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

[Federal Register: November 29, 1996 (Volume 61, Number 231)]

[Rules and Regulations]               

[Page 60578-60610]

From the Federal Register Online via GPO Access [wais.access.gpo.gov]

[DOCID:fr29no96-19]



[[Page 60578]]


-----------------------------------------------------------------------



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.


-----------------------------------------------------------------------


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


[[Page 60598]]


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


[[Page 60599]]


$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 processes of the Department.

    Changes: The FRFA will discuss these costs.

    Comments: Three commenters stated that the breadth of the IRFA 

analysis was insufficient. They stated that the analysis needs to look 

at more components than the reimbursement provision.

    Discussion: The Secretary has reanalyzed the regulation and found 

additional areas where economic impacts may be imposed on small 

entities. The FRFA contains a discussion of these impacts. However, the 

IRFA does contain an analysis of the most significant economic impacts. 

While the additional areas of analysis of economic impacts may not, by 

themselves, constitute a significant economic impact, when taken 

together they might.

    Changes: The summary of the FRFA looks at more than just 

reimbursement.

    Comments: Two commenters stated that the Department must analyze 

this rule in conjunction with another NPRM that was published at the 

same time. These commenters indicated that the ``Financial 

Responsibility'' rule would have the effect of putting more 

institutions on the reimbursement payment method and that this analysis 

of the ``Cash Management'' rule should consider the economic impact on 

those institutions as well.

    Discussion: The Secretary agrees with the general concept that 

proposed rules should be analyzed for their joint impact. In this 

particular situation, however, the proper place for that discussion is 

in the ``Financial Responsibility'' regulations. The costs of 

institutions being provisionally certified and then being put on 

reimbursement would occur as a result of any changes in the ``Financial 

Responsibility'' requirements. The effect of the ``Cash Management'' 

regulations is to extend reimbursement to FFEL. The costs of being put 

on reimbursement that would be imposed by any changes in the 

``Financial Responsibility'' regulations would include the costs of 

being put on reimbursement for all title IV, HEA programs (consistent 

with this regulation). That is, the cost of being put on reimbursement 

for those institutions would be marginally higher as a result of these 

regulations. However, the public comment period has been extended on 

this component of the proposed ``Financial Responsibility'' 

regulations. The analysis of these costs will be included in the 

preamble to the final Financial Responsibility regulations.

    Changes: The FRFA for both regulations will point out the cross-

effects as outlined here.

    Description of the reasons why action by the Department is being 

considered and a succinct statement of the objectives of, and legal 

basis for, the proposed rule.

    The Secretary proposes these regulatory changes to further the 

implementation of the Department of Education initiatives to reduce 

burden and improve program accountability. More information about the 

need and


[[Page 60600]]


justification for the proposed rule can be found in the preamble to the 

NPRM.

    Description and estimate of the number of small entities to which 

the proposed rule will apply.

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

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

entities are the sole focus of the Regulatory Flexibility Analysis. 

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

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

non-profit entities with total annual revenue below $5,000,000; and 

entities controlled by governmental entities with populations below 

50,000. An estimate of the proportion of entities in each of these 

categories was calculated using the best available data from the 

National Center for Education Statistics Integrated Postsecondary 

Education Data System (IPEDS) survey for academic year 1993-94. These 

estimates were applied to Department administrative files, where no 

data element for total revenue is available. The estimates are that 

1,690 small for-profit entities, 660 small non-profit entities and 140 

small governmental entities will be covered by the proposed rule. Where 

exact data were not available to estimate the proportion of small 

entities, data elements were chosen that would have overestimated, 

rather than underestimated, the proportion.

    Estimate of the number of institutions experiencing economic 

impacts from rule and estimates of the economic impacts.

    This rule can be partitioned for analysis purposes into 12 

components. Each component is analyzed separately. As discussed in the 

response to comments above, each component was reanalyzed for possible 

adverse economic impacts as a result of comments received. The 

following components are expected to have a positive or neutral 

economic impact: uniform payment period; restructure regulations; just-

in-time payment method; separate bank accounts; payment period; late 

disbursements; and, excess cash exemption. The following components 

have the potential to impose adverse economic impacts on small 

entities: electronic processes; student notification; disbursement 

timeframes/returning undisbursed funds; and reimbursement extension to 

FFEL. A summary of the analysis of the economic impact of each of these 

components follows.


Electronic Processes Component


    Institutions will be required to use electronic processes that the 

Secretary provides on a substantially free basis. Institutions may have 

to obtain computer hardware and computer training in order to 

participate. It is estimated that a new computer would cost $1,500 and 

computer training might cost as much as $500. Institutions that are 

heavy users of technical assistance may be charged as much as $100 per 

year for this assistance. Changing to electronic processes may require 

changes in an institution's accounting system and/or the institution's 

SFA delivery system. The costs of these changes are entirely dependent 

on the characteristics of the institution under consideration and can 

not be reliably estimated.


Student Notification Component


    This component increases these students notification and 

authorization requirements on institutions. This is estimated to 

require an additional 195.6 hours, as discussed in the paperwork burden 

section. Using a loaded labor rate of $20.00 per hour, this would cost 

$3,912 per institution. It is further estimated that between one and 

three students per thousand will take advantage of the loan 

cancellation provision. It is assumed that most of these students will 

arrange for an alternative method of paying for their postsecondary 

education and there will be no additional economic costs associated 

with accommodating their request since current regulations require such 

requests to be accommodated. However, there may be a few students who 

have changed their mind about attending the postsecondary education 

program within the first few days. It is this student that these 

regulations are designed to protect. The cost of unenrolling such a 

student will vary from program to program, but is estimated to be 

between $100 and $1,000. Data do not exist that would allow for precise 

estimation of the number of small entities that would experience 

adverse economic impacts. However, if we assume that each small entity 

has approximately 100 students, then between three and eight 

institutions will need to unenroll a student each year and be required 

to obtain a refund from that student outside of the student's loan 

proceeds. These estimates are based on the best professional judgment 

of student financial aid staff knowledgeable in this area. Data are not 

readily available that would allow for more precise estimation of these 

costs.


Disbursement Timeframes Component


    Currently, institutions are not allowed to request loan funds from 

lenders sooner than 13 days before the first day of classes of the 

payment period. This component clarifies that this timeframe applies to 

all loan disbursements, not just the first disbursement. This component 

also clarifies that, in the case of students who are subject to delayed 

disbursement, the institution cannot request loan funds more than three 

days before the loan funds are scheduled to be made available to the 

borrower. The economic impact of this component is described below in 

the context of returning funds not disbursed within three days.


Returning Undisbursed Funds Component


    This provision will change the time that institutions can keep 

their funds, requiring institutions to return funds not disbursed 

within 3 business days (or an additional 10 under certain 

circumstances), except that this provision will be phased in gradually 

over 3 years. This analysis compares the cost when the provision is 

fully phased in. There is a potential loss of funds for those 

institutions who have been delaying 45 days and putting the money in 

interest-bearing accounts. It is assumed that between 40 percent and 60 

percent of small entities are currently receiving funds through EFT 

transfers and that these institutions are holding funds between 30 and 

40 days. Lenders bill the Department for in-school interest subsidy 

payments three days after disbursing them electronically. Thus, the 

Department is paying between 27 and 37 days of in-school interest 

subsidy to lenders without the student having the use of these funds 

for educational expenses. At the same time, institutions will lose the 

use of these funds for the same period (30 to 40 days). The economic 

impact of losing the use of these funds is difficult to quantify. Not 

enough is known about the cash flow practices of particular 

institutions to determine the impact, but it is assumed to have some 

impact.


Reimbursement Extension to FFEL Component


    This component will require institutions that participate in the 

FFEL program and that are on the reimbursement payment method for other 

title IV, HEA programs, or for which the Secretary determines there is 

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

from existing sources to the Secretary or an approved entity, that 

supports the certification of FFEL Program applications or supports 

intended disbursements of FFEL Program funds. The FFEL Program 

disbursements at an


[[Page 60601]]


institution could be delayed for an estimated average of 18-20 days 

until approval for those certifications or disbursements is received by 

the institution, costing the institution potential interest expenses 

and paperwork expenses for the submission of supporting documentation. 

For this analysis, the delay was assumed to be longer than the 18-20 

day average. This analysis uses a 30-day period, even though the 

average is 10-12 days less.

    As of July 31, 1996, there were 307 institutions being paid on a 

reimbursement basis, estimated at 257 for-profit entities, 36 non-

profit entities, and 14 governmental entities. Of the 307 institutions, 

175 participated in the FFEL Programs and had loan activity during the 

1995 fiscal year. Where exact data were not available to estimate the 

cost to small entities, data elements were chosen that would have 

overestimated rather than underestimated the cost. For example, 

information is not available on the proportion of these institutions 

that are small versus the number that are large. For this analysis, in 

order to prevent an underestimate, all 175 institutions were assumed to 

be small entities.

    The economic impact that these entities would experience is that 

associated with the need to advance funds to student before receiving 

the payment from the Secretary. Some entities that have funds readily 

available will be losing the interest that those funds would have 

received had they been deposited in an interest-bearing account. Some 

entities that do not have funds readily available may be required to 

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

receiving funds from the Secretary. Since the borrowing rate is higher 

than the saving rate, only the latter case is analyzed. However, it is 

understood that this represents an overestimate of the actual costs 

experienced by real entities. Also, since some entities will experience 

longer delays that the 18-20 day average, this analysis considers that 

funds will be borrowed for 30 days since delays are rarely, if ever, 

longer than this for institutions on the reimbursement method of 

payment. In order to provide a reasonable range for the cost estimates, 

the Secretary analyzed the case for small entities with low FFEL volume 

and small entities with high FFEL volume.

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

by these proposed regulations had a FFEL programs loan volume of less 

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

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

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

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

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

interest earnings that could have accrued for the delayed FFEL Program 

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

$2,219.

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

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

submitting to the Secretary or approved entity documentation in support 

of the certification of loan applications or the disbursement of FFEL 

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

estimated increase of 10 hours of paperwork by an employee at a loaded 

labor rate of $20 per hour, and $3.00 in postage for an average of 10 

mailings.

    Less than 15 percent of the 175 institutions identified had a loan 

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

the interest expenses for the total amount of loan commitments under 

the same conditions above would equal an estimated $33,226. The 

potential loss of interest earnings on those funds equals an estimated 

$8,137 per institution.

    As a result, the total potential cost per school in interest 

expenses and increased paperwork for the 105 small entities, subject to 

the extension of the reimbursement payment method provisions of this 

regulation, with FFEL volume below $900,000 is estimated at $11,511. 

For the approximately 26 small entities subject to the extension of the 

reimbursement payment method provisions of this rule with FFEL Program 

volume above $3,300,000, the total potential cost per school is 

estimated at $41,593. These costs are estimates and the costs 

experienced by actual institutions will undoubtedly be different. These 

estimates should be used as illustrative examples only of the expenses 

incurred by low and high volume schools. Middle volume schools will 

have expenses between these two extremes.

    Description of the steps the Department has taken to minimize the 

significant economic impact on small entities consistent with the 

stated objectives of applicable statutes. 

    The Department has undertaken several actions in these regulations 

to minimize the economic impacts on small (and large) entities. For 

instance, the adoption of a uniform payment period is expected to 

simplify administration of the title IV, HEA programs. The final rule 

removes some prescriptive requirements for maintaining funds in 

separate accounts for institutions under the just-in-time payment 

method. The final rule simplifies and removes redundant provisions in 

the late disbursement regulations.

    In addition, the final rule includes a gradual phase-in of the new 

disbursement timeframes. This phase-in is a change from the proposal 

described in the NPRM. This change was undertaken in response to public 

comment regarding the economic impacts of the new timeframes. This step 

will help to minimize the economic impact on small (and large) 

entities.

    Description of significant alternatives which accomplish the stated 

objectives of applicable statutes and which minimize any significant 

economic impact of the proposed rule on small entities.

    While the Department considered alternative means of satisfying 

many specific provisions, as discussed in the preamble to both the NPRM 

and the preamble to this final rule, there are no other significant 

alternatives that would satisfy the same legal and policy objectives 

while minimizing the impact on small entities. The proposed approach 

balances regulatory reform and improved accountability in a proper 

fashion. Consistent with the Secretary's regulatory relief initiative, 

participating institutions are subject to the minimum requirements that 

adequately protects the Federal fiscal interest. In fact, several 

components of the proposed rule reduce the regulatory burden on 

participating institutions. The Secretary believes that the proposed 

approach is the least complicated and burdensome for small (and large) 

entities involved in the administration of the title IV, HEA programs 

while still allowing for the proper protection of the Federal fiscal 

interests and the interests of students and their parents.

    For the purposes of performing this regulatory flexibility 

analysis, the alternative of ``no action'' could be considered a 

significant alternative. If the Secretary did not undertake any action 

in this area, small (and large) entities would not experience the 

economic impacts imposed by these regulations. However, as described in 

the preamble to the final rule, the Secretary believes that this action 

is required to further Department initiatives and to better protect the 

Federal fiscal interest. This is discussed further below.

    The factual, policy, and legal reasons for selecting the 

alternative adopted in the final rule. 


[[Page 60602]]


    The factual, policy, and legal reasons for selecting the 

alternative adopted in the final rule are discussed above and elsewhere 

in this preamble. The alternative ``no action'' would not adequately 

protect the Federal fiscal interest, as discussed above and elsewhere 

in this preamble.

    The use of the proposed requirement will enable the Secretary to 

better discharge the responsibilities of managing the title IV, HEA 

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

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

the interests of students.

    Why each one of the other significant alternatives to the rule 

considered by the Department which affect the impact on small entities 

was rejected.

    The alternative ``no action'' was rejected because this alternative 

would not adequately protect the Federal fiscal interest, as discussed 

above and elsewhere in this preamble.


Conclusion


    A substantial number of small entities are likely to experience 

significant economic impacts from the proposed rule. However, the 

Secretary has concluded that the costs are outweighed by the benefits. 

In this case, the benefits are better protection of the Federal fiscal 

interest and improved service to students.

    The adverse economic impacts experienced by some small (and large) 

entities is balanced by the positive economic impacts accruing to the 

U.S. taxpayer. These positive impacts arise (1) from the ability of the 

Secretary to ensure that eligible students receive title IV, HEA 

program funds in the amount for which they are eligible in cases where 

there is a need to strictly monitor title IV, HEA program funds at an 

institution and, (2) from the protection of students and the Federal 

interest in the title IV, HEA programs.

    The use of the proposed requirement will enable the Secretary to 

better discharge the responsibilities of managing the title IV, HEA 

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

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

the interests of students.


Waiver of Notice of Proposed Rulemaking


    In accordance with Section 431 (b)(2)(A) of the General Education 

Provisions Act, 20 U.S.C. 1232(b)(2)(A), and the Administrative 

Procedure Act, 5 U.S.C. 553, it is the practice of the Secretary to 

offer interested parties the opportunity to comment on proposed rules 

and regulations. However, the Secretary amends Sec. 668.162(a) as a 

final rule to revise the procedure for presenting cash requests to the 

Department under the exemption from rulemaking requirements in 5 U.S.C. 

553(b)(A) for rules of agency procedure.


Paperwork Reduction Act of 1995


    Sections 668.16, 668.165, 668.167 contain information collection 

requirements. As required by the Paperwork Reduction Act of 1995, the 

U.S. Department of Education has submitted a copy of these sections to 

OMB for its review. (44 U.S.C. 3504(h)).


Assessment of Educational Impact


    In the NPRM published September 23, 1996, the Secretary requested 

comment on whether the proposed regulations in this document would 

require transmission of information that is being gathered by, or is 

available from, any other agency or authority of the United States.

    Based on the response to the proposed rules on its own review, the 

Department has determined that the regulations in this document do not 

require transmission of information that is being gathered by, or is 

available from, any other agency or authority of the United States.


List of Subjects


34 CFR Part 668


    Administrative practice and procedure, Colleges and universities, 

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

education, Student aid, Reporting and recordkeeping requirements.


34 CFR Part 674, 675, and 676


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

requirements.


34 CFR Part 682


    Administrative practice and procedure, Colleges and universities, 

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

and recordkeeping requirements.


34 CFR Part 685


    Administrative practice and procedure, Colleges and universities, 

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

and recordkeeping requirements.


34 CFR Part 690


    Grant programs--education, Reporting and recordkeeping 

requirements, Student aid.


(Catalog of Federal Domestic Assistance Numbers: 84.007 Federal 

Supplemental Educational Opportunity Grant Program; 84.032 

Consolidation Program; 84.032 Federal Stafford Loan Program; 84.032 

Federal PLUS Program; 84.032 Federal Supplemental Loans for Students 

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

Loan Program; 84.063 Federal Pell Grant Program; 84.069 Federal 

State Student Incentive Grant Program; 84.268 William D. Ford 

Federal Direct Loan Programs; and 84.272 National Early Intervention 

Scholarship and Partnership Program)


    Dated: November 22, 1996.

Richard W. Riley,

Secretary of Education.


    The Secretary amends parts 668, 674, 675, 676, 682, 685, and 690 of 

title 34 of the Code of Federal Regulations as follows:


PART 668--STUDENT ASSISTANCE GENERAL PROVISIONS


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

follows:


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

unless otherwise noted.


Subpart A--General


    2. Section 668.4 is added to read as follows:



Sec. 668.4  Payment period.


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

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

eligible program that is offered in semesters, trimesters, quarters, or 

other academic terms and measures progress in credit hours, the payment 

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

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

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

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

is one academic year or less in length--

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

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

or clock hours; and

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

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

or clock hours.

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

one academic year in length--

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

year as measured in credit or clock hours--

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

student completes the first half of the academic


[[Page 60603]]


year as measured in credit or clock hours; and

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

student completes the second half of that academic year;

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

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

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

student completes the first half of the remaining portion of the 

eligible program as measured in credit or clock hours; and

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

student completes the remainder of the eligible program; and

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

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

the payment period is the remainder of that eligible program.

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

if a student is enrolled in an eligible program that measures progress 

in credit hours and the student cannot earn half the credit hours in 

the program under paragraph (b)(1) of this section or half of the 

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

(b)(2)(ii) of this section until after the calendar midpoint between 

the first and last scheduled days of class, the second payment period 

begins on the later of--

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

of class of the program or academic year; or

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

has completed half of the academic coursework.

    (4) If, in an academic year, in a program of less than an academic 

year, or in the remaining portion of an eligible program under 

paragraph (b)(2) of this section, an institution chooses to have more 

than two payment periods, the rules in paragraphs (b)(1) through (b)(3) 

of this section are modified to reflect the increased number of payment 

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

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

one-third of the academic year.


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


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


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

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

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

follows:



Sec. 668.16  Standards of administrative capability.


* * * * *

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

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

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

* * * * *

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


    4. Subpart K is revised to read as follows:


Subpart K--Cash Management



Sec. 668.161  Scope and purpose.


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

under which a participating institution requests, maintains, disburses, 

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

intended to--

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

an institution;

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

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

institution; and

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

HEA loan program.

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

this subpart also apply to a third-party servicer.

    (3) As used in this subpart--

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

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

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

programs;

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

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

Program regulations; and

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

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

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

the FWS Program instead of the disbursement procedures and requirements 

under this subpart.

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

funds received by an institution for administrative expenses and for 

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

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

programs are held in trust for the intended student beneficiaries and 

the Secretary. FFEL program funds are also held in trust for the 

lenders and guaranty agencies, in addition to the student beneficiaries 

and the Secretary, under 34 CFR 682.207. The institution, as a trustee 

of Federal funds, may not use or hypothecate (i.e., use as collateral) 

title IV, HEA program funds for any other purpose.


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



Sec. 668.162  Requesting funds.


    (a) General. (1) The Secretary has sole discretion to determine the 

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

to an institution. In accordance with procedures established by the 

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

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

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

method), or by reimbursing an institution for disbursements already 

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

    (2) Each time an institution requests funds from the Secretary, the 

institution must identify the amount of funds requested by program and 

fiscal year designation that the Secretary assigned to the 

authorization for those funds.

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

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

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

the institution needs immediately for disbursements the institution has 

made or will make to eligible students and parents;

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

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

designated by the institution; and

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

administratively feasible but no later than three business days 

following the date the institution received those funds.

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

method--

    (1) For each student or parent that an institution determines is 

eligible for title IV, HEA program funds, the institution transmits 

electronically to the Secretary, within a timeframe established by the 

Secretary, records that contain program award information for that 

student or parent. As part of those records, the


[[Page 60604]]


institution reports the date and amount of the disbursements that it 

will make or has made to that student or that student's parent;

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

the Secretary provides by EFT the corresponding disbursement amount to 

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

that disbursement;

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

accepted by the Secretary, the institution may disburse those funds 

based on its determination at the time the institution transmitted that 

record to the Secretary that the student is eligible for that 

disbursement; and

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

accepted record within the time established by the Secretary in a 

notice published in the Federal Register.

    (d) Reimbursement payment method. Under the reimbursement payment 

method--

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

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

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

programs before the institution may seek reimbursement from the 

Secretary for those disbursements. The Secretary considers an 

institution to have made a disbursement if the institution has either 

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

its own funds;

    (2) An institution seeks reimbursement by submitting to the 

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

actual disbursements the institution has made to students and parents 

included in that request;

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

Secretary requires the institution to--

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

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

documentation that shows that each student and parent included in the 

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

program funds for which reimbursement is sought; and

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

reimbursement request for a student or parent and pays the institution 

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

parent that the institution--

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

HEA program funds;

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

funds paid to the student or parent; and

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

of this section.


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



Sec. 668.163  Maintaining and accounting for funds.


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

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

Federally insured or secured by collateral of value reasonably 

equivalent to the amount of those funds.

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

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

program funds are maintained in that account by--

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

Funds''; or

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

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

notice; and

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

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

the account contains Federal funds and maintaining a copy of that 

statement.

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

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

investment account that contains no other funds if the Secretary 

determines that the institution failed to comply with--

    (1) The requirements in this subpart;

    (2) The recordkeeping and reporting requirements in subpart B of 

this part; or

    (3) Applicable program regulations.

    (c) Interest-bearing or investment account. (1) An institution must 

maintain the Fund described in Sec. 674.8(a) of the Federal Perkins 

Loan Program regulations in an interest-bearing bank account or 

investment account consisting predominately of low-risk, income-

producing securities, such as obligations issued or guaranteed by the 

United States. Interest or income earned on Fund proceeds are retained 

by the institution as part of the Fund.

    (2) Except as provided in paragraph (c)(3) of this section, an 

institution must maintain Direct Loan, Federal Pell Grant, FSEOG, and 

FWS program funds in an interest-bearing bank account or an investment 

account as described in paragraph (c)(1) of this section.

    (3) An institution does not have to maintain Direct Loan, Federal 

Pell Grant, FSEOG, and FWS program funds in an interest-bearing bank 

account or an investment account for an award year if--

    (i) The institution drew down less than a total of $3 million of 

those funds in the prior award year and anticipates that it will not 

draw down more than that amount in the current award year;

    (ii) The institution demonstrates by its cash management practices 

that it will not earn over $250 on those funds during the award year; 

or

    (iii) The institution requests those funds from the Secretary under 

the just-in-time payment method.

    (4) If an institution maintains Direct Loan, Federal Pell Grant, 

FSEOG, and FWS program funds in an interest-bearing or investment 

account, the institution may keep the initial $250 it earns on those 

funds during an award year. By June 30 of that award year, the 

institution must remit to the Secretary any earnings over $250.

    (d) Accounting and internal control systems and financial records. 

(1) An institution must maintain accounting and internal control 

systems that--

    (i) Identify the cash balance of the funds of each title IV, HEA 

program that are included in the institution's bank or investment 

account as readily as if those program funds were maintained in a 

separate account; and

    (ii) Identify the earnings on title IV, HEA program funds 

maintained in the institution's bank or investment account.

    (2) An institution must maintain its financial records in 

accordance with the provisions under Sec. 668.24.

    (e) Standard of conduct. An institution must exercise the level of 

care and diligence required of a fiduciary with regard to maintaining 

and investing title IV, HEA program funds.


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



Sec. 668.164  Disbursing funds.


    (a) Disbursement. (1) Except as provided in paragraph (a)(2) of 

this section, an institution makes a disbursement of title IV, HEA 

program funds on the date that the institution credits a student's 

account at the institution or pays a student or parent directly with--

    (i) Funds received from the Secretary;

    (ii) Funds received from a lender under the FFEL Programs; or

    (iii) Institutional funds used in advance of receiving title IV, 

HEA program funds.

    (2) If, earlier than 10 days before the first day of classes of a 

payment period,


[[Page 60605]]


or for a student subject to the requirements of Sec. 682.604(c)(5) or 

Sec. 685.303(b)(4) earlier than 30 days after the first day of the 

payment period, an institution credits a student's institutional 

account with institutional funds in advance of receiving title IV, HEA 

program funds, the Secretary considers that the institution makes that 

disbursement on the 10th day before the first day of classes, or the 

30th day after the beginning of the payment period for a student 

subject to the requirements of Sec. 682.604(c)(5) or 

Sec. 685.303(b)(4).

    (b) Disbursements by payment period. (1) Except as provided in 

paragraph (b)(2) of this section, an institution must disburse title 

IV, HEA program funds on a payment period basis. Except as provided in 

paragraph (g) of this section, an institution may disburse title IV, 

HEA program funds to a student or parent for a payment period only if 

the student is enrolled for classes for that payment period and is 

eligible to receive those funds.

    (2) The provisions of paragraph (b)(1) of this section do not apply 

to the disbursement of FWS Program funds.

    (3) For a student enrolled in an eligible program at an institution 

that measures academic progress in clock hours, in determining whether 

the student completes the clock hours in a payment period, an 

institution may include clock hours for which the student has an 

excused absence if--

    (i) The institution has a written policy that permits excused 

absences; and

    (ii) The number of excused absences under the written policy for 

purposes of this paragraph does not exceed the lesser of--

    (A) The policy on excused absences of the institution's accrediting 

agency or, if the institution has more than one accrediting agency, the 

agency designated under 34 CFR part 600.11(b);

    (B) The policy on excused absences of any State agency that 

licenses the institution or otherwise legally authorizes the 

institution to operate in the State; or

    (C) Ten percent of the clock hours in the payment period.

    (4) For purposes of paragraph (b)(3) of this section, an ``excused 

absence'' is an absence that a student does not have to make up.

    (c) Direct payments. An institution pays a student or parent 

directly by--

    (1) Releasing to the student or parent a check provided by a lender 

to the institution under an FFEL Program;

    (2) Issuing a check or other instrument payable to and requiring 

the endorsement or certification of the student or parent. An 

institution issues a check by--

    (i) Releasing or mailing the check to a student or parent; or

    (ii) Notifying the student or parent that the check is available 

for immediate pickup;

    (3) Initiating an electronic funds transfer (EFT) to a bank account 

designated by the student or parent; or

    (4) Dispensing cash for which an institution obtains a signed 

receipt from the student or parent.

    (d) Crediting a student's account at the institution.

    (1) Without obtaining the student's or parent's authorization under 

Sec. 668.165, an institution may use title IV, HEA program funds to 

credit a student's account at the institution to satisfy current 

charges for--

    (i) Tuition and fees;

    (ii) Board, if the student contracts with the institution for 

board; and

    (iii) Room, if the student contracts with the institution for room.

    (2) After obtaining the appropriate authorization from a student or 

parent under Sec. 668.165, the institution may use title IV, HEA 

program funds to credit a student's account at the institution to 

satisfy--

    (i) Current charges that are in addition to the charges described 

in paragraph (d)(1) of this section that were incurred by the student 

at the institution for educationally related activities; and

    (ii) Minor prior award year charges if these charges are less than 

$100 or if the payment of these charges does not, and will not, prevent 

the student from paying his or her current educational costs.

    (3) If an institution disburses Direct Loan Program funds by 

crediting a student's account at the institution, the institution must 

first credit the student's account with those funds to pay for 

outstanding current and authorized charges.

    (4) For purposes of this paragraph, current charges refers to 

charges assessed the student by the institution for--

    (i) The current award year; or

    (ii) The loan period for which an institution certified or 

originated a loan under the FFEL or Direct Loan programs.

    (e) Credit balances. Whenever an institution disburses title IV, 

HEA program funds by crediting a student's account and the total amount 

of all title IV, HEA program funds credited exceeds the amount of 

tuition and fees, room and board, and other authorized charges the 

institution assessed the student, the institution must pay the 

resulting credit balance directly to the student or parent as soon as 

possible but--

    (1) No later than 14 days after the balance occurred if the credit 

balance occurred after the first day of class of a payment period; or

    (2) No later than 14 days after the first day of class of a payment 

period if the credit balance occurred on or before the first day of 

class of that payment period.

    (f) Early disbursements. Except as provided under paragraph (f)(3) 

of this section--

    (1) If a student is enrolled in a credit-hour educational program 

that is offered in semester, trimester, or quarter academic terms, the 

earliest an institution may disburse title IV, HEA program funds to a 

student or parent for any payment period is 10 days before the first 

day of classes for a payment period.

    (2) If a student is enrolled in a credit-hour educational program 

that is not offered in semester, trimester, or quarter academic terms, 

or in a clock hour educational program the earliest an institution may 

disburse title IV, HEA program funds to a student or parent for any 

payment period is the later of--

    (i) Ten days before the first day of classes of the payment period; 

or

    (ii) The date the student completed the previous payment period for 

which he or she received title IV, HEA program funds, except that this 

provision does not apply to the payment of Direct Loan or FFEL program 

funds under the conditions described in 34 CFR 685.301 (b)(3)(ii), 

(b)(5), and (b)(6) and 34 CFR 682.604 (c)(6)(ii), (c)(7), and (c)(8), 

respectively.

    (3) The earliest an institution may disburse the initial 

installment of a loan under the Direct Loan or FFEL programs to a 

first-year, first-time borrower as described in 34 CFR 682.604(c) and 

34 CFR 685.303(b)(4) is 30 days after the first day of the student's 

program of study.

    (g) Late disbursements--(1) Ineligible students who may receive a 

late disbursement. An institution may make a late disbursement under 

paragraph (g)(2) of this section, if the student became ineligible 

solely because--

    (i) For purposes of the Direct Loan and FFEL programs, the student 

is no longer enrolled at the institution as at least a half-time 

student for the loan period; and

    (ii) For purposes of the Federal Pell Grant, FSEOG, and Federal 

Perkins Loan programs, the student is no longer enrolled at the 

institution for the award year.

    (2) Conditions for late disbursements. An institution may disburse 

funds under a title IV, HEA program to an ineligible student and to the 

parent of an ineligible student as described in


[[Page 60606]]


paragraph (g)(1) of this section if, before the date the student became 

ineligible--

    (i) The institution received a SAR from the student or an ISIR from 

the Secretary and the SAR or ISIR has an official expected family 

contribution calculated by the Secretary; and

    (ii)(A) For a Direct Loan Program loan, the institution created the 

electronic origination record for that loan. An institution may not 

make a late second or subsequent disbursement of a Direct Subsidized or 

Direct Unsubsidized loan unless the student has graduated or 

successfully completed the period of enrollment for which the loan was 

intended;

    (B) For an FFEL Program loan, the institution certified an 

application for that loan. An institution may not make a late second or 

subsequent disbursement of a Stafford loan unless the student has 

graduated or successfully completed the period of enrollment for which 

the loan was intended;

    (C) For a Direct Loan or FFEL Program loan, the student completed 

the first 30 days of his or her program of study if the student was a 

first-year, first-time borrower as described in 34 CFR 682.604(c)(5) or 

685.303(b)(4);

    (D) For a Federal Pell Grant Program award, the institution 

received a valid SAR from the student or a valid ISIR from the 

Secretary; and

    (E) For a Federal Perkins Loan Program loan or an FSEOG Program 

award, the student was awarded a loan or grant.

    (3) Making a late disbursement. If a student or a parent borrower 

qualifies for a late disbursement under paragraphs (g) (2) and (3) of 

this section, the institution--

    (i) May make that late disbursement of title IV, HEA program funds 

only if the funds are used to pay for educational costs that the 

institution determines the student incurred for the period in which the 

student was enrolled and eligible; and

    (ii) Must make the late disbursement no later than 90 days after 

the date that student becomes ineligible under paragraph (g)(1) of this 

section.


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



Sec. 668.165  Notices and authorizations.


    (a) Notices. (1) Before an institution disburses title IV, HEA 

program funds for any award year, the institution must notify a student 

of the amount of funds that the student or his or her parent can expect 

to receive under each title IV, HEA program, and how and when those 

funds will be disbursed. If those funds include Direct Loan or FFEL 

Program funds, the notice must indicate which funds are from subsidized 

loans and which are from unsubsidized loans.

    (2) If an institution credits a student's account at the 

institution with Direct Loan, FFEL, or Federal Perkins Loan Program 

funds, the institution must notify the student, or parent of--

    (i) The date and amount of the disbursement;

    (ii) The student's right, or parent's right to cancel all or a 

portion of that loan or loan disbursement and have the loan proceeds 

returned to the holder of that loan. However, the institution does not 

have to provide this information with regard to FFEL Program funds 

unless the institution received the loan funds from a lender through an 

EFT payment or master check; and

    (iii) The procedures and the time by which the student or parent 

must notify the institution that he or she wishes to cancel the loan or 

loan disbursement.

    (3) The institution must send the notice described in paragraph 

(a)(2) of this section--

    (i) No earlier than 30 days before and no later than 30 days after 

crediting the student's account at the institution; and

    (ii) Either in writing or electronically. If the institution sends 

the notice electronically, it must require the recipient of the notice 

to confirm receipt of the notice and must maintain a copy of that 

confirmation.

    (4) (i) A student or parent must inform the institution if he or 

she wishes to cancel all or a portion of a loan or loan disbursement.

    (ii) The institution must return the loan proceeds, cancel the 

loan, or do both, in accordance with applicable program regulations if 

the institution receives a loan cancellation request either--

    (A) Within 14 days after the date the institution sends the notice 

described in paragraph (a)(2) of this section; or

    (B) If the institution sends the notice described in paragraph 

(a)(2) of this section more than 14 days prior to the first day of the 

payment period, by the first day of the payment period.

    (iii) If a student or parent requests a loan cancellation after the 

period set forth in paragraph (a)(4)(ii) of this section, the 

institution may return the loan proceeds, cancel the loan, or do both, 

in accordance with applicable program regulations.

    (5) An institution must inform a student or parent in writing or 

electronically regarding the outcome of any cancellation request.

    (b) Student or parent authorizations. (1) If an institution obtains 

written authorization from a student or parent, as applicable, the 

institution may--

    (i) Disburse title IV, HEA program funds to a bank account 

designated by the student or parent;

    (ii) Use the student's or parent's title IV, HEA program funds to 

pay for charges described in Sec. 668.164(d)(2) that are included in 

that authorization; and

    (iii) Except if prohibited by the Secretary under the reimbursement 

method, hold on behalf of the student or parent any title IV, HEA 

program funds that would otherwise be paid directly to the student or 

parent under Sec. 668.164(e).

    (2) In obtaining the student's or parent's authorization to perform 

an activity described in paragraph (b)(1) of this section, an 

institution--

    (i) May not require or coerce the student or parent to provide that 

authorization;

    (ii) Must allow the student or parent to cancel or modify that 

authorization at any time; and

    (iii) Must clearly explain how it will carry out that activity.

    (3) A student or parent may authorize an institution to carry out 

the activities described in paragraph (b)(1) of this section for the 

period during which the student is enrolled at the institution.

    (4)(i) If a student or parent modifies an authorization, the 

modification takes effect on the date the institution receives the 

modification notice.

    (ii) If a student or parent cancels an authorization to use title 

IV, HEA program funds to pay for authorized charges under 

Sec. 668.164(d)(2), the institution may use title IV, HEA program funds 

to pay only those authorized charges incurred by the student before the 

institution received the notice.

    (iii) If a student or parent cancels an authorization to hold title 

IV, HEA program funds under paragraph (b)(1)(iii) of this section, the 

institution must pay those funds directly to the student or parent as 

soon as possible but no later than 14 days after the institution 

receives that notice.

    (5) If an institution holds excess student funds under paragraph 

(b)(1)(iii) of this section, the institution must--

    (i) Identify the amount of funds the institution holds for each 

student or parent in a subsidiary ledger account designed for that 

purpose;

    (ii) Maintain, at all times, cash in its bank account in an amount 

at least equal to the amount of funds the institution holds for the 

student; and

    (iii) Notwithstanding any authorization obtained by the institution 

under this paragraph, pay any remaining balance on loan funds by the 

end of the loan period and any remaining other title IV, HEA program 

funds by the end of the last payment


[[Page 60607]]


period in the award year for which they were awarded.


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



Sec. 668.166   Excess cash.


    (a) General. (1) The Secretary considers excess cash to be any 

amount of title IV, HEA program funds, that an institution does not 

disburse to students or parents by the end of the third business day 

following the date the institution received those funds from the 

Secretary. Except as provided in paragraph (b) of this section, an 

institution must return promptly to the Secretary any amount of excess 

cash in its account or accounts.

    (2) The provisions in this section do not apply to the title IV, 

HEA program funds that an institution receives from the Secretary under 

the just-in-time payment method.

    (b) Excess cash tolerances. (1) If an institution draws down title 

IV, HEA program funds in excess of its immediate cash needs, the 

institution may maintain the excess cash balance in the account the 

institution established under Sec. 668.164 only if--

    (i) In the award year preceding that drawdown, the amount of that 

excess cash balance is less than--

    (A) For a period of peak enrollment at the institution during which 

that drawdown occurs, three percent of its total prior-year drawdowns; 

or

    (B) For any other period, one percent of its total prior-year 

drawdowns; and

    (ii) Within the next seven days, the institution eliminates its 

excess cash balance by disbursing title IV, HEA program funds to 

students or parents for at least the amount of that balance.

    (2) For the purposes of this section, a period of peak enrollment 

at an institution occurs when at least 25 percent of the institution's 

students start classes during a given 30-day period. For any award 

year, an institution calculates the percentage of students who started 

classes during a given 30-day period by--

    (i) For the prior award year in which the 30-day period began, 

determining the number of students who started classes during that 

period;

    (ii) Determining the total number of students who started classes 

during the entire award year used in paragraph (b)(2)(i) of this 

section;

    (iii) Dividing the number of students in paragraph (b)(2)(i) of 

this section by the number of students in paragraph (b)(2)(ii) of this 

section; and

    (iv) Multiplying the result obtained in paragraph (b)(2)(iii) of 

this section by 100.

    (3) For the purpose of determining the total amount of title IV, 

HEA program funds under paragraph (b)(1)(i) of this section, an 

institution that participates in the Direct Loan Program may include, 

for the latest year for which the Secretary has complete data, the 

total amount of loans guaranteed under the FFEL Program for students 

attending the institution during that year.

    (c) Consequences for maintaining excess cash balances. (1) If the 

Secretary finds that an institution maintains in its account excess 

cash balances greater than those allowed under paragraph (b) of this 

section, the Secretary--

    (i) As provided in paragraph (c)(2) of this section, requires the 

institution to reimburse the Secretary for the costs the Secretary 

deems to have incurred in making those excess funds available to the 

institution; and

    (ii) May initiate a proceeding to fine, limit, suspend, or 

terminate the institution's participation in one or more title IV, HEA 

programs under subpart G of this part.

    (2) For the purposes of this section, upon a finding that an 

institution has maintained excess cash, the Secretary--

    (i) Considers the institution to have issued a check on the date 

that the check cleared the institution's bank account, unless the 

institution demonstrates to the satisfaction of the Secretary that it 

issued the check shortly after the institution wrote the check; and

    (ii) Calculates, or requires the institution to calculate, a 

liability for maintaining excess cash balances in accordance with 

procedures established by the Secretary. Under those procedures, the 

Secretary assesses a liability that is equal to the difference between 

the earnings that the excess cash balances would have yielded if 

invested under the applicable current value of funds rate and the 

actual interest earned on those balances. The current value of funds 

rate is an annual percentage rate, published in a Treasury Financial 

Manual (TFM) bulletin, that reflects the current value of funds to the 

Department of Treasury based on certain investment rates. The current 

value of funds rate is computed each year by averaging investment rates 

for the 12-month period ending every September. The TFM bulletin is 

published annually by the Department of Treasury. Each annual bulletin 

identifies the current value of funds rate and the effective date of 

that rate.


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



Sec. 668.167   FFEL Program funds.


    (a) Requesting FFEL Program funds. In certifying a loan application 

for a borrower under Sec. 682.603--

    (1) An institution may not request a lender to provide it with loan 

funds by EFT or master check earlier than--

    (i) Twenty-seven days after the first day of classes of the first 

payment period for a first-year, first-time Federal Stafford Loan 

Program borrower as defined in Sec. 682.604(c)(5); or

    (ii) Thirteen days before the first day of classes for any 

subsequent payment period for a first-year, first-time Federal Stafford 

Loan Program borrower or for any payment period for all other Federal 

Stafford Loan Program borrowers; and

    (2) An institution may not request a lender to provide it with loan 

funds by check requiring the endorsement of the borrower earlier than--

    (i) The first day of classes of the first payment period for a 

first-year, first-time Federal Stafford Loan Program borrower as 

defined in Sec. 682.604(c)(5); or

    (ii) Thirty days before the first day of classes for any subsequent 

payment period for a first-year, first-time Federal Stafford Loan 

Program borrower or for any payment period for all other Federal 

Stafford borrowers; and

    (3) (i) An institution may not request a lender to provide it with 

loan funds by EFT or master check for any Federal PLUS Program loan 

earlier than provided in paragraph (a)(1) of this section.

    (ii) An institution may not request a lender to provide loan funds 

by check requiring the endorsement of the borrower for any Federal PLUS 

Program loan earlier than provided in paragraph (a)(2) of this section.

    (b) Returning funds to a lender. (1) Except as provided in 

paragraph (c) of this section, an institution must return FFEL Program 

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

student or parent for a payment period within--

    (i) Ten business days following the date the institution receives 

the funds if the lender provides those funds to the institution by EFT 

or master check on or after July 1, 1997 but before July 1, 1999;

    (ii) Three business days following the date the institution 

receives the funds if the lender provides those funds to the 

institution by EFT and master check on or after July 1, 1999; or

    (iii) Thirty days after the institution receives the funds if a 

lender provides those funds by a check payable to the borrower or 

copayable to the borrower and the institution.

    (2) If the institution does not disburse the loan funds as 

specified in paragraph (b)(1) or (c) of this section, the institution 

must return those funds to the lender promptly but no later than 10 

business days after the date the


[[Page 60608]]


institution is required to disburse the funds.

    (3) If an institution must return loan funds to the lender under 

paragraph (b)(2) of this section and the institution determines that 

the student is eligible to receive the loan funds, the school may 

disburse the funds to the student or parent rather than return them to 

the lender provided the funds are disbursed prior to the end of the 

applicable timeframe under paragraph (b)(2) of this section.

    (c) Delay in returning funds to a lender. An institution may delay 

returning FFEL program funds to a lender for--

    (1) Ten business days after the date set forth in paragraph (b)(1) 

of this section if--

    (i)(A) The institution does not disburse FFEL Program funds to a 

borrower because the student did not complete the required number of 

clock or credit hours in a preceding payment period; and

    (B) The institution expects the student to complete required hours 

within this 10-day period; or

    (ii)(A) The student has not met all the FFEL Programs eligibility 

requirements; and

    (B) The institution expects the student to meet those requirements 

within this 10-day period; or

    (2) Thirty days after the date set forth in paragraph (b) of this 

section for funds a lender provides by EFT or master check if the 

Secretary places the institution on the reimbursement payment method 

under paragraph (d) or (e) of this section.

    (d) An institution placed under the reimbursement payment method. 

(1) If the Secretary places an institution under the reimbursement 

payment method for the Federal Pell Grant, Direct Loan or campus-based 

programs, the institution--

    (i) May not disburse FFEL Program funds to a borrower until the 

Secretary approves a request from the institution to make that 

disbursement for that borrower; and

    (ii) If prohibited by the Secretary, may not certify a borrower's 

loan application until the Secretary approves a request from the 

institution to make that certification for that borrower.

    (2) In order for the Secretary to approve a disbursement or 

certification request from the institution, the institution must submit 

documentation to the Secretary or entity approved by the Secretary that 

shows that each borrower included in that request whose loan has not 

been disbursed or certified is eligible to receive that disbursement or 

certification.

    (3) Pending the Secretary's approval of a disbursement or 

certification request, the Secretary may--

    (i) Prohibit the institution from endorsing a master check or 

obtaining a borrower's endorsement of any loan check the institution 

receives from a lender;

    (ii) Require the institution to maintain loan funds that it 

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

the requirements under Sec. 668.164; and

    (iii) Prohibit the institution from certifying a borrower's loan 

application.

    (e) An institution participating solely in the FFEL Programs. If 

the FFEL Programs are the only title IV, HEA programs in which an 

institution participates and the Secretary determines that there is a 

need to monitor strictly the institution's participation in those 

programs, the Secretary may subject the institution to the conditions 

and limitations contained in paragraph (d) of this section.


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


PART 674--FEDERAL PERKINS LOAN PROGRAM


    5. The authority citation for part 674 continues to read as 

follows:


    Authority: 20 U.S.C. 1087aa-1087ii and 20 U.S.C. 421-429, unless 

otherwise noted.


    6. Section 674.2(a) is amended by adding the term ``Payment 

period'' in alphabetical order and revising the introductory clause to 

read as follows:



Sec. 674.2  Definitions.


    (a) The definitions of the following terms used in this part are 

set forth in subpart A of the Student Assistance General Provisions, 34 

CFR part 668:

* * * * *

    7. Section 674.2(b) is amended by removing the definition of the 

term ``*Payment period''.

    8. Section 674.16 is amended by removing in paragraphs (d) (1) and 

(e) ``Sec. 668.165'' and adding, in its place, ``Sec. 668.164''; by 

removing paragraph (g) and by redesignating paragraphs (h), (i), and 

(j) as paragraphs (g), (h), and (i), respectively.


PART 675--FEDERAL WORK-STUDY PROGRAMS


    9. The authority citation for part 675 continues to read as 

follows:


    Authority: 42 U.S.C. 2571-2756b, unless otherwise noted.


    10. Section 675.2(a) is amended by revising the introductory clause 

to read as follows:



Sec. 675.2  Definitions.


    (a) The definitions of the following terms used in this part are 

set forth in subpart A of the Student Assistance General Provisions, 34 

CFR 668:

* * * * *

    11. Section 675.2(b) is amended by removing the definition of the 

term ``*Payment period''.


PART 676--FEDERAL SUPPLEMENTAL EDUCATIONAL OPPORTUNITY GRANT 

PROGRAM


    12. The authority citation for part 676 continues to read as 

follows:


    Authority: 20 U.S.C. 1070b-1070-3, unless otherwise noted.


    13. Section 676.2(a) is amended by adding the term ``Payment 

period'' in alphabetical order and revising the introductory clause to 

read as follows:



Sec. 676.2  Definitions.


    (a) The definitions of the following terms used in this part are 

set forth in subpart A of the Student Assistance General Provisions, 34 

CFR part 668:

* * * * *

    14. Section 676.2(b) is amended by removing the definition of the 

term ``*Payment period''.

* * * * *



Sec. 676.16  [Amended]


    15. Section 676.16 is amended by removing in paragraph (c) 

``Sec. 668.165'' and adding, in its place, ``Sec. 668.164''; by 

removing paragraph (e) and by redesignating paragraphs (f) and (g) as 

paragraphs (e) and (f), respectively.


PART 682--FEDERAL FAMILY EDUCATION LOAN (FFEL) PROGRAM


    16. The authority citation for part 682 continues to read as 

follows:


    Authority: 20 U.S.C. 1071 to 1087-2, unless otherwise noted.


    17. Section 682.200(a)(1) is amended by adding the term ``payment 

period'' in alphabetical order and revising the introductory clause to 

read as follows:



Sec. 682.200  Definitions.


    (a)(1) The definitions of the following terms used in this part are 

set forth in subpart A of the Student Assistance General Provisions, 34 

CFR part 668:

* * * * *

    18. Section 682.207 is amended by removing the word ``separate'' 

and adding, ``in accordance with Sec. 668.163 after the word 

``maintained'' in paragraph (b)(1)(ii)(B); removing the word 

``separate'', and adding ``in accordance with Sec. 668.163'' after the 

word ``maintained'' in paragraph


[[Page 60609]]


(b)(1)(ii)(C); removing the word ``separate'' and adding ``in 

accordance with Sec. 668.163'' after the word ``maintained'' in 

paragraph (b)(1)(v)(B)(1); revising paragraphs (c) (3) and (4) and 

adding new paragraph (c)(5); and revising paragraph (d) to read as 

follows:



Sec. 682.207  Due diligence in disbursing a loan.


* * * * *

    (c) * * *

    (3) Disbursement must be made on a payment period basis in 

accordance with the disbursement schedule provided by the school.

    (4) If one or more scheduled disbursements have elapsed before a 

lender makes a disbursement and the student is still enrolled, the 

lender may include in the disbursement loan proceeds for previously 

scheduled, but unmade, disbursements.

    (5) A lender is not required to make more than one disbursement if 

a school is not in a State.

    (d)(1) A lender may disburse loan proceeds after the student has 

ceased to be enrolled on at least a half-time basis.

    (2) A disbursement described in paragraph (d)(1) of this section 

may be made--

    (i)(A) Only if the school certified the loan application and the 

loan funds will be used to pay educational costs that the school 

determines the student incurred for the period in which the student was 

enrolled and eligible;

    (B) Only if the student completed the first 30 days of his or her 

program of study if the student was a first-year, first time borrower 

as described in Sec. 682.604(c)(5) of this section; and

    (C) Only if the student graduated or successfully completed the 

period of enrollment for which the loan was intended, in the case of a 

second or subsequent disbursement.

    (3) The lender shall give notice to the school that the loan 

proceeds have been disbursed in accordance with (d)(1) of this section 

at the time the lender sends the loan proceeds to the school.

    19. Section 682.603 is amended by amending paragraph (b)(4) by 

adding the word ``and'' after the semicolon; revising paragraph (b)(5); 

removing paragraph (b)(6); removing and reserving paragraph (c); and 

revising paragraph (h)(1) to read as follows:



Sec. 682.603  Certification by a participating school in connection 

with a loan application.


* * * * *

    (b) * * *

    (5) The schedule for disbursement of the loan proceeds, which must 

reflect the delivery of the loan proceeds as set forth in 

Sec. 682.604(c)(6).

* * * * *

    (h) Requesting loan proceeds. (1) Pursuant to paragraph (b)(5) of 

the section, a school may not request the disbursement by the lender 

for loan proceeds earlier than the period specified in Sec. 668.167.

* * * * *

    20. Section 682.604, paragraph (a) is amended by revising the 

paragraph heading, designating the text as paragraph (a)(1), and adding 

new paragraphs (a)(2) and (a)(3); paragraph (b) is amended by revising 

the paragraph heading; paragraph (b)(2)(ii) is removed and reserved; 

paragraph (b)(2)(iii) is amended by removing ``34 CFR Part 668'' and 

adding, in its place, ``Sec. 668.26''; paragraph (c)(2)(i) is amended 

by removing ``45'' and adding, in its place, ``30''; paragraph 

(c)(2)(ii)(A) is amended by removing ``45'' and adding, in its place, 

``30''; paragraph (c)(2)(ii)(B) is amended by removing 

``668.165(b)(2)'' and adding, in its place, ``668.164(e)''; paragraphs 

(c)(3)(i) and (ii) are revised; paragraph (c)(4) is amended by removing 

``Sec. 682.605(c)'' and adding, in its place, ``Sec. 668.22(j)''; 

paragraphs (c)(6) through (c)(9) are added; paragraph (d)(1)(i) is 

amended by removing ``Sec. 668.165(c)(2)'' and adding, in its place, 

``Sec. 668.164''; paragraph (d)(2) is revised; paragraph (d)(3) is 

amended by removing ``or does not begin attendance on a delayed basis 

as provided in Sec. 682.604(b)(2)(ii),'' and removing ``30 days after 

the first day of that period of enrollment'' and adding, in its place, 

``the period specified in Sec. 668.167''; and paragraph (e) is revised 

to read as follows:



Sec. 682.604  Processing the borrower's loan proceeds and counseling 

borrowers.


    (a) General. (1) * * *

    (2) Prior to a school delivering or crediting an FFEL loan account 

by EFT or master check, the school must provide the student or parent 

borrower with the notice as described under Sec. 668.165.

    (3) If the school is placed under the reimbursement payment method 

as provided under Sec. 668.162, a school shall not disburse a loan, as 

provided in Sec. 668.167.

    (b) Releasing loan proceeds. * * *

    (c) * * *

    (3) * * *

    (i) Deliver the proceeds to the student or parent borrower as 

specified in Sec. 668.164; or

    (ii) Credit the student's account in accordance with paragraph 

(d)(1) of this section and Sec. 668.164, notify the student or parent 

borrower in writing that it has so credited that account, and deliver 

to the student or parent borrower the remaining loan proceeds not later 

than the timeframe specified in 668.164.

* * * * *

    (c) * * *

    (6) Notwithstanding any other provision of this section, unless 

Sec. 682.207(c) (4) or (5) applies--

    (i) If a loan period is more than one payment period, the school 

shall deliver loan proceeds at least once in each payment period; and

    (ii) If a loan period is one payment period, the school shall make 

at least two deliveries of loan proceeds during that payment period. 

The school may not make the second delivery until the calendar midpoint 

between the first and last scheduled days of class of the loan period.

    (7) If an educational program measures academic progress in credit 

hours and does not use semesters, trimesters, or quarters, the school 

may not deliver a second disbursement until the later of--

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

of class of the loan period; or

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

completed half of the academic coursework in the loan period.

    (8) If an educational program measures academic progress in clock 

hours, the school may not deliver a second disbursement until the later 

of--

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

of class of the loan period; or

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

completed half of the clock hours in the loan period.

    (9) The school must deliver loan proceeds in substantially equal 

installments, and no installment may exceed one-half of the loan.

    (d) * * *

    (2) For purposes of paragraphs (c)(2)(i), (c)(2)(ii) and (c)(3) of 

this section, a school may not deliver loan proceeds earlier than the 

timeframe specified in Sec. 668.164.

* * * * *

    (e) Processing a late disbursement.

    (1) A school may process a late disbursement received from a lender 

under Sec. 682.207(d) in accordance with Sec. 668.164(g).

    (2) If the total amount of the late disbursement and all prior 

disbursements is greater than that portion of the borrower's 

educational charges, the school shall return the balance of the 

borrower's loan proceeds to the lender with a notice certifying--


[[Page 60610]]


    (i) The beginning and ending dates of the period during which the 

borrower was enrolled at the school as an eligible student during the 

loan period or payment period; and

    (ii) The borrower's corrected financial need for the loan for that 

period of enrollment or payment period.

* * * * *


PART 685--WILLIAM D. FORD FEDERAL DIRECT LOAN PROGRAM


    21. The authority citation for Part 685 continues to read as 

follows:


    Authority: 20 U.S.C. 1087a et seq., unless otherwise noted.


    22. Section 685.102 is amended in paragraph (a)(1) by adding the 

term ``payment period'' in alphabetical order and revising the 

introductory clause to read as follows:



Sec. 685.102  Definitions.


    (a) (1) The definitions of the following terms used in this part 

are set forth in subpart A of the Student Assistance General 

Provisions, 34 CFR part 668:

* * * * *

    23. Section 685.301 is amended by revising paragraph (b) to read as 

follows:



Sec. 685.301  Origination of a loan by a Direct Loan Program school.


* * * * *

    (b) Determining disbursement dates and amounts. (1) Before 

disbursing a loan, a school that originates loans shall determine that 

all information required by the loan application and promissory note 

has been provided by the borrower and, if applicable, the student.

    (2) Unless paragraph (b)(5), (6), or (7) of this section applies, 

an institution shall disburse the loan proceeds on a payment period 

basis in accordance with 34 CFR 668.164(b).

    (3) Unless paragraph (b)(4), (5), or (6) of this section applies--

    (i) If a loan period is more than one payment period, the school 

shall disburse loan proceeds at least once in each payment period; and

    (ii) If a loan period is one payment period, the school shall make 

at least two disbursements during that payment period. The school may 

not make the second disbursement until the calendar midpoint between 

the first and last scheduled days of class of the loan period.

    (4)(i) If one or more payment periods have elapsed before a school 

makes a disbursement, the school may include in the disbursement loan 

proceeds for completed payment periods; or

    (ii) If the loan period is equal to one payment period and more 

than one-half of it has elapsed, the school may include in the 

disbursement loan proceeds for the entire payment period.

    (5) If an educational program measures academic progress in credit 

hours and does not use semesters, trimesters, or quarters, the school 

may not make a second disbursement until the later of--

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

of class of the loan period; or

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

has completed half of the academic coursework in the loan period.

    (6) If an educational program measures academic progress in clock 

hours, the school may not make a second disbursement until the later 

of--

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

of class of the loan period; or

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

has completed half of the clock hours in the loan period.

    (7) The school must disburse loan proceeds in substantially equal 

installments, and no installment may exceed one-half of the loan.

    (8) A school not in a State is not required to make more than one 

disbursement.

* * * * *

    24. Section 685.303(d) is revised to read as follows:



Sec. 685.303  Processing loan proceeds.


* * * * *

    (d) Late Disbursement. A school may make a late disbursement 

according to the provisions found under 34 CFR 668.164(g).

    25. Section 685.303(c) is amended by removing the citation 

``668.165'' at the end of the paragraph and adding, in its place, 

``668.164''.



Sec. 685.309  [Amended]


    26. Section 685.309(e) is amended by removing the citation 

``668.164'' at the end of the paragraph and adding, in its place, 

``668.163''.


PART 690--FEDERAL PELL GRANT PROGRAM


    27. The authority citation for part 690 continues to read as 

follows:


    Authority: 20 U.S.C. 1070a, unless otherwise noted.


    28. Section 690.2 is amended by revising the section heading, 

adding the term ``Payment period'' in alphabetical order in paragraph 

(a) and revising the introductory clause of paragraph (a) to read as 

follows:



Sec. 690.2  Definitions.


    (a) The definitions of the following terms used in this part are 

set forth in subpart A of the Student Assistance General Provisions, 34 

CFR part 668:

* * * * *



Sec. 690.3  [Removed and reserved]


    29. Section 690.3 is removed and reserved.

    30. Section 690.75 is amended by removing paragraph (b) and by 

redesignating paragraphs (c), (d), and (e) as paragraphs (b), (c), and 

(d), respectively.



Sec. 690.78  [Amended]


    31. Section 690.78 is amended by removing in paragraph (a) 

``Sec. 668.165'' and adding, in its place, ``Sec. 668.164''.


[FR Doc. 96-30393 Filed 11-27-96; 8:45 am]

BILLING CODE 4000-01-P