Maintained for Historical Purposes

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

Institutional Eligibility and Administrative Requirements - Cash Management

AwardYear: 1997-1998
EnterChapterNo: 3
EnterChapterTitle: Institutional Eligibility and Administrative Requirements
SectionNumber: 3
SectionTitle: Cash Management
PageNumbers: 57-78


The cash management requirements govern a school's management
of most SFA Program funds. These requirements 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.

[[New regulations]]
Final regulations published November 29, 1996 made significant
changes to the cash management requirements. Those changes are
discussed here.

GENERAL REQUIREMENTS

[[Purpose of cash management requirements]]
The cash management requirements are intended to

- promote sound cash management of SFA Program funds by
schools,

- minimize the costs to the government of making SFA Program
funds available to students and schools, and

- minimize the costs that accrue to students who receive SFA loans.

The SFA Program 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, and funds used for the Job Location and Development
Program under the FWS Program. (See the Administrative Cost
Allowance discussion on page 3-77.) All other funds are held in
trust by the school for students, the Department, and also, in the case
of FFEL Program funds, for lenders and guaranty agencies. SFA
Program funds cannot be used as collateral or for any other purpose.

[[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 3-50.

[[Definition of "parent"]]
[[CLARIFICATION]]
Note that for purposes of these cash management requirements, a
"parent" means a parent borrower under the PLUS Program.

REQUESTING FUNDS

[[CLARIFICATION]]
Currently, the Department provides Pell Grant, Direct Loan, and
campus based program funds to a school either by the "advance
payment method" or the "reimbursement payment method." The
November 29, 1996 final regulations introduced a third method for
requesting funds from the Department: the just-in-time payment
method. The final regulations also emphasize that the Department
has the sole discretion to determine the method under which SFA
Program funds are provided to a school (although at this time,
participation in the just-in-time payment method is voluntary).

[[Advance payment method]]
Under the ADVANCE PAYMENT METHOD, a school may submit
a request for Pell Grant, Direct Loan, and campus-based program
funds to the Department prior to disbursing aid to eligible students
and parents. If the Department accepts a school's request for funds, it
will make an electronic funds transfer (EFT) of the amount requested
to a bank account designated by the school. A school may not
request more funds than the school needs immediately for
disbursements the school has made or will make to eligible students
and parents. Therefore, a school must make the disbursements as
soon as administratively feasible, but no later than three business
days following the date the school received those funds.

[[CLARIFICATION]]
The November 29, 1996 final regulations clarify that the Department
does not automatically accept a request for funds from a school
under the advance payment method. For example, the Department
may reject a request if the amount of the request exceeds the amount
of funds the school is authorized to draw down.

[[Reimbursement payment method]]
Under the REIMBURSEMENT METHOD, a school must disburse
Pell Grant, Direct Loan, and campus-based program funds to eligible
students and parents before requesting funds from the Department.
Generally, the Department places a school on the reimbursement
payment method if it determines that there is a need to monitor
strictly the school's participation in the SFA Programs. The school
cannot request more cash than the amount that it actually disbursed
to those eligible students and parents. As part of the school's request
the school must

- identify the students and parents for whom it is seeking
reimbursement, and

- submit documentation demonstrating that each student and parent
included in the request was eligible to receive and has received the
SFA Program funds for which reimbursement is requested.

Before approving a school's request for funds, the Department
determines that the school has

- accurately determined the SFA eligibility of each student,

- accurately determined the SFA payment to each student and
parent included in its request, and

- submitted the required documentation.

[[NEW]]
The November 29, 1996 final regulations specify comparable
limitations on the use of FFEL funds. These limitations apply to any
school on reimbursement on or after July 1, 1997. If a school is
placed on reimbursement, or a school that participates only in the
FFEL Program has most of the limitations of reimbursement placed
on it, the school

[[Limitations on use of FFEL funds]]
- may not disburse FFEL Program funds to a borrower until the
Department approves the school's request to disburse funds to that
borrower, and

- if prohibited by the Department, may not certify a loan application
for a borrower until the Department approves the school's request
to make the certification for that borrower.

The school must provide documentation demonstrating that each
borrower included in the request is eligible to receive the
disbursement or certification. The documentation must be provided
to the Department or an entity approved by the Department for that
purpose (for example, a certified public accountant, financial aid
consultant, or guaranty agency).

Until the Department approves a request, the school may be

- prohibited from endorsing a master check or obtaining a
borrower's endorsement of any loan check the school receives
from a lender,

- required to maintain loan funds that it receives from a lender via
EFT in a separate bank account, and

- prohibited from certifying a borrower's loan application.

Because the school's submission and the Department's review of
documentation to support a borrower's eligibility takes time, the
school may delay returning FFEL Program funds provided by EFT
or master check to a lender for a specified period of time (see
Chapter 10).

[[NEW]]
[[Just-in-time payment method]]
The JUST-IN-TIME PAYMENT METHOD, introduced in the
November 29, 1996 final regulations, will be part of the student-
centered integrated delivery system under development by Project
EASI. (For more information on Project EASI, see Section 2). At this
time, the Department expects to use the just-in-time payment method
only at schools that volunteer for participation. Moreover, a school
will be able to choose the SFA Programs for which it would use the
just-in-time method. For example, a school may volunteer to
participate in the just-in-time payment method for the Pell Grant
Program only, and continue to request and receive funds under the
advance payment method for the Direct Loan and campus-based
programs. More information on the implementation of the just-in-
time payment method will be provided to schools by the Department
in the future.

Under the just-in-time payment method, a school will submit
electronically a request for funds on or near the actual date of
disbursement. The request will include the date and amount of the
disbursement it will make or has made to each student or parent. For
each request the Department accepts for a student or parent, the
funds will be provided to the school through EFT on or before the
disbursement date reported by the school.

If for some reason a student is not eligible to receive the amount
requested at the time the funds are actually disbursed, the school
must report the adjustment in the funds for which the student is
eligible within 30 days of the date that the school becomes aware of
the change. A school will be permitted to make a disbursement of
funds to a student or parent prior to submitting a record of that
disbursement to the Department. However, if the student's eligibility
for those funds has changed by the actual date of disbursement, any
adjustment must be reported.

[[Exemption from excess cash requirement]]
Schools using the just-in-time payment method will be exempt from
the requirements for returning excess cash (see page 3-75). Using
this payment method, schools will have only a nominal amount of
excess cash created by minor period adjustments. Since the
Department will modify new requests for funds after deducting any
adjustments reported by the school, large amounts of excess cash
should not occur.

The just-in-time payment method will enable the delivery system to
provide the most current payment information to students and other
system users, thereby reducing burden related to the reconciliation of
payment data. This payment information will form the core of the
individual student account that is the basis for the Project EASI
integrated delivery system. By providing funds based on current
student-level data, this payment method will strengthen the
Department's ability to monitor the integrity of the SFA Programs by
reducing the potential for the misuse of funds.

[[NEW]]
[[GAPS]]
By December 1997, the Department plans to implement a new
automated fund processing system, the Grants and Payment System
(GAPS), a part of the Education Department's Central Automated
Processing System (EDCAPS). This new system will meet new
federal financial system standards, provide schools both grant and
payment information, and simplify expenditure reporting. A school
receiving Pell Grant or campus-based program funds will use this
system to request funds regardless of the method used to request
payment. One of the primary features of this new system is the
identification of funds by SFA Program as they are requested. To
facilitate implementation of this new system, the November 29,
1996 final regulations require that each time a school requests funds
from the Department, the school must identify the amount of funds
requested by the program and fiscal year designation that the
Department has assigned to the authorization for those funds. More
information on GAPS will be provided to schools at a later date.

MAINTAINING AND ACCOUNTING FOR FUNDS

All schools must maintain a bank account into which the Department
transfers, or the school deposits, SFA Program funds. The account
must be federally insured or secured by collateral of value
reasonably equivalent to the amount of SFA Program funds in the
account. A school is not required to maintain a separate account for
SFA Program funds unless the Department specifies otherwise.

[[NEW]]
The November 29, 1996 final regulations eliminate the requirement
that a school must maintain a separate bank account for FFEL
Program funds that the school receives from a lender by EFT. The
Department believes that this provision is no longer necessary
provided that a school maintains and accounts for FFEL Program
funds in the same manner required for other SFA Program funds.
The regulations make clear that for FFEL Program funds, a school
must comply with the bank account notification requirements, and
the accounting and financial requirements (discussed below).

[[Bank account notification requirements]]
For each account that contains SFA Program funds, a school must
identify that SFA Program funds are maintained in the account by

- including the phrase "federal funds" in the name of the account, or

- notifying the bank or investment company of the accounts that
contain SFA Program funds and keeping a copy of this notice in
its records AND, except for public institutions, filing 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 the UCC-1 statement in its records.

[[Public schools exempt from UCC-1 requirement]]
The requirement that a school file a UCC-1 statement when an
account's name does not include the phrase "federal funds" 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.

The Department may require a school to maintain SFA Program
funds in a separate account that contains only SFA Program funds if
the Department determines that the school failed to comply with cash
management requirements, recordkeeping and reporting
requirements, or other applicable program regulations.

[[Interest-bearing or investment account]]
Except in the instances discussed below, the account that Direct
Loan, Pell Grant, FSEOG, and FWS program funds are deposited in
must be an interest-bearing account or an investment 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 Direct Loan, Pell Grant, FSEOG, and FWS
program funds maintained in an interest-bearing account or an
investment account 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 Direct Loan, Pell Grant,
FSEOG, and FWS program funds in a interest-bearing account or an
investment account for an award year if

- the school drew down less than $3 million from these funds in the
prior award year and anticipates that it will not draw down more
than $3 million in the current award year,

- the school can demonstrate that it would not earn over $250 in
interest on the funds it will draw down during the award year, or

- the school requests these funds under the just-in-time payment
method.

[[NEW]]
The November 29, 1996 final regulations added the exemption for
schools that request funds under the just-in-time payment method
because this method would ensure the expeditious accounting and
disbursement of program funds. Therefore, little or no interest would
be earned on funds provided to the school.

[[NEW]]
The November 29, 1996 final regulations eliminate the exemption
for a school that earned less than $250 in interest on the total amount
of SFA Program funds drawn down in the prior award year.
However, a school in this situation may qualify for an exemption by
indicating that it did not earn $250 in interest in the prior award year
and by demonstrating that it will disburse the funds it receives in the
current award year in the same manner as it disbursed funds in the
prior award year.

[[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.

[[Accounting and financial requirements]]
[[NEW]]
If a school is not required to maintain separate accounts and chooses
not to, it must maintain accounting and internal control systems that

- identify the balance of the funds of each SFA Program that are
included in the school's bank or investment account as readily as if
those funds were in a separate account, and

- identify earnings on SFA Program funds in the school's bank or
investment account.

A school must maintain its financial records in accordance with the
recordkeeping requirements of 34 CFR 668.24 (see Section 7).

DISBURSING FUNDS

These disbursement requirements apply to all the SFA Programs
specified at the beginning of this section, except for the FWS
Program. A school must follow the disbursement procedures in 34
CFR 675.16 for paying a student his or her wages under the FWS
Program (see Chapter 7).

[[Changes made by final regulations]]
The November 29, 1996 final regulations made several changes to
the requirements for disbursing SFA Program funds. These include

- modifying the definition of an SFA Program disbursement,

- adding a requirement that SFA Program funds be disbursed on a
payment period basis,

- consolidating the late disbursement requirements previously found
in the individual program regulations, and

- clarifying some existing requirements (e.g., early payment of SFA
Program funds).

[[NEW]]
[[Definition of "disbursed"]]
The November 29, 1996 regulations specify that SFA Program funds
are DISBURSED when a school credits a student's account with the
funds or pays a student or parent directly with

- SFA Program funds received from the Department,

- FFEL funds received from a lender, or

- institutional funds labeled as SFA Program funds in advance of
receiving actual SFA Program funds.

[[Knowing when an SFA disbursement occurs]]
It is important to distinguish when SFA Program funds have been
disbursed for a number of reasons. To begin with, once SFA
Program funds have been disbursed, a student becomes an SFA
recipient and the rights and responsibilities of an SFA recipient are in
effect. For example, as an SFA recipient, a student has the right to
the protection of the refund and repayment requirements and the
responsibility to meet the satisfactory academic progress
requirements. If the student is an SFA loan recipient, he or she
assumes responsibility for the loan (and all interest accruing on the
loan if it is unsubsidized), and has the right to cancel the loan. In
addition, knowing when an SFA disbursement occurs will allow a
school to determine when it must comply with regulatory
requirements related to disbursements and other cash management
issues.

Previously, for SFA Programs other than the Direct Loan Program, a
disbursement of SFA Program funds did not occur when a school
credited a student's account with institutional funds labeled as SFA
Program funds in advance of receiving actual SFA Program funds.
The new definition of "disbursed" makes clear that any funds labeled
as SFA Program funds ARE SFA Program funds.

[[Exceptions]]
However, because of other SFA Program requirements, there are two
instances when crediting institutional funds labeled as SFA Program
funds to a student's account in advance of receiving the actual SFA
Program funds will not result immediately in an SFA disbursement:

- If a school credits a student's account with the institutional funds
in advance of receiving SFA Program funds earlier than 10 days
before the first day of classes of a payment period, the SFA
disbursement occurs on the tenth day before the first day of
classes. See the example below. (This provision corresponds to the
early disbursement requirements. See page 3-68.)

- For a student whose loan funds are subject to the 30-day
disbursement delay, if a school credits the student's account with
institutional funds in advance of receiving SFA Program funds
earlier than 30 days after the first day of the payment period, the
SFA loan disbursement occurs on the 30th day after the beginning
of the payment period.

[[The graphic "Example - Advance credit to account" is currently
unavailable for viewing. Please reference your paper document
for additional information.]]

In addition, if a school simply makes a memo entry for billing
purposes or credits a student's account and does not identify it as an
SFA credit (for example, an "estimated Federal Pell Grant") the
disbursement does not occur until the posting is subsequently
converted to an actual credit. If the posting is never converted to an
actual credit, it never becomes an SFA Program disbursement.

[[Implementation]]
To allow schools to make administrative or system changes to
comply with this new definition of a disbursement, the Department
will not take adverse action against schools that fail to satisfy the
new disbursement requirements during the 1997-98 award year if the
Department determines that the school did not have sufficient time to
make the necessary changes.

[[CLARIFICATION]]
[[Disbursement by crediting a student's account]]
The November 29, 1996 final regulations clarify the charges for
which a school may credit a student's account. When a school
disburses SFA Program 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 on
page 3-71.)

[[Allowable charges]]
[[CLARIFICATION]]
ALLOWABLE CHARGES are

- current charges for 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 current charges that a student incurs for educationally
related activities, if the school obtains the student's or parent's
authorization to have such charges credited with SFA Program
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 Program funds
for the charges.

CURRENT CHARGES: Charges assessed the student by the
school for the current award year or the loan period for which the
school certified or originated a FFEL or Direct Loan.

[[CLARIFICATION]]
[[Disbursing SFA funds directly]]
In addition to crediting a student's account, SFA Program funds may
be disbursed directly to a student. The November 29, 1996 final
regulations clarify the requirements for disbursing SFA Program
funds directly to a student or parent. A school may disburse funds
"directly" by one of four methods:

- releasing a check provided to the school by a FFEL Program
lender to the student or parent;

- issuing a check or other instrument payable to and requiring the
endorsement or certification of the student or parent. (A check is
issued if the school releases or mails the check to a student or
parent, or notifies the student or parent that the check is available
for immediate pickup.);

- initiating an electronic funds transfer (EFT) to a bank account
designated by the student or parent; and

- paying the student in cash, provided that the school obtains a
signed receipt from the student or parent.

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.

[[CLARIFICATION]]
Note that the law requires a school that disburses Direct Loans to
student accounts to first use Direct Loan funds to pay for outstanding
allowable charges. This does not mean that Direct Loan funds must
be credited to a student's account prior to other funds. The law
simply requires that if there is any outstanding balance for current or
authorized charges on the student's account when Direct Loan funds
are disbursed, the Direct Loan funds must be applied to those
outstanding charges before any Direct Loan funds may be disbursed
directly to the borrower.

DISBURSEMENT BY PAYMENT PERIOD

[[NEW]]
The November 29, 1996 final regulations include a new definition of
a payment period that is applicable to all SFA Programs, except FWS
(for more information, see Section 1). The November 29, 1996 final
regulations also require schools to disburse all SFA Program funds
(except FWS) on a payment period basis. However, disbursement
requirements vary by program. For information on the specific
effects of the payment period disbursement requirement on
disbursement of funds under a particular SFA Program, please see
the applicable Handbook chapter.

Unless a student is eligible to receive a late disbursement of SFA
Program funds, a school may disburse SFA 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.

[[Excused absences]]
The November 29, 1996 final regulations include requirements for
determining when an excused absence (an absence that does not have
to be made up) may be counted as a completed clock hour. For a
student enrolled in a program measured in clock hours, the school
may include clock hours for which the student has an excused
absence in determining whether the student completes the clock
hours in the payment period if

- the school has a written policy that permits excused absences, and

- for SFA purposes, the number of excused absences under the
policy does not exceed the lesser of

- the policy on excused absences of the school's designated
accrediting agency,

- the policy on excused absences of any state agency that legally
authorizes the school to operate, or

- 10% of the clock hours in the payment period.

An excused absence may only be counted if the student is excused
from hours that were actually scheduled, missed, and not to be made
up.

EARLY AND LATE DISBURSEMENTS

[[CLARIFICATION]]
[[Early disbursements]]
The November 29, 1996 final regulations clarify the requirements for
making early disbursements of SFA Program funds. The earliest a
school may disburse SFA Program funds is

- for a student enrolled in a credit-hour program offered in
semester, trimester, or quarter academic terms, 10 days before the
first day of classes for a payment period.

- for a student enrolled in a clock hour program or a credit-hour
program that is not offered in semester, trimester, or quarter
academic terms, THE LATER of 10 days before the first day of
classes for the payment period, or the date the student completed
the previous payment period for which he or she received SFA
Program funds (see the example below).

[[The graphic "Example - Early disbursement" on page 3-68 is
currently unavailable for viewing. Please reference
your paper document for additional information.]]

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 the first installment of his or her loan until
30 days after the student's first day of classes.

[[Late disbursements]]
[[NEW]]
The November 29, 1996 final regulations consolidated the
requirements for late disbursements of SFA Program funds. A
student who withdraws or otherwise ceases attendance has lost SFA
eligibility and generally may not be paid further funds for the
enrollment period. However, a late disbursement of SFA Program
funds may be made to an ineligible student if the student became
ineligible only because

- for purposes of the Direct Loan and FFEL programs, the student is
no longer enrolled at the school as at least a half-time student for
the loan period, and

- for purposes of the Pell Grant, FSEOG, and Perkins Loan
programs, the student is no longer enrolled at the school for the
award year.

In addition, other conditions must be met depending on the SFA
Program from which the late disbursement is to be made. The
following chart lists these conditions:

[[The chart "Late Disbursements" on page 3-69 is currently
unavailable for viewing. Please reference your paper document
for additional information.]]

[[Institutional late disbursement policy]]
A school may make the late disbursement only if the funds are used
to pay for unpaid educational costs that the school determines the
student incurred for the period in which the student was enrolled and
eligible. A school is not required to obtain detailed expenditure
documentation from the student. Instead, the school may develop a
policy that it applies in all cases. For example, a school may adopt a
policy that all expenses for books and supplies are considered to
have been incurred by a student who withdraws after the first two
weeks of the term (provided that this policy does not conflict with
any applicable refund requirements).

[[Deadline for payment]]
The school must make the late disbursement to the student no later
than 90 days after the date that the student becomes ineligible. For a
FFEL, this means that the funds would have to be disbursed to the
school by the lender to provide sufficient time for the school to
disburse the funds to the student within 90 days.

CREDIT BALANCES AND PRIOR-YEAR CHARGES

[[CLARIFICATION]]
[[SFA credit balance]]
The November 29, 1996 final regulations clarify the requirements for
handling SFA credit balances. Whenever a school credits SFA
Program funds to a student's account, and those funds exceed the
student's allowable charges, an SFA CREDIT BALANCE occurs. A
school must pay the excess SFA Program funds (the credit balance)
directly to the student as soon as possible, but no later than 14 days
after the later of

- the date the balance occurred on the student's account, if the
balance occurred after the first day of class of a payment period
(see Example 1 below), or

- the first day of classes of the payment period if the credit balance
occurred on or before the first day of class of that payment period
(see Example 2 below).

[["Example - Payment of a credit balance" #1 and #2 on page 3-70
are currently unavailable for viewing. Please reference your paper
document for additional information.]]

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 Program funds
create a credit balance. For information on the treatment of a credit
balance when a student withdraws, see Section 4.

[[Holding excess funds]]
A school is permitted to hold excess funds (credit balances) if it
obtains a voluntary authorization from the student or parent. If a
school receives authorization to hold excess funds, the school must
identify the student or parent and the amount of funds the school
holds for the student or parent 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. Because SFA Program funds are awarded to students to
pay current year charges, notwithstanding any authorization obtained
by a school from a student or parent, the school must pay

[[CLARIFICATION]]
- any remaining balance on loan funds by the end of the loan
period, and

- any other remaining SFA Program funds by the end of the last
payment period in the award year for which they were awarded.

[[NEW]]
The school is permitted to retain any interest earned on the student's
credit balance funds. The November 29, 1996 final regulations
specify that the Department may prohibit a school that has been
placed on reimbursement from holding excess funds. Although the
November 29, 1996 final regulations eliminate the across-the-board
rule that 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, this limitation still may be imposed
by the Department under certain circumstances.

[[Payment of prior year charges]]
In general, SFA Program funds are allowed to be used to pay only
for educational expenses a student incurs in the period for which
those funds are provided. However, a school is permitted to use a
student's SFA Program 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 or parent's authorization to pay the prior-
year charges.

A school may obtain authorization from a student in advance to use
SFA Program funds to cover prior-year charges that are less than
$100. To pay prior-year charges for amounts equal to or greater than
$100, in addition to obtaining an authorization, a school must
determine that payment would not prevent the student from paying
for his or her current educational expenses.

REQUIRED SCHOOL NOTIFICATIONS

[[NEW]]
The November 29, 1996 final regulations modify the requirement
that a school provide notification of expected SFA Program funds.
Before a school disburses SFA Program funds for any award year,
the school must notify a student of the amount of SFA Program
funds the student AND HIS OR HER PARENT can expect to receive
from each SFA Program, and how and when those funds will be
disbursed. Previously, notification had to be made to the student for
all SFA Program funds expected to be received by the student, and to
the parent for any expected PLUS Loan funds. The final regulations
also specify that, 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.

A school must provide the best information it has regarding the
amount of SFA Program funds a student can expect to receive.
Because the actual loan disbursements received by a student may
differ slightly from the amount expected by the school (due to loan
fees and rounding differences), a school may include the gross
amount of the loan disbursement or a close approximation of the net
disbursement amount.

[[Opportunity for loan cancellation]]
Because incurring a loan obligation is a serious responsibility, a
borrower must be given the opportunity to cancel the loan at or close
to the time the funds are actually disbursed and the debt incurred.
Notification of when a loan disbursement occurs is required to
remind borrowers of their loan obligation and to give students the
opportunity to replace credited loan proceeds with other funds.
Therefore, the school must notify a student or parent in writing or
electronically whenever the school credits the student's account with
Direct Loan, FFEL, or Perkins Loan program funds. The notification
must include

- the date and amount of the disbursement;

- the right of the student or parent borrower to cancel all or a
portion of the loan. (This is applicable to FFEL Program funds
only if the school received the loan funds from a lender through
EFT payment or master check.); and

- the procedures and the time by which the student or parent
borrower must notify the school that he or she wishes to cancel the
loan or a portion of the loan.

A school is not required to provide notification of cancellation rights
if the school disburses a FFEL directly to the student or parent by
check. This is because a student or parent who receives a FFEL
disbursement via check has the opportunity to refuse the funds by not
endorsing the check or by returning the check.

[[NEW]]
[[60 day window for notification]]
This notification of crediting a student's account with loan funds
must be sent no earlier than 30 days before and no later than 30 days
after crediting the student's account (see example below). If a school
notifies a borrower electronically, it must request that the borrower
confirm the receipt of the notice and the school must maintain a copy
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.

[[The graphic "Example - Notification when credit account" on
page 3-73 is currently unavailable for viewing. Please reference
your paper document for additional information.]]

A school MAY NOT use an in-person or telephonic conversation as
the sole means of notification. In-person and telephonic
conversations are not adequate and verifiable methods of providing
notice. However, notification to borrowers in-person and by
telephone may be done in addition to providing written or electronic
notice.

[[NEW]]
[[14 day cancellation window]]
Once the school has provided notification, if the student or parent
wishes to cancel all or a portion of a loan, he or she must inform the
school. The school must honor the request if the request is received
no later than

- 14 days after the date the school sends the notice (see example 1
below), or

- the first day of the payment period, if the school sends the notice
more than 14 days before the first day of the payment period (see
example 2 below).

[[The graphic "Example - 14 day cancellation period" on page 3-73
is currently unavailable for viewing. Please reference your paper
document for additional information.]]

[[Response to request is required]]
If a student's or parent's request for cancellation is received within
the specified time period, the school must return the loan proceeds
and/or cancel the loan as appropriate. If a student's or parent's request
for cancellation is received AFTER the specified time period, the
school may, but is not required to, honor the request. Regardless of
when the request is received, the school must inform the student or
parent, in writing or electronically, of the outcome of the request.

A SCHOOL IS NOT RESPONSIBLE FOR RETURNING A
PORTION OF A LOAN THAT WAS DISBURSED TO A
STUDENT OR PARENT DIRECTLY BEFORE THE REQUEST
FOR CANCELLATION WAS RECEIVED. HOWEVER, A
SCHOOL IS ENCOURAGED TO TAKE AN ACTIVE ROLE IN
ADVISING THE BORROWER TO RETURN THE PORTION OF
FUNDS ALREADY RECEIVED.

REQUIRED STUDENT AUTHORIZATIONS

A school must obtain authorization from a student (or parent
borrower) before

- disbursing SFA Program funds by EFT to a bank account
designated by the student or parent

- using SFA Program funds to pay for allowable charges other than
tuition, fees and room and board (if the student contracts with the
school)

- holding excess SFA Program funds (credit balances)

- applying SFA Program funds to prior-year charges.

In obtaining an authorization from a student or parent, a school
MAY NOT REQUIRE OR COERCE THE AUTHORIZATION and
must notify the student or parent that he or she may cancel or modify
the authorization at any time. Once a student or parent cancels or
modifies his or her authorization, the school may not perform the
function, or must perform the function as modified, from that date
forward.

[[Effective date of cancellation]]
[[CLARIFICATION]]
A cancellation or modification is not retroactive. If a student or
parent cancels an authorization to use SFA Program funds to pay for
allowable charges other than tuition, fees, and room and board (if the
student contracts with the school), or prior-year charges, the school
may use SFA Program funds to pay any authorized charges incurred
by the student before the notice was received by the school. If a
student or parent cancels an authorization to hold excess funds, the
funds must be paid directly to the student or parent as soon as
possible, but no later than 14 days after the school receives the notice
(see example on the next page).

[[The graphic "Example - Payment after cancel authorization" on
page 3-75 is currently unavailable for viewing. Please reference
your paper document for additional information.]]

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 clearly explain how the school will carry out
an activity. It does not need to detail every aspect pertaining to the
activity; however, a blanket authorization that only identifies the
activities to be performed is not acceptable. For example, an
authorization permitting a school to use excess SFA Program funds
must provide detail that is sufficient to give the student (or parent) 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.

[[NEW]]
The November 29, 1996 final regulations eliminate the requirement
that a school must notify annually a student or parent of the
provisions contained in an authorization previously provided to the
school. Beginning with the 1997-98 award year, unless otherwise
specified, a student or parent may authorize a school to carry out the
activities for which authorization is provided for the entire period
during which the student is enrolled at the school. As mentioned
above, a student or parent may cancel or modify an authorization at
any time.

EXCESS CASH

"Excess cash" is any amount of SFA Program funds, other than funds
received under the just-in-time payment method (see page 3-60), that
a school does not disburse to students by the end of the third business
day following the date the school receives 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 Program 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 Program 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 9.)

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 and campus-based programs. As defined in the regulations, the
Pell Grant Program ACA is $5 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 from the Federal
Reserve. (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]]
[[NEW]]
In the Department's fiscal year 1996 budget, Congress eliminated the
ACA for the Direct Loan Program. The Department made final
payments in the winter of 1996-97 for all loans originating on or
before April 26, 1996. (See Direct Loan Bulletin 96-11 for more
information.)

Last Modified: 07/21/1998