| AwardYear: 1996-1997 EnterChapterNo: 3 EnterChapterTitle: Institutional Eligibility and Administrative Requirements SectionNumber: 3 SectionTitle: Cash Management PageNumbers: 53-64 On December 1, 1994, the Department published regulations that govern a school's management of most SFA funds. These regulations are known as the "cash management" regulations. These regulations establish rules and procedures that a school must follow in requesting, maintaining, disbursing and otherwise managing funds under the Pell Grant, FSEOG, Perkins Loan, FWS, Direct Loan, and FFEL programs. For purposes of this discussion SFA FUNDS refers only to these SFA Programs. Previously, most cash management requirements were found in the individual SFA Program regulations or various Department publications. The December 1, 1994 regulations consolidated many of these requirements and added new requirements for proper handling of SFA funds. This section will highlight the provisions of these new regulations. However, a school is still responsible for following other cash management rules and procedures specific to an SFA Program. [[Third-party servicers]] These rules and procedures also apply to a third-party servicer. For more information about third-party servicers, see the discussion on page 3-46. As in the past, the SFA funds received by a school are intended solely for the use of student beneficiaries, except for funds received as an administrative cost allowance, which are intended as a payment to the school. (See the Administrative Cost Allowance discussion on page 3-64.) All other funds are held in trust by the school for students and for the Department. SFA funds cannot be used as collateral or for any other purpose. REQUESTING FUNDS The December 1, 1994 regulations include provisions for requesting SFA funds from the Department that are based on longstanding Department policy. The Department provides SFA funds to a school either by the "advance payment method" or the "reimbursement payment method." [[Advance payment method]] Under the advance payment method, the Department accepts a school's request for funds and transfers the amount requested to a bank account designated by the school. The school should not request more cash than is needed to make disbursements to students within THREE BUSINESS DAYS. Therefore, a school should make the disbursements as soon as administratively feasible, but no later than three business days following the date the school received those funds. [[Reimbursement payment method]] Under the reimbursement method, a school must disburse funds to eligible students before requesting funds from the Department. The school cannot request more cash than the amount that it actually disbursed to those eligible students. Before approving a school's request for funds, the Department determines that the school has - identified the students for whom it is seeking reimbursement, - documented properly the SFA eligibility of each student, - calculate correctly the SFA payment to each student included in its request, - credited appropriately each student's account, and - submitted the documentation required by the Department to support each of those conditions. [[FFEL/Direct Loan EFT]] In certifying a loan application for a borrower who is not subject to delayed disbursement provisions, a school may not request that a lender provide by electronic fund transfer (EFT) or master check the loan proceeds for that borrower earlier than 13 days before the first day of a student's enrollment period. While the regulations speak to the first day of the enrollment period, for subsequent disbursements of Direct Loan or FFEL program loans, it is expected that schools will not request that a lender provide the loan proceeds earlier than 13 days before the first day of a semester, term, or other period of enrollment for which the disbursement is intended. MAINTAINING FUNDS [[Account for federal funds]] All schools must maintain a bank account into which the Department transfers, or the school deposits, campus-based, Direct Loan, and Pell Grant funds.*1* A school is not required to maintain a separate account for SFA funds unless the Department specifies otherwise. [[NEW]] [[Changes to UCC-1 statement requirement]] Previously, the regulations required all schools to file a UCC-1 statement. Beginning with the 1996-97 award year, the December 1, 1995 regulations (with corrections published February 1, 1996) require schools other than public schools to EITHER - ensure that the name of the account includes the phrase "federal Funds" to clearly identify that SFA funds are maintained in the account, or - notify the bank of the accounts that contain federal funds and keep a copy of this notice in its records AND file a UCC-1 statement with the appropriate state or municipal government entity that discloses that an account contains federal funds. The school must keep a copy of this statement in its records. [[Public schools exempt from UCC-1 requirement]] Because the regulations no longer require PUBLIC institutions to file a UCC-1 statement, a public institution must EITHER - ensure that the name of the account includes the phrase "federal Funds" to clearly identify that SFA funds are maintained in the account, or - notify the bank of the accounts that contain federal funds and keep a copy of this notice in its records. The requirement that a school file a UCC-1 statement was established to reduce the possibility that a school could misrepresent federal funds as its own funds to obtain a loan or secure credit. Because public institutions generally do not seek to obtain credit in the same manner as private institutions, they have been exempted from the requirement. [[Interest bearing or investment account]] Except in the instances discussed below, the account that SFA funds are deposited in must be an interest-bearing account or an investment account. An INTEREST-BEARING ACCOUNT must be federally insured or secured by collateral of value reasonably equivalent to the amount of SFA funds in the account. An INVESTMENT ACCOUNT must consist predominately of low-risk income- producing securities. If a school chooses to maintain federal funds in an investment account, the school must maintain sufficient liquidity in that account to make required disbursements to students. [[Interest must be remitted to the Department]] Any interest earned on SFA funds maintained in an interest-bearing account or an investment account (other than Perkins Loan funds) that exceeds $250 per year, must be remitted to the Department at least once a year. A school may keep up to $250 per year of the interest or investment revenue earned (other than that earned on Perkins Loan funds) to pay for the administrative expense of maintaining an interest-bearing account. A school must keep any interest earned on Perkins Loan funds for transfer to the Perkins Loan Fund. [[Exceptions to interest-bearing account or investment account]] A school is not required to maintain funds in a interest-bearing account or an investment account if - The school drew down less than $3 million from the SFA Programs in the prior award year, - The school earned less than $250 in interest on the total amount of SFA funds drawn down in the prior award year, or - The school can demonstrate that it would not earn over $250 in interest on the total amount of SFA funds it will draw down. A non-interest-bearing account must be federally insured, or secured by collateral of value reasonably equivalent to the amount of SFA funds in the account. [[Federal Perkins Loan Program participants]] A school that participates in the Perkins Loan Program must ALWAYS maintain an interest-bearing account or an investment account for Perkins Loan funds. If a school is also required to maintain an interest-bearing account or investment account for other federal funds, the school may use one account for Perkins Loan funds and all other federal funds. If the school chooses to maintain one account, it must determine the exact amount of any interest earned on the Perkins Loan funds for transfer to the Perkins Loan Fund. DISBURSING FUNDS The December 1, 1994 regulations consolidated and added to existing requirements for disbursing SFA funds. These requirements apply to all the SFA Programs specified at the beginning of this section, except for the FWS program. A school must continue to follow all applicable FWS disbursement procedures. [[Definition of "disbursed"]] SFA funds are DISBURSED when a school makes a payment of SFA funds, or delivers proceeds of an SFA loan to or on behalf of a student, either directly or by crediting a student's account with the funds (posting payment of funds). [[Knowing when an SFA disbursement occurs]] It is important for a school to understand when the crediting of federal student aid to a student's account will result in an SFA disbursement. Knowing this will allow a school to determine when it must comply with regulatory requirements related to disbursements and other cash management issues. - Except for Direct Loan program funds, the Department considers a disbursement of SFA funds to have taken place by crediting a student's account once the school has both credited the student's account AND drawn down federal funds. The crediting of a student's account must be backed up with federal funds before it is considered an SFA disbursement. That is, the school must either draw down federal funds or use federal funds it had in an account at the school such as funds from the school's Perkins Revolving Account or carryover funds from an earlier drawdown. - In the case of Direct Loan program funds, a disbursement of SFA funds takes place by crediting a student's account when the school actually credits the student's account (if the school uses student accounts), whether the initial funds used to credit the account are federal funds or the school's own funds that it is designating as Direct Loan funds.*2* [[Early payments]] The earliest a school may disburse SFA funds (credit a student's account or pay the student directly) is 10 days before the first day of the payment period or period of enrollment for which the disbursement is intended. (Note that a school may not make a disbursement to a student for a payment period or period of enrollment until the student is enrolled in classes for that period.) For subsequent disbursements of Direct Loan or FFEL Program loans, the earliest a school may disburse SFA funds is 10 days before the first day of a semester, term, or other period of enrollment for which disbursement is intended. Remember, with the exception of Direct Loan program funds noted above, any crediting to a student's account which occurs without federal funds being used IS NOT A FEDERAL DISBURSEMENT. Therefore, a school may credit a student's account with award amounts from SFA Programs earlier than 10 days prior to the beginning of the payment or enrollment period as long as federal funds are not used. A federal disbursement will have occurred on the day that federal funds are taken to support the credit or on the date that the school credits the student's account for Direct Loan purposes. [[Delayed disbursement of loan funds]] Note that if a student is in the first year of an undergraduate program and is a first-time borrower under the FFEL or Direct Loan program, a school may not disburse or deliver the first installment of his or her loan until 30 days after the student's first day of classes. When a school disburses SFA funds to a student by CREDITING A STUDENT'S ACCOUNT, it may only do so for ALLOWABLE CHARGES. Funds in excess of the allowable charges must be paid directly to the student, unless otherwise authorized by the student. (An exception for the payment of prior year charges is discussed below.) [[Allowable charges]] ALLOWABLE CHARGES are - tuition and fees (as defined in section 472 of the Higher Education Act of 1965, as amended [HEA]), room and board (if the student contracts with the school), and - other cost-of-attendance charges and other school charges that a student incurs at his or her discretion, if the school obtains the student's or parent's authorization to have such charges credited with SFA funds. If a charge does not meet the definition of tuition and fees in section 472 of the HEA (with the exception of contracted room and board charges), the school must obtain the student's permission (or parent's, if applicable) to credit the student's account with SFA funds for these charges. [[Required notifications]] [[NEW]] A school must notify a student (or parent borrower) of the amount of SFA funds the student can expect to receive, and how and when those funds will be paid. The school must also notify a student (or parent borrower) in writing or electronically whenever the school credits the student's account with Direct Loan, FFEL, and (beginning with the 1996-97 award year) Perkins Loan program funds. Regulations published on December 1, 1995 applied this requirement to Perkins Loan Program funds because the regulations eliminated the requirement that a Perkins Loan recipient sign for each loan advance (see Chapter 6). [[Electronic notification]] [[NEW]] Note that, beginning with the 1996-97 award year, the December 1, 1995 regulations permit a school to notify a student or parent borrower electronically (as opposed to in writing) that his or her account has been credited with SFA loan funds. If a school notifies a borrower electronically, it must request that the borrower confirm the receipt of the notice and maintain a record of that confirmation. For example, if a school notifies a borrower through electronic mail, the school must request a "return receipt" message and keep a copy of the receipt on file. A school MAY NOT use an in-person or telephonic conversation as the sole means of notification. This notification is required to remind students of their loan obligation and to give students the opportunity to replace credited loan proceeds with other funds; in-person and telephonic conversations are not adequate and verifiable methods of providing notice. Notification to borrowers in-person and by telephone may be done in addition to providing written or electronic notice. [[SFA credit balance]] Beginning with the 1996-97 award year, the December 1, 1994 regulations require that, whenever a school credits SFA funds to a student's account, and those funds exceed the student's allowable charges, a school must pay the excess SFA funds (the CREDIT BALANCE) directly to the student within 14 days*3* of the later of - the date the balance occurs on the student's account, - the first day of classes of the payment period or period of enrollment, or - the date the student rescinds his or her authorization for the school to retain funds in excess of the amount needed to cover allowable charges. Note that the law requires that any excess PLUS loan funds be returned to the PARENT. Therefore, if a school determines that PLUS loan funds created a credit balance, the credit balance would have to be given to the parent. At this time, the Department does not specify how a school must determine which SFA funds create a credit balance. For information on the treatment of a credit balance when a student withdraws, see Section 5. [[Payment of prior year charges]] [[NEW]] In general, SFA funds are allowed to be used to pay only for educational expenses a student incurs in the period for which those funds are provided. Previously, schools were not allowed to apply SFA funds to charges assessed the student in a prior award year or period of enrollment. Regulations published December 1, 1995 permit a school to use a student's SFA funds to pay minor prior-year institutional charges if the student has or will have an SFA credit balance, and the school obtains the student's authorization to pay the prior-year charges. Although the regulations were not effective until July 1, 1996, schools were permitted to implement this provision upon publication of the final regulations (December 1, 1995). A school may obtain authorization from a student in advance to use SFA funds to cover prior-year charges that do not exceed $100. To pay prior-year charges for amounts over $100, in addition to obtaining authorization from a student, a school must determine if that payment would prevent the student from paying for his or her current educational expenses. [[Disbursing SFA funds directly]] In addition to crediting a student's account, SFA funds may be disbursed directly to a student. Funds are disbursed "directly" by one of three methods: - A school may make a payment by check (or other means of payment) that is payable to and requires the endorsement of the student (or parent borrower for PLUS loan funds), - A school may initiate an electronic funds transfer (EFT) to a bank account designated by the student (or parent borrower for PLUS loan funds), and - A school may pay the student in cash, provided that the school obtains a signed receipt from the student (or parent borrower*4*). Note that a parent borrower of PLUS loan funds may authorize the school to transfer PLUS loan funds to a bank account in the student's name. [[EFT]] Beginning with the 1995-96 award year, a school has been allowed to make an EFT payment to a student. A school must obtain voluntary authorization from the student (or parent borrower) to disburse by the EFT method into a bank account designated by the student or parent. [[Holding student funds]] A school is permitted to hold excess funds if it obtains a voluntary authorization from the student (or parent borrower). If a school receives authorization to hold excess funds, the school must identify the student and the amount of funds the school holds for the student in a subsidiary ledger account designated for that purpose. The school must maintain, at all times, cash in its bank account at least equal to the amount the school holds for students. The school is permitted to retain any interest earned on the student's funds. A school may not hold excess funds for any student if the Department determines that the school has failed to meet the financial responsibility standards under 34 CFR 668.15 of the Student Assistance General Provisions regulations. An authorization permitting a school to use excess SFA funds must provide detail that is sufficient to give the student (or parent borrower) a general idea of what the excess funds would be used to pay. A blanket statement that excess funds would cover ANY charges is not acceptable. [[Required authorizations]] A school must obtain authorization from a student (or parent borrower) before - disbursing SFA funds by EFT - using SFA funds to pay for allowable charges other than tuition, fees and room and board (if the student contracts with the school) - holding excess SFA funds - applying SFA funds to prior year charges. In obtaining authorization from a student (or parent borrower) for these purposes, a school MAY NOT REQUIRE THE AUTHORIZATION, and must allow the student or parent to rescind the authorization at any time. Once a student or parent rescinds his or her authorization, the school may not perform the function from that date forward. A school may include two or more of the items that require authorization on one statement. However, a student (or parent borrower) must be informed that he or she may refuse to authorize any individual item on the statement. Any authorization must contain an explanation of the provisions regarding the activities that an institution seeks to perform on behalf of a student. It does not need to detail every aspect pertaining to the activity; however, a blanket authorization which only identifies the activities to be performed is not acceptable. An authorization is valid for the award year or period of enrollment in which the authorization is obtained or until the student or parent revokes the authorization. This authorization continues to be valid in subsequent award years if the school notifies the student or parent prior to performing a function that requires continued authorization in the subsequent award year. The notification must clearly explain those functions for which continued authorization is necessary (including what will happen to any interest that the school earns on the student's funds) and provide the student or parent with an opportunity to cancel or modify the provisions of the authorization. EXCESS CASH "Excess cash" is any amount of SFA funds (other than FFEL or Perkins funds) that a school does not disburse to students by the end of the third business day following the school's receipt of those funds. Excess cash must be returned to the Department immediately. However, under certain circumstances, a school may maintain an excess cash balance for up to seven additional days. [[Allowable excess cash tolerances]] For a period of peak enrollment (see below) at the school during which a drawdown of excess cash occurs, the school can maintain the excess cash balance in its federal account if the excess cash balance is less than 3% of the school's total prior-year drawdowns. The school is required to eliminate the excess cash balance within the next seven days by disbursing SFA funds to students for at least the amount of that excess cash balance. A period of peak enrollment at a school occurs when at least 25% of the school's students start classes during a given 30-day period. A school determines this percentage for an award year with the following fraction: Number of students who started classes in the comparable 30 day period in the prior award year --------------------------------------------- Total number of students who started classes during the entire prior award year For any period other than a period of peak enrollment, the school can maintain the excess cash balance if the excess cash balance is less than 1% of the school's prior-year drawdowns. In this case also, the school is required to eliminate the excess cash balance within the next seven days by disbursing SFA funds to students for at least the amount of that balance. If a school that is participating in the Direct Loan program does not have prior-year drawdown data for the Direct Loan program because it did not participate in the Direct Loan program for that prior award year, the school may include the total amount of loans guaranteed under the FFEL program for students attending the school during that year in determining total prior-year drawdowns. The Department reviews schools to determine where excess cash balances have been improperly maintained and to seek recovery from those schools of the resulting losses to the government. [[Consequences for improperly maintaining excess cash balances]] Upon a finding that a school has maintained an excess cash balance in excess of allowable tolerances, a school is required to reimburse the Department for the costs that the government incurred in making those excess funds available to the school. In addition, where excess cash balances are disproportionately large to the size of the school or represent a continuing problem with the school's responsibility to administer efficiently the SFA Programs, the Department may initiate a proceeding to fine, limit, suspend, or terminate the school's participation in one or more of the SFA Programs. (For more on fines and other actions against schools, see Section 10.) Generally, a check is "issued" when the school releases, distributes, or makes available the check by mailing the check to the student or parent (if applicable), or by notifying the student or parent expeditiously that the check is available for immediate pickup. However, upon a finding that a school has maintained excess cash balances, the Department considers the school to have issued a check on the date that check cleared the school's bank account, unless the school demonstrates to the satisfaction of the Department that it issued the check to the student shortly after the school wrote that check. Finally, the Department will assess a school that maintains excess cash balances a liability that is equal to the difference between the earnings those cash balances would have yielded under a Treasury- derived rate and the actual interest earned on those cash balances. ADMINISTRATIVE COST ALLOWANCE [[Pell Grant allowance]] The Department pays an administrative cost allowance (ACA) to schools to offset some of the administrative costs related to the Pell Grant, campus-based, and Direct Loan programs. As defined in the regulations, the Pell Grant program ACA is $5.00 for each Pell Grant recipient at the school (calculated by the Department, based on the number of Pell Grant recipients reported by the school). Schools are notified of their Pell Grant ACA by mail three times during the processing year. The Pell Grant allowance is paid directly to the school by the U.S. Treasury. (For more information, see Chapter 4.) [[Campus-based allowance]] A school calculates its own campus-based program ACA in its annual Fiscal Operations Report and Application to Participate (FISAP), based on a percentage of its campus-based expenditures in the previous award year (see Chapter 5). Unlike the Pell Grant ACA procedures, the school must draw down the campus-based ACA from its program allocation using the ED Payment System. (A school may use up to 10% of the FWS-based ACA for expenses incurred for its community service program.) [[Direct Loan allowance]] For schools that originate loans under the Direct Loan program, the ACA is $10.00 for each Direct Loan borrower for schools that print the promissory notes, and $7.00 for each Direct Loan borrower for schools that do not print the promissory notes. *1* FFEL Program funds that a school received through EFT or by master check must be maintained in accordance with 34 CFR 682.207(b). *2* Clarification provided in the June 30, 1995 technical corrections final regulations. *3* For the 1995-96 award year, this period of time was 21 days. *4* Clarification provided in the June 30, 1995 technical corrections final regulations. |