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This resource is being maintained for historical purposes only and is not currently applicable.

Institutional Eligibility and Administrative Requirements - Administrative and Fiscal Standards

AwardYear: 1995-1996
EnterChapterNo: 3
EnterChapterTitle: Institutional Eligibility and Administrative Requirements
SectionNumber: 2
SectionTitle: Administrative and Fiscal Standards
PageNumbers: 33-54



[[Trusteeship of SFA funds]]
[[Administrative requirements found in the law
and regulations]]
Administrative and fiscal standards are important because all
SFA funds received by a participating school are held in trust
by that school, solely for the intended student beneficiaries. A
school may contract with a consultant for assistance in
administering the SFA programs. However, the school
ultimately is responsible for the use of SFA funds and will be
held accountable if the consultant mismanages the programs.
(See the "Third-Party Servicers" discussion on pg. 3-46 for
more details.) Administrative requirements to which a
participating school is subject are found in the Higher
Education Act of 1965, as amended, the General Provisions
regulations, and the regulations for each SFA program.

The law requires that all individuals who make decisions about
SFA program administration or SFA student eligibility must
report (when asked by the Department) on any financial
interests held in other SFA schools. This requirement applies
to all employees, consultants, lenders, guaranty agencies,
servicers, accrediting agencies, State licensing boards, and
secondary markets (including all officers, general partners, and
directors of the above-mentioned entities).

The law also states that a school is not considered eligible for
SFA program participation if it filed for bankruptcy on or after
July 23, 1992, or if the school (or its CEO or owner) was
convicted or pled guilty or nolo contendre to a crime or was
judicially determined to have committed fraud involving SFA
funds. A school's eligibility and participation are considered
terminated as of the date of the bankruptcy filing, or on the
date of conviction or guilty plea (or the date of fraud
determination).

These are just some of the SFA administrative and fiduciary
requirements. This section reviews the many requirements that
apply to SFA schools, with emphasis on the recent changes in
the regulations.


THE PROGRAM PARTICIPATION AGREEMENT

An eligible school must enter into a Program Participation
Agreement (PPA or Agreement) with the Department to
participate in any SFA program other than the State Student
Incentive Grant (SSIG) program or the National Early
Intervention Scholarship Program (NEISP). The PPA covers
the school's participation in the following programs: Pell
Grant, FSEOG, FWS, Federal Perkins (Perkins), FFEL, and
PAS. Currently, schools participating in the Direct Loan
program have a separate PPA.

[[Purpose and scope of the PPA]]
Under the PPA, the school agrees to comply with the laws and
regulations governing the SFA programs. The Agreement
automatically terminates when the school is recertified, loses
eligibility, has a change of ownership that results in a change of
control, loses its provisional certification, stops providing
education, or voluntarily terminates SFA participation. The
Agreement may also be terminated if the Department or a
SPRE finds the school to be in violation of statutory or
regulatory requirements. For more on the PPA and loss of
approval to participate, see Section Ten of this Chapter.

When entering into an Agreement, the school must
demonstrate that it is financially responsible and
administratively capable of providing the education it promises
and of properly managing the SFA programs. After being
certified for SFA participation, the school must administer
SFA funds in a prudent and responsible manner.

[[PPA requirements]]
The PPA lists some of the basic administrative requirements of
SFA participation. Many of these are discussed in this or
other chapters of this Handbook, as noted below --

1. The school will provide timely information on its
administrative capability and financial responsibility to the
Department, and to the appropriate State, guaranty, and
accrediting agencies. (Sect. 2)

2. If the school advertises job placement rates to attract
students, it must provide to prospective students any relevant
information on State licensing requirements for the jobs for
which the offered training will prepare them. (Sect. 8)

3. The school cannot deny SFA on the grounds that a student
is studying abroad in an approved-for-credit program.
(Sect. 1)

4. To begin participation in the FFEL programs (or if a school
changes ownership or changes its status as a parent or
subordinate institution), the school must develop a Default
Management Plan for approval by the Department, and must
implement the plan for at least two years. (Chapter 10)

5. The school must acknowledge the authority of the
Department and other entities to share information regarding
fraud, abuse, or the school's approval to participate in the
SFA programs. (Sect. 10)

6. The school cannot knowingly employ or contract with (in
the administration of or receipt of SFA funds) any individual,
agency, or organization that has been convicted of or pled
guilty or nolo contendre to a crime or was judicially
determined to have committed fraud involving the misuse of
SFA funds. (Sect. 2)

7. The school must, in a timely manner, complete surveys
under the Integrated Postsecondary Education Data System
(IPEDS) or any other data collection effort of the Department.
(Sect. 8)

8. If the school offers athletically related student aid, it must
annually compile data relating to its revenues and expenses,
total and those related to athletics; this data must be audited
and provided to the Department and to the public. (Sect. 2)

9. The school cannot penalize in any way a student who is
unable to pay institutional costs due to compliance with the
SFA program requirements, or due to a delay in Federal aid
disbursement caused by the school. (Sect. 2)

10. The school cannot pay commissions or other incentives
based directly or indirectly on securing enrollment or financial
aid (except when recruiting foreign students ineligible for SFA
funds) to persons engaged in recruiting, admission, or financial
aid administration. (Sect. 2)

11. The school must comply with the requirements of the
Department, as well as those of SPREs and accrediting
agencies. (Sect. 2)

12. The school must have a fair and equitable refund policy in
accordance with regulations. (Sect. 5)

[[Processing fee for SFA funds prohibited]]
13. Schools cannot charge for processing or handling any
application or data used to determine a student's SFA
eligibility. For instance, the school may not charge (or include
in the student's cost of attendance) a fee to certify a loan
application, complete a deferment form, process a Pell Grant
payment, verify an application, or send or request a financial
aid transcript.

[[Use of free Federal form]]
14. A student may always use the Free Application for Federal
Student Aid (FAFSA) to apply for SFA funds. However, a
school may require additional data that is not provided on the
Federal form to award institutional or State aid. Effective for
the 1993-94 award year, institutional charges for collecting
such data must be reasonable and within marginal costs.

The above list is not exhaustive; schools must carefully review
all of the requirements listed on their PPA and those specified
in 34 CFR 668.14. In addition, a school must meet any
requirements for participation specific to an individual SFA
program.

When a school signs the Program Participation Agreement, it
agrees to comply with the civil rights and privacy requirements
contained in the Code of Federal Regulations (CFR), which
apply to all students in the educational program, not just SFA
recipients.


FINANCIAL RESPONSIBILITY

[[Standards of financial responsibility]]
In order to participate in the SFA programs, a school must
demonstrate that it is financially responsible. To provide the
Department with the information necessary to evaluate a
school's financial responsibility, schools are required to submit
an audited financial statement to the Department every year,
within four months of the end of the school's fiscal year. A
school is also required to submit a compliance audit that is
used to evaluate the school's administration of the SFA
programs. See Section Seven of this Chapter for more
information on the submission of a compliance audit.*1*

[[New regulations published]]
Final regulations published on April 29, 1994 have greatly
modified the standards that a school must meet in order to
demonstrate financial responsibility. In addition, the
November 29, 1994 final regulations made a couple of changes
to the financial responsibility standards. What follows is a
general overview of those standards; however, schools should
refer to 34 CFR 668.15 for complete information.

[[Three categories]]
The financial responsibility standards can be divided into three
categories: (1) GENERAL STANDARDS (basic financial
standards that all schools are required to meet), (2)
TYPE-SPECIFIC STANDARDS (standards that apply
specifically to each type of school--for-profit, nonprofit, and
public), and (3) PERFORMANCE AND AFFILIATION
STANDARDS (standards to evaluate a school's past
performance and persons affiliated with the school).

[[General standards for all schools]]
To prove financial responsibility, a school must demonstrate
that it is --

- providing the services described in its official publications and
statements,

- providing the administrative resources necessary to comply
with the requirements for SFA participation,

- meeting all of its financial obligations, which includes but
is not limited to making refunds that it is required to
make and repayment of SFA program liabilities, and

- current in its debt payments.

A school must also demonstrate that it has not had a statement
by the accountant in its audit report for the school's most
recently completed fiscal year expressing substantial doubt
about the school's ability to continue as a "going concern," or
a disclaimed or adverse opinion.

[[Final Rule 11-29-94]]
Beginning with the 1995-96 award year, most schools are not
required to maintain a cash reserve fund for the payment of
refunds as was required for the 1994-95 award year. Instead a
school is considered to have sufficient cash reserves to make
refunds if, for the past two years, the school has been
financially responsible and has paid all required refunds on
time. If a school has not demonstrated financial responsibility,
the school is required to post a letter of credit in accordance
with the letter of credit exemption to the general financial
responsibility standards discussed below. If a school has not
paid refunds on time, the school must post a letter of credit
equal to 25% of the SFA refunds it was required to make for
the past year.

[[Type-specific standards]]
In addition to the general standards of financial responsibility,
a school must meet the requirements specific to the school
type (for-profit, nonprofit, or public), as explained below. In
lieu of meeting these specific standards, a school may
demonstrate that it has a superior bond rating, as defined in
regulations.

A FOR-PROFIT SCHOOL IS FINANCIALLY RESPONSIBLE
IF IT DEMONSTRATES:

- an "acid test" ratio of at least 1:1,

- a positive tangible net worth, AND

- no operating losses over either or both of its two latest fiscal
years that total more than 10% of the school's total net worth

A NONPROFIT*2* SCHOOL IS FINANCIALLY
RESPONSIBLE IF IT DEMONSTRATES

- an "acid test" ratio of at least 1:1, AND

- a positive unrestricted current fund balance or positive
unrestricted net assets, OR not had an excess of current fund
expenditures over current fund revenues over both of its two
latest fiscal years that total more than 10% of either the
unrestricted current fund balance or the unrestricted net assets

A PUBLIC SCHOOL IS FINANCIALLY RESPONSIBLE IF IT
DEMONSTRATES -

- liabilities backed by the full faith and credit of a State, or by an
equivalent governmental entity,

- a positive current unrestricted fund balance if reporting under
the Single Audit Act, OR

- a positive unrestricted current fund in the State's Higher
Education Fund

OR, if it submits to the Department a statement from the State
Auditor General that the school has met all of its financial
obligations during the past year, and that it continues to have
sufficient resources to meet all of its financial obligations.

[[Performance and affiliation standards]]
A school's financial responsibility is also evaluated based on
the past performance of the school and persons affiliated with
the school. A school is not financially responsible if a person
who exercises substantial control over the school (or any
members of the person's family alone or together) owes a
liability for an SFA program violation, or has ever exercised
substantial control over another school (or a third-party
servicer) that owes a liability for an SFA program violation,
unless that person, family member, institution, or servicer is
making payments in accordance with an agreement to repay
the liability.

SUBSTANTIAL CONTROL -- Direct or indirect control over at
least 25% ownership interest (either alone or with family
members); representation (under voting trust, power of attorney,
or proxy) of a person who individually or with a group has at least
25% ownership interest; status as CEO or other executive officer
or member of a board of directors of an entity holding at least
25% ownership interest.

OWNERSHIP INTEREST -- A share of the legal of beneficial
ownership or control of, or a right to share in the proceeds of the
operation of, a school or a schoolÂ’s parent corporation; including
(but not limited to) sole proprietorship, interest as tenant,
partnership, or interest in a trust.

[[Substantial control/financial guarantees]]
The Secretary can require financial guarantees from the owners
of a school or from other persons with substantial control over
the school. The same persons may be required to assume
personal liability for financial losses to the Federal government
and students, and for civil/criminal monetary penalties
authorized under the HEA of 1965, as amended.

Such financial guarantees will not be required for a school
that --

- has not been subject to a limitation, suspension, or termination
action by the Department or a guaranty agency in the last five
years,

- has not had, in the last two SFA program reviews or audits,
findings that required a repayment of more than 5% of its SFA
funds for any year,

- has not failed to resolve any compliance problems identified in
program reviews or audit reports,

- meets, and has met for the last five years, the financial
responsibility requirements given above, and

- has not been cited during the last five years for failing to submit
audits as required under the HEA of 1965, as amended.

EXCEPTIONS TO FINANCIAL RESPONSIBILITY
STANDARDS. If a school does not meet the general, type-specific,
or performance and affiliation standards of financial responsibility
(as discussed above), it may still be financially responsible if it
meets one of the following exceptions.

[[Exception to cash reserve requirement]]
[[Final Rule 11-29-94]]
CASH RESERVE REQUIREMENT (25% LETTER OF
CREDIT): A school that has not paid refunds on time does not
have to post a letter of credit equal to 25% of the SFA refunds it
was required to make for the past year, if the Department
determines that the State in which the school is located (and is
legally authorized to operate) has a tuition recovery fund that
ensures that the school is able to pay all required refunds, the
fund is acceptable to the Department, and the school contributes
to the fund. A school is also exempt from the 25% letter of credit
requirement if the school has its liabilities backed by the full
faith and credit of the State, or an equivalent government entity.

When a State submits a tuition recovery fund for evaluation by
the Department, the Department will consider the extent to
which the recovery fund --

- provides refunds to both in-State and out-of-State students,

- complies with SFA requirements for the order of return of
refunds to sources of assistance, and

- will be replenished should any claims arise that deplete the
fund.

[[Exception to general and type-specific standards]]
GENERAL AND TYPE-SPECIFIC STANDARDS: A currently
participating school that does not meet one or more of the general
or the specific standards (excluding the cash reserve requirement)
is still financially responsible if the school submits to the
Department an acceptable irrevocable letter of credit equal to at
least one-half of the SFA program funds received by the school
during the last complete award year, or demonstrates (in
accordance with the regulations) that the school has sufficient
resources to ensure that it will not close precipitously.

[[Exception to acid test ratio]]
ACID TEST RATIO: A school that does not meet the acid test
requirement is still financially responsible if it provides a two-
year or four-year associate or baccalaureate degree program and
the school can demonstrate to the satisfaction of the Department
that --

- There is no reasonable doubt as to its continued solvency and
ability to deliver quality educational services,

- It is current in its payment of all current liabilities, including
student refunds, repayments to the Department, payroll, and
payment of trade creditors and withholding taxes, and

- It has substantial equity in school-occupied facilities, the
acquisition of which was the direct cause of its failure to meet
the acid test ratio requirement.

[[Exception to substantial control standard]]
SUBSTANTIAL CONTROL: A school that does not meet
the requirement that persons who exercise substantial control
over the school may not owe a liability for an SFA program
violation is still financially responsible if the school -

- notifies the Department that the person repaid to the
Department an acceptable portion of the liability, in
accordance with the regulations,

- notifies the Department that the liability is currently being
repaid in accordance with a written agreement with the
Department, or

- demonstrates why the person(s) who exercise substantial
control should nevertheless be considered to lack that control.

[[Audited financial statement required]]
A school's audited financial statement must cover the school's
two most recently completed fiscal years. In addition to a
school's financial statements, the Department may request that
the school submit additional information, such as submission
of or access to the accountant's work papers. Also, if the
Department finds it necessary to evaluate a particular school's
financial condition, it can require a school to submit an audited
financial statement more frequently than once a year.

A school that has an audit performed under the Single Audit
Act (an A-133 audit, or an A-128 audit) may submit its
financial statement to the Department in accordance with the
requirements for that particular audit. (For details on these
audits and related requirements, see Section Seven of this Chapter.)

[[Fidelity bond coverage]]
In the past, schools were required to maintain fidelity bond
coverage for its employees. This is no longer a Federal
requirement for schools that participate in the SFA programs.
However, some schools are still required to maintain fidelity
bond coverage because State laws require it. Even if it is not
required to do so, a school may choose to maintain fidelity
bond coverage to protect itself when losses occur resulting
from a lack of integrity, honestly, or fidelity on the part of the
school's employees or officers.

[[Changes in control]]
A school must report any changes of control under which a
person acquires the ability to affect substantially the actions of
the school. Such changes in control could call into question
the school's financial responsibility. For more information, see
Section Ten of this Chapter.


STANDARDS OF ADMINISTRATIVE CAPABILITY

As directed in the law, the Secretary has developed
procedures and requirements concerning the assessment of a
school's administrative capability, taking into consideration the
school's past SFA-related performance and recordkeeping.

[[Coordination of aid]]
An eligible school must designate a capable individual*3* to
administer the SFA programs and to coordinate aid from these
programs with the school's other Federal and nonFederal
student aid programs. The school's administration must be
coordinated in such a way that all the information it receives
concerning a student's SFA eligibility --from any school
office-- is communicated to the financial aid administrator. To
properly package and most effectively use the various types of
student assistance (Federal, school, State, private, etc.), a
financial aid administrator must be aware of all sources of aid
at the school, and be able to coordinate with all financial aid
programs a school offers to ensure that a student's aid does
not exceed his or her need.

[[Consistency of student information]]
The school must have a system of identifying and resolving
discrepancies in the SFA-related information received by
various school offices. Such a system would include a review
of all financial aid and need analysis documents, Statements of
Educational Purpose and Registration Status, Federal and
State income tax forms, and documents relating to admissions,
citizenship, and previous educational experience. For
instance, if a student receives veterans benefits through one
school office, that office must notify the aid administrator of
these benefits to ensure that the amounts are correctly
reported on the student's aid application, and are counted as a
resource for the campus-based programs and estimated
financial assistance for the FFEL programs. As another
example, the school's admissions or registrar's office must
provide the financial aid office with any information that it has
affecting a student's eligibility--the student's enrollment in an
ineligible program, for instance, or past educational
experience.

[[OIG referrals]]
If the school finds that a student may have engaged in fraud or
other criminal misconduct in applying for SFA funds, it must
refer this information to the Department's Office of Inspector
General (OIG), which will in turn notify other officials as
appropriate. (Please note that this requirement does not
preclude the school from notifying other law enforcement
agencies as necessary.) Some examples of fraudulent
information: the use of false identities, forgery of signatures or
certifications, and false claims of income, citizenship, or
independent student status.

[[Counseling]]
The school must provide adequate financial aid counseling to
all enrolled and prospective students and their families.
Counseling must include, at a minimum, information about the
source and amount of each type of aid offered, the method by
which aid is determined and disbursed or applied to a
student's account, and the rights and responsibilities of the
student associated with the student's enrollment and receipt of
financial aid. This information should include a description of
the school's refund policy, satisfactory progress standards,
and any other conditions or factors that may affect the
student's aid package. The school must also provide entrance
and exit counseling for student borrowers in the Perkins,
Federal Stafford, and Federal Direct Loan programs. (See
Section Nine of this Chapter, and Chapters Six and Ten of this
Handbook for further information on exit counseling.)

[[Adequate staffing]]
To manage a school's aid programs effectively, the aid
administrator must be supported by an adequate number of
professional, paraprofessional, and clerical personnel. An
"adequate" staff depends on the number of students aided, the
number and types of programs in which the school
participates, the number of applicants evaluated and
processed, the amount of funds administered, and the type of
financial aid delivery system the school uses. What may be
adequate at one school may be completely insufficient at
another. The Department will determine, on a case-by-case
basis, whether a school has an adequate number of qualified
persons, based on program reviews, audits, and information
provided on the school's application for approval to
participate.

[[Separation of function]]
In addition to having a well-organized financial aid office staffed by
qualified personnel, a school must ensure its administrative
procedures for the SFA programs include an adequate system of
internal checks and balances. This system, at a minimum, must
separate the functions of AUTHORIZING PAYMENT and
DISBURSING OR DELIVERING FUNDS so that no one person or
office exercises both functions for any student receiving SFA funds.
Small schools are not exempt from this requirement, even though
they may have limited staff. Individuals working in either
authorization or disbursement may perform other functions as well,
but not both authorization and disbursement.

An eligible school must also have a policy to measure the
academic progress of its students, according to the elements
of a reasonable standard of satisfactory progress as provided
in the regulations. See Chapter Two of this Handbook for an
overview of satisfactory progress.

In addition, a school is not administratively capable when --

[[High default rates]]
- the cohort default rate for Perkins loans made to students for
attendance at the school exceeds 15%.*4*

- the cohort default rate for Stafford or SLS loans made to
students for attendance at the school equals or exceeds 25% for
three consecutive years. (See Chapter Ten of this Handbook
for details.)

If a school is not administratively capable because of a high
default rate ONLY, the Department will provisionally certify the
school. A school may appeal this loss of full participation
under the procedures for appealing lost FFEL participation
due to a high default rate. (See Chapter Ten for more details.)

[[Final Rule 11-29-94]]
Prior to the 1994-95 award year, all schools had to have an
undergraduate withdrawal rate for regular students of no more
than 33% in order to be administratively capable (prior to the
1994-95 award year, the withdrawal rate was used as an
INDICATOR of administrative capability, not as an absolute
standard). Beginning with the 1995-96 award year, the 33%
withdrawal rate is applicable only to new schools (schools that
seek to participate in an SFA program for the first time). In
addition, the withdrawal rate requirement has been changed to
require all new schools to report their withdrawal rates for an
award year period, rather than for an academic year period.

[[Calculating the withdrawal rate]]
As in the past, when calculating the withdrawal rate, all regular,
enrolled students must be must be included. The definition of
"enrolled" does not require either payment of tuition or class
attendance; therefore, the withdrawal rate calculation must
include enrolled students who have not yet paid tuition or who
did not actually begin attending classes. A student is
considered to have withdrawn if he or she officially withdraws,
unofficially drops out, or is expelled from the school or
receives a refund of 100% of their tuition and fees (less any
permitted administrative fee). Students who withdraw from
one or more courses or programs, but do not withdraw
entirely from the school, do not meet the definition of
"withdrawn." Note that the 33% withdrawal rate applies to all
enrolled, regular students--not just to SFA recipients.

ENROLLED -- a student enrolls when he or she completes the
registration requirements (except payment of tuition and fees) at
the school. Correspondence students are enrolled if they have
been admitted to the program and have submitted one lesson (that
was completed without the assistance of a school representative).

[[Default management plan required]]
As a part of the Default Reduction Initiative (regulations published
June 5, 1989 and April 29, 1994), schools whose Federal
Stafford/SLS default rate EXCEEDS 20% (BUT IS LESS THAN
40.1%) are required to implement a default reduction plan that is in
accordance with 34 CFR part 668, Appendix D of the General
Provision regulations (or a similar plan, with Departmental
approval). Schools with a default rate that EXCEEDS 40% must
implement ALL Appendix D default reduction measures within 60
days of notification from the Department that the school's cohort
default rate exceeds 40%. New schools are required to develop a
Default Management Plan prior to certification. (See Chapter Ten
of this Handbook for more information on default requirements.)

[[Loss of FFEL eligibility]]
Additionally, for FY 1994 and subsequent fiscal years,
schools with default rates that equal or exceed 25% for three
consecutive years will not be eligible to participate in the FFEL
programs (schools may appeal).

DEBARMENT AND SUSPENSION CERTIFICATION.
Debarment and suspension requirements are also a part of the
administrative capability standards. Before it can receive Pell Grant
or campus-based funding, a school must certify that neither the
school nor its employees have been debarred or suspended by
a Federal agency. This certification is on the PPA and, for
schools participating in the campus-based programs, is
included on ED Form 80-0013, which is a part of the FISAP
package mailed to schools each summer.

[[Debarment of school or its principals]]
If the school or its principals have been suspended or
debarred by one Federal agency, the school is no longer
eligible to participate in any SFA program. The PRINCIPALS of
the school include the owners, the directors, officers, partners,
employees or any other person with primary management or
supervisory responsibilities. A principal can also be someone
who is not employed by the school, but who has critical
influence on or substantive influence over a covered transaction
(such as the receipt of Pell Grant or campus-based funds).

If a school discovers that a person employed in a "primary
management or supervisory capacity" has been suspended or
debarred by a Federal agency, the school must remove that
person from such a position or risk losing its SFA eligibility.

[[Checking prospective employees or contractors]]
To protect itself, a school might ask prospective employees
and contractors about previous debarment or suspension,
either in person or on a written application. A school may also
call the Institutional Participation Division (IPD) to find out if
an individual or organization is on the Nonprocurement List.
(The debarment or suspension of a person who is not a
principal of the school and who does not work in the financial
aid office will not affect the school's SFA eligibility, so long as
that person is not involved in any covered transactions.)

[["Lower-tier covered transactions"]]
A school must not enter into LOWER-TIER COVERED
TRANSACTIONS with a debarred or suspended individual or
organization. A lower-tier covered transaction is any transaction
between a participant in a covered transaction (such as the school)
and another individual or organization, if that transaction stems
from a covered transaction. Examples of common lower-tier
covered transactions are a school's contracts with a financial aid
consultant service, or with a loan collection or billing agency. A
school must obtain a certification from any "lower-tier"
organizations if the amount of the lower-tier transaction is $25,000
or more. (The required certification clause is given on pg. 25 of
Dear Colleague Letter GEN-89-21.) It is the responsibility of the
lower-tier organization to inform the school in writing if the
organization or its principals are debarred or suspended. Therefore,
the certification does not need to be renewed from year to year.

[[NPRM 12-20-94]]
The Department published a Notice of Proposed Rulemaking
(NPRM) on December 20, 1994 (with public comments due
by February 21, 1995) that proposes to make changes to the
debarment and suspension procedures as follows --

[[Proposed changes to debarment and suspension provisions]]
- To reflect changes made by the Higher Education Amendments
of 1992, the NPRM proposes that the Department, in
determining an entity's eligibility to participate in a Title IV,
HEA program, take into consideration only debarment and
suspension actions that have been imposed under procedures
that provide due process protections equivalent to those afforded
under Subpart G of the General Provisions and the Federal
Family Education Loan programs.

- The NPRM proposes to apply similar debarment and
suspension procedures to debarments and suspensions of
lenders or loan servicers under the FFEL program.

- The NPRM proposes to make a governmentwide debarment or
suspension of a school or third-party servicer mandatory
grounds for termination or suspension.

- Finally, the NPRM proposes that whenever a school, lender, or
third-party servicer is suspended under the governmentwide
debarment and suspension provisions, the Department
determine whether an emergency action should be taken against
the entity.

CONTRACTS WITH THIRD-PARTY SERVICERS

[[New requirements]]
Section 668.25 of the General Provisions regulations published
April 29, 1994, added new requirements for all participating
institutions that contract with third-party servicers. These
requirements were effective July 1, 1994. As defined by regulation,
a THIRD-PARTY SERVICER is a individual or organization that
enters into a contract (written or otherwise) with an school to
administer any aspect of the institution's SFA participation.

[[Activities included in "servicer" definition]]
Examples of functions that are covered by this definition include --

- processing student financial aid applications, performing need
analysis, and determining student eligibility or related
activities,

- certifying loan applications, servicing loans, or collecting loans,

- processing output documents for payment to students, and
receiving, disbursing, or delivering SFA funds,

- conducting required student consumer information services,
and

- preparing and certifying requests for advance or reimbursement
funding, preparing and submitting notices and applications
required of eligible and participating schools, or preparing the
Fiscal Operations Report and Application to Participate
(FISAP).

[[Excluded activities]]
Examples of functions that are not covered by this definition
include --

- performing lock-box processing of loan payments,

- performing normal electronic fund transfers,

- publishing ability-to-benefit tests,

- performing functions as a Multiple Data Entry Processor
(MDE),

- financial and compliance auditing,

- mailing documents prepared by the institution, or warehousing
institutional records, and

- providing computer services or software.

[[Final Rule 11-29-94]]
[[Defintion of "employee"]]
The November 29, 1994 final regulations clarified that an
employee of a school is NOT a third-party servicer. For this
purpose, an EMPLOYEE --

- works on a full-time, part-time, or temporary basis,

- performs all duties on site at the school under the supervision of
the school,

- is paid directly by the school,

- is not employed by or associated with a third- party servicer,
and

- is not a third-party servicer for any other school.

[[Eligibile servicer; applicable requirements]]
A school can only contract with an eligible third-party servicer,
as determined by specific regulatory criteria. Under such a
contract, the servicer agrees to comply with all applicable
requirements, to refer any suspicion of fraudulent or criminal
conduct in relation to SFA program administration to the
Department's Inspector General, and, if the servicer disburses
funds, to confirm student eligibility and make required refunds.
If the contract is terminated, or the servicer ceases to perform
any functions prescribed under the contract, the servicer must
return all applicable SFA funds and related records to the school.

[[School is liable]]
Although an eligible servicer is responsible for meeting all
these and other requirements, the school remains liable for any
and all SFA-related actions taken by the servicer on its behalf,
under the terms of the contract.

[[DCL GEN-95-13]]
In January 1995, the Department requested that all schools
provide the Department with the following information for each
third-party servicer with which the school contracts: name,
address, employer identification number, telephone number,
fax number, and Internet address.

Schools are not required to provide copies of the actual
contracts with third-party servicers until the school applies for
recertification, or the Department specifically requests the
school to submit the contracts.

[[Must report contracts]]
The requested information was to be submitted to the
Department by March 31, 1995. If your school has not
submitted this information to the Department, it must do so
immediately. If a school has submitted information regarding
its third-party servicers as part of an application for
certification or recertification, no additional submission is
required. Also, a school is not required to notify the
Department if it does not contract with any third-party
servicers.

Schools are also required to notify the Department if the
school enters into a new contract with a third-party servicer,
significantly modifies a contract with an existing third-party
servicer, the school or one of its third-party servicers
terminates a contract, or a third-party servicer ceases to
provide contracted services, goes out of business, or files for
bankruptcy. Notification to the Department (which must
include the name and address of the servicer and the nature of
the change or action) must be made within ten days of the date
of the change or action.

When submitting information on third-party servicers to the
Department, a school must display its OPEID (the institutional
identifier found on the eligibility or approval letter establishing
its HEA eligibility) on the upper right side of the transmittal.

The information should be sent to one of the following
addresses:

If by mail:

U.S. Department of Education
Institutional Participation Division
Attn: Third-Party Servicer Team
600 Independence Avenue, S.W.
Washington, D.C. 20202-5323

If by overnight mail or courier delivery:

U.S. Department of Education
Institutional Participation Division
Attn: Third-Party Servicer Team
7th and D Streets S.W.
GSA Building, Room 3030
Washington, D.C. 20024

If by fax -

(202) 260-6107
ATTN: 3rd PSTeam

If by internet:
serve@sfa.ope.ed.gov


ADMINISTRATIVE COST ALLOWANCE

[[Federal Pell Grant allowance]]
The Department pays an administrative cost allowance (ACA)
to schools to offset some of the administrative costs related to
the Pell Grant, campus-based, and Direct Loan programs. As
defined in regulation, the Pell Grant program ACA is $5.00 for
each Pell Grant recipient at the school (calculated by the
Department, based on the number of Pell Grant recipients
reported by the school). Schools are notified of their Pell
Grant ACA by mail, three times during the processing year.
The Pell Grant allowance is paid directly to the school by the
U.S. Treasury. (For more information, see Chapter Four of
this Handbook.)

[[Campus-based allowance]]
A school calculates its own campus-based program ACA in
its annual Fiscal Operations Report and Application to
Participate (FISAP), based on a percentage of its
campus-based expenditures in the previous award year (see
Chapter Five of this Handbook). Unlike the Pell Grant ACA
procedures, the school must draw down the campus-based
ACA from the ED Payment System. (A school may use up to
10% of the FWS-based ACA for expenses incurred for its
community service program.)

[[Direct Loan allowance]]
For schools that originate loans under the Direct Loan
program, the ACA is $10.00 for each Direct Loan borrower
for schools that print the promissory notes, and $7.00 for each
Direct Loan borrower for schools that do not print the
promissory notes.


SPECIAL REQUIREMENTS FOR SCHOOLS AWARDING
ATHLETICALLY RELATED FINANCIAL AID

As discussed earlier in this section, the Higher Education
Amendments of 1992 added language to the PPA concerning
additional administrative requirements for institutions offering
athletically related financial aid.

ATHLETICALLY RELATED STUDENT AID -- any
scholarship, grant, or other form of financial assistance, the terms
of which require the recipient to participate in a program of
intercollegiate athletics at the school in order to be eligible to
receive such assistance.

Participating schools must compile an annual report, within six
months of the end of each fiscal year, that provides the
following figures --

- total school revenues earned from intercollegiate athletics,

- revenues earned from each of the following sports: football,
men's basketball, women's basketball, other men's sports
combined, and other women's sports combined,

- total expenses of intercollegiate athletics,

- expenses for each of the following sports: football, men's
basketball, women's basketball, other men's sports combined,
and other women's sports combined, and

- total revenues and total operating expenses of the school.

REVENUE -- Includes, but is not limited to, gate receipts,
broadcast revenues and other conference distributions, appearance
guarantees and options, concessions, and advertising (student
activity fees, alumni contributions, and investment income not
allocable to a sport may be counted in total revenues only).

EXPENSES -- Includes grants-in-aid, salary and payroll, travel
costs, equipment and supply purchases (general and
administrative overhead costs may be counted in total expenses
only).

The school's reports must be independently audited every
three years, and the information contained in both the report
and the audits must be made available to the Secretary and the
public. At this time, schools are not required to submit this
information to the Department.


ANTI-DRUG ABUSE REQUIREMENTS

The HEA of 1965, as amended, requires a school to certify to
the Department that it operates a drug abuse prevention
program that is accessible to its students, employees, and
officers. Two other laws have added related requirements for
postsecondary schools that receive SFA funds.

The Drug-Free Workplace Act of 1988 (P.L. 101-690) requires a
FEDERAL GRANT RECIPIENT to certify that it provides a drug-
free workplace. Because a school applies for and receives its
campus-based allocation directly from the Department, the school is
considered to be a "grantee" for purposes of the Act. Therefore, to
receive campus-based funds, a school must complete the certification
on ED Form 80-0013, which is part of the FISAP package (the
application for campus-based funds). This certification must be
signed by the school's CEO, or other official with authority to sign
the certification on behalf of the entire institution.

[[Requirements for a drug-free workplace]]
The certification lists a number of steps that the school must
take to provide a drug-free workplace, including --

- establishing a drug-free awareness program to provide
information to employees,

- distributing a notice to its employees of prohibited unlawful
activities and the school's planned actions against an employee
who violates these prohibitions, and

- notifying the Department and taking appropriate action when it
learns of an employee's conviction under any criminal drug
statute.

The school's ACA may be used to help defray related
expenses, such as the cost of printing informational materials
given to employees.

[[Scope of drug-free workplace]]
The drug-free workplace requirements apply to all offices and
departments of a school that receives campus-based funds.
Organizations that contract with the school are considered
"subgrantees" - only grantees are subject to the requirements
of the Drug-Free Workplace Act.

[[Information to be distributed to students]]
The Drug-Free Schools and Communities Act (P.L. 101-226)
requires a school to certify that it has adopted and
implemented a program to prevent drug and alcohol abuse by
its students. Unlike the annual drug-free workplace
certification, a school usually will only submit this new
certification to the Department once. (An exception would be
a school that changes ownership.)

The drug prevention program adopted by the school must
include annual distribution to all students and employees of
information concerning drug and alcohol abuse as described
above, except that these steps must be taken by schools that
receive ANY FEDERAL FUNDING and must include the school's
STUDENTS as well as its employees. The information that must
be distributed is more specifically described in Section Nine of
this Chapter.

[[Developing a drug prevention program]]
A school must review its drug prevention program once every
two years to determine its effectiveness and to ensure that its
sanctions are being enforced. The development of a drug
prevention program, although it is a condition for SFA funds,
is usually an enterprise that is undertaken by the school
administration at large, not by the financial aid office. The
regulations originally published on this topic (August 16, 1990)
were mailed to participating schools at the time; they offer a
number of suggestions for developing a drug prevention
program. Also, several organizations that can serve as
resources are listed on the facing page.

[[Measuring the effectiveness of the program]]
The effectiveness of a school's drug prevention program can
be measured by tracking --

- The number of drug- and alcohol-related disciplinary actions,

- The number of drug- and alcohol-related treatment referrals,

- The number of drug- and alcohol-related incidents recorded by
campus police or other law enforcement officials,

- The number of drug- and alcohol-related incidents of
vandalism,

- The number of students or employees attending self-help or
other counseling groups related to alcohol or drug abuse, and

- Student, faculty, and employee attitudes and perceptions about
the drug and alcohol problem on campus.

A school that does not certify that it has a drug prevention
program, or that fails to carry out a drug prevention program,
may lose its approval to participate in SFA programs. (See
the regulations for details on Department sanctions and
appeals procedures available to the school.)

[[The chart "Additional Sources of Information" on page 3-53 is currently
unavailable for viewing. Please reference your paper document
for additional information.]]


ANTI-LOBBYING CERTIFICATION AND DISCLOSURE

In accordance with P.L. 101-121 (and regulations published
December 20, 1989), school receiving more than $100,000 for
campus-based programs must provide the following to the
Department for each award year --

[[Forms required for schools with campus-based
allocation over $100,000]]
- CERTIFICATION FORM (Combined with Debarment and
Drug-Free Workplace certifications, ED-80-0013) the school
will not use Federal funds to pay a person for lobbying activities
in connection with Federal grants or cooperative agreements.
This certification must be renewed each year for your school to
be able to draw down campus-based funds.

- DISCLOSURE FORM (Standard Form LLL) If the school has
used nonFederal funds to pay a noninstitutional employee for
lobbying activities, it must disclose these lobbying activities to
the Department. The school must update this disclosure at least
quarterly, when changes occur.

Both of these forms are sent to schools with the campus-based fiscal
report/application (FISAP) each summer. The certification form and
the disclosure form must be signed by the Chief Executive Officer or
other individual who has the authority to sign on behalf of the entire
institution. Schools are advised to retain a copy in their files.

[[ACA may not be used for membership fees]]
This certification primarily covers the use of the campus-based
ACA. Schools may not use the ACA to pay for their membership in
professional associations (such as NASFAA, NATTS, AICS, or
NACUBO), regardless of whether the association engages in
lobbying activities. Association membership is not a legitimate
administrative cost of the SFA programs.

The school is also responsible for payments made ON ITS BEHALF,
and must include the certification in award documents for any
subgrantees or contractors (such as need analysis servicers, financial
aid consultants, or other third parties paid from the ACA).

*1* Beginning with the 1995-96 award year, a school's compliance
audit is due within six months of the end of the school's fiscal year.

*2* To demonstrate its compliance with the financial responsibility
standards, a nonprofit school must prepare a classified statement of
financial position in accordance with generally accepted accounting
principles or provide the required information in notes to the audited
financial statement.

*3* An individual is "capable" if he or she is certified by the State
in which the school is located), if State certification is required.
Other factors include the individual's successful completion of SFA
program training provided or approved by the Department, and
previous experience and documented success in SFA program
administration.

*4* A school with a Perkins cohort default rate that equals or
exceeds 15% must develop and implement a default reduction plan.
See Chapter Six, Section Eight of this Handbook.