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

DEPARTMENT OF EDUCATION

34 CFR Parts 668, 674, 675, 676, 682, 685, and 690

RIN 1840-AC37

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

AGENCY: Department of Education.

ACTION: Final regulations.

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SUMMARY: The Secretary amends 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 regulations further the

implementation of Department of Education (Department) initiatives to

reduce burden and improve program accountability. They clarify and

consolidate current policies and requirements, improve the delivery of

title IV, HEA program funds to students and institutions, and further

protect students and the Federal fiscal interest.

DATES: Effective date: These regulations take effect on July 1, 1997.

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

collection requirements in Secs. 668.16, 668.165, and 668.167 until the

Department publishes in the Federal Register the control numbers

assigned by the Office of Management and Budget (OMB) to these

information collection requirements. Publication of the control numbers

notifies the public that OMB has approved these information collection

requirements under the Paperwork Reduction Act of 1995.

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: 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 R. 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 S.

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 time Monday through Friday.

SUPPLEMENTARY INFORMATION: On September 23, 1996, the Secretary

published a notice of proposed rulemaking (NPRM) in the Federal

Register (61 FR 49874). In the NPRM, the Secretary proposed to amend

the Student Assistance General Provisions regulations (part 668) which

apply to all of the title IV, HEA programs and the regulations for the

Federal Pell Grant (part 690), Federal Perkins Loan (part 674), FWS

(part 675), FSEOG (part 676), FFEL (part 682), and Direct Loan (part

685) programs. The Secretary proposed to amend these regulations to

further the implementation of several major initiatives within the

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 fiscal interest. A

discussion of these initiatives can be found in the preamble to the

NPRM on pages 49874 through 40875.

The NPRM included a discussion of the major issues surrounding the

proposed changes which will not be repeated here. The following list

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

NPRM on which a discussion of those issues can be found:

The adoption of a uniform definition of payment period for all the

title IV, HEA programs as proposed in Sec. 668.4 (pages 49875-49876).

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) (pages 49876-

49877).

The restructuring and clarification of the provisions under subpart

K, Cash Management, of the Student Assistance General Provisions

regulations (pages 49877-49882).

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

Sec. 668.162(c) (pages 49877-49878).

The revision of the definition of a disbursement as proposed in

Sec. 668.164(a) (page 49878).

The requirement that title IV, HEA program funds be disbursed on a

payment period basis as proposed in Sec. 668.164(c) (pages 49878-

49879).

The clarification of the requirements for early disbursements as

proposed in Sec. 668.194(f) (page 49879).

The consolidation of the individual title IV, HEA program

requirements regarding late disbursements as proposed in

Sec. 668.164(h) (page 49879).

The revised student notification requirements as proposed under

Sec. 668.165 (pages 49879-49880).

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) (pages 49880-49881).

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)

(page 49881).

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) (page 49881).

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) (pages 49881-49882).

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) (page 49878).

[[Page 60579]]

The conforming changes for the campus-based, Federal Family

Education Loan, Direct Loan, and Federal Pell Grant programs resulting

from the adoption of a uniform definition of a payment period as

proposed in Secs. 674.2, 675.2, 676.2, 682.200, 685.102, and 690.2

(page 49882).

The amendments to the disbursement rules for the FFEL and Direct

Loan programs as a result of the adoption of a uniform definition of a

payment period as proposed in Secs. 682.207, 682.604, and 685.301 (page

49882).

Substantive Changes to the NPRM

The following discussion reflects substantive changes made to the

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

order in which they appear in the proposed rules.

Student Assistance General Provisions

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

Section 668.16 Standards of Administrative Capability Electronic

Services

To reflect public comment, the Secretary is revising the proposed

regulations by changing the reference to ``electronic services'' to

``electronic processes.'' This revision is being made to clarify that

the Secretary's intent is that institutions participate in the

electronic processes, e.g., electronic data exchange and the Student

Financial Assistance Bulletin Board Service (BBS), by which the

Secretary administers the title IV, HEA programs and that institutions

are not restricted to using software and services provided by the

Secretary.

Subpart K--Cash Management

Section 668.161 Scope and Purpose

The proposed regulations are revised to clarify that FFEL Program

funds are held in trust by an institution for the intended student

beneficiaries, the lenders, the guaranty agencies, and the Secretary.

Section 668.162 Requesting Funds

To take advantage of technological improvements in funding

procedures, the Secretary anticipates the implementation by October 1,

1997, for fiscal year 1998, the Grants and Payments System (GAPS) of

the Department of Education Central Automated Processing System

(EDCAPS). This system, when operational, meets new Federal financial

system standards, provides institutions both grant and payment

information, and simplifies expenditure reporting. A key element of the

new system is the identification of the source of requested funds by

the specific designation assigned to those funds by the Secretary. The

Secretary notifies the institution of this designation at the time the

funds are authorized. Under GAPS, the institution is able to select the

particular authorization under which it seeks funds from among the

various authorizations that may be available. Institutions that lack

the technological capability of accessing GAPS are still able to

request funds from the Department by telephone or other existing

methods. Regardless of the method used by an institution to request

funds, any request made after implementation of GAPS during fiscal year

1998 and thereafter must include the specific designation for those

funds.

Section 668.164 Disbursing Funds

Definition of Disbursement

The Secretary is revising the proposed regulations to clarify that

if an institution credits a student's institutional account with title

IV, HEA program funds earlier than 10 days before the first day of

classes of a payment period, for example, for the purpose of preparing

a tuition and fee bill for that student, the Secretary considers that

the institution makes that disbursement on the 10th day before class.

Early Disbursements

The Secretary is revising the proposed regulations to clarify that,

if an institution offers an educational program using semesters,

trimesters, or quarters, an institution may disburse title IV, HEA

program funds up to 10 days before the beginning of any payment period

even if the previous payment period is not ended.

Late Disbursements

The Secretary is revising the proposed regulations to remove the

requirement that, in order to make a late disbursement of a Federal

Perkins Loan or an FSEOG Program award, an institution must have

received from the student an acceptance of that loan or award. A late

disbursement under these two programs may be made as long as the

student is awarded aid prior to the date the student becomes

ineligible.

The regulations are revised to allow PLUS loans to be disbursed

under the late disbursement provisions.

Section 668.165 Notices and Authorizations Disbursement Notice

The Secretary is revising the proposed notice requirements to allow

a parent, as well as a student, to cancel all or a portion of a loan or

loan disbursement.

The Secretary is revising the proposed timeframe requiring an

institution to notify a student or parent that the institution credited

the student's account with Direct Loan, FFEL, or Federal Perkins Loan

Program funds, the date and amount of the disbursement, and the

student's or parent's right to refuse all or a portion of a loan or

loan disbursement. The revision allows the institution to provide the

required notice at any point in time during a 60-day window that is no

earlier than 30 days before, and no later than 30 days after, the date

the institution disburses those funds.

The timeframe during which a student or parent may request a loan

cancellation is revised to clarify that the student or parent may

request cancellation either for 14 days from the date the notice was

sent by the institution or, if the notice is sent more than 14 days

before the first day of the payment period, the first day of the

payment period.

Section 668.167 FFEL Program Funds

The Secretary is revising the proposed regulations to provide that

an institution must return to a lender loan proceeds received by EFT or

master check if the institution does not disburse the funds within (a)

10 business days following the date the institution receives the loan

funds if the institution receives the funds on or after July 1, 1997

and (b) 3 business days following the date the institution receives the

loan funds if the institution receives the funds on or after July 1,

1999.

The regulations are also revised to provide that, for funds that

are not disbursed within the specified timeframe, the institution must

return the funds to the lender no later than 10 business days after the

last day those funds are required to be disbursed. The Secretary is

also revising the regulations to provide that if the borrower

establishes eligibility before the institution returns the loan funds

to the lender, the institution may disburse those funds to the

borrower.

Executive Order 12866

These final 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 final regulations are those

resulting from statutory requirements and those determined by the

Secretary to be necessary for administering the title IV,

[[Page 60580]]

HEA programs effectively and efficiently.

In assessing the potential costs and benefits--both quantitative

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

that the benefits of the regulations justify the costs.

The Secretary has also determined that this regulatory action does

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

exercise of their governmental functions.

Summary of Potential Costs and Benefits

The potential costs and benefits of these final regulations are

discussed elsewhere in this preamble under the heading Final Regulatory

Flexibility Analysis, and in the information previously stated under

Supplementary Information and Analysis of Comments and Changes.

Analysis of Comments and Changes

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

more than 250 parties submitted comments. An analysis of the comments

and of the changes in the regulations since the publication of the NPRM

follows.

Major issues are discussed under the section of the regulations to

which they pertain. Technical and other minor changes--and suggested

changes the Secretary is not legally authorized to make under

applicable statutory authority--are not addressed. An analysis of the

comments received regarding the initial regulatory flexibility analysis

can be found elsewhere in this preamble under the heading Final

Regulatory Flexibility Analysis.

Part 668--Student Assistance General Provisions

Subpart A--General

Section 668.4 Payment Period

Payment Period Definition (Sec. 668.4)

Comments: Many commenters supported the Secretary's efforts to

provide consistency among the title IV, HEA programs through the

proposed uniform payment period definition. One institution

specifically endorsed the requirement that, in the case of the FFEL and

Direct Loan Programs, as in other title IV, HEA programs, quarter

institutions make at least one disbursement each quarter. Two

commenters advocated bringing the loan programs further in line with

the Federal Pell Grant Program by requiring that loan disbursements be

prorated according to Federal Pell Grant Program rules. Another

commenter argued for expanding the use of payment periods for loans in

order to eliminate the distinction between borrower-based and scheduled

academic years and the confusion over whether summer terms should be

headers or trailers.

A student advocate organization supported the proposed amendment

permitting clock-hour institutions or institutions that use credit

hours without terms to make the second disbursement only after that

student actually completes one-half the required clock or credit hours,

rather than when half the number of days in the loan period have

elapsed. This commenter believed this change would protect students,

many of whom withdraw from trade institutions before completing one-

half the required hours, from incurring double the loan obligation.

Discussion: The Secretary agrees that title IV, HEA program

requirements should be made more consistent. With regard to the

suggestions that the loan programs be brought further in line with the

Federal Pell Grant Program, the Secretary will consider this option for

the future but notes that currently there are statutory prohibitions

against any further conforming changes. Further, the Secretary does not

intend to eliminate the use of borrower-based academic years and

scheduled academic years in the FFEL and Direct Loan Programs. These

options provide institutions flexibility in awarding loans and

monitoring annual loan maximums for an academic year.

Changes: None.

Comments: A significant number of commenters objected to the

proposed payment period provisions. One commenter who believed the

uniform payment period definition would create great inefficiency and

confusion urged the Secretary to delay implementing the payment period

provisions in order to consult with institutions, associations, and

lenders to try to accommodate program differences. Some commenters

stated that the Secretary did not identify any areas of abuse by

institutions or lenders in connection with the second disbursement of

loan proceeds or did not provide sufficient reasons for the proposed

changes in policy. Several commenters assumed that the Secretary is

proposing additional disbursement requirements on quarter and trimester

institutions for the benefit of the federal fiscal interest. Many

commenters who objected to the proposed payment period provisions

stated that institutional default rates have significantly decreased

over the past six years and suggested that there is no need for the

additional burden of increased disbursements and monitoring of student

progress proposed in this regulation. In response to the Secretary's

efforts to streamline and simplify the disbursement rules for all title

IV, HEA programs, one commenter questioned the validity of establishing

the same disbursement rules for programs with different eligibility

requirements and also questioned who would benefit from the proposed

change.

Discussion: The Secretary continues to believe that establishing a

uniform payment period definition is appropriate at this time. The

Secretary does not expect the proposed changes to cause title IV, HEA

program participants significant problems and, therefore, does not

intend to delay revising program regulations accordingly. Although the

Secretary has not identified any particular areas of abuse of the

existing disbursement rules, the Secretary believes that revising these

existing rules to make them more consistent facilitates the

administration of the title IV, HEA programs including simplification

of the delivery system and provides additional protections to limit

excessive borrowing. In addition, the Secretary believes that the

proposed changes are in the Federal fiscal interest.

Changes: None.

Comments: With regard to the proposed requirements for term

institutions, commenters argued against the proposal to require more

than two disbursements for programs using quarters or trimesters,

stating that this proposal would increase the administrative burden and

expenses for the institution, lenders, and guaranty agencies. Several

of these commenters noted that this policy would increase the

administrative burden of verifying eligibility as well. Many of these

commenters suggested that institutions using academic terms and credit

hours should be allowed to choose whether to make a disbursement each

semester, trimester, or quarter, as applicable, or twice a year as is

currently allowed. Several commenters argued that, for quarter or

trimester institutions, scheduling two larger disbursements, rather

than three or four smaller disbursements, is particularly appropriate

for graduate and professional institutions, where no Federal Pell Grant

and virtually no campus-based funding are disbursed to students. One

commenter stated that requiring more frequent disbursements for quarter

and trimester institutions will complicate loan processing for midyear

transfers and will make the

[[Page 60581]]

paper financial aid transcript an absolute necessity for these

transfers.

Discussion: In response to the arguments against requiring quarter

or trimester institutions to disburse on a term basis rather than twice

per year, the Secretary has proposed this change for two reasons.

First, these disbursement rules aid students in managing their funds

and may reduce overborrowing.

Second, as stated in the preamble to the NPRM, this approach

simplifies the administration of the title IV, HEA programs. This

change assists in the development of a single, integrated title IV

delivery system.

The Secretary recognizes that an institution is required to make

three disbursements of a loan for an academic year if an educational

program is offered using quarters that conform to the traditional usage

of that term, i.e., each term consists of approximately 10-12 weeks of

instruction, full-time is defined as at least 12 quarter credits, and

the program's academic calendar includes three quarters in the fall,

winter, and spring, and often a summer quarter. As noted, the Secretary

believes that students enrolled in educational programs offered using

quarters will be assisted in managing their funds and prevented from

overborrowing.

Although several commenters suggested that the proposed regulations

require institutions using trimesters to make more disbursements than

is currently required, most trimester institutions will be required to

make only two disbursements under these proposed provisions. Most

traditional institutions using trimesters typically schedule only two

trimesters in an academic year; therefore, these institutions are

usually required to make only two disbursements for the loan period. In

some instances, the Secretary is aware that an educational program may

use the term ``trimester'' to describe its academic terms but those

academic terms do not conform to the traditional usage, i.e., each term

consists of approximately 15 weeks of instruction, full-time is defined

as at least 12 semester or trimester hours, and the program's academic

calendar generally consists of three terms, one each in fall, spring,

and summer.

If a term referred to as a trimester or quarter does not conform to

the traditional usage, the references to trimesters or quarters in the

title IV, HEA program regulations do not apply.

With regard to the comment concerning midyear transfers, the

Secretary does not believe that the proposed changes create any extra

institutional burden in processing aid for mid-year transfers.

Changes: None.

Comments: Many commenters stated that the Secretary was imposing

additional requirements on clock-hour and nonterm credit-hour

institutions by requiring that their students complete the necessary

number of hours prior to receiving a subsequent disbursement of title

IV, HEA program assistance. Commenters who objected to this proposal

stated that this requirement would result in a constant readjustment of

scheduled disbursements, would require institutions to monitor

individual student's progress, and would result in disbursements

occurring earlier than the midpoint of the loan period or later than

the midpoint, depending on each individual student's progress.

Commenters also argued against the proposed payment period policy

because they indicated that students do not incur costs according to

hours completed. These commenters argued that payment periods for these

programs should be measured in length of time rather than by completion

of credits.

One institution using credit hours without terms explained that

scheduled breaks in the year fall close to the timing of traditional

semesters. The institution noted that under the proposed regulations,

because the institution does not use terms, the time when the student

completes half of the credits for the year may be significantly longer

than half the year in length. Another commenter who objected to the

proposed requirement for credit-hour programs without terms stated that

the Secretary is imposing more stringent standards on nonterm

institutions than on term institutions.

Several commenters objected to the proposed policy that eliminates

the current Federal Pell Grant payment period definition for clock-hour

programs that are offered in terms. Clock-hour institutions with terms

argued that a term is a payment period, regardless of whether the

courses are measured in clock or credit hours. Commenters argued that

this proposal would create cash flow problems for clock-hour

institutions with academic terms and would result in students receiving

their aid at unpredictable times with payments overlapping terms and

academic years. The institutions explained that they assess fees on a

term basis; they also argued that if they are not allowed to schedule

disbursements according to terms, their students may have fewer

disbursements, which might be a detriment to students with poor money

management skills. Further, they noted that because institutions would

not be allowed to make disbursements until after the student completes

the required number of clock hours, students will not have loan funds

when tuition and fees are due. Finally, these institutions argued that

allowing clock-hour institutions to disburse according to academic

terms would simplify the rules and streamline the disbursements of

title IV, HEA program funds.

Discussion: In response to the commenters objecting to the proposed

requirement that clock-hour institutions with terms track hours

completed, the Secretary reminds commenters that clock-hour

institutions with or without terms are currently required to track

hours completed in order to make subsequent Federal Pell Grant

disbursements. Under the current Federal Pell Grant Program

requirements, if a student does not complete all of the clock hours in

a term for which he or she has been paid, the student may not receive

the payment for the subsequent term until the student has completed the

clock hours for the prior term. Further, the second disbursement is

reduced in accordance with the number of hours that are attributed to

the first payment period. For example, a student is enrolled in a 600

clock-hour program with two terms of 300 clock hours each. In the first

term, the student completes only 250 clock hours. The first payment

period is extended into the second term. When the student completes the

first 50 hours in the second term, the student may receive a second

disbursement based on 250 clock hours (i.e., the balance of the hours

in the second term. The student would then receive a third disbursement

based on 50 clock hours after completing the 250 hours of the second

term for which he or she was paid. Under the revised payment period

definition, the student receives a second disbursement after completing

50 hours in the second term and that disbursement is based on 300 clock

hours. There is no third disbursement.

Through subregulatory guidance, the Secretary has directed clock-

hour institutions without terms to track clock hours completed for

subsequent loan disbursements. In proposing this rule, the Secretary

intended to require clock-hour institutions with and without terms to

track clock hours completed for purposes of disbursing subsequent loan

proceeds in order to align the loan programs more closely with the

Federal Pell Grant Program. However, the Secretary emphasizes to the

commenters that there are differences between the disbursement rules

for loans and for the Federal Pell Grant Program regarding

[[Page 60582]]

clock-hour programs. Because of the statutory requirement that

institutions not disburse the second disbursement of a FFEL or Direct

Loan until at least one-half of the loan period has elapsed (see

Sec. 428G(b) of the HEA), the Secretary proposed that programs

measuring progress in clock hours may not make the second disbursement

until the later of the calendar midpoint of the loan period or the date

that the student completes half the clock hours in the loan period.

These provisions should address the commenters' concerns that students

might receive proceeds prior to the midpoint of the loan period.

In response to the clock-hour institutions that stated that the

proposed payment period definitions would limit their ability to

disburse as often as they currently disburse, the Secretary reminds

them that they can always make smaller, more frequent, equal

disbursements of the proceeds within the payment period, as long as the

student is completing the required number of clock hours necessary for

the next disbursement.

The Secretary also believes that it is appropriate that credit-hour

institutions without terms track credit hours completed. This policy

has been a long-standing requirement in the Federal Pell Grant Program,

and the Secretary believes that this requirement is appropriate for

loan disbursements as well. The Secretary wishes to emphasize that the

loan disbursement rules differ from the Federal Pell Grant disbursement

rules for credit-hour institutions without terms; these rules are found

under 34 CFR 682.604(c)(7) and 34 CFR 685.301(b)(5). As discussed

above, because of the statutory requirement that institutions not

disburse the second disbursement until at least one-half of the loan

period has elapsed, the Secretary proposed that programs measuring

progress in credit hours without terms may not make the second

disbursement until the later of the calendar midpoint of the loan

period or the date that the student completes half the academic

coursework in the loan period.

Changes: None.

Comments: Several commenters stated that the Secretary's efforts to

use terms to protect students and title IV, HEA program recipients has

been ineffective and that the Secretary should define a standard

minimum term. These commenters further stated that some institutions

have defined academic terms for as little as four weeks in length in

order to circumvent federal regulations such as those for pro rata

refunds.

Discussion: With regard to defining a standard minimum term, the

Secretary does not believe it is appropriate to define what an

institution's academic calendar must be. Further, the commenters are

reminded that the loan programs require institutions to use either

credit hours with standard terms or to monitor credit and clock hours

earned. For the Federal Pell Grant Program, institutions can disburse

according to short nonstandard terms. However, payments are prorated

based on the hours in these short terms, so there is no need to require

disbursements according to a defined minimum term.

Changes: None.

Comments: In the NPRM, the Secretary specifically requested

comments on whether to incorporate the proposed approach or the

existing Federal Pell Grant Program rules for certain remaining

portions of programs less than one academic year but greater than one-

half an academic year. Under the proposed approach, for credit-hour

programs without terms or clock-hour programs greater than an academic

year, when the remainder of the program is less than an academic year

but greater than one-half an academic year, this remainder comprises

two equal payment periods. Several commenters supported the proposed

policy, noting that this approach allocates title IV, HEA program funds

more evenly over the remaining portion of the programs than do the

current Federal Pell Grant provisions.

One commenter stated that the proposal to change the determination

of payment periods for the remainder of certain programs longer than

one year in length would require major changes in software programs

that have been designed to pay under the existing payment period

definitions. The commenter stated that the change would decrease the

amount of Federal Pell Grant funds awarded in the third payment period

of a program greater than one year, but less than two, and would place

additional, unnecessary financial burden on both students and

institutions. This commenter also stated that the 1994 attribution

rules were eliminated in reference to loan payments, but that this

change appears to be suggesting that attribution rules are again

effective. Another commenter argued against the proposed rule because,

the commenter stated, this rule would result in some students receiving

less Federal Pell Grant funding when cross-over periods are used. This

commenter suggested that the strict cut off for award-year eligibility

be revised to allow students impacted by this policy to either receive

more than a full Federal Pell Grant in a given award year or that the

concept of cross-over payment be redefined to allow a student to

receive payment from a subsequent award year for a payment period

completed in the prior award year. Another commenter similarly argued

that institutions be allowed to disburse more than one Federal Pell

Grant to degree-seeking students completing more than one academic year

during an award year.

One commenter stated that the commenter's organization did not have

sufficient time for analysis of whether the Federal Pell Grant approach

or the proposed approach should be adopted for the final rule.

Therefore, the commenter suggested either a pilot program to collect

data or allowing institutions to choose either the existing Federal

Pell Grant approach or the proposed approach, as long as they use one

approach consistently.

Discussion: Although one commenter suggested that these rules would

result in decreased Federal Pell Grant awards in some circumstances,

the Secretary assures the commenter that the total amount of Federal

Pell Grant awarded under the proposed rules would be the same as the

amount awarded under the existing rules. For programs that are longer

than one year in length but less than two, where the remaining period

of enrollment is greater than half an academic year, the student would

receive a smaller third disbursement than under the current rules, but

the fourth disbursement would be earlier and larger, and the total

amount would be the same.

With regard to the question concerning whether a student whose

payment period includes a cross-over period would receive less Federal

Pell Grant funding under the proposed rule, the Secretary acknowledges

that in some limited cases recipients may receive less Federal Pell

Grant funding under these provisions than under the current provisions.

However, the Secretary reminds the commenter that even under the

current provisions, some students receive reduced Federal Pell Grant

amounts when their payment period is not included as a cross-over

period as a result of the timing of the academic schedule. When these

regulations become effective, institutions can adjust their academic

calendars to ensure that their students are not affected by the cross-

over payment period restrictions.

In response to the suggestion that institutions be allowed to

disburse more than one Federal Pell Grant in a given award year, the

Secretary recognizes that there was a statutory provision that

[[Page 60583]]

would have allowed the Secretary to increase the number of Federal Pell

Grant awards a recipient can receive within one award year; however,

there has never been any appropriation available to fund additional

Federal Pell Grants. Therefore, the Secretary does not intend to

increase the number of Federal Pell Grant awards a recipient can

receive within one award year.

Changes: None.

Comments: One commenter asked for clarification concerning the

meaning of the phrase, ``other academic term'' in proposed

Sec. 668.4(a). This commenter further noted a contradiction between

proposed Sec. 668.4(a) and proposed 34 CFR 685.301(b)(5), as this

latter section provides that institutions using nonstandard terms

cannot disburse Direct Loans according to the nonstandard terms. This

commenter suggested defining payment periods for nonstandard terms as

the periods of time needed to complete the first and second halves of

the programs, as measured in clock or credit hours.

Another commenter asked for clarification as to how to apply

payment periods to nonstandard term programs when the academic year

exceeds a 12-month period or calendar year. The commenter noted that,

in accordance with 34 CFR 682.603(f)(2), a loan period may not exceed

12 months. Therefore, the commenter suggested that payment periods are

greatly disproportional to the loan period. The commenter gave an

example where the first payment period could be nine months for an

academic year that is 18 months in duration, even though the loan

period is 12 months. This commenter stated that the proposed changes do

not accommodate eligible programs with an academic year exceeding 12

months.

Discussion: The commenter is correct in noting a difference in

language between proposed Sec. 668.4(a) and the Direct Loan

disbursement rules found in proposed 34 CFR 685.301(b)(5). There is

also a difference in the proposed FFEL rules under 34 CFR

682.604(c)(7). The reason for this disparity is that institutions can

disburse according to ``other academic terms,'' that is, nonstandard

terms, in the Federal Pell Grant Program. In the loan programs,

institutions using nonstandard terms cannot disburse according to these

terms. For nonstandard term credit-hour institutions, institutions are

required to disburse the second loan disbursement on the later of the

calendar midpoint between the first and last scheduled days of class or

the date that the student has completed half the academic coursework in

the loan period. The slight difference between the Federal Pell Grant

Program's and the loan programs' disbursement rules exists because of

the statutory requirement that institutions not disburse the second

disbursement of a Direct or FFEL loan until at least one-half of the

loan period has elapsed. See Sec. 428G(b) of the HEA. Also, Federal

Pell Grant Program requirements allow institutions to disburse Federal

Pell Grants according to nonstandard terms because Federal Pell Grant

funds are prorated according to the number of hours in the term

relative to the number of hours in the academic year. Institutions may

not disburse Direct Loan or FFEL program loans according to nonstandard

terms; unlike under the Federal Pell Grant Program, loans are not

prorated based on the number of hours in a term.

The commenter above correctly noted that a loan period cannot be

greater than 12 months. Institutions disbursing loans would not be able

to certify or originate a loan for a period greater than one year in

length. Institutions with an academic year longer than 12 months would

be required to schedule disbursements according to the rules in 34 CFR

682.604(c)(7) and 34 CFR 685.301(b)(5), as applicable.

Changes: None.

Comments: One commenter noted that the Secretary is moving towards

all title IV, HEA program funds being disbursed at the same time and

asked whether the Secretary would propose that certain Federal Pell

Grant recipients be subject to the 30-day delayed disbursement required

for first-time, first-year FFEL and Direct Loan student borrowers.

Discussion: The Secretary does not intend to propose that Federal

Pell Grant recipients be subject to the 30-day delay required for

first-time, first-year borrowers. Although the Secretary has proposed

certain changes in order to promote conformity among disbursement rules

for different programs, the Secretary does not believe that all

restrictions within certain programs should be implemented across all

of the title IV, HEA programs. Just as the Secretary does not propose

to require multiple disbursement of Federal Pell Grants for students

enrolled in one payment period only, the Secretary believes it is not

necessary to require that any Federal Pell Grant recipients be subject

to a 30-day delay in disbursements.

The Secretary notes that under the Federal Pell Grant Program,

institutions have the authority to make disbursements at such times as

best meet the needs of students. See 34 CFR 690.76(a). The Secretary

notes, however, that delaying disbursement for institutional purposes

to avoid refund requirements would not be in compliance with 690.76(a).

Changes: None.

Comments: One institution suggested that the language in this

section identifying payment periods as the ``period of time in which

the student completes [the first or second half of the program] as

measured in credit or clock hours,'' does not require that the student

must successfully complete the credit or clock hours in a payment

period. This institution argued that, for a student who did not

successfully complete the hours in a payment period, the institution

should determine financial aid eligibility, based on the institution's

satisfactory academic progress policy. Another commenter asked which

concept of payment period completion would be used: scheduled hours or

hours actually completed.

Discussion: The Secretary intends that institutions subject to

these provisions, i.e., institutions offering programs using credit

hours without terms or clock hours, monitor credit or clock hours that

are successfully completed including excused absences as provided in

Sec. 668.164(b)(3). For credit-hour programs without terms and clock-

hour programs, students may not receive subsequent disbursements until

they have actually completed the required number of credit or clock

hours.

Changes: None.

Comments: One commenter noted that proposed Sec. 668.4(b)(3)

provides an exception to the payment period definition for programs

where students do not earn any credits until the last day of the year.

The commenter noted that the section refers back to paragraphs (b)(1)

and (b)(2), which affect not only credit-hour institutions without

terms but also clock-hour institutions. The commenter asked, therefore,

whether the Secretary intends to apply this rule to programs using

credit hours without terms only or to both credit-hour programs without

terms and all clock-hour programs.

Discussion: As under the current Federal Pell Grant Program

regulations, the Secretary intends that this provision apply only to

educational programs without terms that measure progress in credit

hours.

Changes: The Secretary has added a clarification that

Sec. 668.4(b)(3) applies only to eligible programs that measure

academic progress using credit hours.

Comments: Several commenters suggested that the proposed policy

would affect the current refund provisions. One commenter stated that

defining payment periods by completion of credit hours is in

[[Page 60584]]

contradiction to the pro rata refund regulations that require refunds

to be calculated based on the portion of the period of enrollment.

Several commenters noted under this proposed policy, certain

institutions would be required to make fewer, and therefore, larger

disbursements; thus, students who withdraw early will owe greater

repayments than if funds had been disbursed according to academic

terms.

One institution objected to the universal payment period definition

specifically because if the first payment period changes to the

completion of the first half of the academic year, and the student

leaves before the completion of the payment period, what the student

would have received in grants will now come out of pocket.

One commenter stated that if the institution must use as a minimum

450 hours for a period of enrollment as a basis for charges, but can

only disburse 289.5 hours worth of Federal Pell Grant funds, there may

be a balance due which would be reflected as an unpaid scheduled cash

payment for refund purposes.

Discussion: With regard to the general comment that the proposed

payment period policy would affect refunds provisions, the Secretary

notes that the requirements for disbursements of title IV aid are not

related to title IV refund requirements. In response to the commenter

who stated that refunds must be calculated based on the portion of the

period of enrollment, the Secretary wishes to clarify that the refund

calculation determines the unearned portion of the actual charges for

the period of enrollment for which the student was charged. Although

one commenter suggested a relationship to the amount of grants received

and the refund calculation, the Secretary notes that the refund

calculation does not determine the source from which an institution

earns funds. Several commenters noted that the proposed payment period

provisions would result in institutions making fewer, and therefore,

larger disbursements; however, institutions are reminded that they are

allowed to schedule smaller, more frequent, disbursements within a

payment period, rather than making one disbursement per payment period.

Finally, in response to the commenter who noted a possible discrepancy

between the minimum number of clock hours that may be used as a basis

for charges vs. the amount of Federal Pell Grant funds that may be

disbursed, the Secretary notes that such a discrepancy may exist under

the current disbursement rules and, therefore, is not a result of the

proposed changes to the payment period requirements.

Changes: None.

Comments: Several commenters objected to the Secretary's proposal

that, for a student enrolled in an eligible clock-hour program, the

institution may include excused absences for up to 10 percent of the

clock hours in the payment period in determining whether the student

has completed the payment period, stating that this proposal dictates

an attendance policy to clock-hour institutions. One commenter stated

that mandating 10 percent of the clock hours in a payment period as the

maximum excused absences an institution may include in determining

whether the student has completed the payment period impinges on

academic freedom and that the satisfactory academic progress

regulations, as well as State and accrediting agency oversight, already

address this area. This commenter noted that many colleges maintain no

attendance requirements.

On the other hand, one student advocate organization generally

supported the proposed regulation's policy regarding excused absences

for clock-hour institutions. However, this commenter suggested lowering

the percentage of excused absences that could be counted towards

attendance from 10 percent to 5 percent, arguing that if these programs

are meaningful, students should not be permitted to miss so many hours

and still receive Federal aid.

Discussion: As stated in the preamble to the proposed rule, 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 clock hours in a payment period would impair the

educational attainment of the student and would not make the best use

of Federal funds (60 FR 49879). This requirement is for purposes of

title IV, HEA programs only and does not infringe on academic

prerogatives of the institution. Institutions can adopt another policy

for other purposes.

Changes: None.

Comments: Many commenters argued that, if the loan period is only

one term, only one disbursement should be required. Several commenters

stated that for a student using the loan for living expenses, getting

the second disbursement halfway through the term does not adequately

cover the student's financial needs. One institution suggested that if

the Secretary cannot change the regulations for all institutions, the

Secretary might establish eligibility criteria for certain institutions

that would be allowed to make one disbursement in a single-term

situation. One commenter pointed out that allowing for a single

disbursement of a loan when the payment period is only one term would

further align loan disbursement rules with Federal Pell Grant

disbursement rules.

One experimental site institution that is exempt from the multiple

disbursement requirements for single semester loans noted that it has

received positive feedback from students regarding single disbursements

for one term. This institution recognized that the multiple

disbursement requirement is statutory and stated its support for

efforts to remove this statutory requirement. Another experimental site

institution that is exempt from multiple disbursement requirements for

single-term loans asked for confirmation that the multiple disbursement

requirement for single payment periods in these regulations will not

affect the exemption for experimental site institutions.

Discussion: The Secretary reminds commenters that unless

institutions have received waiver under the Experimental Sites Program

(authorized under Sec. 487A(d) of the HEA), the statute requires

multiple disbursements of loan proceeds for single-term loans. See

Sec. 428G(a) of the HEA. These regulations do not affect the

experimental site institutions that are exempt from this requirement.

The Secretary will take into consideration the commenter

recommendations in the context of HEA reauthorization.

Changes: None.

Comments: In proposed 34 CFR 682.604(c)(7)(ii), commenters

suggested replacing the proposed phrase, ``academic coursework'' with

the term ``credit hours'' because, the commenters stated, this phrase

is more specific.

Discussion: The Secretary has used the phrase ``academic

coursework'' rather than credit hours in 34 CFR 682.604(c)(7)(ii) and

in 34 CFR 685.301(b)(5)(ii) for two reasons. First, this phrase

provides institutions with flexibility to measure progress by other

means than credit hours. If they choose to do so, they can make this

determination based on credit hours completed; however, they can also

use other measures such as lessons completed in those circumstances

where the midpoint of a student's academic program does not coincide

with the midpoint in credit hours earned. In addition, some

institutions do not allow students to earn credits until the end of a

program or academic year. Under this proposed provision, even if the

institution does not award credit hours until the end of the

[[Page 60585]]

program or academic year, the student could receive the second loan

disbursement according to another measure of progress. Also this policy

is consistent with the similar circumstances addressed in

Sec. 668.4(b)(3).

Changes: None.

Comments: Several institutions advocated allowing unequal loan

disbursements, noting that while the proposed regulations provide that

loans must be disbursed in equal installments, educational costs are

often unequal across terms.

One institution currently addresses the problem of unequal costs by

scheduling three disbursements for one type of loan (e.g., subsidized)

and two disbursements for another (e.g., unsubsidized) for the same

student and notes that this practice would not be permitted according

to the proposed regulations.

Another institution noted that the Direct Loan software allows

institutions to make unequal disbursements and argued that unequal

disbursements also be permitted in the FFEL Program.

One institution expressed concern that the equal disbursement

requirements would reduce the amount the student would receive in

situations where at least one-half the loan period has elapsed prior to

the first disbursement so that the first disbursement is combined with

a subsequent disbursement.

Discussion: The Secretary notes that the statute requires equal

disbursements of loan proceeds. See Sec. 428G(c)(3) of the HEA. The

Secretary will take into consideration allowing unequal disbursements

in the context of HEA reauthorization. With regard to the comment from

the institution that schedules subsidized and unsubsidized loan

disbursements differently in order to meet the student's unequal costs,

this practice goes against the statutory intent that all loans for a

student be disbursed in equal installments. Similarly, the Secretary

reminds Direct Loan institutions that, even though the software for the

Direct Loan program does not reject unequal disbursements, the statute

prohibits Direct Loan institutions from scheduling unequal

disbursements.

Finally, with regard to the question of whether the equal

disbursement requirements would reduce the amount the student would

receive in situations where at least one-half the loan period has

elapsed prior to the first disbursement, the Secretary assures the

commenter that this provision does not reduce the amount the student

would receive. For example, in a quarter situation where a disbursement

is not made until after the start of the second quarter, the

institution could combine the first and second disbursement in one

transaction. Subsequently, the institution could disburse the final

installment in the third quarter. In this situation, statute and

regulations permit the combined first and second disbursements to

exceed the amount of the final disbursement.

Changes: None.

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

Section 668.16 Standards of Administrative Capability

Electronic Processes (Sec. 668.16(o))

Comments: Most commenters supported the concept of moving to

electronic processes in the delivery of title IV, HEA program

assistance. Many commenters recognized and supported the need for

institutions to use electronic processes in order to move to a Project

EASI delivery system and encouraged the Secretary to use the best

available electronic services. One association commenter stated that

the Secretary must be aggressive with regard to institutions'

capabilities to participate in information sharing via electronic

means. Another commenter stated that mandating the use of electronic

processes would enhance the level of student services at institutions.

Another commenter supported this provision because the commenter

believed it was essential to achieving Project EASI's goal of providing

comprehensive, current student information.

Discussion: The Secretary very much appreciates, and thanks the

financial aid community for, its support in moving to greater use of

electronic processes and its contributions to developing and

implementing Project EASI. The Secretary believes that, by working with

the community in these areas, we will be able to improve services for

students and institutions.

Changes: None.

Comments: Several commenters believed that the Secretary proposed

to restrict institutions to using electronic services provided only by

the Secretary. Some commenters were concerned that, while the preamble

to the notice of proposed rulemaking indicated that an institution

would be able to use software developed by the Secretary or software

developed by the institution or its vendor, the proposed regulations

only referenced electronic services provided by the Secretary. Other

commenters were concerned that the proposed regulations would not allow

an institution to be considered administratively capable if it

participated in electronic services through an agency such as the

Pennsylvania Higher Education Assistance Authority. Another commenter

was concerned that an institution would be unable to comply with the

proposed regulations through a third-party servicer. The commenters

suggested that the Secretary should clarify this provision.

Discussion: As some of the commenters noted, it is not the

Secretary's intent to restrict institutions to using only software and

services provided by the Secretary. Nor is it the Secretary's intent to

restrict the ability of institutions to comply with the requirement by

employing third-party servicers. The Secretary agrees with the

commenters that the provision needs clarification since it is his

intent that institutions have the ability to participate in electronic

processes such as electronic data exchange and the BBS, but that

institutions should have available options to achieve compliance other

than by using software or products that the Secretary provides.

Changes: The Secretary has revised the reference to ``electronic

services'' in Sec. 668.16(o) to refer instead to ``electronic

processes.''

Comments: One commenter stated that the Federal Register notice

announcing the electronic processes in which an institution must

participate should address not only the electronic processes or

functionalities an institution must be capable of performing but should

include other information such as optimal system configurations and

network configurations.

Discussion: The Secretary very much appreciates the commenter's

concerns but does not believe that the addition of this information

would be appropriate for publication in the Federal Register. The

Secretary believes that it is more appropriate to include this type of

information in the other publications that he provides that include

such items as systems specifications and record layouts.

Changes: None.

Comments: Many commenters were concerned that the Secretary should

provide institutions reasonable notice and timeframes to implement

these processes. The commenters were concerned that some institutions

may not immediately have the necessary resources to participate in

electronic processes. The commenters believed that additional training

of staff would be needed. One commenter suggested that notice was

needed by December 1 prior to an award year. Another commenter

[[Page 60586]]

also indicated that the Secretary should provide as much advanced

notice as possible of the electronic processes which the Secretary

expects to require over the next several years so that institutions may

include these expectations in securing the necessary resources.

Discussion: The Secretary agrees with the commenters concern that

institutions be provided advanced notice of electronic processes in

which they are expected to participate. The Secretary expects to

provide such notice as soon as the information is available. Under the

current systems development cycles by award year, the Secretary expects

to be able to provide notice before December 1 prior to the award year.

To the extent it is possible to provide a notice covering subsequent

award years, the Secretary will provide such notice.

With respect to training, the Secretary agrees that additional

training is needed for institutional personnel and expects to announce

shortly additional training opportunities that will be available in all

10 regional training facilities.

Changes: None.

Comments: Some commenters believed that the Secretary should use

open networks such as the Internet to provide electronic interfaces

rather than rely on the Title IV Wide Area Network. One commenter was

concerned that security was not adequate on the Internet. Another

commenter believed that it would be beneficial for all institutions to

use the Title IV Wide Area Network but that it should be recommended,

instead of being required, during the 1997-98 award year. Another

commenter believed institutions should be expected to participate in

the Title IV Wide Area Network, to receive Institutional Student

Information Records (ISIRs), and to participate in the National Student

Loan Data System. The commenter questioned whether the Student

Financial Assistance Bulletin Board System (BBS) was duplicated in

other forums.

Discussion: The Secretary is currently exploring issues related to

the use of open systems like the Internet including such issues as

security, authentication, and reliability. The Secretary's primary

concern, however, is that institutions begin to use electronic

processes for delivering title IV, HEA program assistance regardless of

the network configurations that may be available to implement a

particular electronic process. For example, the BBS is currently

available through two electronic networks: the Title IV Wide Area

Network and the Internet (the Internet address is: http://sfa.ed.gov).

If the Secretary requires institutions to be able to access the BBS,

using either electronic network would satisfy the requirement.

Comments: A few commenters proposed that the Secretary provide

additional administrative cost allowances to allow institutions to meet

the requirement to use electronic processes. One commenter was

concerned that the proposed regulations were an unfunded mandate to the

States. The commenter believed that the administrative cost allowance

was not sufficient to cover the costs to institutions of using

electronic services.

Discussion: The current administrative cost allowances are set by

specific statutory authorizations and appropriations and the Secretary,

therefore, is unable to provide a specific administrative cost

allowance for funding institutions using electronic processes. The

Secretary will take into consideration these comments while developing

proposals in the context of HEA reauthorization.

The Secretary does not agree with the comment that these

requirements are an unfunded mandate. Institutions are provided with

administrative cost allowances to administer the title IV, HEA

programs, and these funds may be used by the institution for funding

institutional use of electronic processes that the Secretary does not

expect to have significant cost implications.

Comments: Two commenters were concerned about the meaning of the

phrase ``at no substantial charge to the institution.'' One commenter

believed that the Secretary should absorb all the costs of the central

processor's services.

Discussion: The Secretary considers an electronic process to be

offered to an institution at no substantial charge if the process is

provided for free or there are generally no additional charges for

normal business activity. For example, an institution may make regular

phone calls to a customer service office but, if an institution makes

excessive phone calls, the Secretary believes it is appropriate to

charge for use beyond that normally needed even though the Secretary is

requiring institutions to use that process.

Changes: None.

Comments: One commenter questioned the benefit of using electronic

processes and requested that institutions be able to receive exemptions

from this requirement. Another commenter was concerned that the

Secretary needed to develop an alternative, cost-effective option for

small institutions.

Discussion: As the Secretary noted in the preamble discussion of

this requirement in the proposed regulations, the Secretary believes

that the use of electronic services by institutions is essential to

achieving better services for students and institutions, the Project

EASI goal of an integrated student aid delivery system for students and

institutions, and necessary improvements in program accountability. As

a result, the Secretary does not expect to provide for any alternative

processes such as using paper documents. With respect to small

institutions, the Secretary notes that a number of options are

available to, and are currently being used by, small institutions.

These institutions either are using the services and free products

provided by the Department; or are using the products and services of

private vendors, third-party servicers; or are using the Internet

directly.

Changes: None.

Comments: One commenter opposed the proposed regulations because

the commenter thought that institutions, that the commenter believed

offered quality educational programs, would have difficulty meeting the

requirement. Another commenter opposed the proposed regulations because

the commenter believed that they would result in the elimination of all

small institutions because they rely on Federal information.

Discussion: The Secretary recognizes that some institutions may

have difficulty in meeting the requirement. The Secretary does not

believe that it need result in the elimination of any small

institutions because small institutions are already participating in

electronic processes directly or are participating through third-party

servicers.

Changes: None.

Comments: Two other commenters questioned whether an institution's

electronic capabilities indicated that an institution was

administratively capable.

Discussion: The Secretary believes that an institution's

participation in electronic processes are essential to its

demonstrating administrative capability. The Secretary believes that

institutional use of electronics will result in business processes that

improve service to, and reduce burden on, students and will result in

improved institutional administration and accountability.

Changes: None.

Subpart K--Cash Management

Section 668.161 Scope and Purpose

Comments: One commenter, on behalf of student legal aid services

[[Page 60587]]

organizations, supported the Secretary's stated goals with regard to

the purpose of the cash management regulations, and specifically

appreciated the incorporation of the goal to minimize costs that accrue

to students under the title IV, HEA loan programs as proposed in

Sec. 668.161(a)(1)(iii).

One commenter on behalf of the lending community recommended that

the Secretary clarify in regulations that the cash management rules

under subpart K apply to a third-party servicer employed by the

institution to distinguish between other third-party servicers employed

by lenders and guaranty agencies.

A few commenters on behalf of the lending community expressed

concerns about proposed Sec. 668.161(a)(3)(iii) with regard to the use

of the term ``disburse'' to mean the same as deliver loan proceeds

under 34 CFR 682 of the FFEL Program regulations. These commenters were

worried that the distinction between the terms ``disburse'' and

``deliver'' would be eliminated in the FFEL Program regulations. The

commenters pointed out that under the FFEL Programs a lender or escrow

agent is the disbursing agent who disburses the funds to the

institution who, in turn, delivers the funds to the borrower and that

the distinction is important in determining interest that accrues to

the government and to borrowers. One commenter noted that current

provisions regarding restricted interest arose out of Negotiated

Rulemaking discussions. The commenter argued that the current

definition of disbursement in the FFEL program regulations allows the

lender to utilize a readily identifiable date for this purpose and that

the definition should be retained under the FFEL Program regulations.

Several commenters writing on behalf of the lending community

opined that because FFEL Program funds are provided by lenders, rather

than the Secretary, and unlike other title IV, HEA programs those funds

are private capital, FFEL Program funds are held in trust by the

institutions for the student beneficiaries, the lenders and the

Secretary, and the distinction should be noted in this section.

Discussion: The Secretary disagrees with the commenter who

suggested that Sec. 668.161(a)(2) be revised to distinguish between

third-party servicers employed by institutions and other third-party

servicers employed by lenders and guaranty agencies. The Student

Assistance General Provisions regulations govern institutions and their

third-party servicers. The rules that govern lenders, guaranty agencies

and their third-party servicers are found in 34 CFR 682 of the FFEL

Program regulations. Therefore, it is unnecessary to distinguish in

these regulations that the third-party servicers affected are those

employed by institutions.

With respect to the concerns raised regarding the use of the term

``disburse'' under subpart K to mean the same as ``deliver loan

proceeds'' under the FFEL Program regulations, the Secretary wishes to

clarify that this is not a change from current rules.

For the FFEL Programs, the Secretary is cognizant of the

distinction made in the HEA between a ``disbursement'' by a lender and

``delivering the proceeds of the loan'' by an institution to a

borrower. The definition of disburse under the FFEL Program regulations

remains unchanged for purposes of determining interest due. As

discussed previously in the cash management NPRM of September 29, 1994

(59 FR 49766-49773), the term disburse solely as used in subpart K,

corresponds to the concept of delivery of proceeds under the FFEL

Program regulations in order to prevent confusion by utilizing a single

term for all title IV, HEA programs to which certain rules and

timeframes under subpart K apply. In the most recent NPRM, the

Secretary merely relocated the explanation from the definitions

section, which was eliminated, to Sec. 668.161, Scope and purpose. The

Secretary will take into consideration this issue in the context of HEA

reauthorization.

The Secretary agrees with those commenters who suggested that a

distinction should be made between those funds provided by the

Secretary and those funds provided by lenders and guaranty agencies for

purposes of clarifying that an institution holds FFEL Program funds in

trust and may not use those funds for any unintended or unauthorized

purpose.

Changes: Section 668.161(b) is revised to clarify that FFEL Program

funds are held in trust by an institution for the intended student

beneficiaries, the lenders, the guaranty agencies, and the Secretary.

Comments: One commenter requested clarification concerning the

applicability of the provisions of these regulations to State

institutions in a State with an agreement between the State and the

U.S. Department of the Treasury (Treasury) under the Cash Management

Improvement Act of 1990 (CMIA). The commenter recommended that

provision for the CMIA agreements be incorporated into these

regulations.

Discussion: The Secretary agrees with the validity of the

commenter's concern regarding the applicability of the provisions of

these regulations to State institutions in a State with an agreement

with the Treasury under the CMIA. Such an agreement is uniquely

negotiated between the Treasury and the State and concerns requesting

and transferring funds between a State and the Treasury. Further, a

State's agreement with the Treasury is specific as to the federally

funded programs that are covered. For these reasons the Secretary does

not believe it is necessary or appropriate to incorporate specific

references to CMIA agreements into these regulations.

Changes: None.

Section 668.162 Requesting Funds

Just-In-Time Payment Method (Sec. 668.162(c))

Comments: While most commenters understood and supported the

Secretary's plans to transition the operations of the title IV, HEA

programs into an integrated delivery system and to improve program

accountability, many commenters expressed reservations about the

implementation of the just-in-time payment method.

Their reservations primarily were due to their perceptions that

there was a lack of specificity concerning operational features,

concerns regarding potential expenses and reporting burden, issues such

as the unpredictability of changes in student eligibility, and a belief

that the Secretary was addressing issues of fraud and abuse that should

be addressed through enforcement actions. Commenters were concerned

about whether there would be adequate Department staff and resources to

ensure that all requested funds would be sent to institutions within

adequate timeframes. Some commenters recommended that the Secretary

develop a pilot to provide adequate testing of the new payment method.

Commenters were also concerned that institutions would lose

flexibility under this payment method as opposed to the advance payment

method under which an institution may receive Federal funds without

providing information on the students for whom the funds are intended.

The commenters stated that financial aid offices are at their busiest

just before the start of classes, and the commenters believed that they

would be coping with an increase in reporting activity that would be

time-consuming and staff-intensive. Other commenters were concerned

that a student's funds might be held up due to processing problems;

thus, the student would be forced to take out a short-term loan, to

borrow from family or friends, or to withdraw from the institution.

[[Page 60588]]

Discussion: As the Secretary noted in the preamble to the NPRM, the

just-in-time payment method is a core element to creating the Project

EASI vision of a student-centered integrated student aid delivery

system. Providing student-level information for one or more programs in

a single process and using that same information to provide funds to

institutions is the basis for reengineering the delivery system and

reducing duplicative, uncoordinated, and unreconcilable systems. The

Secretary believes that using a just-in-time payment method in a

reengineered delivery system will result in improved business processes

and better management of the title IV, HEA programs and will improved

accountability at problem institutions. The Secretary recognizes and

very much appreciates the concerns that the commenters have expressed.

The Secretary believes that many of these concerns will be addressed in

the design of the system that will support the just-in-time payment

method. The Secretary understands that further work is needed on the

development of the system before the system can be implemented, and the

Secretary plans to further involve institutions and other participants

in the Title IV, HEA Programs in the development of the system. In

addition, when the system is further developed, the Secretary expects

to use this payment method only at institutions that volunteer to

participate in it. Moreover, the Secretary will permit those

institutions to choose the particular Title IV, HEA programs to run

under the just-in-time method. Thus, for example, an institution may

volunteer to participate in the just-in-time method for the Pell Grant

program only and continue to receive funds under the advance system of

payment for the Direct Loan and campus-based programs.

Changes: None.

Section 668.163 Maintaining and Accounting for Funds

Comments: A number of commenters supported the Secretary's proposal

to eliminate the requirement under Sec. 682.207(b) that an institution

maintain a separate bank account for FFEL Program funds. One commenter

expressed concern that not requiring a separate account may provide an

opportunity for institutions to abuse title IV, HEA program funds.

Discussion: The Secretary appreciates the commenters support of

this proposal. The Secretary continues to believe that there is no

longer any compelling reason to require a separate account for FFEL

Program funds provided by EFT or master check. The Secretary further

believes that, by requiring an institution to comply with the bank

account notification requirements and the accounting and financial

records prescribed in this section, he will greatly reduce the

opportunity for institutions to abuse Federal funds.

Changes: None.

Section 668.164 Disbursing Funds

Definition, Disbursement

Comments: Several commenters requested that the Secretary clarify

the discussion in the preamble that ``a disbursement occurs when an

institution makes the benefits of title IV, HEA program funds

constructively available to students.'' These commenters maintained

that it is difficult, if not impossible, to determine the difference

between funds made constructively available and bill preparation that

includes crediting the student's account. The commenters argued that

since institutions consider a student's title IV, HEA program awards as

a payment toward tuition and fee charges, students realize the benefits

of their title IV, HEA program awards when institutions allow them to

enroll for and attend classes even though institutions have not yet

received Federal funds for those awards.

A few other commenters suggested that the preamble discussion that

``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'' be

codified in final regulations to avoid any misunderstanding between the

preamble and the regulations.

Many commenters representing institutions and higher education

associations objected to the provision that a title IV, HEA program

disbursement occurs on the date that an institution credits a student's

account or pays the student or parent directly with institutional funds

used in advance of receiving title IV, HEA program funds. Some of these

commenters regarded this provision as an intrusion in the way that

institutions bill students and post payments to student accounts and

questioned whether the Secretary has the authority to regulate the use

of institutional funds in this manner. Other commenters believed that

an institution should have a choice in determining whether to use

institutional funds in advance of title IV, HEA program funds since the

institution is solely liable for any funds advanced. In addition, the

commenters stated that at many institutions tuition is generally billed

and payable long before acceptable disbursement dates for title IV, HEA

program purposes. At these institutions, students are not considered to

be ``officially enrolled'' until tuition is paid in cash or by

institutional credit, with such payments or credits occurring many

months prior to the start of classes. Another commenter believed that

the use of institutional funds to credit a student's account should not

be held to the same requirements as a credit of actual title IV, HEA

program funds. This commenter, along with other commenters, noted that

in many cases the crediting of institutional funds is the result of a

``short-term loan'' from the institution to the student (e.g., to

enable the student to pay for off-campus housing) pending the

institution's receipt of title IV, HEA program funds and the subsequent

disbursement of those funds to the student. Still another commenter

maintained that the ability to credit a student's account with

institutional funds prior to the receipt of title IV, HEA program funds

offers important administrative flexibility to institutions to manage

workload and was adamant in stating that until title IV, HEA program

funds are utilized no disbursement of any Federal funds has taken

place. One commenter recommended that the Secretary include in the

final regulations the exception to the definition of disbursement found

in the preamble discussion of the proposed regulations concerning

institutions that, in order to create a bill, must credit the student's

account on the general ledger. The commenter was referring to the

discussion in the preamble of the proposed regulations where the

Secretary noted that he 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.

Discussion: The Secretary appreciates the commenters' concerns

regarding the proposed definition of ``disbursement'' and the apparent

ambiguities surrounding that term both in the proposed regulation

itself and in the preamble. The Secretary hopes to clarify that term in

the following discussion and in a revision to the final regulations.

It is the Secretary's view that a disbursement of Title IV, HEA

program funds occurs when an institution credits a student's account or

pays a student directly, and indicates that the source of that payment

is a Title IV, HEA program. Thus, if an institution credits a student's

account at the institution with $1,200 and indicates on the account

that the $1,200 credit is a

[[Page 60589]]

Federal Pell Grant award, the institution has made a Federal Pell Grant

disbursement regardless of whether the institution used its own funds

or federal funds for that credit.

On the other hand, if the institution simply makes a memo entry for

billing purposes or credits a student's account and does not identify

the credit as a credit for a title IV, HEA program, the Secretary

considers that the institution did not make a Title IV, HEA program

disbursement. For example, if the ledger entry calls the credit an

``estimated Federal Pell Grant,'' the Secretary does not consider the

institution to have made a Federal Pell Grant disbursement.

Consequently, it is the institution that controls whether a payment to

a student is a Title IV, HEA program payment.

The Secretary understands that there are institutions that are

required by State or local law to credit a student's tuition and fee

account with Title IV, HEA program funds in order to send the student a

tuition and fee bill. In addition the Secretary believes that there are

other institutions that, because of accounting and billing systems

constraints, also credit students' accounts in order to generate

billing statements. These institutions may send these bills far in

advance of the first date that an institution can disburse Title IV,

HEA program funds under these rules. The Secretary further understands

that these institutions credit a student's tuition and fee account with

Title IV, HEA program funds but do not actually take Federal funds to

satisfy these credits until they are permitted to do so under the cash

management rules.

The Secretary has amended the definition of the term

``disbursement'' to accommodate these institutions. Under the amended

definition, the Secretary will not recognize that a disbursement of

Title IV, HEA program funds takes place until the first day that such a

disbursement can take place, 10 days before the first day classes, or

30 days after the first day of classes for FFEL or Direct Loan proceeds

for a first year first time borrower.

The Secretary acknowledges that some institutions may need to make

administrative or systems changes to comply with these new

requirements. Therefore, the Secretary may not take an adverse action

against an institution that fails to satisfy the requirements during

the 1997-98 award year if the Secretary determines that the institution

had insufficient time to make the necessary changes.

Changes: The Secretary is revising the definition ``disbursement''

in Sec. 668.164(a) to provide that if an institution credits a

student's institutional account with title IV HEA program funds earlier

permitted under the provisions of Sec. 668.164 solely for the purpose

of preparing a tuition and fee bill for that student, the Secretary

will recognize that disbursement as being made on the first day that it

would be permitted to be made under that section.

Direct Loan Disbursements (Sec. 668.164(d)(3))

Comments: Several commenters questioned the significance of the

provision that requires that institutions disbursing Direct Loans to

student accounts must first credit Direct Loan funds to the student's

account to pay for outstanding current and authorized charges. These

commenters asked why the Secretary does not require Federal Perkins

Loan Program and FFEL Program loans disbursed to student accounts to be

applied first to the student's account to cover outstanding current and

authorized charges and suggested that the Secretary may be moving away

from parity between the Direct Loan and FFEL programs.

Discussion: This provision is based on the statutory requirement

that Direct Loans be applied to the student's account for tuition and

fees, and in the case of institutionally owned housing, to room and

board. See Sec. 455(j)(1) of the HEA. This requirement does not result

in any significant inequity between the FFEL and Direct Loan programs.

Rather, this provision simply promotes the use of EFT to student

accounts as a means of disbursing to borrowers. This statutory

requirement only applies to schools that actually disburse funds

directly to student accounts. Furthermore, this statutory requirement

does not require that Direct Loan funds must be credited to the

student's account prior to other funds, i.e., grants and other loans.

This provision simply requires that if there is any outstanding balance

for current outstanding or authorized charges on the student's account

when Direct Loan funds are disbursed to that account, Direct Loan funds

must be applied to those outstanding charges before any Direct Loan

funds are disbursed directly to the borrower.

Changes: None.

Early Disbursements (Sec. 668.164(f))

Comments: One commenter was concerned about the requirement that an

institution may disburse title IV, HEA program funds on the later of 10

days before the first day of class or the end of the prior payment

period in which the student received title IV, HEA program funds. The

commenter believed that this requirement would delay disbursements

until after classes would have started in instances where the time

between payment periods is less than 10 days. The commenter believed,

for example, that if only seven days separated two quarters, the

disbursement for the second payment period would be delayed until the

third day of classes in the second quarter.

Two other commenters were concerned that the requirements were a

change from current requirements for educational programs using

academic terms and credit hours. For these educational programs, the

commenters understood the current requirements to allow an institution

to make a disbursement up to 10 days prior to the subsequent term. For

example, one of these commenters noted that, when one term ends on

Friday and the next term begins on a Monday, the current regulations

(34 CFR 668.165(c)) provide that an institution may make a disbursement

up to 10 days prior to the Monday on which the subsequent term begins.

Discussion: In general, under proposed Sec. 668.164(f), an

institution would be able to disburse funds for a subsequent payment

period the later of (1) 10 days before the first day of classes of the

payment period, or (2) the date the student completes the previous

payment period for which he or she receives title IV, HEA program

funds. Under the proposed regulations, in the first commenter's

example, the institution would be able to make a disbursement for the

second quarter up to seven days prior to the beginning of the second

quarter instead of three days into the second quarter as the commenter

believed.

The Secretary agrees with the comments of the other two commenters

that the proposed regulations would be a change in the requirements.

The Secretary intended to coordinate the requirements for early

disbursements with the implementation of the disbursement of all title

IV, HEA assistance by payment periods. The Secretary did not intend to

change the current policy for educational programs offered using

semesters, trimesters, or quarters that allows an institution to

disburse title IV, HEA assistance up to 10 days prior to the beginning

of a payment period regardless of the ending date of the prior payment

period.

Changes: The Secretary has revised the requirements in

Sec. 668.164(f) to provide that, in the case of an educational program

offered using semesters, trimesters, or quarters, an institution may

disburse title IV, HEA program assistance up to 10 days prior to the

beginning of any payment period.

[[Page 60590]]

This revision is also in accordance with the disbursement requirements

for the FFEL and Direct Loan programs for educational programs that do

not use semesters, trimesters or quarters.

Late Disbursements (Sec. 668.164(g))

Comments: Several commenters expressed support for the proposal to

consolidate the late disbursement requirements into the cash management

subpart of the regulations. They believed that this proposal would

promote clarity and that the uniformity will enhance program

efficiency.

One commenter believed that a conflict has been created in the

Secretary's effort to consolidate the Federal Pell Grant Program rules

with the other title IV, HEA program's late disbursement rules in

Sec. 668.164(g). The commenter stated that the proposed provision in

paragraph (g)(2) gives an institution discretion to make late

disbursement payments to a student for up to 90 days after the

student's last date of attendance to pay for educational costs that the

student incurred while enrolled. The commenter stated that Sec. 690.78

of the current Federal Pell Grant regulations requires the institution

to disburse funds to a student if the student requests those funds

within 15 days after the last date of his or her enrollment ends in the

award year. If the student has not picked up the payment at the end of

the 15-day period, then he or she forfeits the right to it. However, an

institution could use its discretion to disburse Federal Pell Grant

funds after the 15th day.

Discussion: The Secretary appreciates the commenters' support for

the proposal to consolidate the late disbursement provisions into the

cash management subpart of the regulations.

The Secretary does not agree with the commenter that there is a

conflict between the provisions of Sec. 690.78 and the proposed rule in

Sec. 668.164(g) because they each deal with a different matter. Section

690.78 deals with the situation where an institution pays an eligible

student by check but the student does not pick up the check. That

section indicates that the student forfeits his or her right to the

check after a certain time. Section 668.164(g)(2) deals with the

situation where a student becomes ineligible before the institution

makes a payment to that student and the circumstances under which the

institution can make that payment anyway.

Changes: None.

Comments: One commenter representing a guaranty agency objected to

the proposal that in order to make a late payment of an FFEL Program

loan, before the date the student became ineligible, an institution

must have received a SAR from the student or an ISIR from the

Secretary, and must have been certified the student's loan application.

The commenter indicated that this proposal would penalize students due

to the institution's failure or inability to drawdown ISIRs before a

student became ineligible. The commenter believed that if the student

is otherwise eligible and the institution draws down (or obtains) the

student's ISIR or SAR prior to the disbursement of funds, the

institution should be able to deliver the loan to the student. The same

commenter also indicated that the certification of a loan application

after the date on which the borrower becomes ineligible does not impact

program integrity since the institution would still be required to

certify a cost of attendance which only covers costs incurred by the

student during the period when the student was eligible.

One commenter questioned why there are different proposed rules for

loans and grants. The commenter objected to the proposal that

disbursement of loans may only be made if the student has graduated or

completed the loan period, while grant payments may be made regardless

of the student's status. The commenter believes that the loan

provisions should match the late disbursement provisions for Federal

Pell Grants.

Discussion: Under the FFEL Programs, the HEA requires that an

institution certify that a student is an eligible student at the time

it certifies the student's loan application. Therefore, the commenter's

suggestion is not legally supportable. In addition, the Secretary

believes that in order for an institution to make a late disbursement

to an ineligible student, that student must meet a core requirement: he

or she must have applied for those funds and the institution must

received an ISIR or an SAR with an official EFC before he or she became

ineligible.

The Secretary also disagrees with the commenter who believes the

late disbursement provisions should be identical for loans and Federal

Pell Grants. Under the HEA, an institution is prohibited from making a

late second disbursement of a Direct Loan or FFEL loan unless the

student had graduated or successfully completed the period of

enrollment for which the loan was intended. No legal restriction

applies to grants.

Changes: None.

Comments: Several commenters objected to the proposed requirement

that would make a written acceptance of a Federal Perkins Loan or an

FSEOG Program award from a student a condition for making a late

disbursement. The commenters noted that the Federal Perkins Loan and

FSEOG Program regulations do not require signed acceptance letters. The

commenters view this proposal, therefore, as unnecessarily burdensome.

Several commenters writing on behalf of guaranty agencies, student

loan servicers, and education associations believed that in paragraph

(g)(3) the proposed language, ``If a student qualifies for a late

disbursement . . .'', should be changed to read, ``If a borrower

qualifies for a late disbursement . . .''. The commenters stated that

the current proposed language using the word ``student'' restricts the

approval of late disbursements to student borrowers, and fails to

account for PLUS loans made to parent borrowers who are eligible to

receive a late disbursement.

Discussion: The Secretary agrees with the commenter's objections

regarding late disbursements of a Federal Perkins Loan or an FSEOG

Program award and has made appropriate changes.

The Secretary also agrees with the commenters that the proposed

regulations restrict the approval of late disbursements to student

borrowers and fails to account for PLUS loans made to parent borrowers,

and will revise the section accordingly.

Changes: The Secretary revises paragraph (g) to remove the proposed

provision that would require an institution to have received from the

student an acceptance of the Federal Perkins Loan or an FSEOG Program

award before making a late disbursement. Instead the institution will

merely have to show that it awarded a student a loan or grant before

the student became ineligible.

The Secretary also revises paragraph (g) to allow for PLUS loans to

be disbursed under these same late disbursement provisions.

Comments: One commenter writing on behalf of a consumer law center

objected to the Secretary's discussion of documented educational costs

that student's incur before they become ineligible. The commenter

believed that the preamble statement leaves the impression that the

Department is creating a lesser standard of proof for institutional

charges. The commenter believed that this would permit institutions to

charge students with improper and inflated costs. For example, the

commenter was concerned that the preamble discussion would allow an

institution to charge students who have withdrawn after just two

[[Page 60591]]

weeks for all the term's books and supplies regardless of whether the

student received them or returned them. According to the commenter,

inflated add-on expenses have been a serious problem area with some

institutions, particularly those that require high-cost supplies and

that have their own book distribution and even publishing companies.

The commenter further questioned whether the Department intends to

sanction such overcharges. The commenter suggested that the preamble of

the final regulations specify that the individual student's alleged

costs must be documented, and that any policy the institution develops

must be based solely on books or supplies actually received by the

student and not returned to the institution. The commenter concluded by

suggesting that the preamble of the final regulations specify that such

policies developed by the institution must comply with pertinent State

law, if any, on the issue of permissible charges to students.

Discussion: The Secretary believes that the commenter misconstrued

the intent and effect of the Secretary's preamble discussion on this

matter. The Secretary sought only to expand the means by which an

institution might account for educational costs without the added

burden of requiring each student to keep a detailed expenditure

account. The preamble discussion did not address what the commenter was

concerned about, improper and inflated institutional charges.

It was not the Secretary's intent for that this discussion appear

to sanction unscrupulous practices. With regard to the commenters

suggestion that the preamble should state that institutional policies

on permissible charges to students must comply with State law since the

Secretary assumes that institutions must comply with applicable State

laws at all times.

Changes: None.

Comments: Many commenters writing on behalf of loan servicers,

guaranty agencies, education associations, and business officers

overwhelmingly supported the 90-day timeframe for making a late

disbursement after the date a student becomes ineligible. However,

these commenters were concerned about conflicting policies, such as the

60-day late disbursement timeframe in the current FFEL Program

regulations. The same commenters indicated that since funds are

disbursed by the lender and delivered by the institution, in some

instances, especially with check disbursements, a lender may meet the

90-day disbursement requirement but the institution could not deliver

the proceeds to the student borrower within the 90-day timeframe. These

commenters concluded by suggesting that the provision be revised to

reflect that late disbursements may be delivered by the institution

provided the lender disburses funds, or the institution draws down

funds, within 90 days after the date the student becomes ineligible.

Discussion: The Secretary agrees with the commenters that the 90-

day late disbursement timeframe should coincide with the current FFEL

Program regulations, and that corresponding changes are needed to

remove conflicting policies referenced in those regulations. Section

668.164(g) provides that if a student is eligible for a late

disbursement, the institution is permitted to make the late

disbursement within 90 days after the date the student becomes

ineligible. Contrary to the suggestion of the commenters, the Secretary

requires that the delivery of the FFEL Program loan proceeds to the

student (or parent) by the institution must be made within this 90 day

period. Therefore, a lender would have to make a disbursement to the

school that would provide sufficient time for the school to comply with

this requirement.

Changes: The Secretary revises the late disbursement provisions

found in 34 CFR 682.207 of the FFEL Program regulations to conform to

the changes in Sec. 668.164(g).

Section 668.165 Notices and Authorizations

Award Notice (Sec. 668.165(a)(1))

Comments: One commenter, writing on behalf of student legal aid

services organizations, strongly supported the proposed requirement

concerning notification by the institution of the amount of funds a

student could expect to receive under each title IV, HEA program and

how and when those funds would be disbursed. The commenter also

supported the proposal that, if those funds include Direct Loan or FFEL

Program funds, the notification indicate the amounts of subsidized

loans and the amount of unsubsidized loans. The commenter further noted

that there is apparently a proposal under review to eliminate a

question on the FFEL loan application that provides the applicant with

the opportunity to indicate whether he or she wishes to apply for a

subsidized or an unsubsidized loan. The commenter cautioned that the

notice requirement in Sec. 668.165(a) should not be used as a reason to

eliminate that question on the application.

A couple of commenters suggested that the notification requirement

regarding the amount of subsidized and unsubsidized loans duplicates

information provided by lenders.

Discussion: The Secretary would like to emphasize that the notice

requirement regarding the amount of subsidized and unsubsidized loans

is not intended to eliminate a borrower's right to choose whether to

apply for a subsidized or unsubsidized loan. As to the commenters

suggestion that this notice requirement may duplicate information

otherwise provided by lenders, the Secretary believes that it is useful

for an institution to provide a student with his or her total aid

package even though some of the information provided to the student

might be also provided by others at other times.

Changes: None.

Comments: One commenter was concerned that the institution may not

have definitive information regarding the amount and types of loans

that will be disbursed until the lender issues a disclosure notice. In

addition, the commenter cautioned that while institutions indicate when

a disbursement should be made, sometimes lenders do not adhere to these

dates, and students expect that whatever dates are given to them are

sacrosanct.

Another commenter, writing on behalf of the lending community,

suggested that this section be revised further to state that if the

amount of loan funds or subsidy type (i.e., subsidized or unsubsidized)

changes after the institution's initial notification, the institution

or its agent must notify the borrower within 30 days after the change.

Discussion: With respect to the comment that the institution may

not have definitive information regarding the amount and types of loans

that will be disbursed, the Secretary reminds institutions that they

are responsible for certifying, and thus requesting from the lender, a

specific type and amount of loan, or in the case of a Direct Loan of

originating a specific type and amount. However, the Secretary

understands that in some limited number of instances, the lender may

reduce the certified amount of the loan as a result of a borrower's

request or enforcement edits. The Secretary also understands that the

actual disbursement received from the lender might differ slightly from

what the institution expected because of loan fees and rounding

differences. Thus, the Secretary allows the information provided in

this notice to include the gross amount of the loan disbursement or a

close approximation of the net

[[Page 60592]]

disbursement amount. The Secretary considers that an institution meets

the notice requirement if it provided the best information it had.

With regard to the comment that some lenders do not adhere to the

disbursement dates requested by the institution, the Secretary reminds

both institutions and lenders that the FFEL Program regulations require

the lender to comply with the disbursement dates provided by the

institution, assuming that the requested dates meet all statutory and

regulatory requirements.

With respect to the suggestion that the notice requirement be

expanded to require an institution or its agent to notify a borrower

within 30 days regarding loan changes, the Secretary believes that it

is not necessary to proscribe specific timeframes for either the

initial notice or any required revisions.

Changes: None.

Comments: A few commenters agreed with the proposal to notify

students about PLUS funds. One commenter expressed concern about the

violation of the privacy of a parent borrower under the PLUS programs

when the notice is sent to the student.

Discussion: The Secretary believes that the student should be

informed of all title IV, HEA aid awarded to, or on their behalf. The

Secretary believes that right outweighs any privacy right a parent may

have with regard to a PLUS loan.

Changes: None.

Disbursement Notice (Sec. 668.165(a)(2))

Comments: Many commenters writing on behalf of business officers

and financial aid administrators disagreed with the proposed changes in

the notification requirements regarding the disbursement of Direct

Loan, Federal Perkins Loan Program, or FFEL Program funds that are

provided via EFT or master check. Several commenters disagreed that any

such notification should be required of institutions. These commenters

argued that student and parent borrowers are notified of loan amounts,

estimated disbursement dates, and their rights and responsibilities,

including those regarding the cancellation of loans, several times

during the application process by the institution, lenders, guaranty

agencies, or the Secretary. Many commenters felt that adequate

information was already provided to borrowers through award letters,

loan counseling, debt reduction efforts on behalf of the institution,

and other required notifications such as on the promissory note and in

terms and conditions publications.

A few commenters suggested that if additional information regarding

students' and parents' loan disbursements, rights, and responsibilities

needs to be disclosed to borrowers, the information should be provided

by lenders, included on the promissory notes, or in other consumer

disclosure notices already required. One commenter suggested the

notification be added to the award notice under paragraph (a)(1) of

this section. The commenters indicated that another notice would be

administratively burdensome, costly, and unnecessarily confusing to

students and parents. One commenter thought that the proposal was

contrary to President Clinton's directive to Federal agencies to reduce

regulatory and paperwork burden.

Discussion: The Secretary appreciates the detailed comments

submitted by all parties regarding the requirement that an institution

notify a student or parent borrower of the date and amount of Direct

Loan, FFEL, and Federal Perkins loan funds that are disbursed by

crediting the student's account at the institution. The Secretary

considers the initiation of an EFT of title IV, HEA program loan funds

to a student's or parent's bank account and the subsequent withdrawal

of funds from that account to pay for tuition and fees or other

authorized charges, to be the same as directly crediting the student's

account at the institution and therefore subject to these notification

requirements.

The Secretary wishes to emphasize that this notice requirement is

not new but is a continuation of existing requirements. The provision

reflects the Secretary's continuing view that a borrower is entitled to

be informed when his or her title IV loan funds are being used by the

institution to pay institutional charges thereby generally making the

borrower liable for those loan funds.

Changes: None.

Comments: Several commenters specifically opposed allowing a

student or parent to cancel a loan that had been disbursed, citing

increased administrative burden and inconvenience. Two commenters

argued that the cancellation notice is unnecessary, because an EFT

already requires an authorization and therefore, a borrower's right to

have funds delivered by check is protected, and the current rules

already require a notice to the borrower that loan funds have been

credited to his or her account. The commenters contended that the

proposed rule was designed to undermine the premise by which the loan

was requested. A few commenters suggested that students and parents

would ``game'' the system and misuse the federal loan programs as cash

flow assistance or short-term bridge loans pending receipt of other

funds with which they intend to pay their tuition, fees, room and

board.

Discussion: The Secretary believes that regardless of the manner in

which a loan is provided to an institution, and regardless of the way

the institution chooses to disburse that loan, the borrower should have

the opportunity to decline that loan at, or close to, the time the

funds are disbursed and the debt incurred. Since a borrower has this

opportunity if loans are disbursed in the form of checks, the Secretary

believes an alternative option should be available for EFT and master

check disbursements. The Secretary believes that the borrower's

authorization of an EFT transfer takes place too early in the loan

process to satisfy this consideration.

The Secretary disagrees with the commenters who suggested that this

requirement would be overly burdensome. The Secretary developed this

requirement with the existing notice system in mind. As a result, an

institution can piggyback on other required notices, it does not have

to send a separate notice. This matter is further discussed under

another series of comments.

With respect to the commenters who suggested that the notification

will lead to students and parents ``gaming'' the system and using

Federal funds as cash flow assistance, the Secretary disagrees that the

required notification will in any way influence whether a student or

parent would act in such a manner.

Changes: None.

Comments: Many commenters supported the notification requirement. A

handful of commenters indicated that their institutions grant

cancellation requests of a student or parent request even after the

loan has been disbursed. Several commenters writing on behalf of the

lending community expressed support of the cancellation provision

likening it to a ``right of recession'' period provided for under other

consumer loans.

Some commenters writing on behalf of financial aid administrators

expressed concern regarding how the cancellation provisions would

affect the requirement that a title IV, HEA credit balance must be paid

within 14 days after the first day of classes or within 14 days after

the date on which the credit balance occurs, whichever is later. The

commenters thought there would be a conflict between the 14-day credit

balance rule and the 14-day loan

[[Page 60593]]

cancellation provision and that institutions would be required to

cancel a loan or loan disbursement by returning institutional funds to

cover a loan when all or a portion of the loan was already paid to the

student or parent. The commenters concluded that the institution would

have to then bill the student or parent for those funds.

A few commenters writing on behalf of financial aid administrators

were concerned about how the 14-day cancellation provision would affect

institutional refunds as required under Sec. 668.22. One commenter

contended that the cancellation provision ignored an institution's

right to retain title IV, HEA program funds earned by the institution

under refund regulations. This commenter argued that if a borrower

decided to withdraw and cancel a loan, the institution may be denied

that portion of the loan to which it may be entitled under its refund

policy. It would then be required to bill the student for the unpaid

amount of the tuition and fees to which the institution was entitled.

Discussion: The Secretary appreciates the support of the commenters

for this provision.

The Secretary disagrees with the commenters regarding any conflict

between the loan cancellation provisions and the credit balance

provisions. When a borrower exercises his or her right to request the

cancellation of a loan or loan disbursement, the borrower can only

request that the institution cancel and return to the lender those loan

funds that the institution used to pay institutional charges or is

still holding on behalf of the borrower. Thus, if an institution

released title IV, HEA program loan funds to the student or parent as

part of a credit balance and then received a request to cancel the

loan, it would not be required to return those funds previously

released to the student or parent.

The Secretary agrees with the commenters who pointed out that the

cancellation provisions may have an impact on an institutional refund

under Sec. 668.22. The Secretary reminds the commenters that the refund

requirements determine the unearned portion of the actual charges for

the period of enrollment for which a student has been charged, not the

source from which the institution earns funds. The determination of the

amount of aid received by, or on behalf of, the student takes place

before a refund is calculated. If students or parents avail themselves

of the cancellation provision, a refund calculation may reflect greater

unpaid charges than would have existed if the loan had not been

cancelled. The Secretary points out that, contrary to the commenter's

assertion, there is no ``portion of the loan to which it (the

institution) may be entitled under its refund policy'' when a student

withdraws.

The institution, after returning the requested loan funds to the

lender, would simply calculate the refund without consideration of the

cancelled loan, much as it would do if the loan had never been

disbursed or the student refused to accept a late disbursement. Any

time a refund calculation establishes unpaid charges to which the

institution is entitled that have not been paid by another source, the

institution may bill the student for the unpaid amount. The Secretary

assumes that the student who requested the loan cancellation understood

the implications of that request and its impact on remaining debt to

the institution.

Changes: None.

Comments: A commenter writing on behalf of student legal services

organizations supported the cancellation provision but suggested that

the Secretary include language in the regulations that allows a student

or parent to refuse a loan or loan disbursement in whole or in part. A

significant number of the commenters agreed with the Secretary that

student and parent borrowers should be informed of their rights to

cancel a loan or loan disbursement, but disagreed with the proposed

timeframe within which the institution would be required to notify the

student or parent borrower. The commenters said the timeframe was too

short, and in many cases would require a completely separate notice to

be sent out by the institution. Most commenters suggested that the

timeframe be extended from the 20-day window between 10 days before the

disbursement and 10 days after the disbursement, to a timeframe that

allows for the notice to be easily included in monthly statements

already prepared and issued by the institutions. These commenters cited

increased administrative burden and the cost of systemic changes for an

additional notice, which would ultimately be passed on to the students,

as reasons to extend the timeframe. Other commenters contended that

such a narrow timeframe in combination with the few number of students

or parents who would take advantage of the cancellation provision would

increase administrative burden on the institutions without providing

much, if any, additional benefit.

A few commenters were concerned that due to the proposed changes in

the definition of disbursement under Sec. 668.164, the 10-day timeframe

on either side of the disbursement would be difficult to determine. One

commenter suggested that the beginning date of the notification

timeframe be pushed back at least to 15 days prior to the first day of

a payment period to allow a cancellation to be made before the

institution might need to process a refund. At least one commenter

suggested that there be no required timeframe; that the institution be

provided flexibility in determining when to notify students and

parents.

Discussion: The Secretary agrees with the commenter that a borrower

should be allowed to cancel all or a portion of his or her loan. With

regard to the number of thoughtful comments provided concerning the

timeframes proposed for the notification by the institution to the

borrower, the Secretary is persuaded that a change is necessary.

Therefore, the Secretary is expanding the timeframe from a 20-day

window to a 60-day window. Institutions will be required to provide the

notice to the borrower by the institution no earlier than 30 days

before the disbursement of the loan funds and no later than 30 days

after the disbursement. The Secretary believes that this 60-day window

will provide sufficient flexibility for institutions to utilize

existing systems and processes to provide information to borrowers that

a loan debt has been, or is about to be incurred and of the right of

the borrower to request that the debt be cancelled.

However, in order to ensure that the borrower has sufficient time

to exercise his or her cancellation rights, the Secretary is also

modifying the proposed timeframe placed on the borrower with regard to

how quickly he or she must notify the institution of the request to

cancel all or a part of the loan. The institution must honor such a

request from the borrower if it is received by the institution no later

than 14 calendar days from the day the institution sent the notice to

the borrower, or the first day of classes for the student, whichever is

later. This extension up to the first day of classes will allow the

borrower who receives the required notice 30 or 40 days before the

beginning of classes (early disbursement allowed 10 days before the

first day of classes of a payment period) the opportunity to consider

other funding options and request the cancellation before incurring the

obligation.

The Secretary notes that an institution is free to agree to a

borrower's request

[[Page 60594]]

for loan cancellation after the timeframe established by this rule.

Changes: The notice requirements in Sec. 668.165(a)(2)(ii) are

amended to allow a student or parent to cancel all or a portion of a

loan or loan disbursement. The timeframe under Sec. 668.165(a)(3)(i) is

amended to allow the institution to provide the required notice no

earlier than 30 days before, and no later than 30 days after, the date

the institution has disbursed, or will disburse loan funds. The

timeframe during which a student or parent may request a loan

cancellation is amended to provide that the student or parent has a

minimum of 14 days from the date the notice was sent by the institution

to request a cancellation. If the notice is sent out prior to the first

day of classes the student or parent has 14 days or until the first day

of classes to request a cancellation, whichever is longer.

Comments: A few commenters wondered how this cancellation provision

would affect the rule that borrowers can have a loan cancelled within

120 days of the disbursement if the net amount (minus the guarantee and

insurance fees) of the loan is returned, and prepaid after 120 days if

the gross amount of the loan is returned (including the guarantee and

insurance fees).

A few commenters indicated that if the notice in Sec. 668.165(a)(2)

is provided electronically the institution should not be required to

request receipt of that notice. One commenter expressed doubt that such

an electronic notification could realistically be provided for the

majority of students and parents. The commenter contended that because

this opportunity could not be utilized by many institutions, that the

overall result is increased administrative burden on institutions. The

commenter urged the Secretary to retain the current notification

requirements.

Discussion: The 14-day cancellation provision does not eliminate or

change the provisions that allow a borrower to return the net amount of

an FFEL or Direct Loan program loan within 120 days or the gross amount

of the loan after 120 days.

The Secretary does not believe that because some institutions do

not have the capability to notify students or parents electronically

that other institutions should be prohibited from utilizing electronic

means of notification. In addition, the Secretary continues to believe

that a ``return receipt'' for notices sent electronically is necessary

in order to ensure that the electronic notification has been properly

transmitted.

Changes: None.

Comments: A commenter writing on behalf of student legal services

organizations suggested that the 14-day timeframe allowed for the

borrower to request cancellation of the loan be from the date the

notice is received by the student or parent rather than on the date the

notice was sent by the institution. The commenter also suggested that

the Secretary expand the timeframe within which a student or parent has

to request a loan or loan disbursement cancellation to at least 60 days

from receipt of the notice. The commenter noted that this period would

parallel the Federal Fair Credit Billing Act, (15 U.S.C. 1666), which

is part of the Consumer Protection Credit Act and provides credit card

consumers with 60 days from the receipt of a credit card bill to

dispute a charge. Under that Act the creditor must acknowledge a

complaint within 30 days, and within 90 days either correct the error

or explain why it cannot be corrected. The commenter argued that giving

the borrower adequate time from receipt of the notice within which to

ascertain whether or not a loan is truly necessary will foster sound

borrowing practices and ultimately reduce loan defaults.

Discussion: The Secretary chose to make the timeframe run from the

date of the institution's notice rather than from the date the student

received the notice to avoid having the institution incur the cost and

burden of sending such a notice return receipt requested. The Secretary

continues to believe that the cost and burden is to great and the

benefit to small to change that procedure. On the other hand, when the

Secretary was considering these timeframes, the Secretary allowed for

the relatively long timeframe of 14 days to take into account that the

time period ran from the date of the notice rather than the date the

borrower received the notice. In the event of a dispute, the

institution would bear the burden of proving when it sent the

questioned notice.

With regard to the reference to consumer credit, the Secretary

points out that, unlike the consumer credit example cited, the purpose

of this notice and cancellation provision is to acknowledge the fact

that student loan debt is incurred, not when the promissory note is

signed, but when the institution disburses the loan. These proposals

are not designed to allow the student to ``test'' the product and then

to make a determination that it is faulty and request that the debt be

cancelled.

Changes: None.

Comments: Commenters writing on behalf of financial aid

administrators believed that the institution should be able to let the

borrower know of the possible impact of cancellation at the time the

institution notifies the student or parent of his or her right to

cancel a loan or loan disbursement.

Discussion: The Secretary agrees and encourages institutions to

keep their students well-informed. However, the Secretary reminds

institutions that they must not, in their attempt to provide this

information, imply that the loan or loan disbursement cannot be

cancelled if the cancellation leaves a balance owed to the school.

Changes: None.

Student and Parent Authorizations (Sec. 668.165(b)(1))

Comments: One commenter, writing on behalf of student legal aid

services organization, asked for clarification of whether a student

must have a title IV, HEA credit balance in order to take advantage of

the authorization provisions in Sec. 668.165(b)(1)(iii). The commenter

also disagreed with the proposal to remove the current restriction

prohibiting an institution that fails to meet the financial

responsibility requirements from holding a student's or parent's title

IV, HEA credit balance funds, and the proposal to remove the language

stating that an institution, in holding title IV, HEA program funds, is

acting as a fiduciary for the benefit of the student or parent. The

commenter suggested that a paragraph be added to the regulations that

prohibits institutions placed on reimbursement from obtaining student

or parent authorizations, and further suggested that the Secretary

retains the authority to prohibit institutions from holding student's

or parent's title IV, HEA funds upon a determination of demonstrated

weakness in administrative or financial capability.

Discussion: In response to the commenter's question, the Secretary

wishes to make clear that a student or parent must have a title IV, HEA

credit balance under Sec. 668.164(e) in order to take advantage of the

authorization provisions under Sec. 668.165(b)(1)(iii).

The Secretary agrees in part with the commenter who suggested that

the Secretary prohibit an institution on the reimbursement payment

method from obtaining authorizations to hold a student's or parent's

title IV, HEA program funds. The Secretary believes that a fixed rule

may not be warranted under all circumstances. If the Secretary

determines that there is demonstrated weakness in administrative or

financial capability at an institution, the Secretary will take

appropriate administrative action against the

[[Page 60595]]

institution which may include preventing it from obtaining student and

parent authorizations under Sec. 668.165.

With regard to the request by the commenter that the regulations in

this section include a statement stating that the institution acts as a

fiduciary for the benefit of the student or parent, the commenter is

referred to Sec. 668.161(b).

Changes: Section 668.165(b)(1)(iii) has been amended to give the

Secretary discretion to prohibit institutions that have been placed on

the reimbursement payment method by the Secretary from holding student

funds in excess of allowable charges.

Comments: A few commenters questioned the necessity of a written

authorization from the student, or parent in the case of PLUS funds.

These commenters also questioned the necessity of obtaining written

authorizations to use title IV, HEA program funds to pay prior-year

charges, charges not included in the cost of attendance, and even

future charges. One commenter contended that students and parents

should be allowed to authorize the use of title IV, HEA credit balance

funds for future charges because the funds, especially loan funds, are

the student's or parent's which they must repay. The commenter argued

that there is no logic to the practice of letting credit balance funds

be used for prior-year charges but not for future-year costs. One

commenter argued that students already sign a statement saying they

will use aid for educational purposes. The same commenter questioned

why an institution would want to pay a student credit balance funds

when the student owes a debt to the institution from a previous year or

for other charges. The commenter contended that this requirement causes

more work for the institutions, confusion to students and parents, and

results in no positive benefits to anyone.

Discussion: The Secretary continues to believe that any student or

parent authorization under this section must be in writing. A student

or parent should have control over the title IV, HEA program funds he

or she receives for educational costs in excess of tuition and fees,

and the Secretary believes that demonstration of that control must be

documented. The Secretary notes that title IV, HEA program funds in

excess of current-year tuition and fee charges are the students' funds

and students are entitled to receive those funds within the specified

timeframe.

With regard to comments concerning the use of current year funds to

pay for prior-year charges or for future year charges, the HEA clearly

indicates that title IV, HEA program funds are awarded to students to

pay current year charges. In fact, the HEA requires that the student

sign a ``Statement of Educational Purpose'' that includes a promise

that any funds received will be used to meet educational expenses for

that year. However, in response to institutional comments about the

administrative problems of lingering prior-year charges on student

accounts, the Secretary has authorized a limited exception and permits

title IV, HEA program funds to be used to cover minor prior-year

charges, if the institution had obtained the written authorization of

the student to use those funds in that manner. There is no similar

justification for extending this exception to future years and

therefore this limited exception will not be extended into any future

year. Therefore, an institution must release to the student any current

year title IV funds remaining in the student's account at the end of an

award year (or loan period).

Changes: None.

Single Authorization Throughout Period During Which a Student is

Enrolled at the Institution (Sec. 668.165(b)(3))

Comments: Several commenters writing on behalf of financial aid

administrators and the lending community supported the Secretary's

proposal to eliminate the requirement that an institution must notify a

student or parent annually of the provisions contained in an

authorization previously provided to the institution. The commenters

appreciated the reduction in administrative burden placed on

institutions. One commenter supported the Secretary's efforts to

identify areas where regulatory relief can be granted and urged the

Secretary to continue these efforts. A few commenters suggested that

this single authorization for the entire period during which a student

is enrolled at the institution be extended to EFT authorizations.

One commenter on behalf of student legal aid services organizations

opposed the removal of the requirement for annual authorizations and

the annual extension procedures. The commenter indicated that keeping

the current system was important since cancellations or modifications

are not retroactive. The commenter argued that an annual notice

advising students of their right to directly receive title IV, HEA

credit balance funds is of minimal burden to institutions and is an

important piece of consumer information for students.

Discussion: The Secretary appreciates the commenters' support of

the proposal to eliminate an annual notice outlining authorizations

previously provided to the institution.

With regard to the commenters opposition to these changes, the

Secretary wishes to remind institutions that the initial authorization

provided by the student must clearly and conspicuously provide the

student with information about his or her right to cancel or modify the

authorization at any time, as well as the implications of each of the

authorized actions.

The Secretary will consider in the future the commenters'

suggestion that a single authorization be provided for EFT

transactions.

Changes: None.

Cancellation of a Student or Parent Authorization (Sec. 668.165(b)(4))

Comments: One commenter thought an institution should pay credit

balances three days rather than 14 days after the institution receives

a notice that a student or parent is cancelling an authorization to

hold title IV, HEA program funds.

Discussion: The Secretary appreciates the commenter's position that

title IV, HEA program funds should be paid timely. However, the

Secretary continues to believe that the 14-day timeframe strikes a

balance between institutions with check-writing authority that may

issue a check upon demand, and institutions that cannot provide these

funds as quickly because they must rely on a central office or State

agency to issue a check.

Changes: None.

Payment of Funds Authorized to be Held on Account at the Institution

(Sec. 668.165(b)(5))

Comments: Several commenters disagreed with the Secretary's

proposal to require an institution to pay any remaining balance on loan

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

intended, and to pay any remaining balance on any other title IV, HEA

program funds by the end of the last payment period in the award year

for which those funds were intended, notwithstanding any authorization

obtained by the institution. One commenter writing on behalf of

business officers argued that institutions would be required to pay

funds to students contrary to the students' expressed wishes. The

commenters contended that once the title IV, HEA program funds are held

by the institution at the student's request, they have lost their

federal character. One commenter questioned the need for new rules to

govern an area that the commenter felt is sufficiently governed by

existing rules. One commenter

[[Page 60596]]

asserted that unless there is evidence of fraud or mismanagement, the

Secretary should allow institutions to establish an arrangement with

students and parents regarding funds that are not expended by the end

of the loan period or payment period. The commenter insisted that it is

unnecessary for the Secretary to micromanage this activity.

Discussion: As discussed in an earlier section of this preamble,

the Secretary believes that title IV, HEA program fund are provided for

a specific period of time, and the institution must provide remaining

title IV, HEA loan program funds to the student by the end of the loan

period and the remaining balance of other title IV, HEA program funds

by the end of the last payment period of the award year for which they

were intended.

Changes: None.

Section 668.167 FFEL Program Funds

Comments: Many commenters strongly objected to the Secretary's

proposal that an institution return to a lender any loan funds that the

institution does not disburse to eligible students within three

business days after the institution receives those funds, if those

funds are provided by the lender via EFT or master check. Some

commenters believe that such an abbreviated period for disbursement of

EFT and master check loan proceeds will adversely impact the entire

delivery system of the FFEL Programs and impede the ability to

administer title IV, HEA program funds in an efficient manner. A few

commenters supported the reduction in the timeframe to three business

days.

Some commenters cited the proposed regulatory requirement as

unreasonable, unrealistic, and not administratively feasible and noted

that most institutions disburse in three days if possible. The

commenters suggested that some situations may arise that require funds

to be held longer and that the Secretary should take those situations

into consideration in establishing a timeframe. Examples of such

situations include drop/add period changes, loan counseling

requirements, enrollment verification, history changes, reviewing

prior-term attendance to ensure credits were completed, receiving

financial transcripts, the provision of necessary information by

students, and late registration. Some commenters suggested that

corruption of a file, a data-match problem with the system, or

satisfying multiple system interfaces each could be a two- or three-day

process. A commenter noted that if an overaward occurs between the time

the Stafford loan application is processed and the funds arrive at the

institution, it will usually take more than three days to contact the

student to see if there are additional expenses to consider to reduce

the overaward or to see if there are other avenues to take to reduce/

eliminate the overaward. Some commenters expressed concern that

returning funds to the lender is typically a more difficult process

than receiving the funds. The commenters suggested that the opportunity

for errors in the entire delivery process are greatly increased when

funds are returned to the lender and must be reissued. They stated that

many lenders have a policy that once a disbursement is returned, the

loan is cancelled, thus requiring the student to submit a new loan

application. Some institutions expressed concern that their processing

systems are not as automated as some institutions and they must do a

recertification manually for each student. The institution's inability

to verify eligibility quickly would necessitate the return of the funds

to the lender and a need to request them again. The commenters believed

this would prove distressing to the students and lenders. Some

institutions noted that although they can accept funds electronically,

they manually check the loan amount against the awarded amount and

manually post to the financial aid account. Other commenters noted that

the act of sending funds back to the lenders requires a physical check,

because some lenders and financial institutions currently do not allow

the institution to return funds by EFT. They expressed concern that

this would require more paperwork and processing for both the financial

aid and business offices, taking time away from other EFTs which may

have arrived in the meantime.

The commenters generally believed that review of student files and

records that are needed for a successful distribution of title IV, HEA

program funds may take more than three business days. Some commenters

expressed concern that limited staff or staff unavailability might

render the institution unable to comply with the three-day window. In

some cases, the loss of a single staff person upsets the checks and

balances the institution works so diligently to create and would render

the institution unable to deliver EFT or master check funds to student

accounts in the prescribed timeframe. Some commenters expressed concern

that they do not have the capability to add staff, sophisticated

programming, or even new systems designed to accommodate the loan

delivery process within three business days.

Some commenters suggested that the computer capabilities and

institutional procedures vary so greatly from institution to

institution that such a restricted timeframe may cause some

institutions to consider reverting to the use of paper checks which is

far less efficient. A commenter expressed concern that lenders and

servicers often using the same guaranty agency provide EFT roster

information in different formats. The commenter stated that some

agencies send the information on diskettes, and some still send hard

copy rosters. Some commenters suggested that the disbursement roster,

though issued at the same time, may not arrive on the same date as the

EFT or master check. The commenters suggested that the use of

Commonline format will help, when it becomes more widespread. However,

they note that until that day, it is physically impossible for a

college with high student volume at peak periods to perform the

required edit checks and process loan disbursements within three

business days. The commenters suggested a range of anywhere from 10 to

30 days in the number of days for an institution to disburse loan funds

to a borrower. Most commenters suggested that a reasonable range would

be 7 to 15 business days. Some commenters suggested that even 30 days

was insufficient time to deliver loan proceeds. Some commenters

expressed concern that the NPRM language, as currently written, did not

clearly identify what is to be done within the proposed timeframes,

i.e., return the funds to the lender or disburse those funds to a

student or parent for a payment period. Some commenters suggested

technical corrections to Sec. 682.603 and Sec. 682.604 to conform to

the timeframes for delivering loan proceeds.

Discussion: Given the procedural and systemic changes necessary to

implement this provision, the Secretary recognizes that the proposed

change mandating that funds be returned to a lender within three

business days after the institution receives the funds may initially

place an unfair administrative burden on institutions. However, the

Secretary continues to believe that loan funds received via EFT and

master check should be disbursed within a shorter timeframe than

currently exists to minimize interest costs to both the Federal

taxpayer (subsidized loans) and to the borrower (unsubsidized loans).

Accordingly, the Secretary believes that the intent of this requirement

may best be accomplished by a phase-in. Thus, the Secretary has

determined that for

[[Page 60597]]

funds received from lenders during the period of July 1, 1997 through

June 30, 1999, and may take up to 10 business days to deliver those

funds to a student or return those funds to the lender. Starting on

July 1, 1999 that period is reduced to three business days. The

Secretary believes that the phase-in of this requirement will provide

institutions and FFEL lenders and guaranty agencies ample time to

implement procedural and systemic changes.

In addition, the Secretary has provided for exceptional

circumstances such as determining the midpoint in a clock-hour program

or academic year or the need for a student complete entrance

interviews.

The Secretary clarifies that if the institution does not disburse

the funds in accordance with the specified timeframe, the institution

is required to return those funds to the lender within 10 business days

after the last day the funds could have been disbursed. However, the

Secretary recognizes that in some instances, students may establish

eligibility to receive loan funds before loan funds are returned to the

lender. Therefore, the Secretary clarifies that if a student becomes

eligible for the loan funds during the 10 business day period in which

the institution is processing the return of the loan proceeds and the

institution has not yet returned those funds to the lender, the

institution may deliver the funds to the student.

The Secretary also notes that suggested technical corrections that

are not germane to these regulations will be considered in a future

FFEL technical corrections package.

Changes: The Secretary is revising Sec. 668.167(b) to provide that,

for FFEL Program funds that a lender provides by EFT or master check to

an institution on or after July 1, 1997 but before July 1, 1999, the

institution must return those funds to the lender if it does not

disburse them to the student or parent within 10 business days

following the date the institution receives the funds. FFEL Program

funds received by EFT or master check on or after July 1, 1999, must be

returned if the institution does not disburse them within 3 business

days following the date the institution receives the funds.

The Secretary is also revising Sec. 668.167(b) to provide that the

institution must return funds that were not disbursed within the

specified timeframe promptly to the lender but no later than 10

business days after the last day those funds could have been disbursed.

The Secretary is further revising the Sec. 668.167(b) to provide that

an institution may disburse funds to a borrower rather than return them

to the lender if the borrower is eligible to receive those funds and

the institution disburses those funds within the timeframe required for

the return of those funds.

FFEL Institutions on the Reimbursement Payment Method (Sec. 668.167(d))

Comments: Several commenters, including institutions, and higher

education associations, agreed that the reimbursement method may be

appropriate for institutions that have difficulties administering

Federal student aid funds, but strongly opposed the proposal to extend

reimbursement limitations to FFEL Program funds. These commenters

believed that since FFEL Program funds are disbursed by private

lenders, the Secretary does not have the statutory authority to prevent

these loan funds from reaching students. In addition, the commenters

indicated that this proposal was inappropriate because it would place

an enormous burden on affected institutions and would cause

complications and worry for innocent borrowers. These commenters were

also concerned that lenders would refuse to serve students at

institutions subject to the proposed FFEL reimbursement procedures

because of increased loan cancellations, borrower complaints, and other

unspecified burdens to lenders.

One commenter representing a consumer banking association opposed

the FFEL reimbursement procedures noting that the proposed limitations

have never before been placed on the FFEL Program funds and that

Congress has not provided for a ``reimbursement'' payment method for

funds disbursed by a lender. The commenter asserted that students have

a statutory right under the HEA to FFEL Program funds and that the

Secretary does not have the statutory authority to withhold FFEL

Program funds from borrowers.

Other commenters representing institutions declared that it made no

sense to extend the reimbursement payment method to the FFEL Programs

noting that lenders and guaranty agencies already exercise oversight of

this loan program and that the Secretary's involvement in the loan

certification process would only add unnecessary burden. The commenters

added that the proposed procedures would cause delays that would have a

negative impact on students and institutions.

One commenter representing a guaranty agency requested the

Secretary to clarify why an institution placed on the reimbursement

payment method should have more time (30 days) to disburse FFEL Program

funds than an institution that is not on reimbursement (3 days). The

commenter believed that an institution on reimbursement should be aware

of the time needed to provide the necessary documentation to the

Secretary and should thus schedule loan disbursements accordingly.

Two commenters representing a nonprofit lender and secondary market

and another commenter representing a national loan association

suggested that instead of allowing institutions on reimbursement to

hold FFEL Program funds for 30 days, the Secretary should require those

institutions to follow the 30-day delayed disbursement requirements now

in place for first-year, first-time borrowers. The commenters believed

this 30-day delay would provide sufficient time for the Secretary to

review borrower records. Alternatively, the first commenters requested

the Secretary to clarify in final regulations the difference between

the proposed timeframes for disbursing, holding, and returning FFEL

Program funds. The commenters were concerned that loan proceeds for

eligible students would be unnecessarily returned to lenders and wished

to limit the number of circumstances under which this would happen.

Another commenter representing a guaranty agency agreed with the

Secretary's goal of increased assurance of compliance and equitable

treatment across programs in which an institution participates but

believed that the differences in the delivery system for the FFEL

Programs may require a different solution. The commenter suggested that

the Secretary work with all the parties in FFEL Program delivery

process, especially guarantors, to develop more efficient yet still

reliable methods for accomplishing the Secretary's goal. As a possible

alternative to the proposed rule, the commenter offered that an

institution placed on the reimbursement payment method be required to

work with its primary guarantor to monitor and ensure compliance. The

Secretary could still, within such a system, specify the level of

monitoring that would be required. The commenter concluded that one

major advantage to developing such a plan would be that in many cases

the guarantor would be able to be on-site at the institution more

quickly and frequently and would be already familiar with the

institution's situation and systems through previous guaranty agency

reviews.

One commenter from a legal organization representing student loan

borrowers supported the reimbursement

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proposal for FFEL Program funds. The commenter stated that because

institutions that are now placed on reimbursement for Federal Pell

Grant funds have unfettered access to student loan funds, such

institutions increase vigorously their recruiting and student loan

activity to make up for Federal Pell Grant shortfalls. In addition, the

commenter asserted that since reimbursement is often a precursor to an

institution closing, students incur debts although it is almost

inevitable that they will not receive the education and training for

which that debt was incurred. The commenter noted that depending on the

timing of the institution's closure vis-a-vis the student's enrollment,

the closed institution discharge provision in 20 U.S.C. 1087(c) may

require the Federal government to pay for such ill-advised loans to

students at institutions on Federal Pell Grant reimbursement. The

commenter concluded the reimbursement proposal was a measured and sound

approach since it would require the Secretary's approval of a loan

certification or disbursement on a case-by-case basis. Furthermore, the

commenter agreed with the Secretary that the reimbursement limitations

proposed for institutions that participate solely in the FFEL Programs

would protect the Federal fiscal interest as well as the students'

financial interests.

Discussion: The Secretary disagrees with the commenters who

asserted that the Secretary has no authority to prevent an institution

from certifying an FFEL loan application or disbursing loan proceeds to

a borrower until certain conditions are met. The Secretary notes that

section 432(a)(1) of the HEA authorizes the Secretary ``to prescribe

such regulations as may be necessary to carry out the purposes of this

part, . . . .'' Moreover, the conditions that must be met by an

institution before it can disburse a loan or certify a loan application

all relate to whether the borrower or applicant is eligible to receive

an FFEL loan disbursement. Certainly, the Secretary has the authority

to determine whether a recipient of title IV, HEA program funds is

eligible to receive those funds, regardless of the source of those

funds.

Finally, with regard to the comment that the Secretary is not

authorized to establish a reimbursement system of payment for the FFEL

Program, the Secretary reminds the commenter that institutions are not

being place under the reimbursement system of payment for the FFEL

Program. A critical component of the reimbursement system of payment is

that an institution uses its own funds to make a title IV, HEA program

payment and then seeks reimbursement from the Secretary for that

payment. The Secretary is not requiring institutions to make such a

payment to receive FFEL Program funds.

The Secretary also disagrees with the commenters who stated that is

made no sense to extend the reimbursement payment method to the FFEL

Programs because lenders and guaranty agencies exercise oversight of

institutions participating under these loan programs. The Secretary

notes that lender and guaranty agency oversight of institutions

participating under the FFEL Programs is not exclusive but rather

complimentary to the Secretary's oversight of institutions

participating under all of the title IV, HEA programs. Moreover, since

an institution is placed on reimbursement primarily because it failed

to adequately or properly administer the title IV, HEA programs, the

Secretary believes it is not only logical but compelling to subject

FFEL Program funds to the level of review currently required of all

other title IV, HEA program funds.

The Secretary thanks the commenters supporting the proposed

reimbursement rules and appreciates their suggestions. With regard to

the suggestion that the Secretary require institutions placed on

reimbursement to follow the 30-day delayed disbursement requirements

(now in place only for first-year, first-time borrowers) for all

borrowers, the Secretary believes the suggested requirement would

unnecessarily delay the disbursement of FFEL Program funds to eligible

borrowers. Under the suggested requirement, an institution would

certify a loan application by requesting the lender to provide loan

funds 30 days after the date those funds would normally be provided.

While the Secretary agrees that this procedure may minimize the return

of FFEL Program funds to lenders, it would delay the disbursement of

loan funds to all borrowers by 30 days. In contrast, under the proposed

rules an institution is not precluded from disbursing or certifying a

loan for a borrower earlier than 30 days provided that the institution

seeks and obtains the Secretary's approval within that time.

The Secretary agrees with the merits of the recommendation that an

institution placed on reimbursement be required to work with its

primary guarantor. Therefore, under an arrangement where the guaranty

agency is an entity approved by the Secretary as provided under

Sec. 668.167(d)(2), a guaranty agency may choose to work with

institutions that are under the reimbursement payment method.

With regard to the comment as to why an institution placed on the

reimbursement payment method should have more time (30 days) to

disburse FFEL Program funds than an institution that is not on

reimbursement (3 days), the additional time reflects the time an

institution needs to submit documentation to the Secretary to support a

student's eligibility for a FFEL Program loan, and the time the

Secretary will take to review that documentation. However, that extra

period of time is available only if the lender sends the FFEL funds to

the institution by EFT or master check.

Changes: The Secretary is revising Sec. 668.167(c)(2) to remove its

applicability to an institution placed on reimbursement when the lender

provides loan funds by paper check. In these instances the institution

may retain the loan funds without disbursing them only for the 30-day

timeframe provided in Sec. 668.167(b)(1)(iii).

Final Regulatory Flexibility Analysis

The Secretary has determined that some small entities are likely to

experience economic impacts from the proposed regulations. Thus, the

Regulatory Flexibility Act (RFA) requires that an Initial Regulatory

Flexibility Analysis (IRFA) of the economic impact on small entities be

performed and that the analysis, or a summary thereof, be published in

the notice of proposed rulemaking. The IRFA was performed and a summary

was published. This Final Regulatory Flexibility Analysis (FRFA)

discusses the comments received on the IRFA and fulfills the RFA

requirements.

Summary of significant issues raised by the public comments on the

Initial Regulatory Flexibility Analysis (IRFA), a summary of the

assessment of the Department of such issues, and a statement of any

changes made in the proposed rule as a result of such comments.

Changes were made in the final rule as a result of public comments.

The biggest change that was made was to allow for a phase-in period of

the shorter periods that institutions will hold title IV, HEA program

funds before disbursing them.

Comments: The Secretary received eight comments on the methodology

of the estimation of the economic impacts from five commenters. All

five commenters stated that the initial analysis underestimated the

economic costs. One stated that these regulations would cause the

institution to hire a new full-time employee at a cost of

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$30,000 per year. One simply asserted that the estimated cost of $230

for 10 hours is too low for these regulations but did not provide any

more information. One commenter proposed that the just-in-time payment

method would impose an increased paperwork burden that was not

analyzed.

Discussion: The Secretary believes the paperwork burden estimates

used in the NPRM are accurate. A new full-time staff person would

supply about 2,000 hours of labor in a year. This is much more than is

required for compliance with these regulations, which is estimated to

be about 200 hours. However, there were several areas that might impose

economic impacts of a smaller magnitude than were analyzed in the IRFA.

These were discovered as a function of the comments received and a re-

analysis of the rule.

Changes: The FRFA analyzes components that may impose economic

impacts that the IRFA did not analyze.

Comments: Some commenters apparently did not understand the IRFA

analysis. One commenter confused the estimate for the paperwork for the

entire sector (10 hours per institution x 175 institutions=1750 burden-

hours) as the burden for a single institution. Another commenter stated

that it would take substantially more than 10 hours for institutions to

participate in the reimbursement payment method.

Discussion: The paperwork estimate for institutions that would be

put on reimbursement as a result of this rule corresponds to the

marginal increase in paperwork for institutions that are already on

reimbursement for other title IV, HEA programs. As a result of these

comments, the Secretary reanalyzed the paperwork burden and validated

the earlier estimate of 10 hours per institution.

Changes: The FRFA will contain more easily understandable language

to avoid the confusion in the IRFA.

Comments: Three commenters stated that delays on reimbursement

might be longer that 18-20 days. One commenter suggested that it was

important to look at more than just the average payment delay, since

there may be a substantial number of small entities that experience

significantly longer delays. It was suggested by several commenters

that delays can be as long as 6 weeks.

Discussion: This is another area where the commenters apparently

did not understand the IRFA analysis. The IRFA states that the average

delay is 18-20 days. However, in calculating the interest costs, the

more conservative delay estimate of 30 days was used. Delays of periods

longer than 30 days that are attributable to the Department's action or

inaction would not affect a significant number of small (or large)

entities.

Changes: The FRFA will contain more easily understandable language

to avoid the confusion in the IRFA.

Comments: One commenter took issue with the analysis of the number

of disbursements associated with the reimbursement payment method. The

commenter stated that the more typical situation would be for as many

as 6 or 8 or more disbursements in a year, causing the institution to

obtain a series of different short-term loans at varying face amounts

to operate during the delay.

Discussion: This is another area where the commenter apparently did

not understand the IRFA analysis. There is no presumption about the

timing of the disbursements. Each loan is required by existing statute

and regulations to be disbursed in at least two installments. These are

the two installments that we analyzed. Small entities in the situation

described would probably establish the need for a revolving fund with a

bank. The costs associated with establishing such a fund is comparable

to the costs we have outlined.

Changes: The analysis will discuss this situation.

Comments: One commenter took issue with the costs associated with

the electronic processes component. This commenter stated that some

institutions might have to buy a new computer, pay long distance

charges, and install a dedicated phone line.

Discussion: This is an area where the IRFA did not analyze these

costs. As a result of this comment, the FRFA does discuss the

possibility that some institutions may have to purchase computer

equipment. The FRFA also discusses the possibility that institutions

may have to purchase some computer training or be charged by the

Department for technical assistance calls. However, phone calls are

free to the Department's 800 number. The Secretary does not think it

would be necessary for a small institution to require a dedicated phone

line to participate in the electronic process

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