and that they

receive those funds in the amounts they are eligible for.

Definition and Identification of Small Entities

The Secretary has adopted the U.S. Small Business Administration

(SBA) Size Standards for this analysis. The RFA directs that small

entities are the sole focus of the Regulatory Flexibility Analysis.

There are three types of small entities that are analyzed here. They

are: for-profit entities with total revenue below $5,000,000; nonprofit

entities with total revenue below $5,000,000; and entities controlled

by governmental entities with populations below 50,000. The total

number of institutions (large and small) participating in the title IV,

HEA programs during the 1995-96 award year was 6,576. As of July 31,

1996 there were 307 institutions on the reimbursement payment method:

estimated at 257 for-profit entities, 36 nonprofit entities, and 14

governmental entities. Of the 307 institutions, 175 participate in the

FFEL Programs and had loan activity during the 1995 fiscal year. The

data regarding the number of institutions on the reimbursement payment

method, the number of those institutions that participate in the FFEL

Programs and the volume of loan funds was obtained through Department

of Education databases, such as the National Student Loan Data System.

Where exact data were not available to estimate the cost to small

entities, data elements were chosen that would have overestimated

rather than underestimated the cost. For example, information is not

available on the proportion of these institutions that are small versus

the number that are large. For this analysis, in order to prevent an

underestimate, all 175 institutions were assumed to be small although 8

had a loan volume greater than $5,000,000 under the FFEL Programs. The

Secretary particularly invites comments on the definition of small

entity and the estimate of the number of small entities that would be

covered by the proposed rule.

The component of the proposed rule that could potentially cause a

small entity to be adversely affected is the proposal to require

institutions that participate in the FFEL Programs and that are on the

reimbursement payment method for other title IV, HEA programs, or for

which the Secretary determines there is a need to strictly monitor FFEL

Program funds, to submit documentation from existing sources to the

Secretary or an approved entity, that supports the certification of

FFEL Program applications or supports intended disbursements of FFEL

Program funds. The FFEL Program disbursements at an institution could

be delayed for an estimated average of 18-20 days until approval for

those certifications or disbursements was received by the institution,

costing the institution interest expenses and paperwork expenses for

the submission of supporting documentation.

Compliance Costs of Proposed Rule

Some small (and large) entities will experience economic impacts

from this proposed rule. These entities are those that would have to

borrow funds in order to operate during the 18-20 days prior to

receiving approval from the Secretary to certify loan applications, or

to disburse FFEL Program funds. The economic impact on these entities

are those costs associated with obtaining a short-term loan and those

costs associated with unearned interest revenue (on institutional funds

used in lieu of FFEL Program funds) that could have been earned through

an interest-bearing or investment account during the 18-20 day delay.

An estimate of the calculable costs of obtaining a short-term loan, and

of the loss of interest revenue during the delay, was calculated for

small entities.

More than 60 percent of the 175 institutions that could be affected

by these proposed regulations had an FFEL Program loan volume of less

than $900,000 during the 1995 fiscal year. Therefore, for most

institutions, based upon an interest rate equal to the prime rate plus

4 percent (8.25%+4%=12.25%) for two short-term loans, one for each

disbursement for a period of 30 days, the cost per institution would be

an estimated $9,062 in interest expenses. The potential loss of

interest earnings that could have accrued for the delayed FFEL Program

funds during that time is estimated at 3 percent equaling an estimated

$2,219. Less than 15 percent of the 175 institutions identified had a

loan volume of $3,300,000 or greater. For an institution in this

category, the interest expenses for the total amount of loan

commitments under the same conditions above, would equal an estimated

$33,226. The potential loss of interest earnings on those funds equals

an estimated $8,137 per institution.

In addition to the interest expenses, there would be an estimated

cost of $230 per institution for increased paperwork burden as a result

of submitting to the Secretary or approved entity documentation in

support of the certification of loan applications or the disbursement

of FFEL Program funds to eligible borrowers. The cost is a result of an

estimated increase of 10 hours of paperwork burden performed by an

employee at $20 per hour, and $3.00 in postage for an average of 10

mailings.

The total potential cost in interest expenses and increased

paperwork burden for most small entities with low FFEL Program loan

volume is estimated at $11,511. For the approximately 15 percent of

small entities with a high FFEL Program loan volume, as noted above,

the total potential cost per institution is estimated at $41,593. These

costs are estimates and the costs experienced by actual institutions

will

[[Page 49884]]

undoubtedly be different. These estimates are provided to satisfy the

RFA requirement that costs of compliance be described and should be

used as illustrative examples only. The Secretary particularly invites

comments on these estimates of each of these alternatives for small

entities.

Discussion of Economic Impacts

This analysis has determined that an estimated 138 small for-profit

entities, an estimated 28 small nonprofit entities, and an estimated 9

small governmental entities will experience adverse economic impacts

from these proposed regulations. The adverse economic impacts

experienced by some small (and large) entities is balanced by the

positive economic impacts accruing to the U.S. taxpayer. These positive

impacts arise (1) From the ability of the Secretary to ensure that

eligible students receive title IV, HEA program funds in the amounts

for which they are eligible in cases where there is a need to strictly

monitor title IV, HEA program funds at an institution and (2) from the

protection of students and the Federal interest in the title IV, HEA

programs.

The use of the proposed requirement will enable the Secretary to

better discharge the responsibilities of managing the title IV, HEA

program funds, to promote parallel requirements across the title IV,

HEA programs, and to better safeguard the Federal fiscal interest and

the interests of students.

Identification of Relevant Federal Rules Which May Duplicate, Overlap

or Conflict With the Proposed Rule

The Secretary has not found any other Federal rules which

duplicate, overlap, or conflict with the proposed rule. The Secretary

particularly invites comments on other Federal rules that meet these

criteria.

Significant Alternatives That Would Satisfy the Same Legal and Policy

Objectives While Minimizing the Economic Impact on Small Entities

The Secretary has identified no other significant alternatives that

would satisfy the same legal and policy objectives while minimizing the

economic impact on small entities. The Secretary believes that the

proposed approach is the least complicated and burdensome for small

(and large) entities involved in the administration of the title IV,

HEA programs while still allowing for the proper protection of the

Federal fiscal interests and the interests of students and their

parents. The Secretary particularly invites comments on this

determination.

Conclusion

The Secretary concludes that a substantial number of small entities

are likely to experience significant economic impacts from the proposed

rule. However, as discussed in the section referring to the cost-

benefit assessment of this proposed rule pursuant to Executive Order

12866, the Secretary has concluded that the costs are outweighed by the

benefits. In this case, the benefits are better protection of the

Federal fiscal interest as well as improved service to students

participating in the title IV, HEA programs.

The Secretary invites comments on any aspect of this analysis,

particularly comments on the definition of small entity, the estimated

number of institutions that are expected to experience economic

impacts, the estimated costs, and any significant alternatives that

would satisfy the same legal and policy objectives while minimizing the

economic impact on small entities.

Paperwork Reduction Act of 1995

Proposed Secs. 668.16, 668.162, 668.165, and 668.167 contain

information collection requirements. As required by the Paperwork

Reduction Act of 1995 (44 U.S.C. 3507(d)), the Department of Education

has submitted a copy of these regulations to the Office of Management

and Budget (OMB) for its review. Collection of information: Student

Assistance General Provisions--Section 668.16--Standards of

Administrative Capability--The Department currently has this section

approved under OMB control number 1840-0537. To be considered

administratively capable to participate in the title IV, HEA programs,

the Secretary proposes that an institution participate in the

electronic services that the Secretary provides at no substantial

charge to the institution. This requirement does not change the

information that an institution reports or receives but does change the

way that the institution reports or receives the information.

Section 668.162--Requesting funds--The Secretary proposes under

Sec. 668.162(c) the requirements for a ``just-in-time'' payment method.

Under the just-in-time payment method, for each student that an

institution determines is eligible for title IV, HEA program funds, the

institution transmits electronically to the Secretary, within a

timeframe established by the Secretary, records that contain program

award information for that student. The just-in-time payment method

provides for reporting information that is no different than current

student-level data that an institution is reporting; however, it does

require an institution to report that information earlier.

Section 668.165--Notices and authorizations--Institutions are

required to provide a notice once each award year of the amount of

title IV, HEA program funds a student can expect to receive, how and

when those funds will be paid, and whether any title IV, HEA program

loans are subsidized or unsubsidized. Annual recordkeeping and

reporting burden contained in this collection of information as

proposed in these regulations are estimated to average 78.9 hours

annually per respondent. There are 6,576 respondents and the burden

hours total 518,846.4 hours including the time for reviewing

instructions, searching existing data sources, gathering and

maintaining the data needed, and completing and reviewing the

collection of information. Institutions are also required to provide a

notice to a student or parent in the case of PLUS funds, of (1)

Disbursements of title IV, HEA loan funds credited to the student's

account at the institution or the student's or parent's bank account,

and (2) the student- or parent-borrower's right to cancel a loan or

loan disbursement, and when that cancellation request must be made.

Annual recordkeeping and reporting burden contained in this collection

of information as proposed in these regulations are estimated to

average 116.7 hours annually per respondent. There are a 5,944

respondents and the burden hours total 693,644.8 hours including the

time for reviewing instructions, searching existing data sources,

gathering and maintaining the data needed, and completing and reviewing

the collection of information. The total annual recordkeeping and

reporting burden hours for Sec. 668.165 equals 1,212,491 hours. The

Secretary understands that respondents are already providing this

notice and the actual increase in burden would be much less than this

estimate.

Section 668.167--FFEL Program funds--Institutions that participate

in the FFEL program that are on the reimbursement payment method for

other title IV, HEA programs or for which the Secretary determines

there is a need to strictly monitor FFEL program funds must submit

documentation to the Secretary or an approved entity in support of

disbursements of FFEL program funds to eligible students and parents.

The information to be collected includes: specific information from the

institution's files regarding eligibility and documentary evidence. The

[[Page 49885]]

Secretary needs and uses the information to approve disbursements of

FFEL program funds.

All information is to be collected on a case-by-case basis. Annual

recordkeeping and reporting burden contained in the collection of

information proposed in these regulations are estimated to average 1

hour for an average of 10 submissions for 175 respondents, including

the time for reviewing instructions, searching existing data sources,

gathering and maintaining the data needed, and completing and reviewing

the collection of information. The total annual recordkeeping and

reporting burden hours equals 1750 hours.

Organizations and individuals desiring to submit comments on the

information collection requirements should direct them to the Office of

Information and Regulatory Affairs, OMB, Room 10235, New Executive

Office Building, Washington, D.C. 20503; Attention: Desk Officer for

the U.S. Department of Education.

The Department considers comments by the public on these proposed

collections of information in--

Evaluating whether the proposed collections of information

are necessary for the proper performance of the functions of the

Department, including whether the information will have a practical

use;

Evaluating the accuracy of the Department's estimate of

the burden of the proposed collections of information, including the

validity of the methodology and assumptions used;

Enhancing the quality, usefulness, and clarity of the

information to be collected; and

Minimizing the burden of collection of information on

those who are to respond, including through the use of appropriate

automated, electronic, mechanical, or other technological collection

techniques, or other forms of information technology; e.g., permitting

electronic submission of responses.

OMB is required to make a decision concerning the collections of

information contained in these proposed regulations between 30 and 60

days after publication of this document in the Federal Register.

Therefore, a comment to OMB is best assured of having its full effect

if OMB receives it within 30 days of publication. This does not affect

the deadline for the public to comment to the Department on the

proposed regulations.

Invitation to Comment

Interested persons are invited to submit comments and

recommendations regarding these proposed regulations.

All comments submitted in response to these proposed regulations

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

period, in Room 3053, ROB-3, 7th and D Streets, S.W., Washington, D.C.,

between the hours of 8:30 a.m. and 4 p.m., Eastern standard time Monday

through Friday of each week except Federal holidays.

Assessment of Educational Impact

The Secretary particularly requests comments on whether the

proposed regulations in this document would require transmission of

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

agency or authority of the United States.

List of Subjects

34 CFR Part 668

Administrative practice and procedure, Colleges and universities,

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

education, Student aid, Reporting and recordkeeping requirements.

34 CFR Parts 674, 675, and 676

Loan programs--education, Student aid, Reporting and recordkeeping

requirements.

34 CFR Part 682

Administrative practice and procedure, Colleges and universities,

Loan Programs--education, Student aid, Vocational education, Reporting

and recordkeeping requirements.

34 CFR Part 685

Administrative practice and procedure, Colleges and universities,

Loan Programs--education, Student aid, Vocational education, Reporting

and recordkeeping requirements.

34 CFR Part 690

Grant programs--education, Reporting and recordkeeping

requirements, Student aid.

Dated: September 12, 1996.

Richard W. Riley,

Secretary of Education.

(Catalog of Federal Domestic Assistance Numbers: 84.007 Federal

Supplemental Educational Opportunity Grant Program; 84.032

Consolidation Program; 84.032 Federal Stafford Loan Program; 84.032

Federal PLUS Program; 84.032 Federal Supplemental Loans for Students

Program; 84.033 Federal Work-Study Program; 84.038 Federal Perkins

Loan Program; 84.063 Federal Pell Grant Program; 84.069 Federal

State Student Incentive Grant Program; 84.268 William D. Ford

Federal Direct Loan Programs; and 84.272 National Early Intervention

Scholarship and Partnership Program)

The Secretary proposes to amend parts 668, 674, 675, 676, 682, 685,

and 690 of title 34 of the Code of Federal Regulations as follows:

PART 668--STUDENT ASSISTANCE GENERAL PROVISIONS

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

follows:

Authority: 20 U.S.C. 1085, 1088, 1091, 1092, 1094, and 1141,

unless otherwise noted.

Subpart A--General

2. Section 668.4 is added to read as follows:

Sec. 668.4 Payment period.

(a) Payment period for an eligible program that has academic terms

and measures progress in credit hours. For a student enrolled in an

eligible program that uses semesters, trimesters, quarters, or other

academic terms and measures progress in credit hours, the payment

period is the semester, trimester, quarter, or other academic term.

(b) Payment periods for an eligible program that measures progress

in credit hours and does not have academic terms or measures progress

in clock hours. (1) For a student enrolled in an eligible program that

is one academic year or less in length--

(i) The first payment period is the period of time in which the

student completes the first half of the program as measured in credit

or clock hours; and

(ii) The second payment period is the period of time in which the

student completes the second half of the program as measured in credit

or clock hours.

(2) For a student enrolled in an eligible program that is more than

one academic year in length--

(i) For the first academic year and any subsequent full academic

year as measured in credit or clock hours--

(A) The first payment period is the period of time in which the

student completes the first half of the academic year as measured in

credit or clock hours; and

(B) The second payment period is the period of time in which the

student completes the second half of that academic year;

(ii) For any remaining portion of an eligible program that is more

than one-half an academic year but less than a complete academic year--

(A) The first payment period is the period of time in which a

student completes the first half of the remaining portion of the

eligible program as measured in credit or clock hours; and

[[Page 49886]]

(B) The second payment period is the period of time in which the

student completes the remainder of the eligible program; and

(iii) For any remaining portion of an eligible program that is not

more than half an academic year as measured in credit or clock hours,

the payment period is the remainder of that eligible program.

(3) For purposes of paragraphs (b)(1) and (b)(2) of this section,

if a student cannot earn half the credit hours in the program under

paragraph (b)(1) of this section or half of the remaining portion of

the eligible program under paragraph (b)(2)(i) and (b)(2)(ii) of this

section until after the calendar midpoint between the first and last

scheduled days of class, the second payment period begins on the later

of--

(i) The calendar midpoint between the first and last scheduled days

of class of the program or academic year; or

(ii) The date, as determined by the institution, that the student

has completed half of the academic coursework.

(4) If an institution chooses to have more than two payment periods

in an academic year, in a program of less than an academic year, or in

the remaining portion of an eligible program under paragraph (b)(2) of

this section, the rules in paragraphs (b)(1) through (b)(3) of this

section are modified to reflect the increased number of payment

periods. For example, if an institution chooses to have three payment

periods in an academic year, each payment period must correspond to

one-third of the academic year.

(Authority: 20 U.S.C. 1070 et seq.)

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

3. Section 668.16 is amended by removing ``and'' at the end of

paragraph (m)(2)(ii), removing the period at the end of paragraph (n),

and inserting ``; and'', and adding a new paragraph (o) to read as

follows:

Sec. 668.16 Standards of administrative capability.

* * * * *

(o) Participates in the electronic services that the Secretary--

(1) Provides at no substantial charge to the institution; and

(2) Identifies through a notice published in the Federal Register.

* * * * *

(Authority: 20 U.S.C. 1082, 1085, 1094, 1099c)

4. Subpart K is amended by revising Secs. 668.161 through 668.165

and Sec. 668.166(a) and by adding a new Sec. 668.167 to read as

follows:

Subpart K--Cash Management

Sec. 668.161 Scope and purpose.

(a) General. (1) This subpart establishes the rules and procedures

under which a participating institution requests, maintains, disburses,

and otherwise manages title IV, HEA program funds. This subpart is

intended to--

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

an institution;

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

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

institution; and

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

HEA loan program.

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

this subpart also apply to a third-party servicer.

(3) As used in this subpart--

(i) The title IV, HEA programs include only the Federal Pell Grant,

FSEOG, Federal Perkins Loan, FWS, Direct Loan, and FFEL programs;

(ii) The term ``parent'' means a parent borrower under the PLUS

programs;

(iii) With regard to the FFEL Programs, the term ``disburse'' means

the same as deliver loan proceeds under 34 CFR Part 682 of the FFEL

Program regulations; and

(iv) A day is a calendar day unless otherwise specified.

(4) FWS Program. An institution must follow the disbursement

procedures in 34 CFR 675.16 for paying a student his or her wages under

the FWS Program instead of the disbursement procedures and requirements

under this subpart.

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

funds received by an institution for administrative expenses and for

funds used for the Job Location and Development Program under the FWS

Programs, funds received by an institution under the title IV, HEA

programs are held in trust for the intended student beneficiaries and

the Secretary. The institution, as a trustee of Federal funds, may not

use or hypothecate (i.e., use as collateral) title IV, HEA program

funds for any other purpose.

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

Sec. 668.162 Requesting funds.

(a) General. The Secretary has sole discretion to determine the

method under which the Secretary provides title IV, HEA program funds

to an institution. In accordance with procedures established by the

Secretary, the Secretary may provide funds to an institution in advance

of the institution's need for those funds (advance payment method), by

the date the institution needs those funds (just-in-time payment

method), or by reimbursing an institution for disbursements already

made to eligible students and parents (reimbursement payment method).

(b) Advance payment method. Under the advance payment method--

(1) An institution submits a request for funds to the Secretary.

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

the institution needs immediately for disbursements the institution has

made or will make to eligible students and parents;

(2) If the Secretary accepts that request, the Secretary initiates

an electronic funds transfer (EFT) of that amount to a bank account

designated by the institution; and

(3) The institution must disburse the funds requested as soon as

administratively feasible but no later than 3 business days following

the date the institution received those funds.

(c) Just-in-time payment method. Under the just-in-time payment

method--

(1) For each student that an institution determines is eligible for

title IV, HEA program funds, the institution transmits electronically

to the Secretary, within a timeframe established by the Secretary,

records that contain program award information for that student. As

part of those records, the institution reports the date and amount of

the disbursements that it will make or has made to that student or that

student's parent;

(2) For each record the Secretary accepts for a student or parent,

the Secretary provides by EFT the corresponding disbursement amount to

the institution on or before the date reported by the institution for

that disbursement;

(3) When the institution receives the funds for each record

accepted by the Secretary, the institution may disburse those funds

based on its determination at the time the institution transmitted that

record to the Secretary that the student is eligible for that

disbursement; and

(4) The institution must report any adjustment to a previously

accepted record within the time established by the Secretary in a

notice published in the Federal Register.

[[Page 49887]]

(d) Reimbursement payment method. Under the reimbursement payment

method--

(1) An institution must first make disbursements to students and

parents for the amount of funds those students and parents are eligible

to receive under the Federal Pell Grant, Direct Loan, and campus-based

programs before the institution may seek reimbursement from the

Secretary for those disbursements. The Secretary considers an

institution to have made a disbursement if the institution has either

credited a student's account or paid a student or parent directly with

its own funds;

(2) An institution seeks reimbursement by submitting to the

Secretary a request for funds that does not exceed the amount of the

actual disbursements the institution has made to students and parents

included in that request;

(3) As part of the institution's reimbursement request, the

Secretary requires the institution to--

(i) Identify the students for whom reimbursement is sought; and

(ii) Submit to the Secretary or entity approved by the Secretary

documentation that shows that each student and parent included in the

request was eligible to receive and has received the title IV, HEA

program funds for which reimbursement is sought; and

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

reimbursement request for a student or parent and pays the institution

that amount, if the Secretary determines with regard to that student or

parent that the institution--

(i) Accurately determined the student's eligibility for title IV,

HEA program funds;

(ii) Accurately determined the amount of title IV, HEA program

funds paid to the student or parent; and

(iii) Submitted the documentation required under paragraph (d)(3)

of this section.

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

Sec. 668.163 Maintaining and accounting for funds.

(a) (1) Bank or investment account. An institution must maintain

title IV, HEA program funds in a bank or investment account that is

Federally insured or secured by collateral of value reasonably

equivalent to the amount of those funds.

(2) For each bank or investment account that includes title IV, HEA

program funds, an institution must clearly identify that title IV, HEA

program funds are maintained in that account by--

(i) Including in the name of each account the phrase ``Federal

Funds''; or

(ii)(A) Notifying the bank or investment company of the accounts

that contain title IV, HEA program funds and retaining a record of that

notice; and

(B) Except for a public institution, filing with the appropriate

State or municipal government entity a UCC-1 statement disclosing that

the account contains Federal funds and maintaining a copy of that

statement.

(b) Separate bank account. The Secretary may require an institution

to maintain title IV, HEA program funds in a separate bank or

investment account that contains no other funds if the Secretary

determines that the institution failed to comply with--

(1) The requirements in this subpart;

(2) The recordkeeping and reporting requirements in subpart B of

this part; or

(3) Applicable program regulations.

(c) Interest-bearing or investment account. (1) An institution must

maintain the Fund described in Sec. 674.8(a) of the Federal Perkins

Loan Program regulations in an interest-bearing bank account or

investment account consisting predominately of low-risk, income-

producing securities, such as obligations issued or guaranteed by the

United States. Interest or income earned on Fund proceeds are retained

by the institution as part of the Fund.

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

institution must maintain Direct Loan, Federal Pell Grant, FSEOG, and

FWS program funds in an interest-bearing bank account or an investment

account as described in paragraph (c)(1) of this section.

(3) An institution does not have to maintain Direct Loan, Federal

Pell Grant, FSEOG, and FWS program funds in an interest-bearing bank

account or an investment account for an award year if--

(i) The institution drew down less than a total of $3 million of

those funds in the prior award year and anticipates that it will not

draw down more than that amount in the current award year;

(ii) The institution demonstrates by its cash management practices

that it will not earn over $250 on those funds during the award year;

or

(iii) The institution requests those funds from the Secretary under

the just-in-time payment method.

(4) If an institution maintains Direct Loan, Federal Pell Grant,

FSEOG, and FWS program funds in an interest-bearing or investment

account, the institution may keep the initial $250 it earns on those

funds during an award year. By June 30 of that award year, the

institution must remit to the Secretary any earnings over $250.

(d) Accounting and internal control systems and financial records.

(1) An institution must maintain accounting and internal control

systems that--

(i) Identify the cash balance of the funds of each title IV, HEA

program that are included in the institution's bank or investment

account as readily as if those program funds were maintained in a

separate account; and

(ii) Identify the earnings on title IV, HEA program funds

maintained in the institution's bank or investment account.

(2) An institution must maintain its financial records in

accordance with the provisions under 34 CFR 668.24.

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

care and diligence required of a fiduciary with regard to maintaining

and investing title IV, HEA program funds.

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

Sec. 668.164 Disbursing funds.

(a) Disbursement. An institution makes a disbursement of title IV,

HEA program funds on the date that the institution credits a student's

account at the institution or pays the student or parent directly

with--

(1) Funds received from the Secretary;

(2) Funds received from a lender under the FFEL Programs; or

(3) Institutional funds used in advance of receiving title IV, HEA

program funds.

(b) Disbursements by payment period. (1) Except as provided in

paragraph (b)(2) of this section, an institution must disburse title

IV, HEA program funds on a payment period basis. Except as provided in

paragraph (g) of this section, an institution may disburse title IV,

HEA program funds to a student or parent for a payment period only if

the student is enrolled for classes for that payment period and is

eligible to receive those funds.

(2) The provisions of paragraph (b)(1) of this section do not apply

to the disbursement of FWS Program funds.

(3) For a student enrolled in an eligible program at an institution

that measures academic progress in clock hours, in determining whether

the student completes the clock hours in a payment period, an

institution may include clock hours for which the student has an

excused absence if--

(i) The institution has a written policy that permits excused

absences; and

(ii) The number of excused absences under the written policy for

purposes of

[[Page 49888]]

this paragraph does not exceed the lesser of--

(A) The policy on excused absences of the institution's accrediting

agency or, if the institution has more than one accrediting agency, the

agency designated under 34 CFR part 600.11(b);

(B) The policy on excused absences of any State agency that

licenses the institution or otherwise legally authorizes the

institution to operate in the State; or

(C) Ten percent of the clock hours in the payment period.

(4) For purposes of paragraph (b)(3) of this section, an ``excused

absence'' is an absence that a student does not have to make up.

(c) Direct payments. An institution pays a student or parent

directly by--

(1) Releasing to the student or parent a check provided by a lender

to the institution under an FFEL Program;

(2) Issuing a check or other instrument payable to and requiring

the endorsement or certification of the student or parent. An

institution issues a check by--

(i) Releasing or mailing the check to a student or parent; or

(ii) Notifying the student or parent that the check is available

for immediate pickup;

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

designated by the student or parent; or

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

receipt from the student or parent.

(d) Crediting a student's account at the institution.

(1) Without obtaining the student's or parent's authorization under

Sec. 668.165, an institution may use title IV, HEA program funds to

credit a student's account at the institution to satisfy current

charges for--

(i) Tuition and fees;

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

board; and

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

(2) After obtaining the appropriate authorization from a student or

parent under Sec. 668.165, the institution may use title IV, HEA

program funds to credit a student's account at the institution to

satisfy--

(i) Current charges that are in addition to the charges described

in paragraph (d)(1) of this section that were incurred by the student

at the institution for educationally related activities; and

(ii) Minor prior award year charges if these charges are less than

$100 or if the payment of these charges does not, and will not, prevent

the student from paying his or her current educational costs.

(3) If an institution disburses Direct Loan Program funds by

crediting a student's account at the institution, the institution must

first credit the student's account with those funds to pay for

outstanding current and authorized charges.

(4) For purposes of this paragraph, current charges refers to

charges assessed the student by the institution for--

(i) The current award year; or

(ii) The loan period for which an institution certified or

originated a loan under the FFEL or Direct Loan programs.

(e) Credit balances. Whenever an institution disburses title IV,

HEA program funds by crediting a student's account and the total amount

of all title IV, HEA program funds credited exceeds the amount of

tuition and fees, room and board, and other authorized charges the

institution assessed the student, the institution must pay the

resulting credit balance directly to the student or parent as soon as

possible but--

(1) No later than 14 days after the balance occurred if the credit

balance occurred after the first day of class of a payment period; or

(2) No later than 14 days after the first day of class of a payment

period if the credit balance occurred on or before the first day of

class of that payment period.

(f) Early disbursements. (1) Except as provided under paragraph

(f)(2) of this section, the earliest an institution may disburse title

IV, HEA program funds to a student or parent for any payment period is

the later of--

(i) Ten days before the first day of classes of the payment period;

or

(ii) The date the student completed the previous payment period for

which he or she received title IV, HEA program funds, except that this

provision does not apply to the payment of Direct Loan or FFEL program

funds under the conditions described in 34 CFR 685.301 paragraphs

(b)(3)(ii), (b)(5), and (b)(6) and 34 CFR 682.604 paragraphs

(c)(6)(ii), (c)(7), and (c)(8), respectively.

(2) The earliest an institution may disburse the initial

installment of a loan under the Direct Loan or FFEL programs to a

first-year, first-time borrower as described in 34 CFR 682.604(c) and

685.303(b)(4) is 30 days after the first day of the student's program

of study.

(g) Late disbursements. (1) Ineligible students who may receive a

late disbursement. An institution may make a late disbursement to an

ineligible student under paragraph (g)(2) of this section if the

student became ineligible solely because--

(i) For purposes of the Direct Loan and FFEL programs, the student

is no longer enrolled at the institution as at least a half-time

student for the loan period; and

(ii) For purposes of the Federal Pell Grant, FSEOG, and Federal

Perkins Loan programs, the student is no longer enrolled at the

institution for the award year.

(2) Conditions for late disbursements. An institution may disburse

funds under a title IV, HEA program to an ineligible student described

in paragraph (g)(1) of this section if, before the date the student

became ineligible--

(i) The institution received a SAR from the student or an ISIR from

the Secretary; and

(ii) (A) For a Direct Loan Program loan, the institution created

the electronic origination record for that loan. An institution may not

make a late second or subsequent disbursement of a Direct Subsidized or

Direct Unsubsidized loan unless the student has graduated or

successfully completed the period of enrollment for which the loan was

intended;

(B) For an FFEL Program loan, the institution certified an

application for that loan. An institution may not make a late second or

subsequent disbursement of a Stafford loan unless the student has

graduated or successfully completed the period of enrollment for which

the loan was intended;

(C) For a Direct Loan or FFEL Program loan, the student completed

the first 30 days of his or her program of study if the student was a

first-year, first-time borrower as described in 34 CFR 682.604(c)(5) or

685.303(b)(4);

(D) For a Federal Pell Grant Program award, the institution

received a valid SAR from the student or a valid ISIR from the

Secretary; and

(E) For a Federal Perkins Loan Program loan or an FSEOG Program

award, the institution received from the student an acceptance of that

loan or award.

(3) Making a late disbursement. If a student qualifies for a late

disbursement under paragraphs (g) (1) and (2) of this section--

(i) The institution may make that late disbursement of title IV,

HEA program funds only if the funds are used to pay for educational

costs that the institution determines the student incurred for the

period in which the student was enrolled and eligible; and

(ii) If the institution chooses to make a late disbursement, it

must make that late disbursement no later than 90 days after the date

the student becomes

[[Page 49889]]

ineligible under paragraph (h)(1) of this section.

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

Sec. 668.165 Notices and authorizations.

(a) Notices. (1) Before an institution disburses title IV, HEA

program funds for any award year, the institution must notify a student

of the amount of funds that the student or his or her parent can expect

to receive under each title IV, HEA program, and how and when those

funds will be disbursed. If those funds include FFEL or Direct Loan

Program funds, the notice provided by the institution must indicate

which funds are from subsidized loans and which are from unsubsidized

loans.

(2) If an institution credits a student's account at the

institution with Direct Loan, FFEL, or Perkins Loan Program funds, or

initiates an EFT of those funds to the student's or parent's bank

account and subsequently withdraws funds from that bank account to pay

for tuition and fees or other authorized charges, the institution must

notify the student, and parent if PLUS Loan funds are being disbursed,

of--

(i) The date and amount of the disbursement;

(ii) The student's right, or in the case of a PLUS loan the

parent's right, to cancel that loan or loan disbursement and have the

loan proceeds returned to the holder of that loan. However, the

institution does not have to provide this information with regard to

FFEL Program funds unless the institution received the loan funds from

a lender through an EFT payment or master check; and

(iii) The procedures and the time by which the student or parent

must notify the institution that he or she wishes to cancel the loan or

loan disbursement.

(3) The institution must send the notice described in paragraph

(a)(2) of this section--

(i) No earlier than 10 days before and no later than 10 days after

either crediting the student's account at the institution or crediting

the student's or parent's bank account; and

(ii) Either in writing or electronically. If the institution sends

the notice electronically, it must require the recipient of the notice

to confirm receipt of the notice and must maintain a copy of that

confirmation.

(4)(i) If a student or parent wishes to cancel a loan or loan

disbursement, the student or parent must submit that cancellation

request to the institution.

(ii) If the institution receives the cancellation request within 14

days after the date the institution sent the notice described in

paragraph (a)(2) of this section, the institution must return the loan

proceeds, cancel the loan, or do both, in accordance with applicable

program regulations.

(iii) If a student or parent submits a cancellation request after

the period set forth in paragraph (a)(4)(ii) of this section, the

institution may return the loan proceeds, cancel the loan, or do both,

in accordance with applicable program regulations.

(5) An institution must inform a student or parent in writing or

electronically regarding the outcome of any cancellation request.

(b) Student or parent authorizations. (1) If an institution obtains

written authorization from a student or parent, as applicable, the

institution may--

(i) Disburse title IV, HEA program funds to a bank account

designated by the student or parent;

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

pay for charges described in Sec. 668.164(d)(2) that are included in

that authorization; and

(iii) Hold on behalf of the student or parent any title IV, HEA

program funds that would otherwise be paid directly to the student or

parent under Sec. 668.164(f).

(2) In obtaining the student's or parent's authorization to perform

an activity described in paragraph (b)(1) of this section, an

institution--

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

authorization;

(ii) Must allow the student or parent to cancel or modify that

authorization at any time; and

(iii) Must clearly explain how it will carry out that activity.

(3) A student or parent may authorize an institution to carry out

the activities described in paragraph (b)(1) of this section for the

period during which the student is enrolled at the institution.

(4)(i) If a student or parent modifies an authorization, the

modification takes effect on the date the institution receives the

modification notice.

(ii) If a student or parent cancels an authorization to use title

IV, HEA program funds to pay for authorized charges under

Sec. 668.164(d)(2), the institution may use title IV, HEA program funds

to pay only those authorized charges incurred by the student before the

institution received the notice.

(iii) If a student or parent cancels an authorization to hold title

IV, HEA program funds under paragraph (b)(1)(iii) of this section, the

institution must pay those funds directly to the student or parent as

soon as possible but no later than 14 days after the institution

receives that notice.

(5) If an institution holds excess student funds under paragraph

(b)(1)(iii) of this section, the institution must--

(i) Identify the amount of funds the institution holds for each

student or parent in a subsidiary ledger account designed for that

purpose;

(ii) Maintain, at all times, cash in its bank account in an amount

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

student; and

(iii) Notwithstanding any authorization obtained by the institution

under this paragraph, pay any remaining balance on loan funds by the

end of the loan period and any remaining other title IV, HEA program

funds by the end of the last payment period in the award year for which

they were awarded.

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

Sec. 668.166 Excess cash.

(a) General. (1) The Secretary considers excess cash to be any

amount of title IV, HEA program funds, that an institution does not

disburse to students by the end of the third business day following the

date the institution received those funds from the Secretary. Except as

provided in paragraph (b) of this section, an institution must return

promptly to the Secretary any amount of excess cash in its account or

accounts.

(2) The provisions in this section do not apply to the title IV,

HEA program funds that an institution receives from the Secretary under

the just-in-time payment method.

* * * * *

Sec. 668.167 FFEL Program funds.

(a) Requesting FFEL Program funds. In certifying a loan application

for a borrower under Sec. 682.603--

(1) An institution may not request a lender to provide loan funds

by EFT or master check--

(i) Earlier than 27 days after the first day of classes of the

first payment period for a first-year, first-time Federal Stafford Loan

Program borrower as defined in Sec. 682.604(c)(5); or

(ii) Earlier than 13 days before the first day of classes for any

subsequent payment period for a first-year, first-time Federal Stafford

Loan Program borrower or for any payment period for all other Federal

Stafford Loan Program borrowers; and

(2) An institution may not request a lender to provide loan funds

by check requiring the endorsement of the borrower--

(i) Earlier than the first day of classes of the first payment

period for a first-year, first-time Federal Stafford Loan Program

borrower as defined in Sec. 682.604(c)(5); or

[[Page 49890]]

(ii) Earlier than 30 days before the first day of classes for any

subsequent payment period for a first-year, first-time Federal Stafford

Loan Program borrower or for any payment period for all other Federal

Stafford borrowers; and

(3) (i) An institution may not request a lender to provide loan

funds by EFT or master check for any Federal PLUS Program loan earlier

than provided in paragraph (a)(1) of this section.

(ii) An institution may not request a lender to provide loan funds

by check requiring the endorsement of the borrower for any Federal PLUS

Program loan earlier than provided in paragraph (a)(2) of this section.

(b) Returning funds to a lender. Except as provided in paragraph

(c) of this section, an institution must return FFEL Program funds to a

lender if the institution does not disburse those funds to a student or

parent for a payment period within--

(1) (i) Three business days following the date the institution

receives the funds if a lender provides those funds via EFT or by

master check; or

(ii) Thirty days after the institution receives the funds if a

lender provides those funds by a check payable to the borrower or

copayable to the borrower and the institution.

(c) Delay in returning funds to a lender. An institution may delay

returning FFEL program funds to a lender for--

(1) Ten days after the date set forth in paragraph (b) of this

section if the institution--

(i) Does not disburse FFEL Program funds to a borrower because the

student did not complete the required number of clock or credit hours

in a preceding payment period; and

(ii) Determines that the student will complete the required hours

within this 10-day period; or

(2) Thirty days after the date set forth in paragraph (b) of this

section if the Secretary places the institution on the reimbursement

payment method under paragraph (d) or (e) of this section.

(d) An institution placed under the reimbursement payment method.

(1) If the Secretary places an institution under the reimbursement

payment method for the Federal Pell Grant, Direct Loan and campus-based

programs, the institution--

(i) May not disburse FFEL Program funds to a borrower until the

Secretary approves a request from the institution to make that

disbursement for that borrower; and

(ii) If prohibited by the Secretary, may not certify a borrower's

loan application until the Secretary approves a request from the

institution to make that certification for that borrower.

(2) In order for the Secretary to approve a disbursement or

certification request from the institution, the institution must submit

documentation to the Secretary or entity approved by the Secretary that

shows that each borrower included in that request whose loan has not

been disbursed or certified is eligible to receive that disbursement or

certification.

(3) Pending the Secretary's approval of a disbursement or

certification request, the Secretary may--

(i) Prohibit the institution from endorsing a master check or

obtaining a borrower's endorsement of any loan check the institution

receives from a lender;

(ii) Require the institution to maintain loan funds that it

receives from a lender via EFT in a separate bank account that meets

the requirements under Sec. 668.164; and

(iii) Prohibit the institution from certifying a borrower's loan

application.

(e) An institution participating solely in the FFEL Programs. If

the FFEL Programs are the only title IV, HEA programs in which an

institution participates and the Secretary determines that there is a

need to strictly monitor the institution's participation in those

programs, the Secretary may subject the institution to the conditions

and limitations contained in paragraph (d) of this section.

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

PART 674--FEDERAL PERKINS LOAN PROGRAM

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

follows:

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

otherwise noted.

6. Section 674.2(a) is amended by adding the term ``Payment

period'' in alphabetical order and revising the introductory clause to

read as follows:

Sec. 674.2 Definitions.

(a) The definitions of the following terms used in this part are

set forth in subpart A of the Student Assistance General Provisions, 34

CFR part 668:.

* * * * *

7. Section 674.2(b) is amended by removing the definition of the

term ``*Payment period''.

PART 675--FEDERAL WORK-STUDY PROGRAMS

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

follows:

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

9. Section 675.2(b) is amended by removing the definition of the

term ``*Payment period''.

PART 676--FEDERAL SUPPLEMENTAL EDUCATIONAL OPPORTUNITY GRANT

PROGRAM

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

follows:

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

11. Section 676.2(a) is amended by adding the term ``Payment

period'' in alphabetical order and revising the introductory clause to

read as follows:

Sec. 676.2 Definitions.

(a) The definitions of the following terms used in this part are

set forth in subpart A of the Student Assistance General Provisions, 34

CFR part 668:

* * * * *

12. Section 676.2(b) is amended by removing the definition of the

term ``*Payment period''.

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

13. The authority citation for part 682 continues to read as

follows:

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

14. Section 682.200(a)(1) is amended by adding the term ``Payment

period'' in alphabetical order and revising the introductory clause to

read as follows:

Sec. 682.200 Definitions.

(a)(1) The definitions of the following terms used in this part are

set forth in subpart A of the Student Assistance General Provisions, 34

CFR part 668:

* * * * *

15. Section 682.207 is amended by adding paragraphs (c) (5) and (6)

to read as follows:

Sec. 682.207 Due diligence in disbursing a loan.

* * * * *

(c) * * *

(5) If one or more payment periods have elapsed before a lender

makes a disbursement, the lender may include in the disbursement loan

proceeds for completed payment periods.

(6) A lender is not required to make more than one disbursement if

a school is not in a State.

* * * * *

16. Section 682.603 is amended by revising paragraph (a)(5) to read

as follows:

[[Page 49891]]

Sec. 682.603 Certification by a participating school in connection

with a loan application.

(a) * * *

(5) The schedule for disbursement of the loan proceeds, which must

reflect the delivery of the loan proceeds as set forth in

Sec. 682.604(c); and

* * * * *

17. Section 682.604 is amended by adding paragraphs (c) (6) through

(9) read as follows:

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

borrowers.

* * * * *

(c) * * *

(6) Notwithstanding any other provision of this section, unless

Sec. 682.207(c) (5) or (6) applies--

(i) If a loan period is more than one payment period, the school

shall deliver loan proceeds at least once in each payment period; and

(ii) If a loan period is one payment period, the school shall make

at least two deliveries of loan proceeds during that payment period.

The school may not make the second delivery until the calendar midpoint

between the first and last scheduled days of class of the loan period.

(7) If an educational program measures academic progress in credit

hours and does not use semesters, trimesters, or quarters, the school

may not make a second disbursement until the later of--

(i) The calendar midpoint between the first and last scheduled days

of class of the loan period; or

(ii) The date, as determined by the institution, that the student

has completed half of the academic coursework in the loan period.

(8) If an educational program measures academic progress in clock

hours, the school may not make a second disbursement until the later

of--

(i) The calendar midpoint between the first and last scheduled days

of class of the loan period; or

(ii) The date, as determined by the institution, that the student

has completed half of the clock hours in the loan period.

(9) The school must deliver loan proceeds in substantially equal

installments, and no installment may exceed one-half of the loan.

* * * * *

PART 685--WILLIAM D. FORD FEDERAL DIRECT LOAN PROGRAM

18. The authority citation for part 685 continues to read as

follows:

Authority: 20 U.S.C. 1078a et seq., unless otherwise noted.

19. Section 685.102(a)(1) is amended by adding the term ``Payment

period'' in alphabetical order and revising the introductory clause to

read as follows:

Sec. 685.102 Definitions

The (a)(1) definitions of the following terms used in this part are

set forth in subpart A of the Student Assistance General Provisions, 34

CFR part 668:.

* * * * *

20. Section 685.301 is amended by revising paragraph (b) to read as

follows:

Sec. 685.301 Origination of a loan by a Direct Loan Program school.

* * * * *

(b) Determining disbursement dates and amounts. (1) Before

disbursing a loan, a school that originates loans shall determine that

all information required by the loan application and promissory note

has been provided by the borrower and, if applicable, the student.

(2) Unless paragraph (b) (5), (6), or (7) of this section applies,

an institution shall disburse the loan proceeds on a payment period

basis in accordance with 34 CFR 668.164(b).

(3) Unless paragraph (b) (4), (5), or (6) of this section applies--

(i) If a loan period is more than one payment period, the school

shall disburse loan proceeds at least once in each payment period; and

(ii) If a loan period is one payment period, the school shall make

at least two disbursements during that payment period. The school may

not make the second disbursement until the calendar midpoint between

the first and last scheduled days of class of the loan period.

(4)(i) If one or more payment periods have elapsed before a school

makes a disbursement, the school may include in the disbursement loan

proceeds for completed payment periods; or

(ii) If the loan period is equal to one payment period and more

than one-half of it has elapsed, the school may include in the

disbursement loan proceeds for the entire payment period.

(5) If an educational program measures academic progress in credit

hours and does not use semesters, trimesters, or quarters, the school

may not make a second disbursement until the later of--

(i) The calendar midpoint between the first and last scheduled days

of class of the loan period; or

(ii) The date, as determined by the institution, that the student

has completed half of the academic coursework in the loan period.

(6) If an educational program measures academic progress in clock

hours, the school may not make a second disbursement until the later

of--

(i) The calendar midpoint between the first and last scheduled days

of class of the loan period; or

(ii) The date, as determined by the institution, that the student

has completed half of the clock hours in the loan period.

(7) The school must disburse loan proceeds in substantially equal

installments, and no installment may exceed one-half of the loan.

(8) A school not in a State is not required to make more than one

disbursement.

* * * * *

PART 690--FEDERAL PELL GRANT PROGRAM

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

follows:

Authority: 20 U.S.C. 1070a, unless otherwise noted.

22. Section 690.2(a) is amended by adding the term ``Payment

period'' in alphabetical order and revising the heading and

introductory clause to read as follows:

Sec. 690.2 Definitions.

(a) The definitions of the following terms used in this part are

set forth in subpart A of the Student Assistance General Provisions, 34

CFR part 668:

* * * * *

Sec. 690.3 [Removed and reserved]

23. Section 690.3 is removed and reserved.

[FR Doc. 96-24217 Filed 9-20-96; 8:45 am]

BILLING CODE 4000-01-P