[Federal Register Volume 59, Number 39 (Monday, February 28, 1994)]
[Unknown Section]
[Page ]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-3879]


[Federal Register: February 28, 1994]


_______________________________________________________________________

Part II





Department of Education





_______________________________________________________________________



34 CFR Parts 668 and 690



Student Assistance General Provisions



and Federal Pell Grant Program;



Proposed Rule
DEPARTMENT OF EDUCATION

34 CFR Parts 668 and 690

RIN 1840-AB85


Student Assistance General Provisions and Federal Pell Grant 
Program

AGENCY: Department of Education.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Secretary proposes to amend Subparts A and B of the 
Student Assistance General Provisions regulations and the Federal Pell 
Grant Program regulations to reflect changes made by the Higher 
Education Amendments of 1992 and the Higher Education Technical 
Amendments of 1993 to the Higher Education Act of 1965, as amended 
(HEA). These proposed regulations would seek to improve the efficiency 
of Federal student aid programs and, by so doing, to improve their 
capacity to enhance opportunities for postsecondary education.

DATES: Comments must be received on or before March 30, 1994.

ADDRESSES: All comments concerning these proposed regulations should be 
addressed to Wendy L. Macias, Program Specialist, U.S. Department of 
Education, 400 Maryland Avenue, SW. (Regional Office Building 3, room 
4318), Washington, DC 20202-5346.

FOR FURTHER INFORMATION CONTACT: Wendy L. Macias. Telephone (202) 708-
7888. 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 6 p.m., Eastern time, Monday through 
Friday.

SUPPLEMENTARY INFORMATION: In order to approve a postsecondary 
education institution to participate in the student financial 
assistance programs authorized by Title IV of the HEA (Title IV, HEA 
programs) and many other Federal programs, the Secretary must 
determine, in part, that the institution satisfies the statutory 
definition of an ``institution of higher education.'' Under the HEA and 
other Federal statutes, one element of that definition requires an 
eligible institution of higher education to be accredited or 
preaccredited by an accrediting agency recognized by the Secretary as a 
reliable authority as to the quality of the education or training 
provided by the institution. Another element requires an eligible 
institution to be legally authorized to provide an educational program 
beyond the secondary level in the State in which it is located. Thus, 
the statutory definition of an institution of higher education provides 
the framework for a shared responsibility among accrediting agencies, 
States, and the Federal government to ensure that the ``gate'' to the 
Title IV, HEA programs is opened to only those institutions that 
provide students with quality education or training worth the time, 
energy, and money they invest in it. The three ``gatekeepers'' sharing 
this responsibility have traditionally been referred to as ``the 
triad.'' While the concept of a triad of entities responsible for 
gatekeeping has had a long history, the triad has not always worked as 
effectively as it should to ensure educational quality, nor has it 
served as an effective deterrent to abuse by institutions participating 
in the Title IV, HEA programs. For several years, certain institutions 
participating in the Title IV, HEA programs have failed to provide 
students with education or training of an acceptable level of quality; 
they have also failed to treat students fairly. In addition, they have 
failed to meet acceptable standards of financial responsibility and 
administrative capability and to adequately protect Title IV, HEA 
program funds entrusted to them. The institutions that have engaged in 
these abusive practices are not restricted to a particular sector of 
higher education. Rather, the abuses have been found in all types of 
institutions participating in the Title IV, HEA programs, including 
those in the private non-profit and public sectors of higher education 
as well as those in the proprietary sector.
    At the same time, gatekeeping functions have not been carried out 
effectively. For example, some accrediting agencies have not taken 
sufficient care to ensure the quality of the education or training 
provided by the institutions or programs they accredit or to protect 
student interests when they accredit particular institutions or 
programs. Moreover, some States have also not taken sufficient care to 
ensure the quality of the education or training provided by the 
institutions they authorize or license to operate in the State or to 
protect student interests. Finally, the Federal government's management 
of its responsibilities to determine eligibility and to certify 
institutions to participate in the Title IV, HEA programs has not 
always been adequate to prevent abusive practices at institutions that 
participate in those programs.
    Consequently, in the Higher Education Amendments of 1992, Public 
Law 102-325, (the Amendments of 1992), Congress provided for a new part 
H of Title IV entitled ``Program Integrity Triad.'' Under that part, 
States and accrediting agencies are required to assume major new 
oversight responsibilities, and States, accrediting associations, and 
the Secretary are linked to create a stronger and more coordinated 
evaluation of institutions that participate or wish to participate in 
the Title IV, HEA programs. The Secretary believes that the most 
appropriate approach to this coordinated evaluation of institutions by 
the three components of the triad is a complementary one with each 
component focusing its evaluation on its obligations within the context 
of the HEA. Thus, the focus for accrediting agencies is the quality of 
education or training provided by the institutions or programs they 
accredit. For States, which already had responsibility for determining 
that institutions have the legal authority to operate within the State, 
the HEA added a new focus: reviewing institutions that trigger certain 
statutory review criteria. The focus of the Secretary's evaluation of 
institutions is the administrative and financial capacity of those 
institutions to participate in the Title IV, HEA programs.
    The statute allocates legal responsibility among the entities that 
compose the program integrity triad. While the specific statutory 
responsibilities for the three triad entities may overlap, when viewed 
as a whole the triad brings together in a coordinated fashion three 
different but very important aspects of institutional review. Within 
this statutory scheme, the Secretary has sought to assure that the 
gatekeeping system operates as efficiently as possible, with maximum 
integration among the three triad entities and without unnecessary 
burden on postsecondary institutions. In order to assist the Secretary 
in designing a final regulation that achieves these goals, the 
Secretary specifically requests comment on the following questions:
    (1) In several areas, the statute specifically requires each triad 
entity to evaluate an institution under the same or similar standards. 
For example, a SPRE and an accrediting agency may establish different 
standards for evaluating the financial responsibility of an institution 
or for evaluating the success of an institution's educational program. 
Thus, a reviewed institution would need to satisfy the SPRE's and the 
accrediting agency's standards even though those standards address the 
same areas. How should final regulations be structured to both reduce 
the burden on institutions and enable the triad entities to carry out 
effectively their statutory functions?
    (2) Should final regulations be more explicit in identifying 
levels, characteristics, or definitions for any of the assessment or 
review criteria that a triad entity is expected to consider in its 
evaluation of an institution?
    Subpart 1 of part H creates a new program, the State Postsecondary 
Review Program, or SPRP, under which State oversight of institutions 
participating in the Title IV, HEA programs is strengthened. Subpart 2 
of part H establishes procedures and criteria under which the Secretary 
recognizes an accrediting agency as a reliable authority as to the 
quality of the education or training offered by institutions that the 
agency accredits. Lastly, subpart 3 specifies the procedures the 
Secretary uses to determine whether an institution meets the 
eligibility requirements and has the administrative capacity and 
financial responsibility to administer the Title IV, HEA programs.
    On January 24, 1994, the Secretary published in the Federal 
Register the NPRMs to implement the SPRP provisions in subpart 1 of 
part H of the HEA (59 FR 3604) and the accrediting agency provisions in 
subpart 2 of part H of the HEA (59 FR 3578). The Secretary's 
publication of this NPRM prior to the publication of final regulations 
implementing the SPRP and accreditation provisions provides the 
Department of Education an opportunity to coordinate all comments 
received on the triad.
    The provisions of subpart 3 that pertain to the institutional 
eligibility requirements found in 34 CFR part 600 have been addressed 
in a Notice of Proposed Rulemaking (NPRM) published in the Federal 
Register on February 10, 1994, that proposes changes to 34 CFR part 
600. This NPRM addresses those provisions of subpart 3 that pertain to 
subparts A and B of 34 CFR part 668. Subpart A contains definitions 
applicable to the Title IV, HEA programs. Subpart B contains 
requirements for initial and continued participation in the programs. 
In particular, the following provisions in this NPRM address provisions 
of subpart 3: Proposed Secs. 668.15 and 668.16 delineate the standards 
for the evaluation of an institution's financial responsibility and 
administrative capability, respectively, as required by section 498(a), 
(c), and (d) of the HEA. Proposed Sec. 668.15 also codifies the 
definition of persons who exercise substantial control of an 
institution found in section 498(e) of the HEA. Proposed Sec. 668.12 
addresses the requirements of section 498(b) of the HEA that requires 
the Secretary to develop a single application form to be used by 
institutions that wish to apply to participate or to continue to 
participate in a Title IV, HEA program. Proposed Sec. 668.13 includes 
the provisions governing the requirement of financial guarantees from 
owners found in section 498(e) of the HEA, addresses the provision that 
requires the Secretary to establish a schedule for the expiration of 
the approval of institutions to participate in the Title IV, HEA 
programs found in section 498(g) of the HEA, and codifies the 
provisions governing provisional certification of institutions found in 
section 498(h) of the HEA. Pursuant to sections 498(g) and (h) of the 
HEA, proposed Sec. 668.26 delineates the date that an institution's 
period of participation would end, when the institution's period of 
participation expires, or the institution's provisional certification 
is revoked.
    The Amendments of 1992 amended the HEA in several areas relating to 
the participation of institutions in the Title IV, HEA programs. The 
Student Assistance General Provisions regulations contain requirements 
that are common to educational institutions that participate in the 
Title IV, HEA programs. The following list summarizes the major issues 
in this NPRM.
     Each participating institution is subject to a new 
statutory definition of an academic year in which a full-time student 
(with respect to an undergraduate course of study), during a minimum 
30-week period, must complete: At institutions that measure program 
length in credit hours, at least 24 semester or trimester hours or 36 
quarter hours; or at institutions that measure program length in clock 
hours, at least 900 clock hours. Section 668.2 proposes to clarify the 
terms used in the statutory definition of academic year.
     The statute now mandates the definition of an eligible 
program for proprietary institutions of higher education and 
postsecondary vocational institutions, including ``short-term'' 
programs (at least 300 but less than 600 clock hours) that would be 
eligible for the FFEL programs only. The statute requires that these 
programs must have completion and placement rates of at least 70 
percent, measured in accordance with regulations. Section 668.8 
proposes methodologies for those measurements. The Secretary eventually 
may propose a single methodology (based on comments on this NPRM, 
regulations to implement the Student Right-to-Know Act, and other 
NPRMs) to be used wherever appropriate in regulations for the Title IV, 
HEA programs. In accordance with the statute, this NPRM contains 
further provisions to evaluate the quality of these programs, 
specifically a requirement proposed by the Secretary that a program may 
not exceed by more than 50 percent the minimum number of clock hours 
required by the State for training in the recognized occupation for 
which the program prepares students, and a requirement that a program 
be in existence for at least one year before applying for eligibility 
under these criteria.
     This NPRM proposes to add two new sections to codify 
procedures with regard to applications to participate initially or to 
continue to participate in a Title IV, HEA program (proposed 
Sec. 668.12) and procedures by which the Secretary certifies that an 
institution meets the standards in subpart B of these regulations and 
accordingly may participate in a Title IV, HEA program (proposed 
Sec. 668.13). Proposed Sec. 668.13 also includes proposed procedures 
whereby the Secretary codifies new statutory provisions governing 
provisional certification procedures for participation in a Title IV, 
HEA program. Provisional certification permits the Secretary to allow 
an institution that otherwise would not qualify to participate in a 
Title IV, HEA program to participate on a limited basis. The 
institution is subject to shorter periods of participation than a fully 
certified institution and does not have the right to the extensive 
appeal proceedings under subpart G of the Student Assistance General 
Provisions if the Secretary revokes the institution's provisional 
certification. Instead, as proposed by the Secretary in this NPRM, the 
institution would be offered a modified appeal. Further, an institution 
that is provisionally certified may be monitored more closely to the 
extent that the Secretary believes the institution warrants a greater 
degree of oversight.
     Section 668.14 proposes to amend the regulations governing 
program participation agreements to include numerous new provisions 
added by the Amendments of 1992 and provisions previously prescribed by 
the HEA but not specifically spelled out in the regulations. This 
section also includes provisions proposed by the Secretary. This NPRM 
proposes to implement statutory requirements regarding disclosure of 
revenues and expenses for institutions that offer athletically related 
student aid. This NPRM would also address statutory requirements 
concerning incentive payments based directly or indirectly on success 
in securing enrollments or financial aid.
     This NPRM proposes significant changes to Sec. 668.15 
(currently Sec. 668.13) the section governing the evaluation of an 
institution's financial responsibility. The NPRM proposes to strengthen 
the factors used to evaluate an institution's financial responsibility 
and to reflect statutory changes, including the provision that requires 
that any standards developed for the determination of an institution's 
financial responsibility take into account any differences in 
accounting principles between for-profit and nonprofit institutions. 
For example, this NPRM proposes to require a for-profit institution to 
have a ratio of current assets to current liabilities of 1.25:1 and a 
nonprofit institution to have a ratio of current assets to current 
liabilities of 1:1. As the statute requires the establishment of cash 
reserves sufficient to ensure repayment of any required refunds, the 
NPRM also proposes to require each institution to maintain a minimum 
cash reserve of at least 10 percent of the institution's total deferred 
tuition income at the end of the institution's most recent fiscal year.
     This NPRM proposes, in Sec. 668.16 (currently Secs. 668.14 
and 668.15) to strengthen and expand the standards of administrative 
capability for participating institutions, addressing areas previously 
not regulated or for which there were only guidelines, such as: The 
maximum time frame allowed in the standards for satisfactory academic 
progress for completion of a student's educational program and the 
expansion of standards to include those general areas that will be 
reviewed by State postsecondary review entities (SPREs). The SPRE 
review areas are included because these areas may have a significant 
bearing on an institution's administrative capability and thus should 
be considered as the Secretary reviews the administrative capability of 
an institution.
    However, the NPRM does solicit comments on whether these additional 
proposed standards should be implemented across the board or be made 
applicable only to institutions that meet specific criteria or 
thresholds, e.g., institutions with short-term programs and 
institutions with a history of administrative problems. For example, 
this section of the NPRM includes the proposed requirement that an 
institution that offers a vocational program of less than two years in 
length that prepares students to enter recognized occupations must 
demonstrate that the borrower's increased annual expected earnings, 
based on completion of the training, will exceed the annual amount of 
Title IV, HEA program assistance received for the programs.
     The provisions in proposed Sec. 668.17 (currently 
Sec. 668.15) governing default reduction measures reflect statutory 
changes made by the Amendments of 1992 and current departmental 
practices. The provisions in the Technical Amendments of 1993 that 
address institutional appeals of cohort default rates are not included 
in this NPRM and will be addressed separately.
     As mandated by statute, all participating institutions are 
required to implement a fair and equitable refund policy. This 
statutory provision is similar to the requirement for fair and 
equitable refunds prescribed by the FFEL program regulations for 
institutions that participate in the FFEL programs. Section 668.22 
proposes to clarify the terms used in the statutory definition of a 
fair and equitable refund policy. The NPRM also proposes to mandate a 
refund policy (Appendix A) that an institution must use to calculate a 
student's refund if the student is not entitled to a pro rata refund 
and an institution's State and accrediting agency do not have specific 
refund standards. In addition, because of a new statutory provision 
that specifies the order of return of refunds to the Title IV, HEA 
programs and other sources of aid without regard to the amount of aid 
received from State or private sources, this NPRM proposes to remove 
the fraction that is currently used to determine the portion of the 
refund attributable to the Title IV, HEA programs and that attributable 
to other sources of aid.
     In accordance with the statute, institutions will now be 
required to have compliance audits every year rather than every two 
years, as required by current regulations. Section 668.23 proposes to 
allow institutions that do not pose a great financial risk to the Title 
IV, HEA programs (i.e., institutions that received less than $100,000 
in total annual funding under the Title IV, HEA programs or have not 
had deficiencies identified in their most recently submitted audit 
reports) to submit audits biennially. Further, under this proposal, an 
institution would not be required to submit a compliance audit for any 
year in which the total Title IV, HEA program funds it received were 
less than $25,000. This section also proposes to extend audit 
requirements to foreign institutions.
    This NPRM also contains a proposed change to the Federal Pell Grant 
Program regulations. This NPRM proposes to implement section 487(c)(7) 
of the HEA that provides that an institution may offset the amount of 
Title IV, HEA program disbursements against liabilities or may receive 
reimbursement from the Department for those amounts if, in the course 
of any audit conducted after December 31, 1988, the Department 
discovers or is informed of any Title IV, HEA program assistance 
(specifically, Federal Pell Grant Program funds) that an institution 
has provided to its students in accordance with program requirements, 
but the institution has not previously received credit or reimbursement 
for these disbursements. Although this provision relates directly to 
the Federal Pell Grant Program and is proposed to be included in the 
Federal Pell Grant Program regulations, it is contained in Part G of 
the HEA and is subject to the negotiated rulemaking process explained 
below. Therefore, it has been included in this NPRM instead of the 
Federal Pell Grant Program NPRM, which was not subject to the 
negotiated rulemaking process.
    Under new section 492 of the HEA, these proposed changes are 
subject to the negotiated rulemaking process, which includes a 
requirement for the Secretary to convene regional meetings to obtain 
public involvement in the development of proposed regulations. 
Accordingly, issues related to these proposed changes were discussed in 
meetings held in September 1992 in New York City; San Francisco; 
Atlanta; and Kansas City, Missouri. At these meetings, the Secretary 
provided the attendees with a list of issues to be addressed in these 
proposed regulations. A summary of the responses of the attendees is 
contained in the Appendix to this preamble.
    Groups that attended the regional meetings nominated individuals to 
participate in the regulation negotiations. The Secretary selected 
regulation negotiators from the names nominated and chose negotiators 
to reflect all the groups that participate in the Title IV, HEA 
programs, such as students, student financial aid administrators, and 
various types of eligible institutions.
    These proposed regulations also address statutory changes required 
by the Higher Education Technical Amendments of 1993, Public Law 103-
208 (the Technical Amendments of 1993). Those areas affected by the 
Technical Amendments of 1993 are identified in the discussion of 
regulatory changes. The Secretary notes that the statutory changes 
required by the Technical Amendments of 1993 are not subject to the 
negotiated rulemaking process of section 492 of the HEA.

Regulatory Changes

    In accordance with section 492(b) of the HEA, the Secretary 
prepared draft proposed regulations and negotiated the provisions of 
that draft with negotiators. The great majority of the proposed changes 
do not reflect consensus reached at the negotiations (as consensus was 
rarely obtained). The Secretary has identified in the discussion of 
changes the areas where consensus was reached.
    The following discussion reflects proposed significant changes to 
the existing Student Assistance General Provisions regulations and the 
Federal Pell Grant Program regulations. Proposed changes are discussed 
in the order in which they appear in the proposed regulatory text. If a 
provision applied to more than one section or is included in more than 
one section, it is discussed the first time it appears with an 
appropriate reference to its other appearances.

Subpart A--General

Section 668.1  Scope

    The Secretary proposes to revise this section to remove vocational 
school from the list of what the term institution includes, because 
vocational schools are no longer eligible institutions under the HEA. 
The Secretary proposes to revise this section to reflect a listing of 
currently existing Title IV, HEA programs that would be subject to part 
668. Programs added to the list would include the National Early 
Intervention Scholarship and Partnership, Presidential Access 
Scholarship, and Federal Direct Student Loan programs. The Income 
Contingent Loan Program, which no longer exists, would be removed from 
the list. These revisions reflect statutory changes made to the HEA by 
the Amendments of 1992.

Section 668.2  General Definitions

    This section includes definitions proposed in NPRMs published on 
October 4, 1993 (58 FR 51716), and on February 17, 1994 (in part II) 
(59 FR 8044). Those definitions are: designated department official, 
initiating official, output document, show-cause official, and third-
party servicer. The Secretary will not repeat the discussion of those 
definitions here.
    The Secretary proposes to remove the definitions of Award year, 
Regular student, and State, because they would be included in 34 CFR 
part 600, governing institutional eligibility under the HEA. The 
Secretary proposed to move these definitions to 34 CFR Part 600 in the 
NPRM published on February 10, 1994 (59 FR 6446).
    The Secretary is proposing technical changes to clarify the 
definitions of the current Title IV, HEA programs and to add 
definitions of the newly authorized Title IV, HEA programs to conform 
with statutory changes and for consistency with terminology used in the 
individual program regulations. The Secretary also proposes to make 
technical changes in the definitions of Independent student, to reflect 
statutory changes, and Enrolled, Valid student aid report, and Valid 
institutional student information report for consistency with other 
program regulations. The Secretary would move the definition of 
Participating institution from Sec. 668.81 to this section.
    The Secretary is proposing to add or amend the following 
definitions:
Academic Year
    Section 481(d)(2) of the HEA provides a definition of academic year 
to be used for all the Title IV, HEA programs. The statute specifies 
that in an academic year, a full-time student is expected to complete 
at least twenty-four semester or trimester hours or thirty-six quarter 
hours at an institution that measures program length in credit hours, 
or at least nine hundred clock hours at an institution that measures 
program length in clock hours. The definition delineates not only the 
minimum amount of work that a full-time student enrolled in an 
undergraduate educational program is expected to complete during an 
academic year, but also the minimum period of time over which the work 
in any educational program must be completed.
    The Technical Amendments of 1993 specify that this provision is 
only applicable with respect to an undergraduate course of study. The 
Secretary expects that institutions would continue to use their own 
academic standards, within the framework of current program 
regulations, to determine the amount of work full-time graduate and 
professional students are expected to complete over a minimum of thirty 
weeks of instruction.
    The minimum time period specified is thirty weeks of instructional 
time. The Technical Amendments of 1993 further amended section 481 of 
the HEA definition of academic year to provide that the Secretary may 
reduce, for good cause on a case-by-case basis, the 30-week minimum to 
not less than 26 weeks of instructional time in the case of an 
institution of higher education that provides a 2-year or 4-year 
program of instruction for which it awards an associate or 
baccalaureate degree. The Secretary has been unable to determine a 
definition of ``good cause'' that would justify using this authority. 
In addition, the Secretary is concerned that regulatory standards for 
those reductions would encourage many institutions to seek that 
treatment routinely and this implementation would result in the 
inequitable treatment of Federal student aid recipients from 
institution to institution. Further, the Secretary is concerned that 
widespread implementation would result in increased costs to the Title 
IV, HEA programs. Therefore, the Secretary has not proposed specific 
criteria to implement this technical amendment at this time. The 
Secretary requests comments on a definition of ``good cause'' and ways 
of implementing this provision through regulations that address the 
Secretary's concerns.
    The Secretary has determined that the terms used in the definition 
of academic year must be clarified if the definition is to be well-
understood and applied consistently. In determining what constitutes 
the 30-week period, the Secretary would count the period that begins on 
the first day of classes and ends on the last day of classes or 
examinations. For example, if an institution's first day of classes 
begins on a Tuesday, the first week of the academic year would begin on 
that Tuesday and end the following Monday. The institution would not 
begin counting with the Sunday preceding the first day of classes.
    The Secretary proposes that, for purposes of this definition, a 
week would be a consecutive seven-day period, as opposed to a five-day 
or six-day school week or seven individual days that are spread out 
over more than one calendar week. This approach would facilitate 
counting and readily accommodate institutions that start and end on 
different days of the week.
    For purposes of this definition, a week of instructional time would 
be any week in which at least one day of regularly scheduled 
instruction, examinations, or preparation for examination occurs. The 
Secretary recognizes that there may be certain weeks during an academic 
year during which fewer than five days of instruction occur. An 
institution should not be prohibited from counting those weeks in its 
30-week period, provided at least one day of regularly scheduled 
classes occurs in each of those weeks. Further, this proposal would 
accommodate innovative educational programs such as those offered only 
on weekends or condensed schedules. At the same time, the proposal does 
not open the door to abuse, because regardless of the number of days of 
study that occur in any week, an institution must still provide enough 
instruction for a full-time student to be able to earn the minimum 
number of credit or clock hours needed to meet the definition. Finally, 
the Secretary would make clear that an institution cannot count, as 
instructional time, periods consisting purely of noninstructional 
activities, such as orientation, counseling, or vacations.
    It should be noted that because the statute specifies both the 
amount of work expected to be completed and the minimum timeframe for 
an academic year for use in the Title IV, HEA programs, an institution 
might need to prorate or adjust Title IV, HEA program assistance for 
its students. For example, if the span of time from the first scheduled 
class at the beginning of the school year until the last examination at 
the end of the school year (excluding any weeks that consist 
exclusively of vacation time and all other activities not directly 
related to instruction, preparation for examinations or examinations) 
is twenty-five weeks, the institution would need to make adjustments in 
accordance with individual program regulations. Because summer sessions 
generally would not be long enough to constitute the equivalent of a 
complete semester or quarter, as they are under various current program 
regulations, Title IV, HEA program funds awarded for summer sessions 
would need to be adjusted to reflect the lengths of the sessions. A 
comprehensive discussion of the potential effect of this new definition 
of academic year on Federal Pell Grant calculations may be found in the 
NPRM on the Federal Pell Grant Program to be published shortly.
Full-Time Student
    The Secretary believes it is necessary to have a definition of 
full-time student that is applicable to all Title IV, HEA programs. A 
definition of full-time student is needed because the definition of 
academic year is based, in part, on the workload of a full-time 
student, and because the term is used elsewhere for other purposes in 
part 668. The Secretary has proposed a definition of full-time student 
that would be based on a slightly modified definition found in the 
Federal Pell Grant and the campus-based program regulations. This 
definition also would incorporate parts of the definition of full-time 
student found in the FFEL program regulations.
    Generally, the Secretary proposes to define a full-time student as 
an enrolled student who is carrying a full-time academic workload 
(other than by correspondence) as determined by the institution under a 
standard applicable to all students enrolled in a particular 
educational program. In determining a student's workload, an 
institution would be permitted to include combinations of courses, 
work, research, or special studies that the institution considers 
sufficient to classify the student as a full-time student. Under this 
proposal, for an undergraduate student, an institution's minimum 
standard must equal or exceed: (1) 12 semester hours or 12 quarter 
hours per academic term in an educational program using a semester, 
trimester, or quarter system; (2) 24 semester hours or 36 quarter hours 
per academic year for an educational program using credit hours but not 
using a semester, trimester, or quarter system (or the prorated 
equivalent for a program of less than one academic year); or (3) 24 
clock hours per week for an educational program using clock hours.
    This definition also provides for a method for determining full-
time status for students enrolled in an educational program using both 
credit and clock hours. In order to evaluate the combined workload of 
the student, an institution could determine full-time status based on 
the sum of the proportionate workload carried in terms of credit hours 
and the proportionate workload carried in terms of clock hours.
    Further, an undergraduate student could be considered a full-time 
student if he or she undertakes a series of courses or seminars that 
equals at least 12 semester hours or 12 quarter hours in a maximum of 
18 weeks. For cooperative education programs, an undergraduate student 
could be considered a full-time student if the work portion of a 
cooperative education program in which the amount of work performed is 
equivalent to the academic workload of a full-time student.
    The Secretary is particularly interested in establishing a minimum 
standard for a full-time academic workload for students who receive 
funds under the FFEL programs. Currently, for the purpose of those 
programs, an institution determines what a full-time academic workload 
is for these students. The Secretary recognizes that, because no 
minimum requirement for an academic workload of a full-time student 
exists under the FFEL programs, there is the potential for abuse of 
FFEL program funds through the use of the definition of an academic 
year. For example, an institution might have educational programs that 
are measured in credit hours and do not use academic terms. The 
institution could claim that it offers a full academic year's worth of 
work over a thirty-week period by giving a full-time student a small 
amount of instruction, which the institution claims to be equivalent to 
24 semester or 36 quarter hours. This situation would result in the 
receipt of an inordinately large amount of FFEL program funds for the 
amount of work actually accomplished. The Secretary requests comments 
on whether, to further address this potential abuse, he should also 
establish a weekly minimum full-time workload for educational programs 
that are measured in credit hours but do not use academic terms.
Undergraduate Student
    The Secretary proposes to add a definition of undergraduate student 
to this section. Because the proposed definition of a full-time student 
makes reference to an undergraduate student and because the term 
undergraduate student is used in other places in part 668, the 
Secretary believes it is now necessary to define undergraduate student 
in this part. The proposed definition is the definition currently found 
in the Federal Pell Grant and campus-based program regulations. The 
Secretary proposes to define an undergraduate student as a student 
enrolled in an undergraduate educational program at an institution who 
has not earned a baccalaureate or first professional degree. The 
student would have to be enrolled in an undergraduate educational 
program that usually does not exceed 4 academic years, or a 4- to 5-
academic-year program designed to lead to a first degree. A student 
enrolled in a program of any other length would be considered an 
undergraduate student for only the first four academic years of that 
program.

Section 668.8  Eligible Program

Admission Requirements
    These proposed regulations would remove the current provisions in 
Sec. 668.8(a)(1) (i) through (iv), which govern the educational 
qualifications of persons admitted into an eligible program. These 
qualifications are appropriately addressed in 34 CFR 600.4 through 
600.6, which govern the types of institutions that may be eligible to 
apply to participate in HEA programs. The educational qualifications of 
eligible students under the Title IV, HEA programs are also addressed 
in Sec. 668.7(a) (3) and (b). Therefore, these provisions are no longer 
needed for purposes of defining an eligible program. Note that other 
provisions governing the admission requirements needed for certain 
educational programs to qualify as an eligible program are discussed 
further below.
Definitions
    These regulations would clarify a number of the terms used to 
determine an eligible program. Proposed Sec. 668.8(b)(1) would define 
the equivalent of an associate degree as either an associate degree, or 
the successful completion of at least a two-year program that is 
acceptable for full credit toward a bachelor's degree and qualifies a 
student for admission into the third year of a bachelor's degree 
program. This definition is needed because educational programs offered 
by a proprietary institution of higher education or a postsecondary 
vocational institution may qualify as eligible programs depending, in 
part, on whether the programs admit students with the equivalent of an 
associate degree (see the discussion on minimum program lengths). The 
definition is based on the provision in section 1201(a)(3) of the HEA 
that qualifies institutions offering 2-year transfer programs for 
institutional eligibility.
    For the same reason (that the terms are needed to establish the 
eligibility of programs offered by proprietary institutions of higher 
education and postsecondary vocational institutions-- see the 
discussion on minimum program lengths) the Secretary proposes to define 
week and week of instruction. For consistency, these terms would be the 
same as those proposed to be used in Sec. 668.2 for the definition of 
academic year. The terms are discussed in detail there.
    It is important to note that short-term programs (those offering 
less than 600 clock hours) that are eligible under current regulations 
because they met the definition of vocational school that used to be in 
section 435 of the HEA, will cease to be eligible when the final 
regulations governing programs become effective, unless those short-
term programs are able to satisfy these regulations. Short-term 
programs that were not offered or were not eligible before July 23, 
1992 can only become eligible when final regulations become effective.
Minimum Program Length
    The proposed regulations would also add requirements regarding the 
minimum length of an eligible program. Under section 481(b) of the HEA, 
a proprietary institution of higher education or a postsecondary 
vocational institution must, to be eligible, provide an eligible 
program, as defined in section 481(e) of the HEA. Proposed 
Sec. 668.8(d) would implement that definition. The proposed definition 
would supplant the current regulatory definition of a six-month 
training program in 34 CFR 600.2.
    Section 481(e) of the HEA provides for three types of eligible 
programs. The first type of eligible program is one that must provide 
at least 600 clock hours, 16 semester or trimester hours or 24 quarter 
hours of instruction offered during a minimum of 15 weeks. The program 
must provide undergraduate training that prepares a student for gainful 
employment in a recognized occupation. The program may admit as regular 
students persons who have not completed the equivalent of an associate 
degree.
    The second type of eligible program is one that must provide at 
least 300 clock hours, 8 semester hours, or 12 quarter hours of 
instruction offered during a minimum of 10 weeks. The program must 
provide training that prepares a student for gainful employment in a 
recognized occupation and be a graduate or professional program or 
admit as regular students only persons who have completed the 
equivalent of an associate degree. For the first time, this type of 
program may qualify for purposes of all Title IV, HEA programs, not 
just the FFEL programs, as under current regulations.
    The third type of eligible program would qualify for the FFEL 
programs only. It must provide at least 300 but less than 600 clock 
hours of instruction offered during a minimum of 10 weeks. The program 
must provide undergraduate training that prepares a student for gainful 
employment in a recognized occupation, and admit as regular students 
some persons who have not completed the equivalent of an associate 
degree. This type of program must also satisfy regulations of the 
Secretary governing placement rates, completion rates, and other 
criteria. These rates and criteria are discussed below.
Qualitative Factors
    Section 481(e)(2) of the HEA requires the third type of eligible 
program to have a verified completion rate of at least 70 percent and a 
verified placement rate of at least 70 percent in accordance with the 
Secretary's regulations and to meet other criteria specified by the 
Secretary in regulations. Proposed Sec. 668.8(e) would implement these 
provisions. Proposed Sec. 668.8(e)(2) would require an institution to 
substantiate the calculation of its completion and placement rates by 
having its independent auditor who prepares its compliance audit report 
under Sec. 668.23 verify the accuracy of the calculations. The 
Secretary believes that the auditor's assurance of these calculations 
would be a reliable independent substantiation. The Secretary also 
believes it is practical for an auditor to check this information, 
inasmuch as he or she is already on site to perform the institution's 
required compliance audit.
    Section 668.8 would include formulas in paragraphs (f) and (g) for 
calculating the appropriate completion and placement rates. The 
Secretary believes a single methodology is desired, and invites 
comments in this area. The Secretary notes that an NPRM implementing 
the Student Right-to-Know provisions in section 485(a) of the HEA, 
which addressed the calculation of completion or graduation rates, was 
published in the Federal Register on July 10, 1992 (57 FR 30826). The 
Secretary will be publishing a second NPRM for implementation of the 
Student Right-to-Know provisions shortly after publication of this NPRM 
to further address this calculation. The Secretary would also like to 
know if any proposals relative to the Student Right-to-Know Act 
regarding graduation and completion rate calculations should be used 
instead of the methods proposed here. The proposed formulas would be 
based on the following:
Award Year
    All calculations would be based on enrollments, completions, and 
placements during an award year. Thus, an applicable completion or 
placement rate would be the rate as it existed at the end of a 
particular award year.
Calculation of Completion Rate
    (1) An institution would base its calculation on the number of 
regular students who were enrolled in the program during the award 
year. The rate calculation is based on regular students because those 
students by definition intend to complete a program. The Secretary 
believes that inclusion of other students would not provide an accurate 
picture of the institution's completion rate.
    (2) The institution would subtract from the number of regular 
students the number of those students who, during that award year, 
withdrew from, dropped out of, or were expelled from the program and 
were entitled to and actually received in a timely manner in accordance 
with Sec. 668.22(i)(3) a refund of 100 percent of their tuition and 
fees (less any permitted administrative fee) under the institution's 
refund policy. The Secretary believes that the inclusion of students 
who have received a 100 percent refund at an institution would unduly 
penalize the institution because these students would not have 
participated in the academic component of an institution's program. 
These students are excluded from the calculation because there would 
not be a loss of Title IV, HEA program funds to the Department of 
Education if the institution has refunded all tuition and fees.
    (3) The institution would subtract the number of students who were 
enrolled in the program at the end of that award year.
    (4) The institution would determine the number of regular students 
who, during that award year, received the degree, certificate or other 
recognized education credential awarded for successfully completing the 
program.
    (5) The institution would divide the number determined in item (4) 
by the total obtained under item (3) of this section.
    This proposed methodology instructs institutions to subtract from 
the denominator all students who were enrolled in the program at the 
end of the award year without regard to any time frame established for 
the completion of the program. In view of the fact that the Secretary 
is addressing the effect of the expectation that a student complete a 
program in a reasonable period of time on the calculation of completion 
rates in the forthcoming NPRM concerning the Student Right-to-Know 
provisions in section 485(a) of the HEA, the Secretary particularly 
invites comment on whether that expectation should also be considered 
in the calculation under this section.
Calculation of Placement Rate
    (1) An institution would determine the number of students who, 
during the award year, received the degree, certificate, or other 
recognized educational credential awarded for successfully completing 
the program. The Secretary believes it would not be fair or accurate to 
include in the placement rate calculation those students who have not 
yet completed the program.
    (2) The institution would subtract from the number of students 
described in item (1) the number of those students who were employed by 
the institution either before or after their receipt of the degree, 
certificate, or other recognized educational credential. The Secretary 
believes that excluding employees of the institution will help curb 
abuse by those schools who may hire their own students in order to 
increase placement rates. The Secretary specifically requests comment 
on whether there are methods of distinguishing legitimate hiring by an 
institution of its graduates or students from hiring simply to improve 
the results of a placement rate calculation.
    (3) Of the total obtained under item (2), the institution would 
determine the number of students who, within 180 days of the day they 
received their degree, certificate, or other recognized education 
credential, obtained gainful employment in the recognized occupation 
for which they were trained or in a related comparable recognized 
occupation and, on the date of this calculation, are employed or have 
been employed for at least 13 weeks following receipt of the credential 
from the institution.
    The Secretary believes that only students who have been placed 
within 180 days should be counted in the calculation. The Secretary 
proposes 180 days because it is consistent with the maximum period of 
time that a payment on a student's loan under the FFEL loan program may 
be deferred. These FFEL deferments include provisions for deferments 
for periods of unemployment. The Secretary considers this time frame to 
be adequate and reasonable, and provides ample time for an institution 
to place a student.
    The proposed regulation allows an institution to include in its 
placement rate a student who is placed in a recognized occupation which 
is comparable and related to the occupation for which the student has 
been trained. For instance, if a student were trained as an auto 
mechanic, he could be included in the placement rate calculation if he 
were placed as a boat mechanic. However, if a student completed a 
retail sales management program, he could not be included in the 
calculation if he were placed as a counterman at a fast food 
establishment.
    To be included in the placement rate, a student must have been 
employed for at least 13 weeks following graduation from the 
institution. The Secretary believes that this requirement will help 
stem abuse by institutions that may arrange to have students hired for 
short term jobs in order to boost placement rates. The proposed 13-week 
period is consistent with the period of time a student must be employed 
to be counted in the calculation of an institution's placement rate 
under the procedures delineated in current Sec. 668.15(g) for the 
appeal of an institution's loss of participation due to an unacceptable 
cohort default rate.
    As stated above, for purposes of this calculation, a student has up 
to 180 days after he or she receives his or her degree, certificate, or 
other recognized education credential to obtain gainful employment and 
then must be employed for at least 13 weeks following receipt of the 
credential from the institution. The Secretary understands that, 
because of the total length of time allowed for obtaining and 
maintaining employment, an institution's calculations may not 
accurately reflect placement results for programs that are offered in 
the latter half of the award year. The Secretary specifically requests 
comments on ways to address this issue.
    (4) The institution would divide the number of students determined 
in item (3) of this section by the total obtained under item (2).
    The institution must maintain documentation that each student 
described in item (3) above, obtained gainful employment in an 
occupation for which he or she was trained or in a related occupation. 
Examples of satisfactory documentation of a student's gainful 
employment include, but are not limited to--
     A written statement from the student's employer;
     Signed copies of State or Federal income tax forms; and
     Written evidence of payments of Social Security taxes.
    The Secretary believes that requiring institutions to collect this 
data will help curb abuse by institutions that may overstate their 
placement rates in order to achieve and maintain eligibility for short-
term programs. Furthermore, to further avoid potential abuse, the 
Secretary proposes that in certifying the accuracy of an institution's 
placement rate, as required under Sec. 668.8(e)(2), the institution's 
auditor should review the above types of documentation collected by the 
institution to verify each student's inclusion in the placement rate 
calculation.
    The statute provides that the Secretary may prescribe other 
regulations to determine the quality of these programs. Under proposed 
Sec. 668.8(e)(1)(iii), to be eligible, programs less than 600 clock 
hours in length may not exceed by more than 50 percent the minimum 
number of clock hours required for training in the recognized 
occupation for which the program prepares students, as established by 
the State in which the program is offered, if the State has established 
such a requirement. For example, if a State requires security guard 
students to complete only 300 clock hours of training, a security guard 
program in that state will not be eligible if it exceeds 450 clock 
hours. The Secretary believes this regulation will help curb abuse of 
the programs by preventing institutions from providing unnecessary 
training to students in order to receive additional Title IV, HEA 
program funds.
    Proposed Sec. 668.8(e)(1)(iv) requires that to be eligible, 
programs less than 600 clock hours must have been in existence for at 
least one full year. The Secretary believes that this time frame is 
necessary so programs may demonstrate the appropriate completion and 
placement rates. Institutions will be required under 34 CFR 600 to 
apply for eligibility of these programs after the one-year requirement 
is satisfied.
English as a Second Language
    In addition to the elements already in place in the current 
regulations regarding English as a Second Language (ESL) programs, 
Sec. 668.8(j)(2) proposes that in order for an ESL program to be 
eligible, the institution must test each student at the end of the 
program to substantiate that the student has attained adequate 
proficiency in written and spoken English to use already existing 
knowledge, training or skills. The institution will also be required to 
identify the test it gives to the students and the basis for the 
judgment that the student has attained the adequate proficiency. This 
proposal, based on California law, was suggested during the negotiation 
process as a method to stem abuse by institutions which offer ESL 
programs. As established by the current regulations, ESL programs which 
qualify as eligible programs are eligible for purposes of the Federal 
Pell Grant program only. This provision remains unchanged.

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

Section 668.12  Application Procedures

    The Secretary proposes to add a new Sec. 668.12 to codify the 
Secretary's current practices with regard to applications to 
participate or to continue to participate in a Title IV, HEA program. 
This section also would include proposed procedures whereby the 
Secretary codifies new statutory provisions governing applications to 
participate or to continue to participate in a Title IV, HEA program.
    Section 498(b) of the HEA requires the Secretary to develop a 
single application form to be used by an institution that wishes to 
apply to participate or to continue to participate in a Title IV, HEA 
program. The statute requires that this form provide for the collection 
of various information and documentation. First, the form must require 
an institution to provide sufficient information and documentation to 
determine that the requirements of institutional eligibility, 
accreditation, and the capability of the institution are met.
    Second, the form must require an institution to describe the 
relationship between a main campus of an institution and all of its 
branches. In particular, the form must require an institution to 
include a description of the student aid processing that is performed 
by the main campus and that which is performed at its branches. Third, 
the form must require an institution to describe all third-party 
servicers of the institution and supply a copy of any contract with a 
third-party servicer. Finally, the form must require an institution to 
provide any other information that the Secretary determines will ensure 
compliance with Title IV, HEA program requirements with respect to 
eligibility, accreditation, administrative capability and financial 
responsibility.
    Currently, the Department of Education uses a single application 
form that addresses both institutional eligibility requirements (as 
found in 34 CFR part 600) and the standards for certification of 
administrative capability and financial responsibility. In recent 
years, although institutions filed a single application form, they 
received separate notifications of action from the Department: an 
institutional eligibility notice and a certification letter. This 
created confusion because some institutions misinterpreted the 
institutional eligibility notice also to be the notice informing the 
institution that it met the requirements for ``certification'' and that 
the institution was now able to participate in a Title IV, HEA program.
    In order to reduce confusion, the Secretary is now combining these 
notices of ``institutional eligibility'' and ``certification'', issuing 
one ``Institutional Approval Notice'' to an institution that meets the 
institutional eligibility and certification requirements. The 
Institutional Approval Notice advises the institution that it is an 
eligible institution, and is approved to participate in the Title IV, 
HEA programs listed in the Notice and indicated in the institution's 
program participation agreement. The effective date of approval, which 
is specified in the Institutional Approval Notice, is the date that the 
Secretary signs the institution's program participation agreement.
    Under current practice, an institution that wishes to participate 
in a Title IV, HEA program for the first time must first apply to the 
Secretary for a certification that the institution meets the standards 
for participation found in Subpart B of these regulations. A currently 
participating institution must apply to the Secretary for a 
certification that the institution continues to meet these standards 
under a number of conditions.
    First, the institution must apply for certification if the 
Secretary requests the institution to apply. The Secretary reserves the 
right to require a participating institution to apply at any time if 
the Secretary is concerned about the institution's continued 
participation in a Title IV, HEA program. Currently, the Secretary 
exercises this authority only rarely, and generally when the Secretary 
receives reliable information that could affect the institution's 
eligibility under 34 CFR part 600 or the institution's financial 
responsibility or administrative capability under subpart B of these 
regulations. For example, if the Secretary receives information that an 
institution that does not grant degrees has received authorization from 
its State and accrediting agency to award degrees, the Secretary would 
require the institution to apply under 34 CFR part 600 to determine 
whether the institution satisfies the definition for a different type 
of institution and therefore might be eligible to apply to participate 
in HEA programs for which the institution earlier was not qualified. At 
the same time, the Secretary requires the institution to apply for 
recertification under this subpart. Similarly, if the Secretary 
receives reliable information that could affect whether an institution 
meets the factors of financial responsibility in this subpart, the 
Secretary requires the institution to apply for recertification. The 
Secretary does not intend to exercise this authority more frequently 
than under current practice.
    Second, a participating institution must apply for certification if 
the institution wishes to include in its participation a branch campus 
(as that term would be defined in 34 CFR part 600) or another location 
that offers 100 percent of an educational program. Adding a branch 
campus or additional location that offers 100 percent of an educational 
program can have a great effect on the ability of an institution to 
continue to participate in the Title IV, HEA programs. The Secretary 
considers it is appropriate to scrutinize the effect of such an 
addition. In particular, the Secretary believes it is necessary to 
examine whether the institution has the financial resources and the 
administrative capability necessary to support such an addition.
    A number of circumstances that could affect an institution's 
participation in a Title IV, HEA program do not, under the Secretary's 
current practice, require the institution automatically to apply for 
recertification under subpart B of these regulations. Instead, these 
circumstances require the institution to notify the Secretary, and, if 
necessary, provide specified information about the circumstances. These 
circumstances parallel many of those described in 34 CFR part 600 
requiring the institution to notify the Secretary of changes that could 
affect the institution's eligibility. Based on that notification and 
information, the Secretary determines whether the institution must 
apply for recertification. If the institution need not apply, the 
Secretary notifies the institution under the provisions of 34 CFR 
600.30 that the institution continues to be eligible and participating. 
If the Secretary needs further information to make that determination, 
the Secretary requests additional information from the institution or 
requires the institution to apply for recertification. These procedures 
apply to the following circumstances: (1) A change in name, address, or 
location of the institution or one of the institution's locations; and 
(2) the inclusion in an institution's participation of a location that 
offers less than 100 percent but at least 50 percent of an educational 
program. In making the determination that the institution must apply 
for approval, the Secretary takes into account the institution's 
ability to provide adequately education or training at the location, 
including such factors as the percentage of an educational program 
offered at the location and the financial and administrative capability 
of the institution.
    Under current practice and under these proposed regulations, a 
participating institution that wishes to include in its participation a 
location that offers less than 50 percent of an educational program 
need not provide any notification or application to the Secretary, 
unless the Secretary so requests.
    Third, a participating institution must apply for certification if 
the institution wishes to continue to participate in a Title IV, HEA 
program following a change in ownership that results in a change in 
control. The regulations governing institutional eligibility (34 CFR 
part 600) contain the requirements governing institutions that change 
ownership resulting in a change of control.
    New section 498(g) of the HEA requires the Secretary to establish a 
schedule for the expiration of the approval of institutions to 
participate in the Title IV, HEA programs. Once this schedule is in 
place, each program participation agreement will have a specific 
expiration date. To continue participating in the Title IV, HEA 
programs beyond the expiration date of its program participation 
agreement, an institution will need to apply for and be granted 
approval for continued participation. The Secretary will notify an 
institution well in advance of the expiration date of the institution's 
program participation agreement that the institution must apply for and 
be granted continued participation. If an institution does not apply 
for or is not granted approval for continued participation by the 
expiration date of the institution's program participation agreement, 
the institution's participation in the Title IV, HEA programs would 
expire on that expiration date. In this case, the Secretary may choose 
to provisionally certify the institution. Provisional certification 
will be addressed in more detail later in this discussion.
    The proposed regulations would specify that an institution that 
applies for participation in any Title IV, HEA program must apply on 
the form prescribed by the Secretary and provide all information and 
documentation requested by the Secretary. The Secretary would like to 
clarify that an institution may be asked to supply additional 
information in support of its application after its initial submission. 
This does not represent a change from current procedures.

Section 668.13  Certification Procedures

    Currently, the Secretary informally refers to the procedures by 
which the Secretary certifies that an institution meets the standards 
in subpart B of these regulations and accordingly may participate in a 
Title IV, HEA program as the ``certification procedures.'' The 
Secretary proposes to add a new Sec. 668.13 to codify these procedures. 
This section also would include proposed procedures whereby the 
Secretary codifies new statutory provisions governing certification and 
provisional certification procedures for participation in a Title IV, 
HEA program.
    Clearly, an institution may not be certified unless the institution 
is eligible under the provisions of 34 CFR part 600. Further, this 
section would make clear that an institution could be certified only if 
the institution meets all the applicable standards for participation in 
subpart B of these regulations.
    Finally, because the requirement that each time an institution 
seeks to begin to participate in a Title IV, HEA program the specified 
individuals must complete ``precertification training'' provided by or 
approved by the Secretary is a certification requirement, the Secretary 
proposes to move this requirement from the current Sec. 668.12 
(Institutional participation agreement) to this section. The Secretary 
proposes to amend this requirement to clarify that an institution 
subject to this training requirement may not begin participation until 
the individuals have completed the training. Under current regulations, 
the Secretary specifies that an institution may request an on-site 
review (instead of electing to use the precertification training 
procedures) before beginning its participation.
    In accordance with section 498(g) of the HEA, the Secretary 
proposes to delineate the period for which an institution may 
participate in a Title IV, HEA program. Generally, this period is the 
maximum of four years permitted by the HEA; however, the Secretary may 
specify a shorter period as the Secretary deems necessary.
    Section 498(h) of the HEA permits the Secretary to provisionally 
certify an institution to participate in a Title IV, HEA program in a 
number of circumstances. Provisional certification permits the 
Secretary to allow an institution that otherwise would not qualify to 
participate in a Title IV, HEA program to participate. However, because 
such an institution cannot meet all the requirements for ``full'' 
certification, the institution's participation would be limited. For 
example, an institution that is provisionally certified could be 
monitored more closely to the extent that the Secretary believes the 
institution warrants a greater degree of oversight. Further, in 
accordance with the statute, an institution that is provisionally 
certified is subject to shorter periods of participation than a fully 
certified institution. The Secretary notes that these limitations may 
vary, within the limits of the statute, to address the specific 
circumstances of the institution. Finally, under the terms of 
provisional certification, an institution will not have the right to a 
formal appeal under subpart G of this part if the Secretary revokes the 
institution's provisional certification; instead, the Secretary 
proposes to offer the institution a modified appeal. These limitations 
are addressed in more detail later in this discussion.
    Under section 498(h) of the HEA, the Secretary may provisionally 
certify an institution that: (1) Applies for initial participation in 
any Title IV, HEA program; (2) has its administrative capability or 
financial responsibility determined by the Secretary for the first 
time; (3) undergoes a change of ownership; (4) seeks to renew its 
certification and jeopardizes its ability to perform its financial 
responsibilities by not meeting the factors of financial responsibility 
or standards of administrative capability in proposed Secs. 668.15 and 
668.16 (and whose participation has been limited or suspended under 
subpart G of this part, or voluntarily enters into provisional 
certification); or (5) is a participating institution that was 
accredited or preaccredited by a nationally recognized accrediting 
agency on the day before the Secretary withdrew recognition of that 
agency. In addition, the Secretary is proposing to add, to the list of 
institutions that may be provisionally certified, an institution that 
allowed its specified period of participation to expire without 
reapplying and qualifying for participation in time.
    The Secretary intends to use provisional certification as a 
mechanism for monitoring an institution that has not previously 
participated or one that has changed ownership, until it has time to 
establish a track record. In keeping with current practice, the 
Secretary does not intend to certify any initial applicant until it has 
successfully completed a period of provisional certification. Because 
many of the requirements for certification cannot be met until an 
institution has participated in the Title IV, HEA programs for a period 
of time, an initially participating institution would still have the 
opportunity to participate while establishing a record that 
demonstrates compliance with all of the proposed current standards for 
participation. The Secretary notes that certain factors of financial 
responsibility and administrative capability, such as requirements 
governing the appropriate handling of Title IV, HEA program funds and 
timely submission of required audits and other reports, cannot be 
judged until an institution has Title IV, HEA program funds to 
administer. In these cases, instead of certifying that an institution 
meets all the standards of subpart B, the Secretary certifies that an 
institution has demonstrated that it meets all the standards it can 
currently and that it will be able to meet all the standards in subpart 
B to qualify it for full certification within a period of time 
specified by the Secretary. Such an institution will receive a modified 
program participation agreement. For the same reasons, the Secretary 
also intends to use provisional certification for all institutions that 
undergo a change of ownership. Provisional certification would permit 
them to participate in Title IV, HEA programs while demonstrating over 
time that they can meet the standards for participation under the new 
ownership.
    In addition, the HEA provides that the Secretary may use 
provisional certification for institutions that are currently 
participating who will have their financial responsibility and 
administrative capability determined for the first time. Some 
institutions have been participating in the Title IV, HEA programs 
since before the establishment of the financial responsibility and 
administrative capability standards, and have never undergone a 
certification review. These institutions may be allowed the time 
necessary to establish that they can remedy any deficiencies found and 
meet the standards for participation.
    Finally, under the provisions of the Technical Amendments of 1993, 
the Secretary may provisionally certify a participating institution 
that is undergoing a certification review if the Secretary believes 
that the institution is in a financial or administrative position that 
could jeopardize the institution's ability to perform its financial 
responsibilities under its program participation agreement. The 
Secretary may provisionally certify an institution under this provision 
if the institution's participation has been limited or suspended under 
subpart G of this part, or voluntarily enters into provisional 
certification. Thus, the Secretary proposes to use provisional 
certification as a probationary period for some participating 
institutions, if the Secretary determines that the institutions are 
capable of meeting the standards for full certification by the end of 
that period. For example, the Secretary might find that an institution 
applying for recertification on its own fails to meet one of the 
standards in proposed Sec. 668.15. If the Secretary determines that the 
failure could jeopardize the institution's ability to meet its 
financial responsibilities, such as the payment of refunds, the 
Secretary would provisionally certify the institution.
    Finally, the Secretary proposes to use provisional certification 
for institutions that seek a renewal of participation in a Title IV, 
HEA program after the expiration of a prior period of participation in 
that program. The Secretary will examine the reasons for the lapse in 
participation to determine if additional safeguards are necessary for 
the institution to demonstrate that it is capable of resuming its 
participation in the Title IV, HEA programs.
    The Secretary does not intend to certify an institution 
provisionally if the institution does not meet the financial 
responsibility standards, unless the institution provides the Secretary 
with certain additional financial guarantees of its ability to continue 
operating. The Secretary believes that additional financial guarantees 
are necessary in that situation to ensure that funds may be available 
to repay liabilities or to pay required refunds that could arise under 
the Title IV, HEA programs. The Secretary generally does not intend to 
certify an institution provisionally if the institution does not meet 
the general standards of financial responsibility or the exceptions to 
the general standards of financial responsibility under proposed 
Sec. 668.15(d) unless the institution meets three additional 
conditions. First, the institution would have to demonstrate to the 
satisfaction of the Secretary that it has sufficient financial and 
administrative resources to participate in the Title IV, HEA programs 
under a funding arrangement other than the Department of Educations's 
standard advance funding arrangement. For example, the institution 
could be funded through an escrow arrangement where an approved third 
party controls the institution's access to Title IV, HEA program funds. 
The Secretary believes that it is necessary for the Department of 
Education to have the added control over Title IV, HEA program funds 
provided by an escrow arrangement. Second, the institution would have 
to submit to the Secretary a letter of credit payable to the Secretary 
equal to not less than 10 percent of the Title IV, HEA program funds 
received by the institution during the last complete award year for 
which figures are available; the Secretary believes that 10 percent of 
an institution's Title IV, HEA program funds is the minimum necessary 
to ensure repayment of liabilities that may be identified during the 
institution's period of provisional certification. Further, the 
Secretary believes that the amount of Title IV, HEA program funds 
received by an institution during the last complete award year for 
which figures are available provides the most accurate indication of 
the amount of Title IV, HEA program funds the institution will use in 
the next award year. Third, the institution would have to demonstrate 
that it has met all of its financial obligations during the preceding 
two award years, including (but not limited to) the payment of required 
refunds and repayments to the Secretary for liabilities and debts 
incurred in programs administered by the Secretary. The Secretary 
believes that an institution that could meet this proposed standard has 
established a track record for meeting its financial obligations.
    The Secretary notes that an institution that is applying for 
initial participation in the Title IV, HEA programs could not satisfy 
the proposed requirement that the institution submit to the Secretary a 
letter of credit payable to the Secretary equal to not less than 10 
percent of the Title IV, HEA program funds received by the institution 
during the last complete award year for which figures are available 
because the institution would not have received any Title IV, HEA 
program funds during the last award year. The Secretary requests 
comments on a comparable way to determine the amount of a letter of 
credit for an institution that is applying for initial participation in 
the Title IV, HEA programs.
    The Secretary also would impose additional conditions on any 
institution that has not been considered financially responsible under 
proposed Sec. 668.15 at any time within the past five years, or if the 
institution is not considered financially responsible for one of the 
following reasons (as delineated in Sec. 668.15(c)(2)): (1) The 
institution has been limited, suspended, terminated or entered into a 
settlement agreement to resolve such an action by the Secretary or a 
guaranty agency within the preceding five years; (2) the institution 
had an audit finding during its two most recent audits, or a program 
review finding during its two most recent program reviews, that 
resulted in the institution's being required to repay an amount greater 
than five percent of the Title IV, HEA funds that the institution 
received for any award year covered by the audit or the program review; 
or (3) the institution failed to address satisfactorily any compliance 
problems identified in program review or audit reports based upon a 
final decision of the Secretary.
    An institution in these categories could only be provisionally 
certified if, in addition to meeting whatever conditions the Secretary 
might reasonably require of a provisionally certified institution, the 
institution satisfied one of the following conditions. First, the 
institution, or one or more persons or entities that the Secretary 
determines to exercise substantial control over the institution, or 
both, would have to submit to the Secretary financial guarantees in an 
amount determined by the Secretary to be sufficient to satisfy the 
institution's potential liabilities arising from the institution's 
participation in the Title IV, HEA programs. Second, one or more 
persons or entities that the Secretary determines to exercise 
substantial control over the institution would have to agree to be 
jointly or severally liable for any liabilities arising from the 
institution's participation in the Title IV, HEA programs and any civil 
and criminal monetary penalties authorized under Title IV of the HEA. 
The law permits the Secretary to impose these conditions on these 
institutions; the Secretary is announcing that he would always impose 
them, because these circumstances are indicative that extra protection 
is needed for the institution and their students to be permitted to 
benefit from the use of Title IV, HEA program funds.
    Generally, provisional certification may be granted for a period of 
no longer than three award years. In accordance with section 498(h) of 
the HEA, an institution that is applying for initial participation may 
be provisionally certified for a period of no longer than one award 
year. A participating institution that was accredited or preaccredited 
by a nationally recognized accrediting agency on the day before the 
Secretary withdrew the Secretary's recognition of that agency may be 
provisionally certified for no longer than 18 months after the date 
that the Secretary withdrew that recognition. The Secretary has the 
authority to specify a shorter period of provisional certification, as 
necessary.
    In accordance with section 498(h) of the HEA, the Secretary may 
revoke an institution's participation in the Title IV, HEA programs, at 
any time before the end of a period of provisional certification, if 
the Secretary determines that the institution is unable to meet its 
responsibilities under its program participation agreement. If the 
Secretary makes that determination, the Secretary would notify the 
institution of the determination by mail, unless the Secretary chooses 
more expeditious means, and revocation would take effect on date that 
notice is mailed. The institution would have to adhere to the 
requirements of proposed Sec. 668.26 which describes the consequences 
of revocation.
    Under the terms of the provisional certification, the institution 
does not have the right to a formal appeal under subpart G of this part 
before the revocation takes effect. However, the Secretary proposes to 
allow the institution to submit a written request to reconsider the 
revocation within 20 days of the institution's receipt of the 
Secretary's notice, after the revocation takes effect. The 
institution's request for reconsideration would have to include written 
evidence that the revocation is unwarranted.
    If the Secretary decides that the revocation is unwarranted, the 
institution's provisional certification would be reinstated in 
accordance with the time, terms, and conditions set out in the 
institution's original provisional certification. If, after 
consideration of the institution's submission, the Secretary denies the 
institution's request, the institution would not be permitted to 
reapply for participation in the Title IV, HEA programs before at least 
18 months after the revocation or the expiration of any debarment or 
suspension of the institution, whichever is later. Generally, an 
institution whose participation has been terminated because the 
institution's provisional certification was revoked would be able to 
apply for reinstatement after 18 months. However, a debarment or 
suspension under E.O. 12549 or the FAR can last 3 or more years. This 
change would eliminate any doubt that a debarred or suspended 
institution may apply for reinstatement of the institution's 
participation during the period of a debarment or suspension. The 
Secretary will not accept any application by a debarred or suspended 
institution until the debarment or suspension has expired or been 
removed.

Section 668.14  Program Participation Agreement.

    The Secretary proposes to redesignate Sec. 668.12 as Sec. 668.14. 
This section includes provisions dealing with third-party servicers 
that were proposed in the NPRM published on February 17, 1994 (in part 
II). The Secretary will not repeat the discussion of those provisions 
here.
    Current regulations governing program participation agreements 
state only the basic terms of participation in the Title IV, HEA 
programs and the purpose and scope of the agreement between the 
Secretary and individual institutions. All of the specific provisions 
of the program participation agreement that are listed in section 
487(a) of the HEA are not restated in the regulations. Instead, all the 
specific statutory provisions are included in the actual agreement 
signed between the Secretary and individual institutions. The Secretary 
proposes to revise this section of the regulations to include not only 
the new provisions of program participation agreements added by the 
Amendments of 1992, but also those provisions previously prescribed by 
the HEA but not specifically spelled out in this section. The Secretary 
will specify which proposed changes have been made to this section as a 
result of the Amendments of 1992 to distinguish them from the 
provisions that the Secretary proposes to add that already existed 
under the HEA, but have not been codified in regulations.
    The additional provisions of program participation agreements 
enumerated in the HEA, as well as other changes the Secretary is 
proposing in order to clarify what the agreements cover and to reflect 
new procedures and statutory language, are described below.
    By providing a comprehensive list of the provisions of the basic 
program participation agreement in one section, thus making reference 
to all the provisions more convenient, the Secretary hopes to 
facilitate institutions' understanding of their responsibilities with 
respect to initial and continued participation in the Title IV, HEA 
programs.
    The Secretary proposes to clarify the scope of the program 
participation agreement. By signing a program participation agreement, 
an institution indicates it understands that its initial or continued 
participation in the Title IV, HEA programs is contingent on compliance 
with the Student Assistance General Provisions regulations, the 
regulations of the specific Title IV, HEA programs in which the 
institution participates, and any additional requirements specific to 
that institution that the Secretary requires the institution to meet. 
Further, the Secretary proposes to make clear the long-standing 
practice that the program participation agreement applies to each 
branch or other additional location of the institution that meets the 
applicable requirements of the Student Assistance General Provisions, 
unless the Secretary specifies otherwise.
    The Secretary proposes to specify that by entering into a program 
participation agreement the institution agrees to comply not only with 
statutory and regulatory requirements, but also with any special 
arrangement, agreement, or limitation. The proposed expansion of this 
provision is necessary to make it clear that if it is to participate in 
a Title IV, HEA program, an institution must adhere not only to those 
requirements listed in the statute and regulations, but to any 
conditions of provisional certification, any limitation imposed on the 
institution to which the institution has agreed, or any other special 
arrangement that the institution makes pursuant to statutory or 
regulatory authority under Title IV of the HEA. The Secretary also 
believes it is necessary to clarify the Secretary's longstanding 
interpretation that to begin or continue to participate in a Title IV, 
HEA program, an institution must comply with each requirement 
applicable to that program, not just selected provisions.
    The Secretary proposes to add a clause specifically requiring that 
institutions that receive Title IV, HEA program funds under an advance 
payment method must time their requests for funds to meet immediate 
programs needs. The Secretary finds that this addition is necessary 
because, in the absence of this specifically stated requirement, too 
many institutions have drawn down funds in excess of immediate need, 
thereby adding unnecessarily to the Federal debt by causing the 
Treasury to incur interest costs on funds given to institutions that 
were not required to meet immediate needs.
    The Amendments of 1992, as clarified by the Technical Amendments of 
1993, has removed the requirement that an institution may not request 
from or charge any student a fee for processing or handling the Federal 
Student Assistance Report, to conform with other statutory provisions 
of the Amendments of 1992 that eliminated previous references to that 
report. The Secretary would remove the corresponding regulatory 
language from this section. No change has been made to the general 
requirement that an institution may not request from or charge any 
student a fee for processing or handling any application, form, or data 
required to determine a student's eligibility for, and amount of, Title 
IV, HEA program assistance.
    In accordance with the HEA, an institution must establish and 
maintain necessary administrative and fiscal procedures and records to 
ensure proper and efficient administration of Title IV, HEA program 
funds that the institution receives from the Secretary or from 
students. Further, the Amendments of 1992 require that the institution 
provide, upon request and in a timely manner, information relating to 
its administrative capability and financial responsibility of the 
institution to the Secretary, the appropriate State postsecondary 
review entity designated under Part H of Title IV of the HEA, any 
applicable guaranty agency under the FFEL programs, and the 
institution's accrediting agency or agencies. The Secretary proposes to 
add to this list of agencies the institution's State agency with legal 
jurisdiction over the institution and, where appropriate, the State 
agency recognized by the Secretary for the approval of public 
postsecondary education as an alternative to accreditation or 
preaccreditation. The Secretary believes that it is important that 
these agencies also have access to information regarding an 
institution's financial responsibility and administrative capability.
    The HEA requires that an institution must agree to comply with the 
Secretary's regulations governing financial responsibility and 
administrative capability. Thus, the Secretary would specify that the 
institution must agree to comply with proposed-to-be-redesignated 
Secs. 668.15 and 668.16.
    The HEA requires that an institution must submit reports, as 
directed by the Secretary, to the Secretary, or, as appropriate, 
holders of student loans under the Title IV, HEA programs, containing 
information required to administer the Title IV, HEA programs. The 
Secretary considers this provision to be self-explanatory and proposes 
to add this statutory requirement to the regulations without 
substantive modifications.
    The HEA requires that an institution may not provide any statement 
to a student or certification to a lender under the FFEL programs that 
qualifies a student for loans in excess of the annual and aggregate 
limits for which the student is eligible for in accordance with 
statutory requirements. The Secretary proposes to extend this 
requirement to include unsubsidized Federal Stafford loans.
    The HEA requires that an institution must comply with the consumer 
information requirements in subpart D of these regulations. The 
Secretary considers this provision to be self-explanatory and proposes 
to add this statutory requirement to the regulations without 
substantive modifications.
    The HEA requires that an institution that advertises job placement 
rates as a means of procuring enrollment must make available to 
prospective students data necessary to substantiate the truthfulness of 
the advertisement. In addition, the Amendments of 1992 require that an 
institution make available to prospective students the relevant State 
licensing requirements for any job for which an institution's 
educational program is designed to prepare prospective students. The 
HEA also requires that an institution must inform all eligible 
borrowers under the FFEL programs of their eligibility for and the 
availability of State grant assistance. The Secretary considers this 
provision to be self-explanatory and proposes to add this statutory 
requirement to the regulations without substantive modifications.
    In order to streamline these regulations, the Secretary proposes to 
list in one place in this section all the certifications that an 
institution must make to participate in a Title IV, HEA program. The 
institution would have to agree in its program participation agreement 
to provide these certifications. These certifications include the 
following: (1) That the institution has in operation a drug abuse 
prevention program accessible to any of the institution's officers, 
employees, and students; and (2) establishment of a campus security 
policy and disclosure requirements as required by section 485(f) of the 
HEA. The Secretary considers this provision to be self-explanatory and 
proposes to add this statutory requirement to the regulations without 
substantive modifications.
    The HEA requires that an institution make available to students who 
receive Title IV, HEA program aid based on their ability to benefit 
from the training offered a program proven successful in assisting 
those students to obtain the recognized equivalent of a high school 
diploma. The Secretary considers this provision to be self-explanatory 
and proposes to add this statutory requirement to the regulations 
without substantive modifications.
    The Amendments of 1992 require an institution to agree that it will 
not deny any form of Federal financial aid to any eligible student 
solely on the grounds that the student is participating in a program of 
study abroad approved for credit by the institution. The Secretary 
considers this provision to be self-explanatory and proposes to add 
this statutory requirement to the regulations without substantive 
modifications.
    The Amendments of 1992 require that as a condition for 
participation any institution seeking to participate for the first time 
in the Federal Stafford Loan, Federal PLUS, and Federal SLS programs 
and any institution participating in those loan programs that changes 
ownership resulting in a change of control or changes its status as a 
main campus, branch campus, or an additional location, develop and 
implement for two years a default management plan. The Secretary 
proposes to allow institutions to develop and implement, or submit if 
required by the Secretary, a default management plan developed in 
accordance with the default reduction measures described in appendix D 
of current regulations to meet this requirement.
    The Amendments of 1992 require that an institution must acknowledge 
the authority of the Secretary, guaranty agencies and lenders as 
defined in 34 CFR part 682, nationally recognized accrediting agencies, 
the Secretary of Veterans Affairs, and State postsecondary review 
entities designated under subpart 1 of part H of Title IV of the HEA, 
to share with each other any information pertaining to the 
institution's eligibility for or participation in the Title IV, HEA 
programs, or any information on fraud and abuse. The Secretary proposes 
to add to this list of agencies the institution's State agency with 
legal jurisdiction over the institution and, where appropriate, the 
State agency recognized by the Secretary for the approval of public 
postsecondary education as an alternative to accreditation or 
preaccreditation.
    The statutory provision that governs the effect of fraud and 
criminal conduct by individuals, agencies, or organizations affiliated 
with an institution was discussed in the NPRM published on February 17, 
1994 (in part II) that deals with third-party servicers.
    The Amendments of 1992 require that an institution must timely and 
satisfactorily complete any survey conducted as a part of the 
Integrated Postsecondary Education Data System (IPEDS), or other 
Federal data collection effort on postsecondary institutions. The 
Secretary considers this provision to be self-explanatory and proposes 
to add this statutory requirement to the regulations without 
substantive modifications.
    The Amendments of 1992 spell out the requirements imposed on 
participating institutions that offer athletically related student aid. 
In order to participate in a Title IV, HEA program, an institution that 
offers athletically related student aid must compile annually and have 
audited independently at least every 3 years, data on the revenues 
derived by the institution from and expenses made by the institution 
for the institution's intercollegiate athletics activities. This 
compilation must include data on total revenues and total expenses, 
revenues and expenses attributable to football, revenues and expenses 
attributable to men's basketball, revenues and expenses attributable to 
women's basketball, revenues and expenses attributable to all other 
men's sports combined, and revenues and expenses attributable to all 
other women's sports combined. The compilation must also include data 
on the total revenues and operating expenses of the institution. The 
institution is required to prepare the compilation within 6 months 
after the end of the institution's fiscal year. The institution must 
make the compilation and, where allowable by State law, the required 
audits, available for inspection by the Secretary and the public.
    For purposes of this compilation, the Amendments of 1992 define 
revenues from intercollegiate athletics activities allocable to a sport 
to include without limitation gate receipts, broadcast revenues, 
appearance guarantees and options, concessions, and advertising. 
Revenues such as student activities fees or alumni contributions not 
allocable to a sport must be included in the calculation of total 
revenues only. The Amendments of 1992 define expenses for 
intercollegiate athletics activities allocable to a sport to include 
without limitation grants-in-aid, salaries, travel, equipment, and 
supplies. Expenses such as general and administrative overhead that are 
not allocable to a sport must be included in the calculation of total 
expenses only. Generally, the Secretary is proposing to restate the 
language of the statute in the regulations. However, the Secretary 
proposes changes to conform with the NCAA's 1989 Financial Audit 
Guidelines. In addition to the statutory definition of what is included 
in revenues from intercollegiate athletics activities allocable to a 
sport, the Secretary proposes to specify that other conference 
distributions in addition to broadcast revenues would also be included. 
The Secretary also proposes to specify that revenues such as investment 
interest income that are not allocable to a sport would be included in 
the calculation of total revenues only.
    The Amendments of 1992 provide that an institution may not impose 
any penalty on any student because of the student's inability to meet 
his or her financial obligations to the institution as a result of the 
delayed disbursement of a title IV, HEA program loan due to compliance 
with statutory and regulatory requirements for the Title IV, HEA 
programs, or delays attributable to the institution. The statute 
specifies that those prohibited penalties include the assessment of 
late fees, the denial of access to classes, libraries, or other 
institutional facilities, or the requirement that the student borrow 
additional funds. The Secretary proposes to clarify that the 
restriction that institutions may not require a student to borrow 
additional funds would apply only to funds for which interest or other 
charges are assessed. Therefore, this provision would not apply to any 
interest-free loans that the institution might require the student to 
borrow until other sources of aid are available.
    The Amendments of 1992 provide that an institution may not provide 
any commission, bonus, or other incentive payment based directly or 
indirectly on success in securing enrollments or financial aid to any 
persons or entities engaged in any student recruiting or admission 
activities. An institution also may not provide such an incentive 
payment to any persons or entities engaged in making decisions 
regarding the awarding of student financial assistance. The statute 
specifies that this requirement does not apply to the recruitment of 
foreign students residing in foreign countries who are not eligible to 
receive Federal student assistance. The Secretary proposes to extend 
this provision to require that institutions also may not contract with 
entities that improperly provide, any commission, bonus, or other 
incentive payment as delineated in the statute. The Secretary believes 
that this provision is necessary to implement more rigid restrictions 
than were seen in the past on the practices of ``commissioned 
salespersons.'' The Secretary proposes to repeat the language of the 
statute with the addition of this change. The Secretary believes it is 
clear that this statutory requirement places rigid restrictions on the 
practice of recruitment, admission activities, and the awarding of 
student financial assistance.
    The Secretary is aware that some institutions pay incentives to 
recruiters or admissions office employees based on the success of those 
persons in enrolling students, provided that the enrolled students 
maintain satisfactory progress for and remain enrolled in the 
institution for a specified period of time. The Secretary considers 
this practice, which commonly is referred to as an incentive based on 
``retention,'' to be an example of an activity that is prohibited by 
the statute.
    During the negotiated rulemaking sessions, the Secretary's 
negotiator requested further examples of prohibited activities. A non-
Federal negotiator offered the following examples that the Secretary 
believes are not permitted by the statute. (1) An institution might 
offer payments or gifts to students for referring other prospective 
students for admission to the institution. (2) An institution might 
offer payments or gifts to students on the condition that persons whom 
the students referred to the institution were actually admitted and 
remained enrolled in the institution for a specified period of time. 
(3) An institution might present gifts to alumni, such as coffee mugs, 
sporting events tickets, or contributions in their name for referring 
students to the institution for admission. (4) An institution might pay 
bonuses to Directors of Admissions (or other management personnel) 
based on the number of enrollments received during a particular 
academic year or the number of students who, after enrolling, remained 
at the institution until all financial aid had been received. The 
Secretary specifically requests comments on these examples and others 
that might serve as useful guidelines in these regulations.
    The Amendments of 1992 require that an institution comply with 
applicable requirements established by all members of the ``triad''; 
i.e., the Secretary, State postsecondary review entities, and 
nationally recognized accrediting agencies pursuant to part H of title 
IV of the HEA. The Secretary considers this provision to be self-
explanatory and proposes to add this statutory requirement to the 
regulations without substantive modifications.
    The Amendments of 1992 require that an institution comply with the 
institutional refund policy established in accordance with Sec. 668.22. 
The Secretary considers this provision to be self-explanatory and 
proposes to add this statutory requirement to the regulations without 
substantive modifications.
    Finally, in addition to the statutory requirements for program 
participation agreements, an institution would have to agree to be 
liable for all improperly spent or unspent funds received under the 
title IV, HEA programs, including funds administered by a third-party 
servicer, and refunds that the institution or its servicer may be 
required to make. This provision was proposed and discussed in the NPRM 
published on February 17, 1994 (in part II) that deals with third-party 
servicers.
    The Amendments of 1992 and the Technical Amendments of 1993 amended 
the HEA to require that an institution that has a change in ownership 
resulting in a change in control reestablish institutional eligibility 
and undergo a certification review before it may participate in any 
title IV, HEA programs. Therefore, the Secretary is proposing to remove 
the provision in current regulations that permitted the new 
participation agreement of an institution that changed ownership to be 
effective on the date of the change of ownership. Instead, under the 
proposed regulations, the program participation agreement of an 
institution that changes ownership would be effective on the date that 
the Secretary signs the agreement, just as any other new program 
participation agreement would.
    The Secretary proposes to specify that a program participation 
agreement expires if the institution's participation ends because: (1) 
The institution closes or stops providing educational programs for a 
reason other than a normal vacation period or a natural disaster that 
directly affects the institution or the institution's students; (2) the 
institution loses its institutional eligibility under 34 CFR part 600; 
(3) the institution's period of participation, as specified under 
Sec. 668.13, expires (that is, the four-year limit on participation, 
the limits on participation established pursuant to provisional 
certification, or shorter periods established by the Secretary), or the 
institution's provisional certification is revoked under Sec. 668.13; 
(4) the Secretary determines under Sec. 668.13(c) that the institution 
that is applying for certification has jeopardized its ability to 
perform its financial responsibilities by not meeting the factors of 
financial responsibility under Sec. 668.15 or the standards of 
administrative capability under Sec. 668.16 (in the case of an 
institution whose participation has been limited or suspended under 
subpart G of this part, or voluntarily enters into provisional 
certification); or (5) the Secretary receives a notice from the 
appropriate SPRE that the institution's participation should be 
withdrawn.
    These provisions would conform to the provisions in proposed 
Sec. 668.26 governing the end of an institution's participation in a 
title IV, HEA program. The first of these circumstances listed above is 
purely a clarification of existing practice. The last three describe 
circumstances mandated by the change made to the HEA by the Amendments 
of 1992.

Section 668.15  Factors of Financial Responsibility

    The Secretary proposes to redesignate Sec. 668.13 as Sec. 668.15.
    This section includes provisions dealing with third-party servicers 
that were proposed in the NPRM published on February 17, 1994 (in part 
II). The Secretary will not repeat the discussion of those provisions 
here. However, this third-party servicer NPRM proposed to apply the 
general standards of financial responsibility that are proposed in this 
NPRM to third-party servicers that contract with lenders or guaranty 
agencies to administer any aspect of the title IV, HEA programs.
General
    Section 487 of the HEA requires the Secretary to develop 
regulations to determine the financial responsibility of an institution 
as a part of the Secretary's determination that an institution is able 
to participate in a title IV, HEA program. Section 498 of the HEA 
mandates some of the standards that the Secretary must use in making a 
determination of financial responsibility. In general, section 498 of 
the HEA adopted, with modifications, the standards used by the 
Secretary in current Sec. 668.13 of the Student Assistance General 
Provisions regulations. The Secretary proposes to require an 
institution to demonstrate that it is financially responsible under the 
proposed requirements in this section.
General Standards of Financial Responsibility
    In paragraph (b) of proposed Sec. 668.15, the Secretary would list 
general standards of financial responsibility. The first six standards 
are applicable to all institutions. Section 498(c)(1) of the HEA 
specifies that an institution's financial responsibility must be 
determined based on whether the institution is able to provide the 
services that the institution claims to provide, to provide 
administrative resources necessary to comply with Title IV, HEA program 
requirements, and to meet all of the institution's financial 
obligations, including refunds and liabilities and debts incurred in 
programs administered by the Secretary. These standards were adopted 
from current regulations and the Secretary proposes to continue to use 
them unchanged.
    The Secretary proposes to add to the list of proposed financial 
responsibility requirements for all institutions the requirement that 
an institution be current on any debt service payments. An institution 
normally has variable costs that fluctuate to meet the demand created 
by increasing or decreasing volume in those costs such as those for 
educational supplies and expenses and instructor salaries associated 
with educating an increasing or decreasing number of students. Debt 
service represents a fixed cost, such as mortgage or lease payments, to 
the institution that generally does not fluctuate with that volume. 
Thus, in a situation in which an institution is experiencing a decline 
in revenue due to a decrease in new enrollments, debt service would 
remain unchanged. The institution's flexibility to deal financially 
with the decline is reduced because management typically is unable to 
adjust the amount of payment for debt service without the consent of 
the creditor to whom the debt is owed. This situation places some 
degree of control outside the institution and beyond the scope of 
management's ability to deal with a deteriorating situation by reducing 
costs. Furthermore, a failure to meet debt service payments might 
precipitate collective action on the part of creditors to place the 
institution in an involuntary liquidation situation under Federal 
bankruptcy laws.
    Alternatively, a growing institution usually must take on more debt 
to fund its operations. Should the growth fail to continue, the 
institution might be unable to service the increasing debt service 
associated with its expansion. Thus, the Secretary believes an 
institution's failure to remain current on its debt service payments 
would be a strong indicator of the institution's inability to meet its 
financial obligations.
    Section 498(c)(5) of the HEA provides that the Secretary must 
establish requirements for an institution to maintain sufficient cash 
reserves to ensure repayment of any required refunds. Section 498(c)(5) 
of the HEA also provides for an exemption to this requirement which is 
discussed below under exceptions to the general standards of financial 
responsibility. The Secretary proposes to require an institution to 
maintain, at all times, a minimum cash reserve of at least 10 percent 
of the institution's total deferred tuition income at the end of the 
institution's most recent fiscal year for repayment of refunds. The 
cash reserve would have to be maintained in a cash reserve account and 
would have to consist of cash or cash equivalents, as those terms are 
defined in accordance with generally acceptable accounting principles.
    The Secretary believes that it would be unreasonable and unduly 
burdensome to require an institution to calculate the percentage of its 
cash reserve on a continual basis. Accordingly, the Secretary would 
require an institution to determine its total deferred income at the 
end of the institution's fiscal year and calculate the percentage based 
on that total. Once that percentage is determined, the institution 
would have to maintain that amount of cash reserve at all times until a 
new calculation is performed at the end of the institution's subsequent 
fiscal year. The calculation would be based on the institution's total 
deferred tuition income because deferred tuition income is an indicator 
of the value of services that the institution will provide for the 
coming year. The Secretary requests comment on a comparable way to 
determine the appropriate level for the cash reserve.
    Ten percent of this amount represents roughly the equivalent of a 
month's worth of an institution's revenue. The Secretary considers this 
amount a reasonable amount for an institution to have available to pay 
refunds in the event of the institution's precipitous closure. 
Generally, under this proposal, an institution would demonstrate its 
compliance with this provision once a year with the submission of the 
institution's audited financial statements. However, because an 
institution would be expected to maintain this cash reserve at all 
times, the Secretary would reserve the right to evaluate an 
institution's compliance with the requirement at any time. Finally, the 
proposal to allow cash equivalents to be included in the cash reserve 
is consistent with generally accepted accounting principles.
    Finally, the Secretary proposes that, in order to be financially 
responsible, an institution must not have as part of its audit report 
for its most recently completed fiscal year any of the following. 
First, the institution's audit would not contain a statement by the 
accountant acknowledging substantial doubt about the institution's 
ability to continue operating as a going concern. A ``going concern'' 
statement is a professional opinion rendered by an independent 
certified public accountant, commenting on the institution's unstable 
financial condition and informing the reader of the possibility that 
the institution may not survive the coming fiscal year. Although such a 
``going concern'' statement is rarely issued, its presence attests to a 
concern held by the auditor that the institution's ability to continue 
operating is uncertain. The Secretary believes that if an auditor, 
after close examination of the institution's operations, concludes that 
such a statement is warranted, this is cause for the Department to 
protect its interest in the Title IV, HEA program funds administered by 
the institution by requiring the institution to be subject to the 
appropriate remedies for establishing financial responsibility, or to 
be subject to provisional certification or the proceedings in subpart G 
of these regulations.
    Second, the institution's audit could not contain a finding of 
unauthorized use of donor restricted net assets to meet current 
operating expenses. Unauthorized use of donor restricted net assets is 
a violation of the restrictions placed on donations by the donor. Any 
donor-restricted funds are placed in an endowment fund to be used for 
specific purposes, such as providing scholarships. Donor restricted net 
assets are most commonly found at nonprofit institutions. The Secretary 
believes that if this money is transferred to current funds or total 
net assets for current operating expenses, this is not only an 
indication of extremely impaired cash flow, but also a violation of an 
institution's responsibility as a fiduciary of Title IV, HEA program 
funds.
    Third, the institution's audit could not contain a disclaimed or 
adverse opinion by the accountant. A disclaimed or adverse opinion is 
an indicator that the auditor is unable to perform a complete audit of 
the institution with the assurance that the audit presents a reliable 
presentation of the institution's financial condition. An audit 
submitted with such a disclaimer or limitation would cause the 
institution's financial report to be rejected by the Secretary. Such a 
statement in the auditor's report is an indication that the financial 
statement was not prepared in accordance with generally accepted 
accounting principles as required in current regulations.
    The statute authorizes the Secretary to prescribe criteria for 
evaluating operating losses, net worth, asset to liabilities ratios and 
operating fund deficits. The Secretary's goal in developing these 
proposed regulations is to ensure that institutions are capable to 
operate as a fiduciary of Federal funds based on a sufficient financial 
base to properly provide education and meet the institution's financial 
obligations. The Secretary, therefore, proposes to amend the current 
factors of financial responsibility section to establish new financial 
responsibility standards as a means of further refining the above 
requirements.
    The Secretary proposes that, as in the past, failure to meet any 
one of the factors may result in initiation of an administrative 
proceeding to limit, suspend, fine or terminate an institution. Because 
some of these proposed factors are more stringent than those currently 
found in the regulations, the Secretary recognizes that an institution 
may need a sufficient period of time to adjust its operations in order 
to come into compliance with these proposed factors, if they are 
adopted. Under this proposal, the Secretary may provisionally certify 
institutions that did not meet these proposed standards to provide them 
with this additional period of time to comply, provided that the 
institution shows that it would have met the current standards.
    The Technical Amendments of 1993 require the Secretary to take into 
account an institution's total financial circumstances in making a 
determination of an institution's financial responsibility. The 
Secretary believes that these proposed factors evaluate, both directly 
and indirectly, the overall soundness of an institution's financial 
condition for the period covered by its audited financial statements 
and, therefore, take into account an institution's total financial 
condition as required by the Technical Amendments of 1993.
    The Technical Amendments of 1993 require that criteria developed 
for the determination of an institution's financial responsibility take 
into account any differences in generally accepted accounting 
principles, including required financial statements, that are 
applicable to for-profit and nonprofit institutions. Therefore, in 
addition to general standards that all institutions would be required 
to meet, the Secretary has proposed standards applicable specifically 
to for-profit, nonprofit, and public institutions that the Secretary 
believes indicate an equal level of financial responsibility. At the 
suggestion of some of the negotiators, the proposed specific standards 
of financial responsibility have been organized by type of institution; 
i.e., for-profit, nonprofit, and public.
    Due to differences in legal and reporting entity, mission, and 
accounting format for nonprofit entities and for profit-seeking 
entities, there are differing tests of financial responsibility to be 
applied. Evaluating a nonprofit entity's overall financial condition is 
more complicated because there is no commonly accepted standard of 
acceptable financial condition. Generally, a measure of an 
institution's financial condition is a measure of an institution's 
solvency, or the ability of an institution to adequately cover its 
expenditures with revenues. In determining an institution's financial 
condition, the Secretary believes it is necessary to look at the 
institution's short-term solvency and long-term solvency, which is the 
ability of an institution to support an adequate level of services over 
the long run, withstanding economic disruption and meeting changing 
demands for services.
    With accounting for for-profit entities, analysis of financial 
statements provides an understanding of an institution's financial 
condition through comparisons of key financial ratios that measure the 
institution's ability to remain solvent while continuing to provide 
educational services at acceptable levels. Examination of financial 
information from nonprofit entities requires a review of other 
organizational factors that measure the ability of the institution to 
provide educational services using a larger and more complex source of 
funds. It is therefore necessary to differentiate the standards that 
are applicable to profit-seeking entities from the standards that are 
applicable to nonprofit entities.
    The Secretary will first address the specific standards for for-
profit institutions.
    The Secretary proposes to require that a for-profit institution 
have, at the end of its latest fiscal year, a ratio of current assets 
to current liabilities of at least 1.25:1. One commonly used means of 
determining whether or not the institution has sufficient short-term 
solvency is use of the ratio of current assets to current liabilities. 
For the past fourteen years the Department has used a current assets to 
current liabilities ratio of at least 1:1 as an indicator of financial 
responsibility. This means that the institution has current assets at 
least equal to their current liabilities. In theory, this would 
indicate that an institution has sufficient resources to handle not 
only debt service, but also other liabilities for at least the coming 
fiscal year. The higher the amount of assets, the better the liquidity 
position of the institution and, therefore, the better the institution 
will be able to handle unforeseen economic conditions. The Secretary 
believes that the current 1:1 benchmark offers little or no indication 
of adequate short-term solvency. A 1.25:1 benchmark has, therefore, 
been proposed for for-profit institutions. Cash is now required to be a 
component. The Secretary believes that the proposed increase in current 
assets will help to ensure that institutions have sufficient resources 
to provide worthwhile education and training.
    The Secretary is proposing a higher ratio of current assets to 
current liabilities ratio for for-profit institutions than for 
nonprofit institutions. The Secretary believes that a higher current 
ratio is necessary for for-profit institutions because they will be 
less likely, in the event of hampered liquidity, to draw on fund-
raising as a source of cash. This rationale is discussed later as part 
of the discussion of the proposed ratio of current assets to current 
liabilities for nonprofit institutions.
    The Secretary proposes to exclude from the calculation of this 
ratio for for-profit institutions, uncollateralized loans receivable 
from owners and related parties. Uncollateralized related party loans 
are loans that have been made to affiliates, officers, or employees and 
have not been secured by tangible assets. In accordance with Accounting 
Research Bulletin 43 (ARB43), chapter 3A, paragraph 6, the concept of 
current assets contemplates the exclusion from that classification of 
such resources as ``* * * (c) receivables arising from unusual 
transactions (such as the sale of capital assets, or loans or advances 
to affiliates, officers, or employees) that are not expected to be 
received within twelve (12) months''. In the event that certain 
financial statements present these types of loans on the balance sheet, 
they will be disregarded by the Secretary in computation of the current 
ratio.
    Further, because the proposed cash reserve requirement may cause a 
portion of the institution's cash reserves to be classified as a 
restricted asset, which would, under generally accepted accounting 
principles, be excluded from classification as current assets, the 
Secretary's proposal specifies that, for for-profit institutions, the 
cash reserves may be included in the institution's current assets in 
calculating the institution's current assets to current liabilities 
ratio. The Secretary believes that it is appropriate to permit for-
profit institutions to treat the cash reserves as current assets 
because the funds are held for the benefit of the students, and 
inclusion of those amounts toward demonstrating a 1.25:1 current ratio 
still leaves the institution with sufficient unrestricted assets to pay 
all current expenses.
    The Secretary proposes that a for-profit institution is financially 
responsible if it has not had operating losses over both of its two 
latest fiscal years that cause an operating loss exceeding 10 percent 
of the institution's previous year's tangible net worth for its latest 
fiscal year. While it may not be unusual for an institution to record a 
loss in any fiscal year, this loss is not harmful so long as the loss 
is not excessive, is not indicative of a deteriorating trend in the 
institution's financial condition, and the institution otherwise meets 
the factors substantiating its financial strength. The Secretary 
proposes to define an operating loss, for purposes of these provisions, 
as total net income minus extraordinary gains or losses, income or 
losses from discontinued operations, prior period adjustments, and the 
cumulative effect of changes in accounting principle, estimate, or 
reporting entity. The Secretary proposes that the calculation of 
tangible net worth shall exclude all assets defined as intangible in 
accordance with generally accepted accounting principles. The Secretary 
believes this standard will measure whether a profit-seeking entity is 
operating from current cash flow to the extent possible. The aggregate 
residual effect of these activities on the organization's individual 
net assets is represented, along with any interfund transfers that may 
have taken place during the period.
    The Secretary proposes that a for-profit institution is financially 
responsible if it had, for its latest fiscal year, a positive tangible 
net worth. The Secretary proposes that, for purposes of this section, a 
positive tangible net worth occurs when the institution's tangible 
assets exceed its liabilities. Further, the Secretary proposes that the 
calculation of tangible net worth shall exclude all assets defined as 
intangible in accordance with generally accepted accounting principles. 
In applying this proposed standard, the Secretary could consider the 
effect of extraordinary gains or losses resulting from unusual and 
infrequent events, and could take into consideration the cumulative 
effect of changes in accounting principle, estimate or reporting entity 
to the extent that such a change results in a more accurate 
representation of the institution's financial position in accordance 
with generally accepted accounting principles. For the past fourteen 
years, the Department has had a standard for net worth that states that 
an institution is not financially responsible if it has a deficit net 
worth (i.e., the institution's liabilities exceed its assets.), a 
measure of long-term solvency. Therefore, an institution with a net 
worth of zero meets this current requirement. The proposed change from 
penalizing a deficit net worth to requiring a positive net worth is 
only a technical change in form that should affect few, if any 
institutions.
    By excluding all assets classified as intangible, all assets such 
as goodwill, organization costs, and covenants-not-to-compete, which 
have little market value in the determination of an institution's 
overall solvency will be eliminated in the calculation of net worth. In 
purchasing a business, the new owner pays an amount and allocates the 
market value to individual tangible assets in order to prepare 
financial statements. After applying the proper market value to the 
various assets, any residual amount that appears on the institution's 
balance sheet as goodwill, organization costs, or covenant-not-to-
compete, is classified as an intangible asset.
    It is the Secretary's intent to identify those institutions that do 
not have sufficient capital assets. For example, businesses that 
operate on month-to-month leases with minimum capital actually invested 
in the business are a potential risk to students, and ultimately to the 
taxpayers in terms of possible collapse and bailout. In these cases 
loans to students are often automatically discharged in accordance with 
provisions in the HEA. Preventing institutions that have no real assets 
from participating in the programs should enhance the gatekeeping 
process.
    In the case of nonprofit institutions, the Secretary has developed 
standards in accordance with Statement of Financial Accounting 
Standards No. 117 (FAS 117) that was issued in June 1993 by the 
Financial Accounting Standards Board (FASB). FAS 117 altered the 
reporting format for not-for-profit organizations after the negotiated 
rulemaking process was already well underway. FAS 117 is effective for 
annual financial statements issued for fiscal years beginning after 
December 15, 1994, except for organizations with less than $5 million 
in total assets and less than $1 million in annual expenses. For those 
organizations, the Statement is effective for fiscal years beginning 
after December 15, 1995 with earlier application encouraged.
    The Secretary proposes to require a nonprofit institution to 
prepare a classified statement of financial position in accordance with 
generally accepted accounting principles to provide the Secretary with 
the financial information necessary to determine the institution's 
financial responsibility under these proposed regulations. The 
Secretary proposes that, alternatively, a nonprofit institution could 
provide this information as footnotes to the audit. Although FAS 117 
does not require a nonprofit institution to submit a classified 
statement of financial position prior to published implementation 
dates, it does not prohibit the institution from doing so. The 
Secretary notes that a financial statement that is not classified is 
not structured to provide the financial information necessary for the 
Secretary to determine an institution's compliance with these proposed 
regulations; however, the information could be included as footnotes to 
the audit.
    The Secretary proposes that a nonprofit institution is not 
financially responsible if it cannot demonstrate, at the end of its 
latest fiscal year, a ratio of current assets to current liabilities of 
at least 1:1. The Secretary proposes to not permit a nonprofit 
institution to include the cash reserves in the institution's current 
assets. The Secretary believes that, because the proposed current 
assets to current liabilities ratio for a nonprofit institution is 1:1, 
if the institution used designated reserve funds to meet this ratio, 
there would be no assurance of solvency.
    The importance of a higher current ratio for for-profit 
institutions lies in the fact that they are not as likely to be able to 
draw on fund raising as a source of cash in the event of hampered 
liquidity because donors are less likely to contribute funds to a for-
profit institution where those contributions would not be tax 
deductible. Many nonprofit institutions have sufficient support in the 
community and from friends and alumni who are willing to donate to the 
institution. The cash intake of for-profit institutions is therefore 
limited to cash generated through profitability, whereas nonprofit 
institutions have an additional source of cash. Endowments, even when 
restricted to functions such as providing scholarships, are awarded and 
may be taken into cash from operations. Consistent profitable 
operations result in a better liquidity position for for-profit 
institutions, whereas consistent profitable operations are not 
necessary for a nonprofit to remain viable. In addition, it is inherent 
in a nonprofit institution that its final cash position not reflect a 
profit. In the nonprofit industry, the financial manager has limited 
authority. The financial manager may make recommendations, but the 
ultimate authority lies with the governing board. There is, therefore, 
less control in the hands of financial managers and a corresponding 
decrease in their ability to control a liquidity situation.
    Lack of liquidity means that the institution is unable to service 
its current debt. This can lead to the forced sale of long-term 
investments and assets. To the owners of an institution, a lack of 
liquidity will mean reduced profitability or it may mean loss of 
control or loss of the entire capital investment. To creditors of the 
enterprise, it means slow collection of principal and interest due or 
even loss of the amounts due them. Students of these institutions can 
also be affected by a short-term poor financial condition. These 
effects may take the form of inability of the institution to perform 
their contract, inability to make refunds due to students or lenders, 
or the loss of supplier relationships. Suppliers are interested in an 
institution's liquidity position, and if it is found to be inadequate, 
it may cease to do business with the institution.
    The Secretary proposes that a nonprofit institution is not 
financially responsible if it has had a decrease in total net assets at 
the end of its latest fiscal year of such significance that, if 
continued, would result in a ratio current assets to current 
liabilities of less than 1:1. Under this proposal, the Secretary could 
consider the effect of extraordinary gains or losses resulting from 
unusual and infrequent events, and could take into consideration the 
cumulative effect of a change in accounting principle, estimate or 
reporting entity to the extent that such a change results in a more 
accurate representation of the institution's financial position in 
accordance with generally accepted accounting principles. For purposes 
of this proposed analysis, the Secretary could exclude unrealized gains 
and losses on investments that have been reported as changes in 
unrestricted net assets. The standard was revised to reflect the 
changes brought about with the issuance of FASB 117 and in order to 
provide parity with the for-profit institutions. The concept of net 
worth, as it applies to profit-seeking entities, does not exist for a 
not-for-profit entity. Upon implementation of FASB 117, fund accounting 
will no longer be used for colleges and universities, but these 
entities will adopt a format that is more similar to the format for-
profit entities have been using. The term ``fund balance'' will no 
longer apply, but will be replaced by total net assets, divided into 
unrestricted, temporarily restricted and permanently restricted assets. 
For institutions not required to implement FAS 117 prior to the 
effective date of these regulations, the regulations applying to 
nonprofits currently found in 34 CFR 668.13(c), ``the institution shall 
not have a deficit current unrestricted fund balance'', will remain in 
effect until the institution adopts FAS 117.
    The Secretary requests comments on whether the Secretary should 
determine a nonprofit institution to be financially responsible even if 
it does not meet these requirements if the institution has an 
acceptable ``bond rating''. The Secretary suggests that a type of 
acceptable bond rating may be a current general obligation or general 
obligation equivalent debt rating (because such a rating is backed by 
the full resources of the institution) by a nationally recognized debt 
rating organization, approved by the Secretary, that is at least 
investment grade.
    The Secretary proposes that a public institution is financially 
responsible only if the institution has its liabilities backed by the 
full faith and credit of the State, or by an equivalent government. The 
Secretary is aware that accounting principles for public institutions 
differ from those for for-profit and nonprofit institutions. The 
Secretary solicits comments on other acceptable measures of a public 
institution's financial responsibility that take the applicable 
accounting principles into account.
Past Performance of an Institution or Persons Affiliated With An 
Institution
    The Secretary proposes to remove from the factors of financial 
responsibility the provisions in current Sec. 668.13 (c)(4) and (d)(2) 
governing the effect on an institution's financial responsibility of 
criminal conduct and fraud involving Federal funds. Those provisions 
have been superseded by a similar statutory provision that is addressed 
in the discussion on proposed Sec. 668.14 governing program 
participation agreements.
    Under proposed Sec. 668.15(c)(2), an institution would not be 
considered financially responsible, despite meeting all other 
requirements of this proposed section, if: (1) The institution has been 
limited, suspended, terminated, or entered into a settlement agreement, 
to resolve such an action by the Secretary or a guaranty agency within 
the preceding five years; (2) the institution had an audit finding 
during its two most recent audits, or a program review finding during 
its two most recent program reviews, that resulted in the institution's 
being required to repay an amount greater than five percent of the 
Title IV, HEA funds that the institution received for any award year 
covered by the audit or the program review; or (3) the institution 
failed to address satisfactorily any compliance problems identified in 
program review or audit reports based upon a final decision of the 
Secretary.
    The consequences of this proposed provision are described more 
fully earlier in this preamble in the discussion on provisional 
certification. Essentially, institutions that fall into one of these 
categories not only would not be considered financially responsible, 
but could not be provisionally certified without the submission of 
certain financial guarantees or personal assumptions of liability 
arising from participation in the Title IV, HEA programs.
Exceptions to the General Standards of Financial Responsibility
    The Amendments of 1992, as amended by the Technical Amendments of 
1993, provide that the Secretary shall determine an institution to be 
financially responsible even though it does not meet certain general 
standards of financial responsibility, under various conditions.
    Section 498(c)(5)(B) of the HEA provides that the Secretary shall 
establish a process whereby an institution is exempt from the cash 
reserve requirement if the institution is located in, and is legally 
authorized to operate within, a State that has a tuition recovery fund 
that ensures that the institution is able to pay all required refunds 
and the institution contributes to that tuition recovery fund. The 
Secretary proposes that an institution is exempt from the proposed cash 
reserve requirement if it meets these conditions; however, the 
Secretary proposes to stipulate that a State's tuition recovery fund 
must be acceptable to the Secretary. The Secretary would like to ensure 
that a State's tuition recovery fund truly has the resources to ensure 
payment of all required refunds if necessary. To this end, the 
Secretary would expect States to provide as much information as 
possible to demonstrate that their tuition recovery fund can pay all 
required refunds on behalf of an institution that closed precipitously. 
The Secretary invites comment on what specific standards should be used 
to measure the acceptability of a State's tuition recovery fund.
    Section 498(c)(3) of the HEA provides that an institution is 
financially responsible even though it does not meet the other general 
standards of financial responsibility, under the following 
circumstances. First, an institution that is not financially 
responsible under the general standards of financial responsibility 
(except the cash reserve requirement) is financially responsible if the 
institution submits to the Secretary third-party financial guarantees, 
such as performance bonds or letters of credit payable to the 
Secretary, that equal not less than one-half of the annual potential 
Title IV, HEA program liabilities of the institution. The Secretary 
proposes that a letter of credit that is payable to the Secretary and 
effective for a period of time as determined by the Secretary would be 
the only acceptable type of third-party guarantee for this requirement. 
The determination by the Secretary that payment from a third-party 
guarantee requires that funds become immediately available to make 
refunds or to reimburse the Secretary for debts incurred in the 
programs. It has been the Secretary's experience that letters of credit 
are the only method by which funds do become immediately available; 
however, the Secretary requests comments on other standard forms of 
publicly guaranteed security that would provide the same level of 
security to the Secretary. The Secretary notes that an institution is 
liable for all mishandled Title IV, HEA program funds that it receives. 
Further, the Secretary believes that the total Title IV, HEA program 
funds received by an institution during the last complete award year is 
the best indicator of the amount of Title IV, HEA program assistance 
that the institution will receive for the next award year. Therefore, 
the Secretary proposes to require an institution to submit a letter of 
credit equal to not less than one-half of the Title IV, HEA program 
funds received by the institution during the last complete award year 
for which figures are available in order to meet this requirement.
    Second, the Technical Amendments of 1993 provide that an 
institution that is not financially responsible under the general 
standards of financial responsibility (except the cash reserve 
requirement) is financially responsible if it establishes to the 
satisfaction of the Secretary, with the support of a financial 
statement audited by an independent certified accountant with generally 
accepted accounting standards, that the institution has sufficient 
resources to ensure against the precipitous closure of the institution, 
including the ability to meet all of its financial obligations, 
including refunds of institutional charges and repayments to the 
Secretary for liabilities and debts incurred in programs administered 
by the Secretary. The Secretary proposes to restate the statute, 
modifying it only to propose to require that the financial statement be 
submitted in accordance with the proposed requirements for 
documentation of financial responsibility that will be discussed later.
    The Technical Amendments of 1993 further provide that an 
institution is not required to meet the general standards of financial 
responsibility (except for the cash reserve requirement) if the 
institution is an institution that provides a 2-year or 4-year 
educational program for which the institution awards an associate or 
baccalaureate degree that demonstrates to the satisfaction of the 
Secretary that there is not reasonable doubt as to its continued 
solvency and ability to deliver quality educational services, it is 
current in its payment of all current liabilities, including student 
refunds, repayments to the Secretary, payroll, and payment of trade 
creditors and withholding taxes, and it has substantial equity in 
school-occupied facilities, the acquisition of which was the direct 
cause of its failure to meet the current operating ratio requirement. 
The Secretary proposes to restate the statute without modification.
Documentation of Financial Responsibility
    Section 498(c)(4) of the HEA provides that the determination of an 
institution's financial responsibility be based on an audited and 
certified financial statement of the institution or, where appropriate, 
its parent corporation, conducted by a qualified independent 
organization or person in accordance with standards established by the 
American Institute of Certified Public Accountants. The statement must 
be submitted to the Secretary when the institution is applying to begin 
or continue participation in the Title IV, HEA programs. The statute 
further provides that the Secretary may require the submission of 
additional audits if the first submission does not establish compliance 
with the general standards of financial responsibility. Although 
audited financial statements should be rendered in a uniform manner, 
there is some leeway with regards to contents of the statements. The 
Secretary proposes to require institutions to submit financial 
statements on an annual basis within four months after the end of the 
institution's fiscal year. The Secretary believes that four months from 
the end of an institution's fiscal year is a sufficient period of time 
for an institution to submit a financial statement. The Secretary also 
clarifies that, upon request, the institution must provide or otherwise 
make available the accountant's work papers in order to ensure that all 
information relevant to preparing an audited financial statement is 
readily available. Institutions are already required to provide access 
to such information pursuant to current Sec. 668.23, and the Secretary 
proposes to reference that access to records in this proposed section. 
The Secretary proposes that an institution may be granted a filing 
extension to an institution upon a showing of good cause. The Secretary 
intends that this extension would be granted on an infrequent basis, as 
the Secretary believes it is imperative to have the financial 
information from the institution that most accurately reflects the 
current financial situation of the institution.

Section 668.16  Standards of Administrative Capability

    The Secretary proposes to redesignate Sec. 668.14 as Sec. 668.16.
    In matters not governed by specific provisions, section 
487(c)(1)(B) of the HEA provides for the establishment of standards of 
administrative capability for participating institutions that include 
any matter the Secretary deems necessary for the sound administration 
of the Title IV, HEA programs. Section 498(d) of the HEA, which was 
added by the Amendments of 1992, authorizes the Secretary to establish 
procedures and requirements relating to administrative capability, 
including the consideration of past performance of institutions or 
individuals in control of those institutions and maintenance of 
records. In addition, section 498(d) authorizes the Secretary to 
establish other reasonable procedures that will contribute to ensuring 
that institutions will be administratively capable.
    Given this framework, the Secretary proposes to strengthen and 
modify the administrative capability standards in the current 
regulations by making significant, substantive changes to the 
administrative standards as well as some technical changes; the 
significant proposed changes to the current regulations are described 
below.
    The Secretary proposes to clarify the Secretary's current principle 
that an institution must demonstrate that it is capable of meeting each 
of the administrative standards in this section to be considered 
administratively capable. During negotiated rulemaking, alternatives to 
requiring that institutions meet each administrative standard were 
discussed. Among the options considered were that the various factors 
be ``weighted,'' i.e., the Secretary would identify which factors he 
considered to be the most critical and would incur the greatest penalty 
if they were not met. Some of the negotiators suggested that the 
various factors be used only as indicators of capability; that is, the 
Secretary would be required to review each institution that did not 
comply with one or more standard to determine the seriousness of 
noncompliance. However, the negotiators did not reach consensus on an 
approach. Therefore, the Secretary is proposing that to be fully 
certified as meeting the standards in this section (as well as the 
other standards in Subpart B of these regulations) an institution must 
demonstrate that it is administratively capable by meeting all the 
administrative standards. An institution that fails to demonstrate 
compliance with one or two administrative standards could be certified 
provisionally (see the earlier discussion on provisional certification) 
if the Secretary were to determine the institution capable of meeting 
all the standards within a specific time period and that the 
noncompliance did not necessitate taking a stronger sanction such as a 
fine, limitation, suspension, or termination proceeding against the 
institution.
    For example, an initial applicant would not be able to demonstrate 
compliance with all standards prior to participation. However, the 
Secretary expects such an institution to demonstrate that it is capable 
of complying with all the standards. Therefore, the Secretary currently 
provisionally certifies an initial applicant if the Secretary 
determines that the applicant is capable of meeting the current 
standards within a specified period of time. The Secretary will 
continue this practice, using any additional standards proposed in this 
section if they are adopted in final.
    The Secretary proposes to make explicit the requirement that, to be 
considered administratively capable, an institution must administer all 
the Title IV, HEA programs in which it participates in accordance with 
all applicable statutory and regulatory provisions and special 
arrangements, agreements, and limitations. This expectation has been 
implicit. However, the Secretary believes it is important to lay out 
this standard together with all the other administrative standards.
    The Secretary proposes to clarify what is meant by a capable 
individual who is responsible for administering the Title IV, HEA 
programs. It is important for each institution that is currently 
participating or seeking to participate in the Title IV, HEA programs 
to demonstrate that it has staff who are capable of administering the 
programs properly. While obviously a number of factors should be 
considered in determining what constitutes ``capable,'' the Secretary 
believes that one factor that should be addressed in regulations is 
whether a financial aid administrator has been certified by his or her 
State to have that capability. This factor would apply in a State that 
requires financial aid administrators to be certified. The Secretary 
also proposes to consider whether an individual has successfully 
completed Title IV, HEA program training that the Secretary has 
provided or approved. The Secretary is aware that some professional 
organizations provide high caliber training in various aspects of the 
administration of the Title IV, HEA programs and wishes to allow for 
acceptance of that outside training to meet this requirement in the 
future. The Secretary welcomes comments on what elements and safeguards 
should be present in an acceptable training program for financial aid 
administrators. While adequate experience and training are major 
considerations in evaluating compliance with this standard, the 
Secretary welcomes suggestions regarding any other appropriate factors 
that the Department of Education should take into account in 
determining an individual's capability.
    The Secretary proposes to clarify the factors that are considered 
in determining whether a financial aid office is adequately staffed. 
The Secretary proposes to specify that in looking at the amount of 
funds administered by the institution, the Secretary would also 
consider the number of students who receive any student financial 
assistance at the institution as it has a direct bearing on whether an 
office is adequately staffed. The Secretary also proposes to add 
consideration of the degree of office automation in the financial aid 
office. While the Secretary has always considered the extent to which 
financial aid processing is automated in assessing the adequacy of 
financial aid offices, the Secretary believes it is helpful to 
acknowledge specifically in the regulations the bearing the degree of 
office automation has on the staffing levels of financial aid offices.
    During the negotiated rulemaking sessions, discussions were held 
regarding the possible development of specific staffing levels, such as 
ratios of financial aid staff to the number of financial aid recipients 
at an institution, for determining the adequacy of the financial aid 
office of an institution participating in the Title IV, HEA programs 
for the first time, an institution that undergoes a change of ownership 
resulting in a change of control, and an institution that has exhibited 
administrative difficulty with other standards in this section. The 
Secretary believes that it is not necessary to prescribe specific 
staffing levels for participating institutions that have not 
experienced administrative problems. However, the Secretary agreed to 
solicit comments on the need for an additional method to assess 
staffing levels of other institutions.
    An institution participating in the Title IV, HEA programs for the 
first time has neither the experience in dealing with large numbers of 
financial aid recipients nor a record of administering those programs 
that can be evaluated. During discussions at the negotiated rulemaking 
session, it was suggested that it might be necessary to prescribe a 
specific number of staff for the institution's financial aid office 
that could serve as a guide for determining whether the institution can 
handle the volume of financial aid applications and funds it expects to 
receive. This standard would be required until the Secretary is able to 
judge the institution's actual administration of the programs. 
Similarly, there is no assurance that an institution that changes 
ownership will operate with the same staff and procedures and at the 
same level of funding as was the case under the previous ownership. 
Thus, that institution's former track record could not be relied upon 
to predict its continued administrative capability and there might be a 
need to be able to evaluate the adequacy of current or anticipated 
staffing levels using specific numbers or ratios, just as the 
Department would evaluate those of a new participating institution. 
Finally, if an institution has documented problems or indicators of 
trouble in administering the Title IV, HEA programs, these problems 
could well be caused by inadequate staffing levels in the institution's 
financial aid office. Requirements for financial aid staff to be 
maintained at specific levels might need to be imposed upon the 
institution. To address the problems and administer the Title IV, HEA 
programs correctly, it is logical to expect an institution to meet 
minimum staffing levels that might be adopted.
    The Secretary solicits comments on other ways of measuring staff 
adequacy at newly participating institutions, institutions that change 
ownership resulting in a change of control and participating 
institutions with documented administrative problems as well as any 
other categories of institutions that should be subject to requirements 
for specific staffing levels. The Secretary further invites comment on 
how such considerations as the size of the institution, and the volume 
of Title IV, HEA program funds administered by the institution should 
determine the number or ratio of financial aid staff that the Secretary 
should prescribe. For example, the Secretary wishes to know whether a 
reasonable ratio of staff to applicants or recipients can be 
established, and, if so, what that ratio might be. The Secretary 
understands the difficulty inherent in strict application of a 
quantitative formula; nevertheless, concern was expressed at the 
negotiated rulemaking sessions about having an adequate basis on which 
to make fair, worthwhile, and consistent judgments of administrative 
capability. The Secretary recognizes that appropriate staffing levels 
must include staff not only in the financial aid office but also in the 
business office or other offices within an institution, and that the 
use of third-party servicers and office automation have a bearing on 
those levels. The Secretary asks commenters to address these factors in 
their recommendations.
    The Secretary proposes to require that to be considered 
administratively capable, an institution have written procedures, or 
other written information covering, at a minimum, the nature and 
frequency of communication of information among all the offices that 
have an impact on the administration of the Title IV, HEA programs and 
the responsibilities of various offices with respect to the awarding 
and delivery of Title IV, HEA program funds and reports to the 
Secretary. The Secretary encourages institutions to have specific 
written procedures where possible, preferably in procedural manuals, 
for this purpose. However, the Secretary recognizes that some of the 
information might be found in catalogs, student or administrative 
handbooks, or other sources. The Secretary is proposing to add these 
provisions because audits and program reviews of Title IV, HEA programs 
administered by institutions have shown that lack of written procedures 
in these key areas is frequently a contributing factor to a lack of 
proper controls, resulting in overawards and inadequate accounting of 
expenditures. To ensure that only eligible students receive funds and 
in the correct amount, and that borrowers are tracked accurately and 
timely, it is essential that each institution be clear about how and 
when pertinent information is transmitted from one office to another. 
The proposed addition to the regulations includes examples of the types 
of information to be transmitted. Similarly, it is critical that each 
office that is responsible for the approval and disbursement or 
delivery of Title IV, HEA funds have in writing that office's 
responsibilities and reporting requirements.
    The Secretary proposes to clarify what constitutes division of the 
authorizing and disbursing or delivering functions by adding an 
example. In the past, there has been virtually no real separation of 
these duties in some institutions; this situation has presented an 
opportunity for significant abuse. It is important that two different 
individuals authorize and disburse or deliver payment, and that an 
individual performing one of these functions not have control over the 
work activities of the person or persons performing the other. To guard 
against collusion, it is also critical that the individuals not be 
members of the same family or exercise substantial control over the 
institution through a combined ownership interest in the institution. 
The terms substantial control and ownership interest are currently 
defined in Sec. 668.13. The Secretary considers two individuals to 
exercise substantial control through a ``combined'' ownership interest 
if the individuals hold together at least a 25 percent ownership 
interest in the institution. Thus, an institution would be precluded 
from having one individual with a 10 percent ownership interest who 
awards Title IV, HEA program assistance and another individual with a 
15 percent ownership interest who disburses the funds. This concept is 
designed to allow for those employees who participate to a moderate 
degree in a profit-sharing plan to be employed in one of the capacities 
described in this provision without having a detrimental impact on the 
institution's administrative capability. Finally, the Secretary wishes 
to clarify that, under both current regulations and the proposed 
regulations, it is acceptable for a check that is to be disbursed or 
delivered to a student by another office to pass through the office 
that authorizes payment, as long as the office that authorizes payment 
does no more than deliver the check to the office responsible for 
disbursement or delivery to the student.
    The Secretary proposes to make explicit that record-keeping is a 
basic standard of administrative capability. Those new institutions 
that do not have adequate record-keeping capability would not be 
approved to participate in the Title IV, HEA programs. The record-
keeping capability of participating institutions would be evaluated 
when the institutions seek renewal of their program participation.
    The Secretary proposes to revise the satisfactory progress 
standards to require that the maximum time frame for completion of an 
undergraduate program be no longer than 150 percent of the published 
length of the educational program and that increments of the maximum 
time frame not exceed the lesser of one academic year or one-half the 
published length of the educational program. The establishment of the 
maximum time frame must, as usual, take into account a student's 
enrollment status. Thus, an institution that offers a four-year degree 
program (as listed in the institution's catalog) would have to 
establish a maximum time frame of no more than six years for completion 
of the program by a full-time student. The time frame could be 
proportionally longer for a half-time student. The Secretary emphasizes 
that this requirement would set an upper limit on the period of time 
for which a student may receive Title IV, HEA program aid. An 
institution would not be required to expel or otherwise remove a 
student from the educational program after the expiration of this 
maximum time frame (unless, of course, the institution has a similar 
requirement for students who do not receive Title IV, HEA program 
assistance). The Secretary has a longstanding policy under which 150 
percent of the length of an educational program is considered to be a 
reasonable period in which a serious student should be able to complete 
the program. The Secretary notes that this proposed time frame is also 
consistent with proposals made by the NPRM implementing the Student 
Right-to-Know provisions in section 485(a) of the HEA (57 FR 30826). 
The Secretary does not believe that Title IV, HEA program aid should be 
provided beyond the point at which a student can reasonably be expected 
to complete his or her educational objective.
    The Secretary proposes to expand and clarify the requirements for 
reporting information about possible fraud or illegal misconduct 
related to the Title IV, HEA programs. The proposed regulations would 
eliminate the current provision for an institution to refer suspected 
instances of fraud or other criminal misconduct involving Title IV, HEA 
program assistance to a State or local law enforcement agency rather 
than the Office of Inspector General (OIG), if more appropriate. 
Instead, the proposed regulations would require the institution to 
notify only the OIG. The proposed regulations would also remove a 
related requirement--that the institution report to the OIG, for each 
calendar year, all relevant referrals to State or local law enforcement 
agencies, as this would no longer be necessary if all referrals were 
made directly to the OIG. Upon receipt of the information, the OIG will 
notify and work with the appropriate officials to resolve the issue. 
The Secretary is proposing to amend this section to streamline the 
referral process and reduce the burden of reporting information.
    Currently, under this provision governing the reporting of 
instances of suspected fraud and criminal misconduct, institutions are 
required to report only information regarding applicants for Title IV, 
HEA program assistance. Another proposed change would expand the 
reporting requirement with respect to both the types of misconduct to 
be reported and the individuals and entities involved in the 
misconduct. In addition to the information currently required, an 
institution would be required to report information regarding illegal 
conduct involving the eligibility and funding of the institution and 
its students through Title IV, HEA programs believed by the institution 
to have been committed by any employee, third-party servicer, or other 
agent of the institution that acts in a capacity that involves the 
administration of the Title IV, HEA programs. This provision would 
specify that illegal conduct would include possible fraud, 
misrepresentation, conversion or breach of fiduciary responsibility, or 
any other illegal conduct. The Secretary believes it is important to 
investigate any possible illegal misconduct (i.e., misconduct where 
formal criminal charges have not been brought) in addition to possible 
criminal misconduct. The intent of this expansion is to specify that 
institutions should report not only acts that constitute fraud or 
criminal conduct, but any and all other illegal conduct involving Title 
IV, HEA programs in which an employee or third-party servicer might 
have engaged.
    In addition to modifying and expanding some of the existing 
administrative capability standards, and making others explicit, the 
Secretary proposes to expand the administrative capability standards to 
include the general areas that SPREs will review when they become 
operational. The Secretary realizes that the SPRE review standards must 
be developed in consultation with institutions located in the State and 
will apply only to those institutions that trigger reviews; therefore, 
those standards may differ greatly from those proposed here for 
purposes of evaluating an institution's administrative capability. 
However, the Secretary believes that these areas of review have a 
significant bearing on an institution's administrative capability and 
therefore should be incorporated in the Federal administrative 
capability standards.
    The Secretary's overriding concern is that the Secretary have 
sufficient information on which to make a determination that a new or 
currently participating institution is administering or is capable of 
administering the Title IV, HEA programs efficiently, effectively, and 
correctly. With this in mind, the Secretary solicits comments on 
specific ways to quantify these provisions (for example, what a 
``significant number of students with special needs'' is) and whether 
each of these added requirements should be made applicable to all 
institutions or whether these provisions should be made applicable only 
to institutions that meet specific criteria or thresholds, e.g., 
institutions with short-term programs, a history of high withdrawal 
rates, high default rates, student complaints, etc.
    Specifically, the Secretary is proposing to require institutions 
that enroll significant numbers of students with special needs to have 
and implement a plan that provides access to adequate support services 
for those students. The Secretary believes that an institution that 
cannot provide adequate peripheral support should not enroll those 
special-needs students in significant numbers. In evaluating 
administrative capability, the Secretary has looked historically at 
withdrawal rates. High withdrawal rates often result in refund and 
default problems in the FFEL programs. Some institutions have high 
withdrawal rates because they have recruited students who were not able 
to complete the program. Student withdrawal for academic reasons has 
been addressed by changes to the ability-to-benefit provisions: 
students who do not have a high school diploma or the recognized 
equivalent now need to pass an independently administered, approved 
examination. However, other students who have been admitted have had 
the academic capability to succeed, but have been unable to complete 
the program because of other factors, such as lack of child care, or 
changes in child care arrangements, or lack of adequate transportation. 
Some of the negotiators provided the Secretary with examples of 
students who could not complete a course of study because of a lack of 
information about how to access adequate support services, who 
otherwise may not have enrolled in those programs if accurate 
information about the restricted availability of those services had 
been disclosed. For example, if a school enrolls a significant number 
of students who have small children and, therefore, need someone to 
look after their children while they are in classes and studying, or 
students who have no transportation of their own, it is incumbent upon 
the institution to work with these students to ensure they have access 
to the ancillary services required in order for them to complete their 
education or training. The institution may, but need not, actually 
provide the specific services, such as child care, but must, at a 
minimum, provide adequate guidance and access to enable their students 
to overcome barriers to attendance.
    The Secretary is proposing that affected institutions have a plan, 
which they may be asked to submit, to demonstrate that they meet this 
provision. However, the Secretary is interested in receiving 
suggestions about other ways to address the problem of institutions 
that recruit and enroll significant numbers of students who need 
support services without informing those students about access to the 
support services. The Secretary solicits comments regarding how to 
determine what constitutes a ``significant number'' of students with 
special needs and what special needs should be included. Further, the 
Secretary would like to receive proposals for alternate means of 
addressing this issue.
    The Secretary proposes to require each institution to have 
procedures for receiving, investigating, and resolving student 
complaints.
    The Secretary proposes to require that if the stated objectives of 
an educational program are to prepare students for gainful employment, 
the institution must be able to show that there is a reasonable 
relationship between the length of the program and entry level 
requirements for employment. In addition to supporting the length of a 
program, the institution should be able to substantiate the need for 
the number of hours of training. The Secretary proposes to consider the 
relationship between the quantity of training provided in the program 
and entry-level requirements to be reasonable if the number of clock 
hours in the program does not exceed by more than 50 percent any State 
requirement for the minimum number of clock hours necessary to train 
the student in the occupation for which the program prepares the 
student. For example, the Secretary is aware of an institution that 
sought approval of a 600-hour program when the state in which the 
institution is located requires only 40 hours of training for entry 
level positions for which the program provided training. The Secretary 
believes that in situations such as this, the onus is on the 
institution to demonstrate the value of the longer program. The 
Secretary believes that the excessive length of programs requires a 
student to incur additional unnecessary debt.
    A corollary requirement is that the need for the training provided 
is established. Over the past several years, the Secretary has been 
made aware of many schools that have provided three to six months of 
training for entry-level jobs, some of which required no external 
training before employment, as the employers have internal training 
programs or provide on-the-job training. As a basic tenet of student 
financial assistance is to enable students who would not otherwise be 
able to afford needed training or education to enroll in an appropriate 
program, the Secretary believes that if an institution is administering 
the Title IV, HEA programs adequately, it can demonstrate that the 
training it provides is needed. The Secretary solicits suggestions on 
the most appropriate documentation to show the need for the training.
    The Secretary proposes to add to the administrative capability 
standards the requirement that the institution make information on job 
availability and state licensing requirements available to students in 
occupational, professional and vocational educational programs. The 
Secretary believes that, in order for a prospective occupational, 
professional or vocational education student and financial aid 
applicant to make an informed decision about enrollment and use of 
student financial assistance in a particular program, the applicant 
must have access to accurate, up-to-date information on the job market 
for that field, and the availability of specific jobs for which he or 
she would be adequately prepared after completion of the program. 
Similarly, the applicant should have access to information on the 
extent to which the educational or training program addresses state 
licensing standards, so the informed student can determine, with 
reasonable assurance, that necessary topics are covered in the program 
and the extent to which additional information, not necessary for state 
licensure, is covered. The Secretary notes that this information may be 
obtained by the institution from other Federal and State sources, such 
as Employment Service or State occupational coordinating committees. An 
institution would not be required to produce this information on its 
own.
    The Secretary proposes to include within the administrative 
capability standards a requirement that the institution have 
advertising, promotion, and student recruitment practices that 
accurately reflect the content and objectives of the educational 
programs offered by the institution. The Secretary believes that to 
administer the Title IV, HEA programs in a responsible manner, the 
institution must advertise its programs and the financial assistance 
available in an accurate manner.
    The Secretary proposes to specify that an institution provide all 
required program and fiscal reports and financial statements in a 
timely manner. The Secretary believes strongly that adequate, timely 
submission of accurate reports is an essential element in the proper 
administration of the Title IV, HEA programs. The failure to meet 
requirements for submission of reports is an indication that an 
institution's administrative capability is impaired.
    The Secretary proposes to include as a specific administrative 
standard the requirement that an institution have no outstanding 
liabilities owed to the Secretary unless the institution has made 
satisfactory arrangements to repay those liabilities and is honoring 
those arrangements. The Secretary believes that unless a participating 
institution demonstrates it has met all its programmatic, contractual, 
and fiscal obligations in the past, and has taken positive steps to 
rectify problems and liabilities in the past, there is no reason to 
presume that the institution has the capability and willingness to 
administer the Title IV, HEA programs responsibly in the future.
    The Secretary proposes to take into account whether significant 
problems have been identified in final reports and determinations 
issued by the Secretary, the OIG, accrediting agencies, SPREs, guaranty 
agencies, and State authorizing agencies and findings in criminal, 
civil, or administrative proceedings, in addition to financial and 
compliance audit reports and program review reports, in assessing an 
institution's administrative capability. The Secretary believes that 
pertinent information from any of the agencies or proceedings 
identified is relevant to determining whether an institution is 
administratively capable. An institution should be considered 
administratively capable only if there is no evidence of significant 
problems in those reviews or proceedings.
    The Secretary proposes to add to the administrative capability 
standards, the prohibition against debarments, suspensions, and causes 
of debarment or suspension under E.O. 12549 and the FAR, 48 CFR subpart 
9.4. The Secretary proposes to amend this section to provide that an 
institution would not be considered administratively capable if (1) 
cause exists for debarring the institution under 34 CFR 85.305, or for 
suspending the institution under 34 CFR 85.405, (2) any principal (as 
that term is used in 34 CFR part 85) of the institution is debarred or 
suspended, or (3) the institution is an affiliate (as that term is used 
in 34 CFR part 85) of any person so debarred or suspended. Under these 
changes, the Secretary would not certify the administrative capability 
of an institution that fits into any of these categories. The Secretary 
would not permit such an institution to begin participation in a Title 
IV, HEA program, and the Secretary would require a participating 
institution to rectify the problem that adversely affects the 
institution's administrative capability. A participating institution's 
inability or unwillingness to rectify the problem would warrant 
initiation of an emergency action, limitation, suspension, or 
termination proceeding against the institution under subpart G. The 
Secretary expects that such a proceeding would be combined with a 
debarment or suspension proceeding under 34 CFR part 85.
    These changes are needed to establish appropriate safeguards to 
protect the Title IV, HEA programs when serious questions are raised 
about the honesty and lawfulness of the conduct of an institution's 
owners, officers, directors, management, employees, or affiliates whose 
duties involve the administration of or influence over those programs.
    The Secretary proposes to require that an institution comply with 
any standards regarding completion and placement rates and pass rates 
on State licensing examinations established by the State in which an 
institution is located as a standard of administrative capability. The 
Secretary supports the development of appropriate standards by each 
State, as individual States will be able to address local concerns and 
conditions in the development of standards. In the absence of such a 
State standard, the Secretary believes an institution must comply with 
appropriate standards regarding completion rates, placement rates and 
pass rates on required State examinations, as established by the 
Secretary, in consultation with institutions located in the State.
    The Secretary proposes to require as a standard for full 
participation in the Title IV, HEA programs that institutions have 
default rates that do not exceed 20 percent for the Federal Stafford 
Loan and Federal SLS programs, and default rates that do not exceed 15 
percent for the Federal Perkins Loan program. For the Federal Stafford 
Loan and Federal SLS programs, a 20 percent trigger is currently used 
as an indicator of impaired administrative capability. For the Federal 
Perkins Loan program, the Secretary has used a 20 percent trigger as an 
indicator of impaired administrative capability. The Secretary is 
proposing to change this figure to 15 percent for consistency with the 
statutory requirement of section 461(g) of the HEA that requires an 
institution with a cohort default rate of 15 percent in the Federal 
Perkins Loan program to establish a default management plan pursuant to 
regulations. Under this proposal, institutions applying for 
participation under a change of ownership or for a renewal of their 
participation with default rates exceeding these proposed amounts would 
be provisionally certified for a lack of administrative capability if 
no other serious administrative capability problems were identified 
that warranted denying the application. The Secretary notes that, under 
this proposal, an institution applying for a renewal of participation 
that has a default rate under the Federal Stafford Loan programs that 
exceeds 20 percent could submit information demonstrating mitigating 
circumstances as provided in Sec. 668.15 of current regulations to 
demonstrate that the institution's default rate is not a basis for 
denial of full participation. If no other serious administrative 
capability problems were identified that warrant denying the 
application for full participation, an institution with default rates 
over these triggers could receive full participation if it successfully 
showed that those mitigating circumstances existed.
    In addition, the Secretary is proposing that an institution would 
not be considered administratively capable if it has a withdrawal rate 
of more than 33 percent. This change from the current regulations, 
under which the Secretary considers withdrawal rates of more than 33 
percent as an indicator of problems in administrative capability, would 
become, like the other standards in this section, absolute requirements 
rather than mere indicators. The calculation of this withdrawal rate is 
currently made using the formula on the application for participation 
in the Title IV, HEA programs.
    The Secretary is proposing these changes to the current default 
rate and withdrawal rate requirements because the Secretary believes 
that these rates are appropriate measures of an institution's past 
administrative performance; an institution that administers the Title 
IV, HEA programs correctly will, absent mitigating circumstances for 
its Federal Stafford Loan and Federal SLS programs default rate, have 
default rates and withdrawal rates below these percentages.
    The Secretary understands that some currently participating 
institutions have rates in excess of these levels. Therefore, the 
Secretary anticipates that when these institutions next undergo a 
reevaluation of their institutional eligibility, administrative 
capability, and financial responsibility, some of them would be 
determined not to be administratively capable purely for failure to 
meet these standards, even if they meet all the other financial 
responsibility and administrative capability standards in these 
proposed regulations. In those cases, if there are no other significant 
problems, these institutions could be granted provisional certification 
so they could continue to participate in the Title IV, HEA programs for 
a limited time on a limited basis to allow them to bring their default 
or withdrawal rates or both down to an acceptable level. However, an 
institution with a high withdrawal rate applying for participation in 
the Title IV, HEA programs for the first time would not be approved to 
participate in the Title IV, HEA programs. In addition to these default 
rates the Secretary plans to establish an appropriate default rate 
applicable to the FDSL Program and solicits comments on what that 
should be. For example, comments are requested on whether FDSL Program 
default rate thresholds should be developed to take into consideration 
students who are using income contingent repayment.

Section 668.17  Default Reduction Measures

Default Rates
    Because of the changes described above in proposed Sec. 668.16 
concerning the effect of default and withdrawal rates on an 
institution's administrative capability, the remaining provisions in 
current Sec. 668.15 would address default reduction measures for 
institutions with high Federal Stafford loan and Federal SLS default 
rates. Therefore, the Secretary proposes to redesignate current 
Sec. 668.15 as Sec. 668.17 and rename it ``Default reduction 
measures.''
    The Secretary proposes to clarify that the Secretary notifies an 
institution of its Federal Stafford loan and Federal SLS cohort default 
rate if that rate exceeds 20 percent for any fiscal year before the 
Secretary takes an action against the institution. This change merely 
reflects the Secretary's current practice.
    The Secretary proposes to remove the option to require an 
institution with a Federal Stafford loan and Federal SLS cohort default 
rate that exceeds 20 percent for any fiscal year to submit to the 
Secretary and guaranty agencies the specific information described in 
current Sec. 668.15(b)(2)(ii) concerning pass rates, job placement 
rates, and completion rates. These changes are consistent with earlier 
statutory and regulatory revisions to current Sec. 668.15 and because 
the Secretary rarely asks institutions to submit this information. The 
Secretary would reserve the right to request any information the 
Secretary deems necessary to make a preliminary determination as to the 
appropriate action to be taken by the Secretary regarding the 
institution.
Default Management Plan
    The Secretary proposes to clarify requirements for implementation 
of default management plans for institutions with Federal Stafford loan 
and Federal SLS cohort default rates greater than 20 percent for any 
fiscal year. The Secretary has required implementation of a default 
management plan for institutions with cohort default rates greater than 
20 percent since the implementation of the default reduction initiative 
in final regulations published June 5, 1989 (54 FR 24114). In the 
preamble to the June 5, 1989, final regulations, the Secretary stated 
that, in accordance with current Sec. 668.15(e), an institution with a 
default rate over 20 percent could be required to implement a default 
management plan. The proposed provision specifies that, for an 
institution with a Federal Stafford loan and Federal SLS cohort default 
rates greater than 20 percent or less than or equal to 40 percent for 
any fiscal year, the institution would have to submit a default 
management plan that implements the measures described in appendix D to 
this part. An institution could only implement a default management 
plan that deviates from the measures in appendix D if the institution 
submits a justification for the deviation that is approved by the 
Secretary. An institution with a Federal Stafford loan and Federal SLS 
cohort default rate that exceeds 40 percent for any fiscal year, and, 
therefore, is subject to a limitation, suspension, or termination 
action under subpart G, would have to implement all of the default 
reduction measures described in appendix D to this part no later than 
60 days after the institution receives the Secretary's notification of 
the institutions cohort default rate. The institution would not be 
required to submit any written plans to the Secretary or a guaranty 
agency unless specifically requested to do so by the Secretary or 
guaranty agency.
End of Participation
    Section 435(a)(2) of the HEA provides that an institution's 
participation in the FFEL programs ends if the Secretary determines 
that the institution's cohort default rate for each of the three most 
recent fiscal years for which the Secretary has determined the 
institution's rate is equal to or greater than the applicable threshold 
rates. Section 435(a)(2)(B) of the HEA sets the threshold rate for 
fiscal year 1994 and all subsequent fiscal years at 25 percent. 
Consistent with current regulations, institutions may appeal such loss 
of participation by demonstrating that mitigating circumstances as 
found in current Sec. 668.15 are present.
    Currently, an institution may not participate in the FFEL programs 
beginning eight calendar days after the date the Secretary notifies the 
institution that its cohort default rate exceeds the specified 
thresholds. The Secretary proposes to change this provision to require 
that an institution may not participate in the FFEL program beginning 
with the date that the institution receives notification from the 
Secretary that its cohort default rate exceeds the specified 
thresholds. The Secretary does not believe it is appropriate to 
continue to allow an institution that has lost its participation due to 
a high default rate to have the benefit of further Title IV, HEA 
program funds unless it successfully appeals. The Secretary proposes to 
make corresponding changes throughout this section.
Appeal Procedures
    The Technical Amendments of 1993 amended section 435(a) and (m) of 
the HEA as those sections relate to institutional appeals of cohort 
default rates. These amendments are not reflected in this NPRM but will 
be addressed separately. However, the Secretary proposes to remove the 
provision that provides that an institution may appeal its loss of 
participation in the FFEL programs under the provisions of this section 
on the grounds that the institution has reduced its cohort default rate 
for each of the two most recent fiscal years for which the Secretary 
has calculated a cohort default rate for that institution by 50 percent 
of the amount by which its cohort default rate for the previous year 
exceeds the applicable threshold percentage specified in this section. 
This provision is no longer applicable because it was limited to 
notices of loss of eligibility that were received by an institution in 
the fiscal year that ended September 30, 1991.
    Current regulations allow an institution to appeal its loss of 
participation in the FFEL programs under the provisions of this section 
on the grounds that, for any twenty-four month period ending not more 
than six months prior to the date the institution submits its appeal, 
two-thirds or more of the institution's students who are enrolled on at 
least a half-time basis are individuals from disadvantaged economic 
backgrounds as established by documentary evidence submitted by the 
institution such as a Pell Grant Index of zero, or an AGI of less than 
the poverty level, as determined by criteria developed by the 
Department of Health and Human Services. The Secretary proposes that 
the term ``such as'' be eliminated to reflect the current practice; 
i.e., the institution must establish the grounds for its appeal based 
only on the information specified in the regulations. The Department 
would only accept the specific evidence listed in the regulations 
although the current regulations suggest that other evidence is 
acceptable. This change reflects the current practice of the Secretary. 
The Secretary solicits comment on other acceptable forms of acceptable 
documentation.
Definitions
    The Student Loan Reform Act (Pub. L. 103-66) amended the definition 
of cohort default rate to include Federal Consolidation Loans which are 
used to repay Federal Stafford and Federal SLS loans. The Secretary 
proposes to amend this section to reflect this change.
    Definitions applicable to this section would be revised to reflect 
changes to the definition of cohort default rate in section 435(m) of 
the HEA. In accordance with the statute, as in the past, for any fiscal 
year in which 30 or more current and former students at the institution 
enter repayment on Federal Stafford or Federal SLS program loans 
received for attendance at the institution, the cohort default rate is 
the percentage of those current and former students who enter repayment 
in that fiscal year on Federal Stafford or Federal SLS program loans 
received for attendance at that institution who default before the end 
of the following fiscal year. Formerly, for any fiscal year in which 
fewer than 30 of the institution's current and former students entered 
repayment on a Federal Stafford or Federal SLS loans received for 
attendance at the institution, the cohort default rate was the average 
over the three most recent fiscal years of the rates calculated in the 
manner described for any fiscal year in which 30 or more current and 
former students enter repayment on a Federal Stafford or Federal SLS 
program loan. The HEA now requires that, for any fiscal year in which 
fewer than 30 of the institution's current and former students enter 
repayment, the cohort default rate is the percentage of those current 
and former students who entered repayment on Federal Stafford loans or 
Federal SLS loans in any of the three most recent fiscal years who 
default before the end of the fiscal year in which they entered 
repayment.
    The Technical Amendments of 1993 changed section 435(m)(1)(B) of 
the HEA to make clear that the issue of improper loan servicing is only 
part of the appeal process and does not relate to the Secretary's 
initial release of cohort default rates. Thus, in issuing the rates 
initially, the Secretary is not obligated to consider allegations of 
improper loan servicing. The Secretary proposes to amend the 
regulations to reflect this change by removing the requirement that the 
Secretary must exclude any loans that, due to improper servicing or 
collection, would result in an inaccurate or incomplete calculation of 
the cohort default rate.
    Section 435(m) of the HEA requires the addition of the requirement 
that a Federal SLS loan not be considered to enter repayment until 
after the borrower has ceased to be enrolled in an educational program 
leading to a degree or certificate at the eligible institution on at 
least a half-time basis (as determined by the institution) and ceased 
to be in a period of forbearance based on that enrollment. Section 
435(m) further requires that each eligible lender of a Federal SLS loan 
to provide the guaranty agency with the information necessary to 
determine when the loan entered repayment for purposes of this 
definition and requires the guaranty agency to provide that information 
to the Secretary.

Section 668.22  Institutional Refunds and Repayments

General
    The Amendments of 1992 added section 484B to the HEA to require an 
institution to have in place, as of July 23, 1992, a fair and equitable 
institutional refund policy as promulgated in that section. The fair 
and equitable refund requirements prescribed by law are similar to the 
fair and equitable refund requirements prescribed by Sec. 682.606 of 
the FFEL program regulations for institutions that participate in the 
FFEL programs. The HEA extends this requirement to institutions 
participating in any Title IV, HEA program and makes various 
modifications.
    Under this fair and equitable refund policy, an institution must 
make a refund of unearned tuition, fees, room and board, and other 
charges to a student who received Title IV, HEA program assistance 
(including PLUS loans received on behalf of the student) if the student 
does not register for the period of enrollment for which the student 
was charged or if the student withdraws, drops out, or is expelled from 
the institution before completing the period of enrollment for which he 
or she was charged.
    The interpretation of the applicability of a fair and equitable 
refund policy was the subject of extensive discussions among the 
negotiators. The HEA specifically mandates a refund to any student who 
received Title IV HEA program assistance. However, at issue during the 
negotiations was the fairness and equity in having a refund policy for 
students who receive Title IV, HEA program assistance that is different 
from the refund policy for those students enrolled in the same 
educational program who do not receive Title IV, HEA program 
assistance. Several negotiators felt that requiring institutions to 
apply the refund requirements found in this proposed section to all 
students who attend an institution would be an unauthorized intrusion 
by the Secretary into the administrative decisions of an institution. 
Many negotiators felt that compliance with a refund requirement that is 
applicable to all students would be too costly for an institution.
    Therefore, the Secretary proposes to define a fair and equitable 
refund policy only with respect to students who receive Title IV, HEA 
program assistance. Although the Secretary proposes to limit the scope 
of this provision to those recipients, under this proposed provision an 
institution would not be prohibited from adopting these refund 
requirements for all students.
    The Secretary proposes to require that an institution provide a 
written statement containing its refund policy to prospective students 
and make its policy known to currently enrolled students. This proposal 
is based upon requirements currently prescribed by Sec. 682.606 of the 
FFEL program regulations. The Secretary proposes to expand this FFEL 
provision to require that the written statement must be clear and 
conspicuous and must include information on the allocation of refunds 
and repayments to sources of aid. In keeping with current FFEL program 
regulations, the Secretary proposes that the written statement include 
examples of the application of the refund policy. This requirement 
would be met if the institution informs students in the written 
statement that examples are available and the institution makes the 
examples readily available to the student upon request.
    As in the current FFEL program regulations, the Secretary proposes 
to require an institution to provide the written statement to 
prospective students. Section 668.41(b) of current regulations defines 
a ``prospective student'' as an individual who has contacted an 
institution participating in any Title IV, HEA program for the purpose 
of requesting information concerning admission to the institution. The 
Secretary believes that a student is a ``prospective student'' if he or 
she is not enrolled in an institution and has not entered into any 
contractual agreement or incurred a financial obligation to attend an 
institution. Therefore, the Secretary proposes to require an 
institution to provide this written statement to a student prior to the 
earlier of the student's enrollment or the execution of the student's 
enrollment agreement. If the institution's refund policy changes, the 
institution would have to ensure that all students are made aware of 
the new policy and advise the currently enrolled students of any 
changes that the institution intended to apply to those students for 
their current enrollment period.
    The Secretary believes that some institutions have assessed 
excessive equipment charges that have increased the total aid received. 
For example, some students have been charged as much as ten or fifteen 
times an institution's documented equipment costs for kits students 
were required to purchase. If the calculation of a refund includes 
equipment charges with such an extreme price mark-up, the amount of 
money an institution would be permitted to keep is greatly inflated. To 
help curb this abuse, the Secretary is proposing to require an 
institution to publish in its school catalog or other information 
provided to its students, the cost to the student of required supplies 
and equipment. Further, the Secretary proposes to require an 
institution to substantiate to Department officials, upon the request 
of the Secretary, that the costs are reasonably related to the costs of 
providing the supplies and equipment to students. This provision would 
not require the institution to provide this cost substantiation to 
students, but would permit the Secretary to obtain information 
regarding the cost of required supplies and equipment to determine 
whether an abuse in this area is occurring or has occurred. For 
example, this information may be routinely reviewed during a program 
review. If the charges for equipment and supplies appear to be 
unreasonable, the institution would be required to show that its 
charges were reasonably related to the cost of providing those items. 
Under this proposal, an institution would not be expected to provide 
this information to the Secretary as a regularly scheduled submission, 
but only upon request from the Department of Education.
Fair and Equitable Refund Policy
    Section 484B of the HEA defines a fair and equitable refund policy 
to be one that provides for at least the largest of the amounts 
provided under:
    (1) The requirements of applicable State law;
    (2) The specific refund requirements established by the 
institution's nationally recognized accrediting agency and approved by 
the Secretary; or
    (3) The pro rata refund calculation described in the statute for 
students attending the institution for the first time, except that this 
pro rata refund calculation does not apply for any student whose 
withdrawal date is after the 60 percent point in time in the period of 
enrollment for which the student has been charged.
    The Secretary intends to clarify that an accrediting agency's 
refund policy must contain specific standards. Refund ``guidelines'' 
developed by an accrediting agency (for example, an accrediting agency 
refund policy that only requires an institution to develop its own fair 
and equitable refund policy) would not be considered to have standards. 
Obviously, an institution would not be considered to be in compliance 
with a State's or an approved accrediting agency's refund policy if the 
institution adopts a refund policy that is merely similar to the 
State's or accrediting agency's but does not incorporate all the 
required standards. This policy is consistent with the current 
provisions of the FFEL program regulations.
    The Secretary recognizes that there may be situations where an 
institution's State and accrediting agency do not have specific refund 
policies. If a student is not entitled to a pro rata refund, no 
specific standard would then exist under the law to ensure that the 
student received a fair and equitable refund. Because the Secretary 
believes that all recipients of Title IV, HEA program assistance should 
be treated fairly, the Secretary is proposing to require an institution 
to provide a refund to a student that is the larger of the 
institution's refund policy or the specific refund standards contained 
in appendix A to this part if an institution's State and accrediting 
agency do not have refund standards and the student is not entitled to 
a pro rata refund. The NPRM published on January 24, 1994 to implement 
the accrediting agency provisions in subpart 2 of part H of the HEA 
proposes that the Secretary will not recognize an accrediting agency 
unless the agency has a refund policy that provides for a fair and 
equitable refund to a student. The Secretary notes that if this 
provision of the accreditation agency NPRM is adopted in final 
regulations, there would not be a need for the proposed appendix A 
requirement once all accrediting agencies have been reviewed and 
recognized by the Secretary.
    The refund policy proposed to be adopted as appendix A is derived 
from the guidelines developed by the National Association of College 
and University Business Officers (NACUBO). Currently, under the FFEL 
program regulations, an institution must follow the guidelines 
developed by NACUBO and restated in appendix A to the FFEL program 
regulations (or refund policy standards set by another association of 
institutions of postsecondary education and approved by the Secretary) 
if neither an institution's State nor its accrediting agency have 
refund standards. While the NACUBO standards identify policy standards 
that institutions should have for the refund of student charges, the 
Secretary's proposed appendix A establishes policy standards that 
institutions must have for the refund of student charges. The Secretary 
has always considered these standards as mandatory for purposes of the 
FFEL program regulations and is, therefore, making that interpretation 
clear in these proposed regulations. Further, the Secretary's proposed 
appendix A to this part would mandate the percentage of tuition charges 
that must be returned to a student who withdraws from an institution at 
various intervals during the refund period. In the development of the 
actual refund calculation for this policy, the Secretary adapted a 
proportionate calculation that is similar to refund policies used by 
proprietary institutions. The Secretary believes that this refund 
schedule provides a fairer allocation of resources between the 
institution and the Title IV, HEA programs than exists under the 
shorter refund periods often found at traditional colleges and 
universities. This proposed refund policy is not normally as generous 
to the student as the pro rata refund policy prescribed by the statute, 
because the affected students would not be first time students and, 
therefore, would not be entitled to the full protection of the pro rata 
refund policy. Under the standards in appendix A, a student who submits 
written notice of withdrawal up to one week before the first day of 
class would receive a refund of 100 percent of tuition charges. The 
refund would be reduced to at least 90 percent if the student submits 
written notice of withdrawal between the end of the 100 percent period 
and the first 10 percent of the period for which the student was 
charged. A student would receive at least a 50 percent refund if he or 
she withdraws between the first 10 percent and the first 25 percent of 
the period for which the student was charged. Finally, a student would 
receive at least a 25 percent refund if he or she withdraws between the 
first 25 percent and the first 50 percent of the period for which the 
student was charged.
    As a part of the refund policy in proposed appendix A, the 
Secretary would allow an institution to subtract from the refund to a 
student any charges for equipment (including books and supplies) if 
there is a separate charge for the equipment and the student actually 
obtains the equipment but the student fails to return the equipment 
within 20 days after his or her withdrawal. This provision is discussed 
further in the explanation on pro rata refunds.
    An institution must determine whether a student withdrew prior to 
the 60 percent point in time in the period of enrollment for which the 
student has been charged when determining whether the pro rata refund 
calculation is applicable to a student. The Secretary proposes to 
define ``the 60 percent point in time in the period of enrollment for 
which the student has been charged'' based upon whether the educational 
program in which the student is enrolled is measured in credit hours or 
clock hours. In the case of an educational program that is measured in 
credit hours, this point would be the point in calendar time when 60 
percent of the period of enrollment for which the student has been 
charged has elapsed. In the case of an educational program that is 
measured in clock hours, this point would be the point in time when the 
student completes 60 percent of the clock hours scheduled for the 
period of enrollment for which the student is charged.
    For instance, if the student's period of enrollment in an 
educational program that is measured in credit hours is scheduled to 
last 5 months (20 weeks), the 60 percent point of the period is at 12 
weeks. However, in the case of a program measured in clock hours, the 
Secretary believes that it is more accurate to use the number of 
completed clock hours to determine the percentage of enrollment. For 
instance, if the student is scheduled to complete 900 clock hours, the 
60 percent point of the period of enrollment occurs when the student 
has completed 540 clock hours. The Secretary wishes to emphasize that 
the definition of the determination of the 60 percent point in time in 
the period of enrollment for which the student has been charged is 
different from the determination of ``the portion of the period of 
period of enrollment for which the student has been charged that 
remains'' that is used to calculate the refund after the institution 
has determined that the pro rata refund calculation is to be used. The 
proposed definition of the latter term will be discussed later.
    In determining the largest refund to a student, the Secretary 
proposes to require an institution to determine the largest refund for 
each student. An institution would not be permitted to determine which 
refund is generally the most generous and use that refund calculation 
for all students. The Secretary believes that current computer 
technology enables an institution to automate this determination 
through the use of computer software.
Pro Rata Refund
    The Secretary notes that although the statutory requirements for 
pro rata refunds supersede the pro rata regulations found in the FFEL 
program regulations, institutions have been advised to follow guidance 
given for implementation of the FFEL program regulations as ``safe-
harbor'' guidance for implementation of the statutory requirements for 
pro rata refunds. The Secretary intends that final regulations for pro 
rata refunds developed as a result of this NPRM and any guidance given 
for implementation of these regulations will replace the required pro 
rata refund policy for an institution that is required to use a pro 
rata refund policy because the institution has a cohort default rate 
that exceeds 30 percent under the FFEL programs.
    A ``pro rata refund,'' as defined in statute, is required for a 
student attending an institution for the first time, unless another 
applicable refund is greater. The pro rata refund may not be less than 
that portion of the tuition, fees, room, board, and other charges 
assessed the student by the institution equal to the portion of the 
period of enrollment for which the student has been charged that 
remains on the withdrawal date. The pro rata refund is then rounded 
downward to the nearest 10 percent of that period. The pro rata refund 
is then reduced for any unpaid charges and a reasonable administrative 
fee. The administrative fee may not exceed the lesser of one hundred 
dollars or five percent of the tuition, fees, room and board, and other 
charges assessed the student.
    The Secretary proposes to permit institutions to subtract certain 
amounts of institutional charges from the refund to the student. The 
Secretary wishes to clarify that these proposed regulations would 
permit an institution to subtract charges or portion of charges from a 
pro rata refund only if the charges are included in the calculation of 
the pro rata refund.
    Under the statute, an institution may subtract any unpaid charges 
owed to the institution by the student. The Secretary is proposing to 
define unpaid charges by using the definition for an ``unpaid amount of 
a scheduled cash payment'' published in the Federal Register on June 8, 
1993 (58 FR 32188). Although those final regulations discussed the 
unpaid amount of a scheduled cash payment as being excluded from the 
amount the institution may retain for institutional charges, rather 
than for the purpose of excluding any unpaid balance from the refund to 
the student, the Secretary believes it is appropriate to adopt the same 
definition to define these unpaid charges. In accordance with the 
current regulations, a student's scheduled cash payment would be 
defined as the amount of institutional charges that is not paid for by 
financial aid. An institution could count any late disbursements of 
Title IV aid as financial aid for this purpose (i.e., the amount of the 
late disbursement would not be included as part of the student's 
scheduled cash payment.) Any amount of the scheduled cash payment that 
has not been paid would be the amount of unpaid charges owed by the 
student. The treatment of unpaid charges for refunds other than pro 
rata refunds is addressed later in this discussion.
    The statute also permits an institution to subtract a reasonable 
administrative fee from the refund owed to a student. This 
administrative fee must be a real charge and documented as such. An 
institution may not automatically subtract the lesser of five percent 
of the tuition, fees, room and board, and other charges assessed the 
student or one hundred dollars if no such administrative fee actually 
exists.
    The Secretary proposes to add to the list of permitted subtractions 
from the refund to a student any application fee charged by the 
institution. The Secretary believes that an application fee is a fee 
incurred separately from a student's charges for an enrollment period, 
and therefore, should not be included in the refund to the student.
    In addition, for institutions whose students are issued meal 
credits that can be spent irregularly throughout the enrollment period 
(e.g., coupons or meal tokens) the Secretary proposes to allow an 
institution to deduct from the refund owed under this paragraph the 
portion of ``board'' charges (i.e., meal tickets) that has been 
expended by the student that exceeds the portion attributable to the 
period for which the student attended at the time of withdrawal. For 
example, if a student withdrew at the 50 percent point in time in the 
period of enrollment for which the student has been charged but had 
used 60 percent of the meal tickets, the institution could subtract 
from the refund to the student the value of the meal tickets 
attributable to that 10 percent of the period of enrollment that the 
student did not attend. If a student used less than the attributable 
value of the meal tickets at the time of his or her withdrawal, an 
institution would not be permitted to subtract any amount from the 
refund to the student. An institution would not be permitted to 
subtract any amount from the refund to the student in cases where 
students have unlimited use of meal tickets.
    The Secretary intends to continue the current policy regarding the 
inclusion of books, supplies, and other equipment in the pro rata 
refund calculation consistent with guidance given to institutions that 
were required to use a pro rata refund policy because the institution 
had a default rate that exceeds 30 percent and was required to 
calculate a pro rata refund for a student who received a loan under the 
FFEL programs. As is currently the case, an institution is required to 
include the full amount of charges for equipment in the calculation of 
pro rata refund if a separate charge exists for the equipment by the 
institution or if the institution requires the student to purchase the 
equipment from a certain vendor. The Secretary believes that by 
charging students a separate equipment charge or by requiring students 
to purchase the equipment from a single vendor (for example, a school 
book store) the equipment charges are being mandated by the institution 
and should be treated as institutional costs. In effect, the 
institution is the sole source of the equipment. If an institution does 
not have a separate charge for equipment and the student has the option 
of purchasing the equipment from more than one source, the institution 
would not have to include the equipment charge in the pro rata refund 
calculation. An institution would have to be able to demonstrate that 
its students have the option of purchasing the equipment from other 
sources that are easily accessible to the student and that the students 
are advised that an option is available.
    The Secretary proposes to allow an institution to subtract from the 
refund to a student any charges for equipment (including books and 
supplies) that a student could have returned for credit but did not do 
so. Under this provision, there would have to be a separate charge for 
the equipment, and the student must actually have obtained the 
equipment but failed to return the equipment within 20 days after his 
or her withdrawal. This provision was suggested by one of the 
negotiators and is based upon California law. By consensus of the 
negotiators, this provision would be extended to situations where the 
equipment and supplies are sold by an affiliate or related entity of 
the institution. If the student does not return the equipment, the 
institution could subtract from the pro rata refund owed to the student 
the documented cost to the institution of equipment issued to the 
student. The student would be liable for the amount, if any, by which 
the documented cost for equipment exceeds the amount of the student's 
pro rata refund.
    Under this proposal, if some or all of the equipment is not 
actually received by the student, the institution would have to include 
in the pro rata refund calculation 100 percent of the amount paid for 
that portion of the equipment. Further, if an institution gives a 
student the option to return the equipment, the institution would not 
be permitted to subtract the cost of the equipment from the refund to 
the student if the student chooses to return the equipment and does so 
within 20 days of his or her withdrawal. The Secretary believes that 20 
days provides the student with a sufficient period of time to return 
equipment without delaying the refund to the student.
    The Secretary proposes that any equipment returned by a student 
must be in good condition allowing for reasonable wear and tear. The 
Secretary notes that there may be restrictions under State laws that 
prevent an institution from accepting returned equipment due to health 
and sanitary reasons. Other conditions might also limit the return of 
equipment. For example, a workbook that has been written in or a 
damaged text book might not be reusable. The Secretary solicits 
comments on whether this provision should be expanded to identify other 
conditions that could affect the institution's ability to reissue 
equipment.
    The Secretary notes that, because an institution must include the 
charges listed above in the calculation of a pro rata refund and is 
then permitted to subtract the charges or a portion of the charges from 
this refund, in many cases it appears that an institution could retain 
more than the actual charge to the student. For example, if an 
institution that charges a $100 administrative fee calculates a pro 
rata refund to a student, a portion of the $100 charge would be 
refunded to the student in accordance with the pro rata refund formula, 
and a portion of the charge would be retained by the institution. Yet, 
in addition, the institution could then be permitted to subtract the 
full $100 from the refund to the student. The Secretary requests 
comments on whether it may be more appropriate to require institutions 
to exclude these charges from the refund calculation entirely rather 
than subtracting the charge after performing the calculation. The 
Secretary also requests comment on whether some other means should be 
adopted to eliminate this potential ``double counting'' of charges.
    For purposes of determining a pro rata refund, the Secretary 
proposes to exclude from the ``room charges'' that are to be included 
in the refund calculation, any room charges for off-campus housing that 
are passed through the institution in their entirety to an entity that 
is not under the control of, related to, or affiliated with the 
institution. The Secretary recognizes that an institution may enter 
into an agreement with an outside agency to provide lodging for 
students. Under such an arrangement, the institution is merely a 
conduit that passes the room charges along to the other entity, yet 
those charges appear as institutional charges on student accounts. In 
these cases, the independence of the entities and the students' 
continuing right to occupy the housing after the students withdraw 
warrant the exclusion of the room charges from the refund calculation.
    The Secretary also proposes to exclude from the pro rata refund 
calculation charges for group health insurance that are mandatory for 
all students in the calculation of a pro rata refund so long as the 
coverage remains in effect for the students throughout the period for 
which the student was charged. The Secretary notes that the inclusion 
of these group health insurance charges in the refund calculation could 
cancel insurance coverage that might otherwise be extended to the 
student beyond the student's withdrawal date.
    The Secretary proposes to define a student attending an institution 
for the first time as a student who has not previously attended at 
least one class at the institution. A student who received a refund of 
100 percent of his or her tuition and fees (less any permitted 
administrative fee) under the institution's refund policy for previous 
attendance at the institution would also be considered a first-time 
student.
    The Secretary believes that a first-time student at an institution 
is a student who is attending that institution, as opposed to any 
institution, for the first time. Therefore, if the student has not 
previously attended at least one class at a specific institution, the 
Secretary would consider the student to be attending that institution 
for the first time. If a student transfers to another institution, he 
or she would count as a first-time student at the new institution, if 
he or she has not previously attended at least one class at the new 
institution. If a student attends an institution, withdraws from the 
institution (and receives less than a 100 percent refund), and then 
returns to the same institution, the student would not be treated as a 
first-time student for his or her second period of attendance. The 
Secretary believes that if a student has previously received a 100 
percent refund at an institution, for purposes of this definition, the 
student should be treated as if he or she had not previously attended 
the institution.
    The Secretary proposes that a student should remain a first-time 
student until the student withdraws from the institution after 
attending at least one class, or completes the period of enrollment for 
which he or she has been charged, whichever occurs first. Therefore, 
the shortest amount of time a student could remain a first-time student 
is the period until he or she withdraws after attending one class. The 
longest amount of time a student could remain a first-time student is 
the period until his or her completion of the period of enrollment for 
which he or she has been charged.
    The Secretary proposes to adopt for all the Title IV, HEA programs 
the requirement currently found in the FFEL program regulations that an 
institution's payment to a lender of the portion of a refund allocable 
to a Title IV, HEA program cannot be delayed because of a delay in the 
return of equipment. The provision would apply to the portion of the 
refund due to any Title IV, HEA program.
    In the actual calculation of a refund under the pro rata refund 
provisions of section 484B of the HEA, the amount of the refund is 
based on ``the portion of the period of enrollment for which the 
student has been charged that remains [after the student stopped 
attending].'' Under the law, ``the portion of the period of enrollment 
for which the student has been charged that remains'' in an educational 
program measured in credit hours is determined by dividing the number 
of weeks that the student did not complete by the total number of weeks 
in the program. For a clock-hour program, the determination is made by 
dividing the number of clock hours not completed by the total number of 
clock hours. For a correspondence program, the determination is made by 
dividing the number of lessons not completed by the total number of 
lessons. The Secretary has merely repeated that language here. The 
Secretary would like to note that ``the portion of the period of 
enrollment for which the student has been charged that remains'' is 
used to calculate the pro rata refund to a student and is distinct from 
the determination of the 60 percent point in time in the period of 
enrollment for which the student has been charged that is used to 
determine whether the pro rata refund calculation is applicable. The 
definition of ``the 60 percent point in time in the period of 
enrollment for which the student has been charged'' was discussed 
earlier in the summary.
Period of Enrollment for Which the Student Has Been Charged
    Generally, the Secretary proposes to define ``the period of 
enrollment for which the student has been charged,'' as the actual 
period for which an institution charges a student. However, the 
Secretary proposes to establish a minimum period of enrollment for 
which the student has been charged to prevent institutions from 
establishing very short periods to minimize the program charges that 
would be subject to pro rata refunds for first-time students. In the 
case of an educational program that is measured in credit hours and 
uses semesters, trimesters, quarters, or other academic terms, the 
minimum period would be the semester, trimester, quarter, or other 
academic term. In the case of an educational program that is measured 
in credit hours and does not use semesters, trimesters, quarters, or 
other academic terms, or an educational program that is measured in 
clock hours, the minimum period would be the lesser of the length of 
the educational program or an academic year. This proposed definition 
is based on the current policy for the FFEL programs that sets minimum 
certification periods for loans. This policy was designed partly to 
prevent institutions from circumventing the refund provisions currently 
found in Sec. 668.22. The Secretary invites comments on whether other 
safeguards are needed to prevent institutions from circumventing the 
pro rata refund requirements.
    The Secretary notes that there may be institutions that use 
different periods for categories of charges. For example, an 
institution may charge by the academic year for tuition, but by the 
academic term for books and supplies. The Secretary, therefore, 
proposes that, for purposes of determining refunds under this section, 
``the period of enrollment for which the student has been charged'' is 
the longest period for which the student is charged. The institution 
must include any charges assessed the student for that period of 
enrollment or any portion of that period of enrollment in calculating 
the refund. In the example above, since the institution charged for the 
entire academic year for tuition, the institution would have to 
determine the actual total charge for books and supplies for the 
academic year in order to determine the refund to the student. If, in 
the example above, the institution did not charge for books and 
supplies after the first academic term, the institution would only 
include the charges for the first academic term when calculating the 
refund for the academic year.
    The Secretary also proposes to use the period of enrollment for 
which the student has been charged, instead of the payment period 
concept currently used, to determine the return of refunds and 
repayments to the Title IV, HEA programs. In doing away with the 
concept of a payment period for purposes of the calculation of refunds, 
the Secretary also proposes to do away with the practice of attributing 
Title IV, HEA program assistance when determining the return of refunds 
and repayments to the Title IV, HEA programs. The Secretary believes 
that the premise for the calculation of a pro rata refund, (i.e., the 
refund is to be determined for the percentage of a period of enrollment 
for which the student has been charged that remains) dictates that the 
institution should look at the amount of Title IV, HEA program 
assistance received for that same percentage of the period. The 
Secretary believes that adopting the use of the period of enrollment 
for which the student has been charged to determine the return of all 
refunds and repayments to the Title IV, HEA programs greatly simplifies 
these determinations.
Overpayments
    The Secretary proposes to restructure and revise the current 
provisions relating to overpayments and the repayments to Title IV, HEA 
programs of institutional refunds and overpayments. This preamble 
addresses those areas of these current provisions that have been 
significantly revised.
    No changes are proposed to the procedures by which an institution 
determines if a student has received an overpayment for 
noninstitutional costs.
Repayments to Title IV, HEA Programs of Institutional Refunds and 
Overpayments
    The Secretary proposes to remove the fraction that is currently 
used to determine the portion of the refund that an institution must 
return to the Title IV, HEA programs. Section 485 of the HEA now 
specifies the order of return of refunds to the Title IV, HEA programs. 
Further, the Technical Amendments of 1993 changed section 485 of the 
HEA to specify that an institution is to return a refund to other 
sources of student assistance only after the refund has been returned 
to the Title IV, HEA programs (see the discussion below concerning 
allocations.) The Secretary proposes to make a conforming change by 
removing the fraction currently used to determine the portion of an 
overpayment that an institution must return to the Title IV, HEA 
programs.
    The June 8, 1993, final regulations modified the definition of 
institutional refund to require an institution to exclude any unpaid 
charges owed to the institution by a student in determining the amount 
the institution may retain for institutional charges. These proposed 
regulations would retain this provision. However, because the HEA now 
specifies that an institution is permitted to subtract any unpaid 
charges owed by a student from the calculated refund to the student in 
calculating a pro rata refund, the requirements of the June 8, 1993, 
final regulations regarding the treatment of unpaid charges have been 
superseded and are inapplicable only in this case. That is, the 
institution is not required to exclude any unpaid balance owed to the 
institution by the student when the institution determines the amount 
the institution may retain for institutional charges when calculating a 
pro rata refund under section 484B of the HEA. The Secretary notes that 
the requirements of Sec. 668.22 of the June 8, 1993, final regulations 
continue to be in effect for all other refunds calculated in accordance 
with section 484B of the HEA.
    The Secretary proposes that if the amount of a refund owed to a 
student is $25 or less, the institution would not be required to pay 
the refund. The Secretary believes that the administrative cost to 
institutions to make refunds of such a small amount may be greater than 
the refunds themselves. This consideration is of particular concern at 
institutions that have low tuition charges resulting in small refunds 
that are administratively burdensome and costly to the institution.
Allocation of Refunds and Overpayments
    Section 485 of the HEA specifies the order of return of refunds to 
the various sources of aid and to the student. A refund owed to a 
student who received funds under any Title IV, HEA program is to be 
returned to the Title IV, HEA programs from which the student received 
aid in the following order until the amounts received by the student 
from those programs are eliminated. (1) The FFEL programs; (2) The FDSL 
Program; (3) The Federal Perkins Loan Program; (4) The Federal Pell 
Grant Program; (5) The FSEOG Program; (6) All other sources of aid; (7) 
The student. The Secretary proposes to make clear the longstanding 
policy that, after balances resulting from the FSEOG Program are 
eliminated, balances on aid received from all other Title IV, HEA 
programs must be eliminated before the State and private sources of aid 
are refunded. For consistency and to reduce administrative burden, the 
Secretary proposes to apply this order of return to repayment of 
overpayments also except that, in accordance with current regulations, 
no amount of a repayment may be allocated to the Federal Stafford Loan, 
Federal PLUS, and Federal SLS programs.
    The Secretary also would make clear that refunds would be returned 
to eliminate outstanding balances of Title IV, HEA program aid received 
for the period of enrollment for which the refunds are made. The 
Secretary does not believe that refunds should be used to eliminate, 
for example, outstanding balances on loans made for prior years.
    Section 485 of the HEA does not specify an order of return for 
refunds under the FFEL programs. The Secretary proposes a specified 
order of return for FFEL program funds. Refunds would be returned to 
eliminate outstanding balances on: (1) Federal SLS loans; (2) 
unsubsidized Federal Stafford loans; (3) subsidized Federal Stafford 
loans; and (4) Federal PLUS loans, in that order. The Secretary 
believes that this order is beneficial to the student and that by 
mandating the order of return of FFEL program funds, the interest of 
the student would be protected. The Secretary wishes to clarify that 
when returning any FFEL program funds, an institution may return the 
gross amount of a loan (including the guaranty and origination fee) if 
the institution so chooses, to serve as a deterrent to default on the 
small remaining amount. This ``extra'' amount would be used to reduce 
the next source of aid on the list.
    The Secretary wishes to clarify that this order must be used if 
Title IV, HEA program funds are received, whether they are applied 
toward institutional charges or disbursed to the student for living 
expenses. Even if all Title IV, HEA program funds are disbursed to the 
student for living expenses, if a refund is owed when the student 
withdraws from the institution, the refund must first be returned to 
the Title IV, HEA programs from which the student received aid in the 
order specified.
Financial Aid
    No proposed changes are being made to the definition of financial 
aid.
Refund Dates
    The Secretary proposes to apply to all the Title IV, HEA programs 
the definition (with some revisions) of ``withdrawal date'' that 
currently applies to the FFEL programs. Only significant revisions are 
discussed. The definition of ``drop out date'' found in the current 
Sec. 668.22 would be incorporated into this definition. Currently, the 
FFEL program regulations define the withdrawal date for a student who 
has not returned to an institution after the expiration of an approved 
leave of absence as the first day of the leave of absence. The 
Secretary proposes to use, instead, the last recorded date of class 
attendance by a student, as documented by the institution. The 
negotiators reached consensus that it is fair to define the withdrawal 
date for a student who failed to return from an approved leave of 
absence in the same way as the withdrawal date is defined for a student 
who drops out, because the student's period of attendance was only 
extended on the understanding that he or she would be returning by a 
specified date. Further, the Secretary proposes to clarify that a 
student who returns to an institution after the expiration of a leave 
of absence during an award year or, for the FFEL programs, during a 
period of enrollment in which the student was granted the leave of 
absence, the student may not receive additional Title IV, HEA program 
assistance for coursework that he or she has not completed.
    Currently, the FFEL program regulations define the withdrawal date 
for a student who is enrolled in an educational program that consists 
predominantly of correspondence courses as 60 days after the due date 
of a required lesson that the student failed to submit in accordance 
with the established schedule for lessons. The Secretary believes it is 
more reasonable to define the withdrawal date in this case as the date 
of the last submission of a lesson by the student if the student failed 
to submit the subsequent lesson in accordance with the established 
schedule for lessons.
    The Secretary proposes to add the requirement that a leave of 
absence may not exceed the length of time between the beginning of the 
leave of absence and the institution's next period of enrollment, if 
the institution's next period of enrollment after the start of the 
leave of absence begins more than thirty days after the beginning of 
the leave of absence due to a period of nonenrollment (i.e., summer 
break) that prevents a student from enrolling in any coursework. The 
Secretary proposes to add this provision to address graduate programs 
that do not have summer school sessions, thereby preventing students 
from re-enrolling during this time. As the determination of a student's 
withdrawal date is necessary to determine when a refund must be paid to 
a student, the Secretary believes it would be unfair to penalize an 
institution for failure to pay timely refunds to a student who is 
deemed to have ``withdrawn'' only because he or she cannot return to 
the institution from a leave of absence because classes are not in 
session. This provision would not additionally limit the length of a 
student's leave of absence which could be up to sixty days or six 
months under the specified conditions.
    The Secretary notes that this proposed definition of a leave of 
absence is a departure from current Federal Pell Grant Program policy. 
Currently, for purposes of the Federal Pell Grant Program, a student 
who is granted a leave of absence is considered to be no longer 
enrolled in the institution. The Secretary specifically request 
comments on the effects of this proposed change on institutional 
procedures in relation to the Federal Pell Grant Program.
    The Secretary proposes to require an institution to pay a refund to 
a student within a specified period of time. The Secretary believes 
that 30 days is a sufficient period of time for an institution to 
complete the administrative procedures necessary for payment of a 
refund to a student. This requirement would be in addition to other 
requirements, which would not change, for timely payment of refunds to 
a lender under the FFEL programs.

Section 668.23  Audits, Records, and Examinations

    This section includes provisions dealing with third-party servicers 
that were proposed in the NPRM published on February 17, 1994 (in part 
II). The Secretary will not repeat the discussion of those provisions 
here.
    The Secretary proposes to extend the requirements of this section 
to foreign institutions as that term would be defined in 34 CFR 600.52 
of the regulations governing institutional eligibility under the HEA, 
published in the Federal Register on February 10, 1994 (59 FR 6446). 
Participating institutions, like institutions in the United States, 
would accordingly be required to have compliance audits performed, be 
subject to program reviews and other investigations, and maintain 
records under the provisions of this section. The Secretary believes 
these steps provide the best means for evaluating a foreign 
institution's compliance with the requirements for participation in the 
Title IV, HEA programs.
    Section 487(c) of the HEA requires the Secretary to prescribe 
regulations as may be necessary to provide for a compliance audit of an 
institution with regard to any funds received under the Title IV, HEA 
programs on at least an annual basis.
    The Secretary notes that, currently, the Department of Education 
could not properly and effectively review the volume of audits that the 
Department would receive if every institution submitted an audit report 
on at least an annual basis. The Secretary is concerned that an effort 
that extensive could diminish the resources needed to concentrate on 
timely review of those institutions that pose the greatest financial 
risk to the government and the taxpayer. The Secretary proposes to 
exempt from some or all of the audit requirements of this section 
certain categories of institutions that pose no serious threat to the 
integrity of the Title IV, HEA programs. The Secretary proposes that an 
institution, other than an institution that is participating in the 
Title IV, HEA programs for the first time, have the audit performed at 
least once every two years if it meets the following conditions: (1) 
The institution received less than $100,000 in total annual funding 
under the Title IV, HEA programs for the period covered by the audit; 
or (2) the institution had no deficiencies identified in the audit 
report most recently submitted to the Department if that audit report 
was submitted in a timely fashion. The Secretary bases this amount on 
the amount that would exempt entities from the audit requirements of 
the Single Audit Act. The Secretary also believes that an institution 
that had no deficiencies identified in its most recently submitted 
audit report will continue to perform at a level that does not warrant 
as great a degree of oversight. In addition, an institution would not 
be required to have a compliance audit for any year in which the 
institution receives less than $25,000 in total annual funding under 
the Title IV, HEA programs. This proposal would establish in 
regulations the Secretary's current practice. Institutions that do not 
handle large amounts of Title IV, HEA program funds do not put a large 
amount of Title IV, HEA program funds at risk.
    The Secretary notes that in spite of these exemptions the Secretary 
would reserve the right to require an institution to have a compliance 
audit performed annually from any institution as the Secretary deems 
necessary. Further, the Secretary proposes to require an institution 
participating in the Title IV, HEA programs for the first time to have 
an audit performed at least once a year for the first five years of its 
participation. The Secretary believes it is important to monitor an 
institution more closely if the institution has not previously 
participated in the programs and has not had an opportunity to 
establish a record of consistent compliance with Title IV, HEA program 
requirements.
    Section 487(c) of the HEA requires that an audit performed in 
accordance with this section must cover the period since the most 
recent audit. The Secretary proposes to specify, for clarification, 
that an institution's first audit for a Title IV, HEA program must 
cover the institution's activities from the beginning of the 
institution's participation in that program.
    Rather than continuing to specify deadlines in regulations for the 
submission of audit reports, the Secretary proposes to require an 
institution to submit its audit to the Department's Inspector General 
by the deadlines established in the audit guides developed by the 
Department's Office of Inspector General. Beyond establishing deadlines 
for the submission of audit reports, these guides will provide for 
certain extensions beyond establishing deadlines for valid reasons. 
These guides are developed in consultation with the academic community.
    Section 487(c) of the HEA requires the Secretary to make the 
results of compliance audits available to cognizant guaranty agencies 
and eligible lenders under the FFEL programs, State agencies, and 
designated SPREs. The Secretary proposes to add nationally recognized 
accrediting agencies to this list, because of the role of accrediting 
agencies in assisting the Secretary with regard to institutional 
participation in the Title IV, HEA programs. The Secretary proposes to 
require institutions to provide copies of their audit reports to these 
entities upon request.
    The Secretary proposes to add a requirement that specifies that an 
institution must establish and maintain, on a current basis, financial 
and other institutional records necessary to determine the 
institutional eligibility, financial responsibility, and administrative 
capability of the institution. The Secretary believes it is essential 
for the Department to have access to this information when evaluating 
an institution's compliance with the requirements of the provisions 
governing the institutional eligibility, financial responsibility, and 
administrative capability of the institution. Further, an institution 
needs to maintain this information because, under its program 
participation agreement, the institution must agree to make the 
information available to appropriate authorities specified there (see 
the discussion on proposed Sec. 668.14).
    The Secretary proposes to require that all records required under 
the applicable Title IV, HEA program regulations be retained by the 
institution for at least five years from the time the record is 
established unless specific program regulations require that a record 
be kept for a period of time longer than five years. Five years is the 
standard period of time that institutions are required to keep most 
records under the Title IV, HEA programs. The Secretary believes that 
this is a reasonable period of time to require institutions to maintain 
most records so that the Department is able to evaluate the past 
performance of an institution.

Section 668.26  End of an Institution's Participation in the Title IV, 
HEA Programs

    The Secretary proposes to clarify the purpose of the section 
currently titled ``Loss of institutional eligibility to participate in 
the Title IV, HEA programs'' by changing the title to ``End of an 
institution's participation in the Title IV, HEA programs.'' The 
Secretary proposes to specify the date on which an institution's 
participation ends under a variety of circumstances to reflect 
statutory changes and to make clear existing practice. The Secretary 
has clarified in these proposed regulations the end of participation 
date currently used by the Department to be the date that: The 
institution closes or stops providing educational programs (the 
Secretary proposes, consistent with provisions proposed to be included 
in the regulations governing institutional eligibility under the HEA, 
to specify that this closure must be for a reason other than a normal 
vacation period or a natural disaster that directly affects the 
institution or the institution's students); the institution loses its 
institutional eligibility under 34 CFR part 600; the institution's 
participation is terminated under the proceedings in subpart G of this 
part; or the institution's program participation agreement is 
terminated or expires.
    The Secretary proposes to specify that an institution's 
participation ends on the date that an institution's period of 
participation, as specified under proposed Sec. 668.13 governing 
certification procedures, expires, or the institution's provisional 
certification is revoked in accordance with the procedures outlined in 
that proposed section. This change would be made pursuant to provisions 
of section 498(g) and (h) of the HEA.
    The Secretary proposes to specify that an institution's 
participation in the FFEL programs ends on the date that the Secretary 
has determined that the institution's cohort default rate, for each of 
the three most recent fiscal years for which the Secretary has 
determined the institution's rate, is equal to or greater than the 
threshold rates listed under proposed Sec. 668.17(c)(2). This change 
simply makes the provisions of proposed Sec. 668.26 consistent with 
those of proposed Sec. 668.17.
    Finally, the Secretary proposes to specify that an institution's 
participation ends on the date that the Secretary receives a notice 
from the appropriate SPRE that the institution's participation should 
be withdrawn. This change is mandated by section 494C(h) of the HEA.
    The Secretary proposes to add to the requirements for an 
institution when the institution's participation in a Title IV, HEA 
program ends, that the institution shall, if the institution's 
participation in the NEISP or SSIG Program ended, inform immediately 
the State in which the institution is located of that fact. Further, 
notwithstanding the requirements for the treatment of Title IV, HEA 
program funds found in this section, the institution must follow the 
instructions of that State concerning the end of that participation. 
The Secretary also proposes to add that if the institution's 
participation in all the Title IV, HEA programs end has ended, the 
institution must inform the Secretary of how the institution will 
arrange for the collection of any outstanding loans made under the 
National Defense/Direct Student Loan and ICL programs. These changes 
are necessary to make the Student Assistance General Provisions 
regulations consistent with specific program regulations.

Subpart G--Fine, Limitation, Suspension and Termination Proceedings

Section 668.81  Scope and Special Definitions

    The Secretary proposes to make technical changes to this section 
consistent with changes proposed throughout these proposed regulations. 
The Secretary proposes to clarify in this section that the procedures 
under this section do not apply in the case of an institution that 
fails to qualify for provisional certification because the institution 
does not meet the factors of financial responsibility. In addition, the 
procedures under this section would not apply in the case of an 
institution where the institution's period of provisional certification 
has expired, nor would they apply in the case of an institution that 
has its provisional certification revoked. These changes are necessary 
to make the scope of Subpart G of these regulations consistent with 
provisions in section 498(g) and (h) of the HEA.

Section 690.83  Submission of Reports

    Section 487(c)(7) of the HEA provides that, if, in the course of 
any audit conducted after December 31, 1988 pursuant to the audit 
requirements of section 487(c) of the HEA and Department regulations 
implementing those requirements, the Department discovers or is 
informed of any Title IV, HEA program assistance (specifically, Federal 
Pell Grant Program funds) that an institution has provided to its 
students in accordance with program requirements, but the institution 
has not previously received credit or reimbursement for these 
disbursements, the institution may offset the amount of those 
disbursements against liabilities owed under the audit, or if no 
liabilities arise from the audit, may receive reimbursement from the 
Department for those amounts.
    The HEA requires that the development of NPRMs for implementation 
of changes made by the Amendments to Parts B (Federal Family Education 
Loan programs), G (general provisions relating to the student 
assistance programs) or H (Program Integrity Triad) of Title IV of the 
HEA, is subject to the negotiated rulemaking process. Although this 
provision relates directly to the Federal Pell Grant Program, it is 
contained in Part G of the HEA. Therefore, it has been included in this 
NPRM instead of the Federal Pell Grant Program NPRM, which was not 
subject to the negotiated rulemaking process.
    The Secretary proposes that, notwithstanding the regulatory 
requirements for submission of reports, if an institution demonstrates 
to the satisfaction of the Secretary that the institution has provided 
Federal Pell Grants in accordance with the Federal Pell Grant Program 
regulations, but has not received credit or payment for those grants, 
the institution may receive payment or a reduction in accountability 
for those grants. The institution would have to demonstrate that it 
qualifies for a credit or payment by means of a finding contained in an 
audit report as initially submitted to the Department that was 
conducted after December 31, 1988. The audit would have to have been 
timely submitted in accordance with 34 CFR 668.23(c), with respect to 
grants made during the period of that audit. The Secretary specifies 
that, in determining whether the institution qualifies for a payment or 
reduction in accountability, the Secretary would take into account any 
liabilities of the institution arising from that audit or any other 
source. The Secretary collects those liabilities by offset in 
accordance with 34 CFR part 30.

Executive Order 12866

    These proposed 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 proposed regulations are 
those resulting from statutory requirements and those determined by the 
Secretary to be necessary for administering this program effectively 
and efficiently. Burdens specifically associated with information 
collection requirements, if any, are identified and explained elsewhere 
in this preamble under the heading Paperwork Reduction Act of 1980.
    In assessing the potential costs and benefits--both quantitative 
and qualitative--of these proposed regulations, the Secretary has 
determined that the benefits of the proposed 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 function.
    To assist the Department in complying with the specific 
requirements of Executive Order 12866, the Secretary invites comment on 
whether there may be further opportunities to reduce any potential 
costs or increase potential benefits resulting from these proposed 
regulations without impeding the effective and efficient administration 
of the program.

Regulatory Flexibility Act Certification

    The Secretary certifies that these proposed regulations would not 
have a significant economic impact on a substantial number of small 
entities. The small entities affected by these proposed regulations are 
small institutions of postsecondary education. These regulations make 
modifications that reduce potential abuse in the Title IV, HEA 
programs. These changes will not impose excessive regulatory burdens or 
require unnecessary Federal supervision. The regulations would impose 
minimal requirements to ensure the proper expenditure of program funds.

Paperwork Reduction Act of 1980

    Sections 668.8, 668.12, 668.13, 668.14, 668.15, 668.16, 668.17, 
668.22, 668.23, 668.26, 690.83 and Appendix A contain information 
collection requirements. As required by the Paperwork Reduction Act of 
1980, the Department of Education will submit a copy of these sections 
to the Office of Management and Budget (OMB) for its review. (44 U.S.C. 
3504(h)).
    This NPRM contains provisions that would affect postsecondary 
institutions who wish to participate in the Title IV student financial 
assistance programs. Annual public reporting and recordkeeping burden 
contained in the collection of information proposed in these 
regulations is estimated to be 10,488 hours, including the time for 
searching existing data sources, gathering and maintaining the data 
needed, completing and reviewing the collection of information, and 
submitting materials.
    Organizations and individuals desiring to submit comments on the 
information collection requirements should direct them to the Office of 
Information and Regulatory Affairs, OMB, Room 3002, New Executive 
Office Building, Washington D.C. 20503; Attention Daniel J. Chenok.

Invitation to Comment

    Interested persons are invited to submit comments and 
recommendations regarding these proposed regulations.
    All comments submitted in response to these proposed regulations 
will be available for public inspection, during and after the comment 
period, in room 4318, Regional Office Building 3, 7th and D Streets, 
SW., Washington, DC, between the hours of 8:30 a.m. and 4 p.m., Monday 
through Friday of each week except Federal holidays.

Assessment of Educational Impact

    The Secretary particularly requests comments 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.

List of Subjects

34 CFR Part 668

    Administrative practice and procedure, Colleges and universities, 
Consumer protection, Education, Grant programs--education, Loan 
programs--education, Reporting and recordkeeping requirements, Student 
aid.

34 CFR Part 690

    Education of disadvantaged, Grant programs--education, Reporting 
and recordkeeping requirements, Student aid.

(Catalog of Federal Domestic Assistance Numbers: 84.007 Supplemental 
Educational Opportunity Grant Program; 84.032 Guaranteed Student 
Loan Program; 84.032 PLUS Program; 84.032 Supplemental Loans for 
Students Program; 84.033 College Work-Study Program; 84.038 Perkins 
Loan Program; 84.063 Pell Grant Program; 84.069 State Student 
Incentive Grant Program; and 84.226 Income Contingent Loan Program)

    Dated: February 16, 1994.
Richard W. Riley,
Secretary of Education.
    The Secretary proposes to amend parts 668 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 is revised to read as 
follows:

    Authority: 20 U.S.C. 1085, 1088, 1091, 1092, 1094, 1099c, and 
1141, unless otherwise noted.

    2. Section 668.1 is amended by revising paragraph (b) (2) and (3); 
removing paragraph (b)(4); and revising paragraph (c) to read as 
follows:


Sec. 668.1  Scope.

* * * * *
    (b) * * *
    (2) A proprietary institution of higher education as defined in 34 
CFR 600.5; and
    (3) A postsecondary vocational institution as defined in 34 CFR 
600.6.
    (c) The Title IV, HEA programs include--
    (1) The Federal Pell Grant Program (20 U.S.C. 1070a et seq.; 34 CFR 
part 690);
    (2) The National Early Intervention Scholarship and Partnership 
(NEISP) Program (20 U.S.C. 1070a-21 et seq.; 34 CFR part 693);
    (3) The Presidential Access Scholarship (PAS) Program (20 U.S.C. 
1070a-31 et seq.; 34 CFR part 691);
    (4) The Federal Supplemental Educational Opportunity Grant (FSEOG) 
Program (20 U.S.C. 1070b et seq.; 34 CFR part 676);
    (5) The State Student Incentive Grant (SSIG) Program (20 U.S.C. 
1070c et seq.; 34 CFR part 692);
    (6) The Federal Stafford Loan Program (20 U.S.C. 1071 et seq.; 34 
CFR part 682);
    (7) The Federal Supplemental Loans for Students (Federal SLS) 
Program (20 U.S.C. 1078-1; 34 CFR part 682);
    (8) The Federal PLUS Program (20 U.S.C. 1078-2; 34 CFR part 682);
    (9) The Federal Consolidation Loan Program (20 U.S.C. 1078-3; 34 
CFR part 682);
    (10) The Federal Work-Study (FWS) Program (42 U.S.C. 2751 et seq.; 
34 CFR part 675);
    (11) The Federal Direct Student Loan (FDSL) Program (20 U.S.C. 
1087a et seq.; 34 CFR part 685); and
    (12) The Federal Perkins Loan Program (20 U.S.C. 1087aa et seq.; 34 
CFR part 674).

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

    3. Section 668.2 is revised to read as follows:


Sec. 668.2  General definitions.

    (a) The following definitions are contained in the regulations for 
Institutional Eligibility under the Higher Education Act of 1965, as 
Amended, 34 CFR part 600:

Accredited
Award year
Branch campus
Clock hour
Correspondence course
Educational program
Eligible institution
Federal Family Education Loan (FFEL) programs
Incarcerated student
Institution of higher education
Legally authorized
Nationally recognized accrediting agency
Nonprofit institution
One-year training program
Postsecondary vocational institution
Preaccredited
Proprietary institution of higher education
Recognized equivalent of a high school diploma
Recognized occupation
Regular student
Secretary

State

Telecommunications Course

    (b) The following definitions apply to all Title IV, HEA programs:
    Academic year: (1) A period that begins on the first day of classes 
and ends on the last day of classes or examinations and that is a 
minimum of 30 weeks of instructional time during which a full-time 
student is expected to complete at least--
    (i) Twenty-four semester or trimester hours or 36 quarter hours in 
an educational program whose length is measured in credit hours; or
    (ii) Nine hundred clock hours in an educational program whose 
length is measured in clock hours.
    (2) For purposes of this definition--
    (i) A week is a consecutive seven-day period; and
    (ii) The Secretary considers a week of instructional time to be any 
week in which at least one day of regularly scheduled instruction, 
examinations, or preparation for examinations occurs. Instructional 
time does not include periods of orientation, counseling, vacation, or 
other activity not related to class preparation or examinations.

(Authority: 20 U.S.C. 1088)

    Campus-based programs: (1) The Federal Perkins Loan Program (34 CFR 
part 674);
    (2) The Federal Work-Study (FWS) Program (34 CFR part 675); and
    (3) The Federal Supplemental Educational Opportunity Grant (FSEOG) 
Program (34 CFR part 676).
    Defense loan: A loan made before July 1, 1972, under Title II of 
the National Defense Education Act of 1958.

(Authority: 20 U.S.C. 421-429)

    Dependent student: Any student who does not qualify as an 
independent student (see Independent student).
    Designated department official: An official of the Department of 
Education to whom the Secretary has delegated responsibilities 
indicated in this part.
    Direct loan: A loan made under Title IV-E of the HEA after June 30, 
1972, that does not satisfy the definition of ``Federal Perkins loan.''

(Authority: 20 U.S.C. 1087aa et seq.)

    Enrolled: The status of a student who--
    (1) Has completed the registration requirements (except for the 
payment of tuition and fees) at the institution he or she is attending; 
or
    (2) Has been admitted into an educational program offered 
predominantly by correspondence has submitted one lesson, completed by 
him or her after acceptance for enrollment and without the help of a 
representative of the institution.
    Federal Consolidation Loan Program: The loan program authorized by 
Title IV-B, section 428C, of the HEA that encourages the making of 
loans to borrowers for the purpose of consolidating their repayment 
obligations, with respect to loans received by those borrowers while 
they were students, under the Federal Insured Student Loan (FISL) 
Program as defined in 34 CFR part 682, the Federal Stafford Loan, 
Federal PLUS (as in effect before October 17, 1986), Federal SLS, ALAS 
(as in effect before October 17, 1986), Federal Direct Student Loan, 
and Federal Perkins Loan programs, and under the Health Professions 
Student Loan (HPSL) Program authorized by subpart II of part C of Title 
VII of the Public Health Service Act, for parent Federal PLUS borrowers 
whose loans were made after October 17, 1986, and for Higher Education 
Assistance Loans (HEAL) authorized by subpart I of part A of Title VII 
of the Public Health Services Act.

(Authority: 20 U.S.C. 1078-3)

    Federal Direct PLUS loan: A Federal PLUS loan made under the 
Federal Direct Student Loan Program.

(Authority: 20 U.S.C. 1078-2 and 1087a et seq.)

    Federal Direct Stafford loan: A Federal Stafford loan made under 
the Federal Direct Student Loan Program.

(Authority: 20 U.S.C. 1071 et seq. and 1087a et seq.)

    Federal Direct Student loan: A loan made under Title IV-D of the 
HEA after July 23, 1992.

(Authority: 20 U.S.C. 1087a et seq.)

    Federal Direct Student Loan (FDSL) Program: The student loan 
program authorized on July 23, 1992, by Title IV-D of the HEA.

(Authority: 20 U.S.C. 1087a et seq.)
    Federal Pell Grant Program: The grant program authorized by Title 
IV-A-1 of the HEA.

(Authority: 20 U.S.C. 1070a)

    Federal Perkins loan: A loan made under Title IV-E of the HEA to 
cover the cost of attendance for a period of enrollment beginning on or 
after July 1, 1987, to an individual who on July 1, 1987, had no 
outstanding balance of principal or interest owing on any loan 
previously made under Title IV-E of the HEA.

(Authority: 20 U.S.C. 1087aa et seq.)

    Federal Perkins Loan Program: The student loan program authorized 
by Title IV-E of the HEA after October 16, 1986.

(Authority: 20 U.S.C. 1087aa-1087ii)

    Federal PLUS loan: A loan made under the Federal PLUS Program.

(Authority: 20 U.S.C. 1078-2)

    Federal PLUS Program: The loan program authorized by Title IV-B, 
section 428B, of the HEA, that encourages the making of loans to 
parents of dependent undergraduate students. Before October 17, 1986, 
the PLUS Program also provided for making loans to graduate, 
professional, and independent undergraduate students. Before July 1, 
1993, the PLUS Program also provided for making loans to parents of 
dependent graduate students.

(Authority: 20 U.S.C. 1078-2)

    Federal SLS loan: A loan made under the Federal SLS Program.

(Authority: 20 U.S.C. 1078-1)

    Federal Stafford loan: A loan made under the Federal Stafford Loan 
Program.

(Authority: 20 U.S.C. 1071 et seq.)

    Federal Stafford Loan Program: The loan program authorized by Title 
IV-B (exclusive of sections 428A, 428B, and 428C) that encourages the 
making of subsidized Federal Stafford and unsubsidized Federal Stafford 
loans as defined in 34 CFR part 682 to undergraduate, graduate, and 
professional students.

(Authority: 20 U.S.C. 1071 et seq.)

    Federal Supplemental Educational Opportunity Grant (FSEOG) Program: 
The grant program authorized by Title IV-A-2 of the HEA.

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

    Federal Supplemental Loans for Students (Federal SLS) Program: The 
loan program (formerly called the ALAS Program) authorized by Title IV-
B, section 428A, of the HEA that encourages the making of loans to 
graduate, professional, independent undergraduate, and certain 
dependent undergraduate students.

(Authority: 20 U.S.C. 1078-1)

    Federal Work Study (FWS) Program: The part-time employment program 
for students authorized by Title IV-C of the HEA.

(Authority: 42 U.S.C. 2751-2756b)

    FFELP loan: A loan made under the FFEL Program.

(Authority: 20 U.S.C. 1071 et seq.)

    Full-time student: An enrolled student who is carrying a full-time 
academic workload (other than by correspondence) as determined by the 
institution under a standard applicable to all students enrolled in a 
particular educational program. The student's workload may include any 
combination of courses, work, research or special studies that the 
institution considers sufficient to classify the student as a full-time 
student. However, for an undergraduate student, an institution's 
minimum standard must equal or exceed one of the following minimum 
requirements:
    (1) 12 semester hours or 12 quarter hours per academic term in an 
educational program using a semester, trimester, or quarter system.
    (2) 24 semester hours or 36 quarter hours per academic year for an 
educational program using credit hours but not using a semester, 
trimester, or quarter system, or the prorated equivalent for a program 
of less than one academic year.
    (3) 24 clock hours per week for an educational program using clock 
hours.
    (4) In an educational program using both credit and clock hours, 
any combination of credit and clock hours where the sum of the 
following fractions is equal to or greater than one:
    (i) For a program using a semester, trimester, or quarter system--

Number of credit hours per term (12) + Number of clock hours per week 
(24).

    (ii) For a program not using a semester, trimester, or quarter 
system--

Number of semester or trimester hours per academic year (24) + Number 
of quarter hours per academic year (36) + Number of clock hours per 
week (24).

    (5) A series of courses or seminars which equals 12 semester hours 
or 12 quarter hours in a maximum of 18 weeks.
    (6) The work portion of a cooperative education program in which 
the amount of work performed is equivalent to the academic workload of 
a full-time student.
    HEA: The Higher Education Act of 1965, as amended.

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

    Income Contingent Loan (ICL) Program: The student loan program 
authorized by Title IV-D of the HEA prior to July 23, 1992.

(Authority: 20 U.S.C. 1087a et seq.)

    Independent student: A student who qualifies as an independent 
student under section 480(d) of the HEA.

(Authority: 20 U.S.C. 1087vv)

    Initiating official: The designated department official authorized 
to begin an emergency action under Sec. 668.83.
    National Defense Student Loan Program: The student loan program 
authorized by Title II of the National Defense Education Act of 1958.

(Authority: 20 U.S.C. 421-429)

    National Direct Student Loan (NDSL) Program: The student loan 
program authorized by Title IV-E of the HEA between July 1, 1972, and 
October 16, 1986.

(Authority: 20 U.S.C. 1087aa-1087ii)

    National Early Intervention Scholarship and Partnership (NEISP) 
Program: The scholarship program authorized by chapter 2 of subpart 1 
of Title IV-A of the HEA.

(Authority: 20 U.S.C. 1070a-21 et seq.)

    Output document: The Student Aid Report (SAR), Electronic Student 
Aid Report (ESAR), or other document or automated data generated by the 
Department of Education's central processing system or Multiple Data 
Entry processing system as the result of the processing of data 
provided in a Free Application for Federal Student Aid (FAFSA).
    Parent: A student's natural or adoptive mother or father. A parent 
also includes a student's legal guardian who has been appointed by a 
court and who is specifically required by the court to use his or her 
own resources to support the student.
    Participating institution: An eligible institution that meets the 
standards for participation in Title IV, HEA programs in subpart B and 
has a current program participation agreement with the Secretary.
    Payment period: (1) With respect to the Federal Pell Grant and PAS 
programs, a payment period as defined in 34 CFR 690.2 and 691.2;
    (2) With respect to the campus-based programs, a payment period as 
defined in 34 CFR 674.2, 675.2, and 676.2.
    Presidential Access Scholarship (PAS) Program: The scholarship 
program authorized by chapter 3 of subpart 1 of Title IV-A of the HEA.

(Authority: 20 U.S.C. 1070a-31 et seq.)

    Show-cause official: The designated department official authorized 
to conduct a show-cause proceeding for an emergency action under 
Sec. 668.83.
    State Student Incentive Grant (SSIG) Program: The grant program 
authorized by Title IV-A-3 of the HEA.

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

    Third-party servicer: An individual or a State or private, profit 
or nonprofit organization that enters into a contract with an eligible 
institution to administer, through either manual or automated 
processing, any aspect of the institution's participation in any Title 
IV, HEA program. The Secretary considers administration of 
participation in a Title IV, HEA program to--
    (1) Include performing any function required by any statutory 
provision of or applicable to Title IV of the HEA, any regulatory 
provision prescribed under that statutory authority, or any applicable 
special arrangement, agreement, or limitation, such as, but not 
restricted to--
    (i) Processing student financial aid applications;
    (ii) Performing need analysis;
    (iii) Determining student eligibility and related activities;
    (iv) Certifying loan applications;
    (v) Processing output documents for payment to students;
    (vi) Receiving, disbursing, or delivering Title IV, HEA program 
funds, excluding lock-box processing of loan payments and normal bank 
electronic fund transfers;
    (vii) Conducting activities required by the provisions governing 
student consumer information services in subpart D of this part;
    (viii) Preparing and certifying requests for advance or 
reimbursement funding;
    (ix) Loan servicing and collection;
    (x) Preparing and submitting notices and applications required 
under 34 CFR part 600 and subpart B of this part; and
    (xi) Preparing a Fiscal Operations Report and Application to 
Participate--FISAP;
    (2) Exclude the following functions--
    (i) Publishing ability-to-benefit tests;
    (ii) Performing functions as a Multiple Data Entry Processor (MDE);
    (iii) Financial and compliance auditing;
    (iv) Mailing of documents prepared by the institution; and
    (v) Warehousing of records; and
    (3) Notwithstanding the exclusions referred to in paragraph (2) of 
this definition, include any activity comprised of any function 
described in paragraph (1) of this definition.

(Authority: 20 U.S.C. 1088)

    Undergraduate student: A student enrolled in an undergraduate 
educational program at an institution who--
    (1) Has not earned a baccalaureate or first professional degree; 
and
    (2) Is in an undergraduate educational program that usually does 
not exceed 4 academic years, or is enrolled in a 4- to 5-academic-year 
program designed to lead to a first degree. A student enrolled in a 
program of any other length is considered an undergraduate student for 
only the first four academic years of that program.
    U.S. citizen or national: (1) A citizen of the United States; or
    (2) A person defined in the Immigration and Nationality Act, 8 
U.S.C. 1101(a)(22), who, though not a citizen of the United States, 
owes permanent allegiance to the United States.

(Authority: 8 U.S.C. 1101)

    Valid institutional student information report (valid ISIR): A 
valid institutional student information report as defined in 34 CFR 
690.2 for purposes of the Federal Pell Grant Program and in 34 CFR 
691.2 for purposes of the PAS Program.
    Valid student aid report (valid SAR): A valid student aid report 
(valid SAR) as defined in 34 CFR 690.2 for purposes of the Federal Pell 
Grant Program and in 34 CFR 691.2 for purposes of the PAS program.

(Authority: 20 U.S.C. 1070 et seq., unless otherwise noted)

    4. Section 668.8 is revised to read as follows:


Sec. 668.8  Eligible program.

    (a) General. An eligible program is an educational program that--
    (1) Is provided by a participating institution; and
    (2) Satisfies the other relevant requirements contained in this 
section.
    (b) Definitions. For purposes of this section--
    (1) The Secretary considers the ``equivalent of an associate 
degree'' to be--
    (i) An associate degree; or
    (ii) The successful completion of at least a two-year program that 
is acceptable for full credit toward a bachelor's degree and qualifies 
a student for admission into the third year of a bachelor's degree 
program;
    (2) A ``week'' is a consecutive seven-day period; and
    (3) The Secretary considers a ``week of instruction'' to be any 
week in which at least one day of regularly scheduled instruction, 
examinations, or preparation for examinations occurs. Instruction does 
not include periods of orientation, counseling, vacation, or other 
activity not related to class preparation or examinations.
    (c) Institution of higher education. An eligible program provided 
by an institution of higher education must--
    (1) Lead to an associate, bachelor's, professional, or graduate 
degree;
    (2) Be at least a two-academic-year program that is acceptable for 
full credit toward a bachelor's degree; or
    (3) Be at least a one-academic-year training program that leads to 
a certificate, degree, or other recognized educational credential and 
that prepares a student for gainful employment in a recognized 
occupation.
    (d) Proprietary institution of higher education and postsecondary 
vocational institution. An eligible program provided by a proprietary 
institution of higher education or postsecondary vocational 
institution--
    (1)(i) Must require a minimum of 15 weeks of instruction, beginning 
on the first day of classes and ending on the last day of classes or 
examinations;
    (ii) Must be at least 600 clock hours, 16 semester or trimester 
hours, or 24 quarter hours;
    (iii) Must provide undergraduate training that prepares a student 
for gainful employment in a recognized occupation; and
    (iv) May admit as regular students persons who have not completed 
the equivalent of an associate degree;
    (2) Must--
    (i) Require a minimum of 10 weeks of instruction, beginning on the 
first day of classes and ending on the last day of classes or 
examinations;
    (ii) Be at least 300 clock hours, 8 semester or trimester hours, or 
12 quarter hours;
    (iii) Provide training that prepares a student for gainful 
employment in a recognized occupation; and
    (iv) (A) Be a graduate or professional program; or
    (B) Admit as regular students only persons who have completed the 
equivalent of an associate degree; or
    (3) For purposes of the Federal Stafford Loan, Federal PLUS, and 
Federal SLS programs only, must--
    (i) Require a minimum of 10 weeks of instruction, beginning on the 
first day of classes and ending on the last day of classes or 
examinations;
    (ii) Be at least 300 clock hours but less than 600 clock hours;
    (iii) Provide undergraduate training that prepares a student for 
gainful employment in a recognized occupation;
    (iv) Admit as regular students some persons who have not completed 
the equivalent of an associate degree; and
    (v) Satisfy the requirements of paragraph (e) of this section.
    (e) Qualitative factors. (1) An educational program that satisfies 
the requirements of paragraph (d)(3) (i) through (iv) of this section 
qualifies as an eligible program only if--
    (i) The program has a substantiated completion rate of at least 70 
percent, as calculated under paragraph (f) of this section;
    (ii) The program has a substantiated placement rate of at least 70 
percent, as calculated under paragraph (g) of this section;
    (iii) The number of clock hours provided in the program does not 
exceed by more than 50 percent the minimum number of clock hours 
required for training in the recognized occupation for which the 
program prepares students, as established by the State in which the 
program is offered, if the State has established such a requirement; 
and
    (iv) The program has been in existence for at least one year. The 
Secretary considers an educational program to have been in existence 
for at least one year only if an institution has been legally 
authorized to provide, and has continuously provided, the program 
during the 12 months (except for normal vacation periods and, at the 
discretion of the Secretary, periods when the institution closes due to 
a natural disaster that directly affects the institution or the 
institution's students) preceding the date on which the institution 
applied for eligibility for that program.
    (2) An institution shall substantiate the calculation of its 
completion and placement rates by having the certified public 
accountant who prepares its audit report required under Sec. 668.23 
certify the accuracy of the institution's calculations. That 
certification must be included with the institution's audit report and 
in the documentation submitted to the Secretary in support of the 
institution's application for eligibility of the program.
    (f) Calculation of completion rate. An institution shall calculate 
its completion rate for an educational program for any award year as 
follows:
    (1) Determine the number of regular students who were enrolled in 
the program during the award year.
    (2) Subtract from the number of students determined under paragraph 
(f)(1) of this section, the number of regular students who, during that 
award year, withdrew from, dropped out of, or were expelled from the 
program and were entitled to and actually received, in a timely manner 
in accordance with Sec. 668.22(i)(3), a refund of 100 percent of their 
tuition and fees (less any permitted administrative fee) under the 
institution's refund policy.
    (3) Subtract from the total obtained under paragraph (f)(2) of this 
section the number of students who were enrolled in the program at the 
end of that award year.
    (4) Determine the number of regular students who, during that award 
year, received the degree, certificate, or other recognized educational 
credential awarded for successfully completing the program.
    (5) Divide the number determined under paragraph (f)(4) of this 
section by the total obtained under paragraph (f)(3) of this section.
    (g) Calculation of placement rate. (1) An institution shall 
calculate its placement rate for an educational program for any award 
year as follows:
    (i) Determine the number of students who, during the award year, 
received the degree, certificate, or other recognized educational 
credential awarded for successfully completing the program.
    (ii) Subtract from the number determined under paragraph (g)(1)(i) 
of this section the number of students described in paragraph (g)(1)(i) 
of this section who were employed by the institution either before or 
after their receipt of the degree, certificate, or other recognized 
educational credential.
    (iii) Of the total obtained under paragraph (g)(1)(ii) of this 
section, determine the number of students who, within 180 days of the 
day they received their degree, certificate, or other recognized 
educational credential, obtained gainful employment in the recognized 
occupation for which they were trained or in a related comparable 
recognized occupation and, on the date of this calculation, are 
employed or have been employed for at least 13 weeks following receipt 
of the credential from the institution.
    (iv) Divide the number of students determined under paragraph 
(g)(1)(iii) of this section by the total obtained under paragraph 
(g)(1)(ii) of this section.
    (2) An institution shall document that each student described in 
paragraph (g)(1)(iii) of this section obtained gainful employment in 
the recognized occupation for which he or she was trained or in a 
related comparable recognized occupation. Examples of satisfactory 
documentation of a student's gainful employment include, but are not 
limited to--
    (i) A written statement from the student's employer;
    (ii) Signed copies of State or Federal income tax forms; and
    (iii) Written evidence of payments of Social Security taxes.
    (h) Eligibility for Federal Pell Grant and FSEOG programs. In 
addition to satisfying other relevant provisions of this section, an 
educational program qualifies as an eligible program for purposes of 
the Federal Pell Grant or FSEOG Program only if the educational program 
is an undergraduate program.
    (i) Flight training. In addition to satisfying other relevant 
provisions of this section, for a program of flight training to be an 
eligible program, it must have a current valid certification from the 
Federal Aviation Administration.
    (j) English as a second language (ESL). (1) In addition to 
satisfying the relevant provisions of this section, an educational 
program that consists solely of instruction in ESL qualifies as an 
eligible program if--
    (i) The institution admits to the program only students who the 
institution determines need the ESL instruction to use already existing 
knowledge, training, or skills; and
    (ii) The program leads to a degree, certificate, or other 
recognized educational credential.
    (2) An institution shall test each student at the end of the 
educational program to substantiate that the student has attained 
adequate proficiency in written and spoken English to use already 
existing knowledge, training, or skills. The institution shall identify 
the test or tests given to the students and the basis for the judgment 
that the student has attained the adequate proficiency.
    (3) An institution shall document its determination that ESL 
instruction is necessary to enable each student enrolled in its ESL 
program to use already existing knowledge, training, or skills with 
regard to the students that it admits to its ESL program under 
paragraph (j)(1)(i) of this section.
    (4) An ESL program that qualifies as an eligible program under this 
paragraph is eligible for purposes of the Federal Pell Grant Program 
only.
    (k) Undergraduate educational program in credit hours. If an 
institution offers an undergraduate educational program in credit 
hours, the institution must use the formula contained in paragraph (l) 
of this section to determine whether that program satisfies the 
requirements contained in paragraph (c)(3) or (d) of this section, and 
the number of credit hours in that educational program for purposes of 
the Title IV, HEA programs, unless--
    (1) The program is at least two academic years in length and 
provides an associate degree, a bachelor's degree, a professional 
degree, or an equivalent degree as determined by the Secretary; or
    (2) Each course within the program is acceptable for full credit 
toward that institution's associate degree, bachelor's degree, 
professional degree, or equivalent degree as determined by the 
Secretary, provided that the institution's degree requires at least two 
academic years of study.
    (l) Formula. For purposes of determining whether a program 
described in paragraph (k) of this section satisfies the requirements 
contained in paragraph (c)(3) or (d) of this section, and the number of 
credit hours in that educational program with regard to the Title IV, 
HEA programs--
    (1) A semester hour must include at least 30 clock hours of 
instruction;
    (2) A trimester hour must include at least 30 clock hours of 
instruction; and
    (3) A quarter hour must include at least 20 hours of instruction.

(Authority: 20 U.S.C. 1070a, 1070b, 1070c-1070c-2, 1085, 1087aa-
1087hh, 1088, 1091, and 1141; 42 U.S.C. 2753)


Secs. 668.12-668.16   [Redesignated as Secs. 668.14-668.18]

    5. Sections 668.12 through 668.16 are redesignated as Secs. 668.14 
through 668.18, respectively.
    6. A new Sec. 668.12 is added to read as follows:


Sec. 668.12   Application procedures.

    (a) Applications for initial participation. An institution that 
wishes to participate in a Title IV, HEA program must first apply to 
the Secretary for a certification that the institution meets the 
standards in this subpart.
    (b) Applications for continued participation. A participating 
institution must apply to the Secretary for a certification that the 
institution continues to meet the standards in this subpart upon the 
request of the Secretary or if the institution wishes to--
    (1) Continue to participate in a Title IV, HEA program beyond the 
scheduled expiration of the institution's current period of 
participation in the program;
    (2) Include in the institution's participation in a Title IV, HEA 
program--
    (i) A branch campus that is not currently included in the 
institution's participation in the program; or
    (ii) Another location that is not currently included in the 
institution's participation in the program, if--
    (A) That location offers 100 percent of an educational program; or
    (B) The Secretary requires the institution to apply for 
certification under paragraph (c) of this section;
    (3) Reestablish participation in a Title IV, HEA program following 
a change in ownership that results in a change in control according to 
the provisions of 34 CFR part 600.
    (c) Notification and application requirements for additional 
locations. (1) A participating institution must notify the Secretary, 
in writing, if the institution wishes to--
    (i) Include in its participation in a Title IV, HEA program a 
location that is not currently included in the institution's 
participation in the program and that offers at least 50 percent, but 
less than 100 percent, of an educational program; or
    (ii) Continue to include in its participation in a Title IV, HEA 
program a location that--
    (A) Offers at least 50 percent, but less than 100 percent, of an 
educational program; and
    (B) Has changed its name, location, or address.
    (2) The Secretary considers the submission of the required 
notification under 34 CFR 600.30 with respect to that location to 
satisfy the notification requirement of this paragraph.
    (3) The Secretary may require the institution to apply for a 
certification that the institution continues to meet the requirements 
of this subpart.
    (d) Notification and application requirements for changes in name, 
location, or address. (1) A participating institution must notify the 
Secretary, in writing, if the institution wishes to continue to 
participate in a Title IV, HEA program following a change in name, 
location or address of the institution or continue to include in the 
institution's participation--
    (i) A branch campus that has changed its name, location, or 
address; or
    (ii) Another location that has changed its name, location, or 
address if that location offers 100 percent of an educational program.
    (2) The Secretary considers the submission of the required 
notification under 34 CFR 600.30 with respect to that location to 
satisfy the notification requirement of this paragraph.
    (e) Required forms and information. An institution that applies for 
participation under paragraph (a) or (b) of this section must--
    (1) Apply on the form prescribed by the Secretary; and
    (2) Provide all the information and documentation requested by the 
Secretary to certify that the institution meets the standards of this 
subpart.

(Authority: 20 U.S.C. 1099c)

    7. A new Sec. 668.13 is added to read as follows:


Sec. 668.13   Certification procedures.

    (a) Requirements for certification. The Secretary certifies that an 
institution meets the standards of this subpart only if--
    (1) The institution is an eligible institution;
    (2) The institution meets the standards of this subpart;
    (3) Each branch campus to be included in the institution's 
participation meets the applicable standards of this subpart; and
    (4)(i) Except as provided in paragraph (a)(4)(ii) of this section, 
in the case of an institution seeking to participate for the first time 
in the Federal Pell Grant Program, the campus-based programs, the FDSL 
Program, or the Federal Stafford Loan, Federal SLS, or Federal PLUS 
Program, the institution requires the following individuals to complete 
Title IV, HEA program training provided or approved by the Secretary:
    (A) The individual designated by the institution under 
Sec. 668.16(b)(1).
    (B)(1) In the case of a for-profit institution, the chief 
administrator of the institution; or
    (2) In the case of an institution other than a for-profit 
institution, the chief administrator of the institution, or another 
administrative official of the institution designated by the chief 
administrator.
    (ii) If either one of the two individuals who is otherwise required 
to complete training under paragraph (a)(4)(i) of this section has 
previously completed Title IV, HEA program training provided or 
approved by the Secretary, the institution may elect to request an on-
site Title IV, HEA program certification review by the Secretary 
instead of requiring that individual to complete again the Title IV, 
HEA program training provided or approved by the Secretary.
    (iii) An institution may not begin participation in the applicable 
Title IV, HEA program or programs--
    (A) In the case of an institution that requires individuals to 
complete training in accordance with paragraph (a)(4)(i) of this 
section, until the individuals complete the required training; or
    (B) In the case of an institution that requests an on-site review 
in accordance with paragraph (a)(4)(ii) of this section, until the 
Secretary conducts the review and notifies the institution that it is 
in compliance with Title IV, HEA program requirements.
    (b) Period of participation. If the Secretary certifies that an 
institution meets the standards of this subpart, the Secretary also 
specifies the period for which the institution may participate in a 
Title IV, HEA program. An institution's period of participation expires 
four years after the date that the Secretary certifies that the 
institution meets the standards of this subpart, except that the 
Secretary may specify a shorter period.
    (c) Provisional certification. (1) The Secretary may provisionally 
certify an institution if--
    (i) The institution seeks initial participation in a Title IV, HEA 
program;
    (ii) The Secretary is determining for the first time whether the 
institution meets the factors of financial responsibility under 
Sec. 668.15 and the standards of administrative capability under 
Sec. 668.16;
    (iii) The institution is an eligible institution that has undergone 
a change in ownership that results in a change in control according to 
the provisions of 34 CFR part 600;
    (iv) The institution is a participating institution--
    (A) That is applying for a certification that the institution meets 
the standards of this subpart;
    (B) That the Secretary determines has jeopardized its ability to 
perform its financial responsibilities by not meeting the factors of 
financial responsibility under Sec. 668.15 or the standards of 
administrative capability under Sec. 668.16; and
    (C) Whose participation has been limited or suspended under Subpart 
G of this part, or voluntarily enters into provisional certification;
    (v) The institution seeks a renewal of participation in a Title IV, 
HEA program after the expiration of a prior period of participation in 
that program; or
    (vi) The institution is a participating institution that was 
accredited or preaccredited by a nationally recognized accrediting 
agency on the day before the Secretary withdrew the Secretary's 
recognition of that agency according to the provisions contained in 34 
CFR part 603.
    (2) If the Secretary provisionally certifies an institution, the 
Secretary also specifies the period for which the institution may 
participate in a Title IV, HEA program. Except as provided in 
paragraphs (c)(3) and (4) of this section, a provisionally certified 
institution's period of participation expires--
    (i) Not later than 12 months from the date on which the Secretary 
provisionally certified an institution under paragraph (c)(1)(i) of 
this section;
    (ii) Not later than 36 months from the date on which the Secretary 
provisionally certified an institution under paragraphs (c)(1) (ii), 
(iii), (iv), or (v) of this section; and
    (iii) If the Secretary provisionally certified an institution under 
paragraph (c)(1)(vi) of this section, not later than 18 months after 
the date that the Secretary withdrew recognition from the institution's 
nationally recognized accrediting agency.
    (3) Notwithstanding the maximum periods of participation provided 
for in paragraph (c)(2) of this section, if the Secretary provisionally 
certifies an institution, the Secretary may specify a shorter period of 
participation for that institution.
    (4) For the purposes of this section, ``provisional certification'' 
means that the Secretary certifies that an institution has demonstrated 
to the Secretary's satisfaction that the institution--
    (i) Is capable of meeting the standards of this subpart within a 
specified period; and
    (ii) Is able to meet the institution's responsibilities under its 
program participation agreement, including compliance with any 
additional conditions specified in the institution's program 
participation agreement that the Secretary requires the institution to 
meet in order for the institution to participate under provisional 
certification.
    (d) Requirements for provisional certification to participate on a 
limited basis for institutions that are not financially responsible. 
Notwithstanding paragraph (c)(1) of this section, the Secretary does 
not provisionally certify an institution that--
    (1) Fails to meet the general standards of financial responsibility 
in Sec. 668.15(b), unless the institution--
    (i) Demonstrates to the satisfaction of the Secretary that it has 
sufficient financial and administrative resources to participate in the 
Title IV, HEA programs under a funding arrangement other than the 
Department of Education's standard advance funding arrangement;
    (ii) Submits to the Secretary a letter of credit payable to the 
Secretary equal to not less than 10 percent of the Title IV, HEA 
program funds received by the institution during the last complete 
award year for which figures are available; and
    (iii) Demonstrates that it has met all of its financial obligations 
during the preceding two award years, including (but not limited to) 
the payment of required refunds and repayments to the Secretary for 
liabilities and debts incurred in programs administered by the 
Secretary; or
    (2) Is not financially responsible under Sec. 668.15(c)(2), or has 
been determined not to be financially responsible under Sec. 668.15 at 
any time during the five-year period preceding the Secretary's decision 
to certify the institution provisionally unless--
    (i) The institution, or one or more persons or entities that the 
Secretary determines under the provisions of Sec. 668.15 exercise 
substantial control over the institution, or both, submit to the 
Secretary financial guarantees in an amount determined by the Secretary 
to be sufficient to satisfy the institution's potential liabilities 
arising from the institution's participation in the Title IV, HEA 
programs; or
    (ii) One or more persons or entities that the Secretary determines 
under the provisions of Sec. 668.15 exercise substantial control over 
the institution agree to be jointly or severally liable for any 
liabilities arising from the institution's participation in the Title 
IV, HEA programs and civil and criminal monetary penalties authorized 
under Title IV of the HEA.
    (e) Revocation of provisional certification. (1) If, before the 
expiration of a provisionally certified institution's period of 
participation in a Title IV, HEA program, the Secretary determines that 
the institution is unable to meet its responsibilities under its 
program participation agreement, the Secretary may revoke the 
institution's provisional certification for participation in that 
program.
    (2)(i) If the Secretary revokes the provisional certification of an 
institution under paragraph (e)(1) of this section, the Secretary sends 
the institution a notice by registered mail, return receipt requested. 
The Secretary also may transmit the notice by other, more expeditious 
means, if practical.
    (ii) The revocation takes effect on the date that the Secretary 
mails the notice to the institution.
    (iii) The notice states the basis for the revocation, the 
consequences of the revocation to the institution, and that the 
institution may request the Secretary to reconsider the revocation. The 
consequences of a revocation are described in Sec. 668.26.
    (3)(i) An institution may request reconsideration of a revocation 
under this section by submitting to the Secretary, within 20 days of 
the institution's receipt of the Secretary's notice, written evidence 
that the revocation is unwarranted. The institution must file the 
request with the Secretary by hand-delivery, mail, or facsimile 
transmission.
    (ii) The filing date of the request is the date on which the 
request is--
    (A) Hand-delivered;
    (B) Mailed; or
    (C) Sent by facsimile transmission.
    (iii) Documents filed by facsimile transmission must be transmitted 
to the Secretary in accordance with instructions provided by the 
Secretary in the notice of revocation. An institution filing by 
facsimile transmission is responsible for confirming that a complete 
and legible copy of the document was received by the Secretary.
    (iv) The Secretary discourages the use of facsimile transmission 
for documents longer than five pages.
    (4)(i) The Secretary promptly considers an institution's request 
for reconsideration of a revocation and notifies the institution, by 
registered mail, return receipt requested, of the Secretary's final 
decision. The Secretary also may transmit the notice by other, more 
expeditious means, if practical.
    (ii) If the Secretary determines that the revocation is warranted, 
the Secretary's notice informs the institution that the institution may 
apply for reinstatement of participation only after the later of the 
expiration of--
    (A) Eighteen months after the effective date of the revocation; or
    (B) A debarment or suspension of the institution under Executive 
Order 12549 or the Federal Acquisition Regulations, 48 CFR part 9, 
subpart 9.4.
    (iii) If the Secretary determines that the revocation of the 
institution's provisional certification is unwarranted, the Secretary's 
notice informs the institution that the institution's provisional 
certification is reinstated, effective on the date that the Secretary's 
original revocation notice was mailed, for a specified period of time.
    (5)(i) The mailing date of a notice of revocation or a request for 
reconsideration of a revocation is the date evidenced on the original 
receipt of mailing from the U.S. Postal Service.
    (ii) The date on which a request for reconsideration of a 
revocation is submitted is--
    (A) If the request was sent by a delivery service other than the 
U.S. Postal Service, the date evidenced on the original receipt by that 
service; and
    (B) If the request was sent by facsimile transmission, the date 
that the document is recorded as received by facsimile equipment that 
receives the transmission.

(Authority: 20 U.S.C. 1099c and E.O. 12549 (3 CFR, 1986 Comp., p. 
189) and 12689 (3 CFR, 1989 comp., p.235)

    8. Newly designated Sec. 668.14 is revised to read as follows:


Sec. 668.14  Program participation agreement.

    (a)(1) An institution may participate in any Title IV, HEA program, 
other than the SSIG and NEISP programs, only if the institution enters 
into a written program participation agreement with the Secretary, on a 
form approved by the Secretary. A program participation agreement 
conditions the initial and continued participation of an eligible 
institution in any Title IV, HEA program upon compliance with the 
provisions of this part, the individual program regulations, and any 
additional conditions specified in the program participation agreement 
that the Secretary requires the institution to meet.
    (2) An institution's program participation agreement applies to 
each branch campus and other location of the institution that meets the 
applicable requirements of this part unless otherwise specified by the 
Secretary.
    (b) By entering into a program participation agreement, an 
institution agrees that--
    (1) It will comply with any statutory provision of or applicable to 
Title IV of the HEA, any regulatory provision prescribed under that 
statutory authority, or any applicable special arrangement, agreement, 
or limitation, including the requirement that the institution will use 
funds it receives under any Title IV, HEA program and any interest or 
other earnings thereon, solely for the purposes specified in and in 
accordance with that program;
    (2) As a fiduciary responsible for administering Federal funds, if 
the institution is permitted to request funds under a Title IV, HEA 
program advance payment method, the institution will time its requests 
for funds under the program to meet the institution's immediate Title 
IV, HEA program needs;
    (3) It will not request from or charge any student a fee for 
processing or handling any application, form, or data required to 
determine a student's eligibility for, and amount of, Title IV, HEA 
program assistance;
    (4) It will establish and maintain such administrative and fiscal 
procedures and records as may be necessary to ensure proper and 
efficient administration of funds received from the Secretary or from 
students under the Title IV, HEA programs, together with assurances 
that the institution will provide, upon request and in a timely manner, 
information relating to the administrative capability and financial 
responsibility of the institution to--
    (i) The Secretary;
    (ii) The State postsecondary review entity designated under subpart 
1 of part H of Title IV of the HEA for the State or States in which the 
institution or any of the institution's branch campuses or other 
locations are located;
    (iii) A guaranty agency, as defined in 34 CFR part 682, that 
guarantees loans made under the Federal Stafford Loan, Federal PLUS, 
and Federal SLS programs for attendance at the institution or any of 
the institution's branch campuses or other locations;
    (iv) The nationally recognized accrediting agency that accredits or 
preaccredits the institution or any of the institution's branch 
campuses, other locations, or educational programs;
    (v) The State agency that legally authorizes the institution and 
any branch campus or other location of the institution to provide 
postsecondary education; and
    (vi) In the case of a public postsecondary vocational educational 
institution that is approved by a State agency recognized for the 
approval of public postsecondary vocational education, that State 
agency;
    (5) It will comply with the provisions of Sec. 668.15 relating to 
factors of financial responsibility;
    (6) It will comply with the provisions of Sec. 668.16 relating to 
standards of administrative capability;
    (7) It will submit reports to the Secretary and, in the case of an 
institution participating in the Federal Stafford Loan, Federal PLUS, 
Federal SLS, or the Federal Perkins Loan Program, to holders of loans 
made to the institution's students under that program at such times and 
containing such information as the Secretary may reasonably require to 
carry out the purpose of the Title IV, HEA programs;
    (8) It will not provide any statement to any student or 
certification to any lender under the Federal Stafford Loan, Federal 
PLUS, or Federal SLS Program that qualifies the student for a loan or 
loans in excess of the amount that the student is eligible to borrow in 
accordance with sections 425(a), 428(a)(2), 428(b)(1) (A) and (B), and 
428H of the HEA;
    (9) It will comply with the requirements of subpart D of this part 
concerning institutional and financial assistance information for 
students and prospective students;
    (10) In the case of an institution that advertises job placement 
rates as a means of attracting students to enroll in the institution, 
it will make available to prospective students, at or before the time 
that those students apply for enrollment--
    (i) The most recent available data concerning employment 
statistics, graduation statistics, and any other information necessary 
to substantiate the truthfulness of the advertisements; and
    (ii) Relevant State licensing requirements of the State in which 
the institution is located for any job for which an educational program 
offered by the institution is designed to prepare those prospective 
students;
    (11) In the case of an institution participating in the Federal 
Stafford Loan, Federal PLUS, or Federal SLS Program, the institution 
will inform all eligible borrowers, as defined in 34 CFR Part 682, 
enrolled in the institution about the availability and eligibility of 
those borrowers for State grant assistance from the State in which the 
institution is located, and will inform borrowers from another State of 
the source for further information concerning State grant assistance 
from that State;
    (12) It will provide the certifications described in paragraph (c) 
of this section;
    (13) In the case of an institution whose students receive financial 
assistance pursuant to section 484(d) of the HEA, the institution will 
make available to those students a program proven successful in 
assisting students in obtaining the recognized equivalent of a high 
school diploma;
    (14) It will not deny any form of Federal financial aid to any 
eligible student solely on the grounds that the student is 
participating in a program of study abroad approved for credit by the 
institution;
    (15) In the case of an institution seeking to participate for the 
first time in the Federal Stafford Loan, Federal PLUS, and Federal SLS 
programs, the institution has included a default management plan as 
part of its application under Sec. 668.12 for participation in those 
programs and will use the plan for at least two years from the date of 
that application. The Secretary considers the requirements of this 
paragraph to be satisfied by a default management plan developed in 
accordance with the default reduction measures described in appendix D 
of this part;
    (16) In the case of an institution that changes ownership that 
results in a change of control, or that changes its status as a main 
campus, branch campus, or an additional location, the institution will, 
to participate in the Federal Stafford Loan, Federal PLUS, and Federal 
SLS programs, develop a default management plan for approval by the 
Secretary and implement the plan for at least two years after the 
change in control or status. The Secretary considers the requirements 
of this paragraph to be satisfied by a default management plan 
developed in accordance with the default reduction measures described 
in appendix D of this part;
    (17) The Secretary, guaranty agencies and lenders as defined in 34 
CFR part 682, nationally recognized accrediting agencies, the Secretary 
of Veterans Affairs, State postsecondary review entities designated 
under subpart 1 of part H of Title IV of the HEA, State agencies 
recognized under 34 CFR part 603 for the approval of public 
postsecondary vocational education, and State agencies that legally 
authorize institutions and branch campuses or other locations of 
institutions to provide postsecondary education, have the authority to 
share with each other any information pertaining to the institution's 
eligibility for or participation in the Title IV, HEA programs or any 
information on fraud and abuse;
    (18) It will not knowingly--(i) Employ in a capacity that involves 
the administration of the Title IV, HEA programs or the receipt of 
funds under those programs, an individual who has been convicted of, or 
has pled nolo contendere or guilty to, a crime involving the 
acquisition, use, or expenditure of Federal, State, or local government 
funds, or has been administratively or judicially determined to have 
committed fraud or any other material violation of law involving 
Federal, State, or local government funds;
    (ii) Contract with an institution or third-party servicer that has 
been terminated under section 432 of the HEA for a reason involving the 
acquisition, use, or expenditure of Federal, State, or local government 
funds, or that has been administratively or judicially determined to 
have committed fraud or any other material violation of law involving 
Federal, State, or local government funds; or
    (iii) Contract with or employ any individual, agency, or 
organization that has been, or whose officers or employees have been--
    (A) Convicted of, or pled nolo contendere or guilty to, a crime 
involving the acquisition, use, or expenditure of Federal, State, or 
local government funds; or
    (B) Administratively or judicially determined to have committed 
fraud or any other material violation of law involving Federal, State, 
or local government funds;
    (19) It will complete, in a timely manner and to the satisfaction 
of the Secretary, surveys conducted as a part of the Integrated 
Postsecondary Education Data System (IPEDS) or any other Federal 
collection effort, as designated by the Secretary, regarding data on 
postsecondary institutions;
    (20) In the case of an institution that offers athletically related 
student aid, it will comply with the provisions of paragraph (d) of 
this section;
    (21) It will not impose any penalty, including, but not limited to, 
the assessment of late fees, the denial of access to classes, 
libraries, or other institutional facilities, or the requirement that 
the student borrow additional funds for which interest or other charges 
are assessed, on any student because of the student's inability to meet 
his or her financial obligations to the institution as a result of the 
delayed disbursement of the proceeds of a Title IV, HEA program loan 
due to compliance with statutory and regulatory requirements of or 
applicable to the Title IV, HEA programs, or delays attributable to the 
institution;
    (22) It will not provide, nor contract with any entity that 
provides, any commission, bonus, or other incentive payment based 
directly or indirectly on success in securing enrollments or financial 
aid to any persons or entities engaged in any student recruiting or 
admission activities or in making decisions regarding the awarding of 
student financial assistance, except that this requirement shall not 
apply to the recruitment of foreign students residing in foreign 
countries who are not eligible to receive Federal student assistance;
    (23) It will meet the requirements established pursuant to Part H 
of Title IV of the HEA by the Secretary, State postsecondary review 
entities designated under subpart 1 of Part H of Title IV of the HEA, 
and nationally recognized accrediting agencies;
    (24) It will comply with the institutional refund policy 
established in Sec. 668.22; and
    (25) It is liable for all--(i) Improperly spent or unspent funds 
received under the Title IV, HEA programs, including any funds 
administered by a third-party servicer; and
    (ii) Refunds that the institution or its servicer may be required 
to make.
    (c) In order to participate in any Title IV, HEA program (other 
than the SSIG and NEISP programs), the institution must certify that 
it--
    (1) Has in operation a drug abuse prevention program that the 
institution has determined to be accessible to any officer, employee, 
or student at the institution; and
    (2)(i) Has established a campus security policy in accordance with 
section 485(f) of the HEA; and
    (ii) Has complied with the disclosure requirements of Sec. 668.48 
as required by section 485(f) of the HEA.
    (d) In order to participate in any Title IV, HEA program (other 
than the SSIG and NEISP programs), an institution that offers 
athletically related student aid must--
    (1) Cause an annual compilation, independently audited not less 
often than every 3 years, to be prepared within 6 months after the end 
of the institution's fiscal year, of--
    (i) The revenues derived by the institution from the institution's 
intercollegiate athletics activities, according to the following 
categories:
    (A) Total revenues.
    (B) Revenues from football.
    (C) Revenues from men's basketball.
    (D) Revenues from women's basketball.
    (E) Revenues from all other men's sports combined.
    (F) Revenues from all other women's sports combined;
    (ii) Expenses made by the institution for the institution's 
intercollegiate athletics activities, according to the following 
categories:
    (A) Total expenses.
    (B) Expenses attributable to football.
    (C) Expenses attributable to men's basketball.
    (D) Expenses attributable to women's basketball.
    (E) Expenses attributable to all other men's sports combined.
    (F) Expenses attributable to all other women's sports combined; and
    (iii) The total revenues and operating expenses of the institution; 
and
    (2) Make the compilation and, where allowable by State law, the 
audits, required by paragraph (d)(1) of this section available for 
inspection by the Secretary and the public.
    (e) For the purposes of paragraph (d) of this section--
    (1) Revenues from intercollegiate athletics activities allocable to 
a sport shall include without limitation gate receipts, broadcast 
revenues and other conference distributions, appearance guarantees and 
options, concessions, and advertising;
    (2) Revenues such as student activities fees, alumni contributions, 
and investment interest income that are not allocable to a sport shall 
be included in the calculation of total revenues only;
    (3) Expenses for intercollegiate athletics activities allocable to 
a sport shall include without limitation grants-in-aid, salaries, 
travel, equipment, and supplies; and
    (4) Expenses such as general and administrative overhead that are 
not allocable to a sport shall be included in the calculation of total 
expenses only.
    (f)(1) A program participation agreement becomes effective on the 
date that the Secretary signs the agreement.
    (2) A new program participation agreement supersedes any prior 
program participation agreement between the Secretary and the 
institution.
    (g)(1) Except as provided in paragraphs (h) and (i) of this 
section, the Secretary terminates a program participation agreement 
through the proceedings in subpart G of this part.
    (2) An institution may terminate a program participation agreement.
    (3) If the Secretary or the institution terminates a program 
participation agreement under paragraph (g) of this section, the 
Secretary establishes the termination date.
    (h) An institution's program participation agreement automatically 
expires on the date that--
    (1) The institution changes ownership that results in a change in 
control as determined by the Secretary under 34 CFR part 600; or
    (2) The institution's participation ends under the provisions of 
Sec. 668.26(a) (1), (2), (4), or (7).
    (i) An institution's program participation agreement no longer 
applies to or covers a location of the institution as of the date on 
which that location ceases to be a part of the participating 
institution.

(Authority: 20 U.S.C. 1085, 1088, 1091, 1092, 1094, 1099a-3, 1099c, 
and 1141)

    9. Newly redesignated Sec. 668.15, is revised to read as follows:


Sec. 668.15  Factors of financial responsibility.

    (a) General. To begin and to continue to participate in any Title 
IV, HEA program, an institution must demonstrate to the Secretary that 
the institution is financially responsible under the requirements 
established in this section.
    (b) General standards of financial responsibility. In general, the 
Secretary considers an institution to be financially responsible only 
if it--
    (1) Is able to provide the services described in its official 
publications and statements;
    (2) Is able to provide the administrative resources necessary to 
comply with the requirements of this subpart;
    (3) Is able to meet all of its financial obligations, including but 
not limited to--
    (i) Refunds that it is required to make; and
    (ii) Repayments to the Secretary for liabilities and debts incurred 
in programs administered by the Secretary;
    (4) Is current on any debt service payments;
    (5) Maintains, at all times, a minimum cash reserve equal to at 
least 10 percent of the institution's total deferred tuition income at 
the end of the institution's most recent fiscal year for repayment of 
refunds. The cash reserve must be maintained in a cash reserve account, 
consisting of cash or cash equivalents as defined in accordance with 
generally accepted accounting principles;
    (6) Has not had, as part of the audit report for the institution's 
most recently completed fiscal year--
    (i) A statement by the accountant acknowledging substantial doubt 
about the institution's ability to continue operation as a going 
concern;
    (ii) A finding of unauthorized use of donor restricted net assets 
to meet current operating expenses; and
    (iii) A disclaimed or adverse opinion by the accountant;
    (7) For a for-profit institution--(i) Demonstrates at the end of 
its latest fiscal year, a ratio of current assets to current 
liabilities of at least 1.25:1. For purposes of this section, the 
calculation of this ratio must exclude uncollateralized loans 
receivable from owners and related parties. Should application of 
paragraph (b)(5) of this section cause a portion of the institution's 
cash reserves to be classified as a restricted asset, those cash 
reserves may be included in current assets in calculating the 
institution's current ratio;
    (ii) Has not had operating losses over both of its two latest 
fiscal years that causes an operating loss exceeding 10 percent of the 
institution's previous year's tangible net worth for its latest fiscal 
year. For purposes of this subsection, an operating loss will be 
calculated by subtracting from total net income: extraordinary gains or 
losses; income or losses from discontinued operations; prior period 
adjustments; and, the cumulative effect of changes in accounting 
principle, estimate or reporting entity. The calculation of tangible 
net worth must exclude all assets defined as intangible in accordance 
with generally accepted accounting principles; and
    (iii) Had, for its latest fiscal year, a positive tangible net 
worth. For purposes of this section, a positive tangible net worth 
occurs if the institution's tangible assets exceed its liabilities. The 
calculation of tangible net worth must exclude all assets defined as 
intangible in accordance with generally accepted accounting principles. 
In applying this standard, the Secretary may consider the effect of 
extraordinary gains or losses resulting from unusual and infrequent 
events, and may take into consideration the cumulative effect of 
changes in accounting principle, estimate or reporting entity to the 
extent that such a change results in a more accurate representation of 
the institution's financial position in accordance with generally 
accepted accounting principles;
    (8) For a nonprofit institution--(i) Prepares a classified 
statement of financial position in accordance with generally accepted 
accounting principles or provides the required information as footnotes 
to the audit;
    (ii) Demonstrates at the end of its latest fiscal year, a ratio of 
current assets to current liabilities of at least 1:1;
    (iii) Has not had, at the end of its latest fiscal year, a decrease 
in total net assets of such significance that, if continued, would 
result in a ratio of current assets to current liabilities of less than 
1:1. The Secretary may consider the effect of extraordinary gains or 
losses resulting from unusual and infrequent events, and may take into 
consideration the cumulative effect of a change in accounting 
principle, estimate or reporting entity to the extent that such a 
change results in a more accurate representation of the institution's 
financial position in accordance with generally accepted accounting 
principles. For purposes of this analysis, the Secretary may exclude 
unrealized gains and losses on investments that have been reported as 
changes in unrestricted net assets; and
    (9) For a public institution, has its liabilities backed by the 
full faith and credit of a State, or by an equivalent governmental 
entity.
    (c) Past performance of an institution or persons affiliated with 
an institution. An institution is not financially responsible if--
    (1) A person who exercises substantial control over the institution 
or any member or members of the person's family alone or together--
    (i)(A) Exercises or exercised substantial control over another 
institution or a third-party servicer that owes a liability for a 
violation of a Title IV, HEA program requirement; or
    (B) Owes a liability for a violation of a Title IV, HEA program 
requirement; and
    (ii) That person, family member, institution, or servicer is not 
making payments in accordance with an agreement to repay that 
liability; or
    (2) The institution has--
    (i) Been limited, suspended, terminated, or entered into a 
settlement agreement to resolve a limitation, suspension, or 
termination action initiated by the Secretary or a guaranty agency (as 
defined in 34 CFR part 682) within the preceding five years;
    (ii) Had--
    (A) An audit finding, during its two most recent audits of its 
conduct of the Title IV, HEA programs, that resulted in the 
institution's being required to repay an amount greater than five 
percent of the funds that the institution received under the Title IV, 
HEA programs for any award year covered by the audit; or
    (B) A program review finding, during its two most recent program 
reviews, of its conduct of the Title IV, HEA programs that resulted in 
the institution's being required to repay an amount greater than five 
percent of the funds that the institution received under the Title IV, 
HEA programs for any award year covered by the program review;
    (iii) Been cited during the preceding five years for failure to 
submit acceptable audit reports required under this part or individual 
Title IV, HEA program regulations in a timely fashion; or
    (iv) Failed to address satisfactorily any compliance problems 
identified in program review or audit reports based upon a final 
decision of the Secretary issued pursuant to subpart G or subpart H of 
this part.
    (d) Exceptions to the general standards of financial 
responsibility. (1) An institution is not required to meet the standard 
in paragraph (b)(5) of this section if the Secretary determines that 
the institution--
    (i) Is located in, and is legally authorized to operate within, a 
State that has a tuition recovery fund that is acceptable to the 
Secretary and ensures that the institution is able to pay all required 
refunds; and
    (ii) Contributes to that tuition recovery fund.
    (2) The Secretary considers an institution to be financially 
responsible, even if the institution is not otherwise financially 
responsible under paragraphs (b) (1) through (4) and (b) (6) through 
(9) of this section, if the institution--
    (i) Submits to the Secretary an irrevocable letter of credit that 
is acceptable and payable to the Secretary equal to not less than one-
half of the Title IV, HEA program funds received by the institution 
during the last complete award year for which figures are available; or
    (ii) Establishes to the satisfaction of the Secretary, with the 
support of a financial statement submitted in accordance with paragraph 
(e) of this section, that the institution has sufficient resources to 
ensure against the precipitous closure of the institution, including 
the ability to meet all of its financial obligations, including refunds 
of institutional charges and repayments to the Secretary for 
liabilities and debts incurred in programs administered by the 
Secretary.
    (3) An institution is not required to meet the standard in 
paragraphs (b)(7)(i) and (b)(8)(ii) of this section if the institution 
is an institution that provides a 2-year or 4-year educational program 
for which the institution awards an associate or baccalaureate degree 
that demonstrates to the satisfaction of the Secretary that--
    (i) There is not reasonable doubt as to its continued solvency and 
ability to deliver quality educational services;
    (ii) It is current in its payment of all current liabilities, 
including student refunds, repayments to the Secretary, payroll, and 
payment of trade creditors and withholding taxes; and
    (iii) It has substantial equity in school-occupied facilities, the 
acquisition of which was the direct cause of its failure to meet the 
current operating ratio requirement.
    (4) The Secretary may determine an institution to be financially 
responsible even if the institution is not otherwise financially 
responsible under paragraph (c)(1) of this section if--
    (i) The institution notifies the Secretary, in accordance with 34 
CFR 600.30, that the person referenced in paragraph (c)(1) of this 
section exercises substantial control over the institution; and
    (ii)(A) The person repaid to the Secretary a portion of the 
applicable liability, and the portion repaid equals or exceeds the 
greater of--
    (1) The total percentage of the ownership interest held in the 
institution or third-party servicer that owes the liability by that 
person or any member or members of that person's family, either alone 
or in combination with one another;
    (2) The total percentage of the ownership interest held in the 
institution or servicer that owes the liability that the person or any 
member or members of the person's family, either alone or in 
combination with one another, represents or represented under a voting 
trust, power of attorney, proxy, or similar agreement; or
    (3) Twenty-five percent, if the person or any member of the 
person's family is or was a member of the board of directors, chief 
executive officer, or other executive officer of the institution or 
servicer that owes the liability, or of an entity holding at least a 25 
percent ownership interest in the institution that owes the liability;
    (B) The applicable liability described in paragraph (c)(1) of this 
section is currently being repaid in accordance with a written 
agreement with the Secretary; or
    (C) The institution demonstrates why--
    (1) The person who exercises substantial control over the 
institution should nevertheless be considered to lack that control; or
    (2) The person who exercises substantial control over the 
institution and each member of that person's family nevertheless does 
not or did not exercise substantial control over the institution or 
servicer that owes the liability.
    (e) Documentation of financial responsibility. (1) The Secretary 
determines whether an institution is financially responsible under this 
section by evaluating documents submitted by the institution and 
information obtained from other sources, including outside sources of 
credit information. To enable the Secretary to make this determination, 
the institution shall submit to the Secretary for its two latest 
complete fiscal years, a set of financial statements of the 
institution, prepared in accordance with generally accepted accounting 
principles appropriate to that institution as established by the 
American Institute of Certified Public Accountants, audited by an 
independent certified public accountant in accordance with generally 
accepted auditing standards, and accordingly including such tests of 
the institution's accounting records and such other auditing procedures 
that the independent auditor considered necessary in the circumstances. 
The Secretary may also require the institution to submit or otherwise 
make available the accountant's work papers. If an institution submits 
audited consolidated financial statements of its parent corporation for 
the Secretary to use in determining the institution's level of 
financial responsibility, the consolidated financial statements must be 
supplemented with consolidating schedules showing the consolidation of 
each of the parent corporation's subsidiaries (each separate 
institution participating in the Title IV, HEA programs must be shown 
separately), intercompany eliminating entries, and derived consolidated 
totals. The Secretary may also require the institution to submit 
additional substantive information.
    (2) An institution shall submit the documents required in paragraph 
(e)(1) of this section annually within four months after the end of the 
institution's fiscal year, unless the Secretary requests a more 
frequent submission. Upon a showing of good cause, the Secretary may 
grant a filing extension to an institution.
    (f) Definitions and terms. For the purposes of this section--
    (1)(i) An ownership interest is a share of the legal or beneficial 
ownership or control of, or a right to share in the proceeds of the 
operation of, an institution, institution's parent corporation, a 
third-party servicer, or a third-party servicer's parent corporation;
    (ii) The term ownership interest includes, but is not limited to--
    (A) An interest as tenant in common, joint tenant, or tenant by the 
entireties;
    (B) A partnership; and
    (C) An interest in a trust;
    (iii) The term ownership interest does not include any share of the 
ownership or control of, or any right to share in the proceeds of the 
operation of--
    (A) A mutual fund that is regularly and publicly traded;
    (B) An institutional investor; or
    (C) A profit-sharing plan, provided that all employees are covered 
by the plan;
    (2) The Secretary generally considers a person to exercise 
substantial control over an institution or third-party servicer, if the 
person--
    (i) Directly or indirectly holds at least a 25 percent ownership 
interest in the institution or servicer;
    (ii) Holds, together with other members of his or her family, at 
least a 25 percent ownership interest in the institution or servicer;
    (iii) Represents, either alone or together with other persons, 
under a voting trust, power of attorney, proxy, or similar agreement 
one or more persons who hold, either individually or in combination 
with the other persons represented or the person representing them, at 
least a 25 percent ownership in the institution or servicer; or
    (iv) Is a member of the board of directors, the chief executive 
officer, or other executive officer of--
    (A) The institution or servicer; or
    (B) An entity that holds at least a 25 percent ownership interest 
in the institution or servicer; and
    (3) The Secretary considers a member of a person's family to be a 
parent, sibling, spouse, child, spouse's parent or sibling, or 
sibling's or child's spouse.


(Authority: 20 U.S.C. 1094 and 1099c and Section 4 of Pub. L. 95-
452, 92 Stat. 1101-1109)


    10. Newly designated Sec. 668.16 is revised to read as follows:


Sec. 668.16  Standards of administrative capability.

    To begin and to continue to participate in any Title IV, HEA 
program, an institution shall demonstrate to the Secretary that the 
institution is capable of adequately administering that program under 
each of the standards established in this section. The Secretary 
considers an institution to have that administrative capability if the 
institution--
    (a) Administers the Title IV, HEA programs in accordance with any 
statutory provisions of or applicable to Title IV of the HEA, any 
regulatory provisions prescribed under that statutory authority, or any 
applicable special arrangement, agreement or limitation;
    (b)(1) Designates a capable individual to be responsible for 
administering all the Title IV, HEA programs in which it participates 
and for coordinating those programs with the institution's other 
Federal and non-Federal programs of student financial assistance. The 
Secretary considers an individual to be ``capable'' under this 
paragraph if the individual is certified by the State in which the 
institution is located, if the State requires certification of 
financial aid administrators. The Secretary may consider other factors 
in determining whether an individual is capable, including, but not 
limited to, the individual's successful completion of Title IV, HEA 
program training provided or approved by the Secretary;
    (2) Uses an adequate number of qualified persons to administer the 
Title IV, HEA programs in which the institution participates. The 
Secretary considers the following factors to determine whether an 
institution uses an adequate number of qualified persons--
    (i) The number and types of programs in which the institution 
participates;
    (ii) The number of applications evaluated;
    (iii) The number of students who receive any student financial 
assistance at the institution and the amount of funds administered;
    (iv) The financial aid delivery system used by the institution; and
    (v) The degree of office automation used by the institution in the 
administration of the Title IV, HEA programs;
    (3) Communicates to the individual designated to be responsible for 
administering Title IV, HEA programs, all the information received by 
any institutional office that bears on a student's eligibility for 
Title IV, HEA program assistance; and
    (4) Has written procedures for or written information indicating--
    (i) The nature and frequency of communication of pertinent 
information among all the offices that have an impact on the 
administration of the Title IV, HEA programs. Examples of this 
information may include information on a student's admissions status, 
enrollment status, attendance (if applicable), prior or concurrent 
attendance at another postsecondary institution, satisfactory academic 
progress, and payment or disbursement status; and
    (ii) The responsibilities of the various offices with respect to 
the approval, disbursement, and delivery of Title IV, HEA program 
assistance and the preparation and submission of reports to the 
Secretary;
    (c)(1) Administers Title IV, HEA programs with adequate checks and 
balances in its system of internal controls; and
    (2) Divides the functions of authorizing payments and disbursing or 
delivering funds so that no office has responsibility for both 
functions with respect to any particular student aided under the 
programs. For example, the functions of authorizing payments and 
disbursing or delivering funds must be divided so that for any 
particular student aided under the programs, the two functions are 
carried out by at least two organizationally independent individuals 
who are not members of the same family, as defined in Sec. 668.15, or 
who do not together exercise substantial control, as defined in 
Sec. 668.15, over the institution;
    (d) Establishes and maintains records required under this part and 
the individual Title IV, HEA program regulations;
    (e) Establishes, publishes, and applies reasonable standards for 
measuring whether an otherwise eligible student is maintaining 
satisfactory progress in his or her educational program. The Secretary 
considers an institution's standards to be reasonable if the 
standards--
    (1) Conform with the standards of satisfactory progress of the 
nationally recognized accrediting agency that accredits or preaccredits 
the institution, if the institution is accredited or preaccredited, and 
if the agency has those standards;
    (2) For a student enrolled in an eligible program who is to receive 
assistance under a Title IV, HEA program, are the same as or stricter 
than the institution's standards for a student enrolled in the same 
educational program who is not receiving assistance under a Title IV, 
HEA program;
    (3) Include the following elements:
    (i) Grades, work projects completed, or comparable factors that are 
measurable against a norm.
    (ii) A maximum time frame in which a student must complete his or 
her educational program. The time frame must be--
    (A) Based on the student's enrollment status;
    (B) For an undergraduate program, no longer than 150 percent of the 
published length of the educational program; and
    (C) Divided into increments, not to exceed the lesser of one 
academic year or one-half the published length of the educational 
program.
    (iii) A schedule established by the institution designating the 
minimum percentage or amount of work that a student must successfully 
complete at the end of each increment to complete his or her 
educational program within the maximum time frame.
    (iv) A determination at the end of each increment by the 
institution whether the student has successfully completed the 
appropriate percentage or amount of work according to the established 
schedule.
    (v) Consistent application of standards to all students within 
categories of students, e.g., full-time, part-time, undergraduate, and 
graduate students, and educational programs established by the 
institution.
    (vi) Specific policies defining the effect of course incompletes, 
withdrawals, repetitions, and noncredit remedial courses on 
satisfactory progress.
    (vii) Specific procedures under which a student may appeal a 
determination that the student is not making satisfactory progress.
    (viii) Specific procedures for reinstatement of aid; and
    (4) Meet or exceed the requirements of Sec. 668.7(c);
    (f) Develops and applies an adequate system to identify and resolve 
discrepancies in the information that the institution receives from 
different sources with respect to a student's application for financial 
aid under Title IV, HEA programs. In determining whether the 
institution's system is adequate, the Secretary considers whether the 
institution obtains and reviews--
    (1) All student aid applications, need analysis documents, 
Statements of Educational Purpose, Statements of Registration Status, 
and eligibility notification documents presented by or on behalf of 
each applicant;
    (2) Any documents, including any copies of State and Federal income 
tax returns, that are normally collected by the institution to verify 
information received from the student or other sources; and
    (3) Any other information normally available to the institution 
regarding a student's citizenship, previous educational experience, or 
other factors relating to the student's eligibility for funds under the 
Title IV, HEA programs;
    (g) Refers to the Office of Inspector General of the Department of 
Education for investigation--
    (1) After conducting the review of an application provided for 
under paragraph (f) of this section, any information indicating that an 
applicant for Title IV, HEA program assistance may have engaged in 
fraud or other criminal misconduct in connection with his or her 
application. The type of information that an institution must refer is 
that which is relevant to the eligibility of the applicant for Title 
IV, HEA program assistance, or the amount of the assistance. Examples 
of this type of information are--
    (i) False claims of independent student status;
    (ii) False claims of citizenship;
    (iii) Use of false identities;
    (iv) Forgery of signatures or certifications; and
    (v) False statements of income; and
    (2) Any information indicating that any employee, third-party 
servicer, or other agent of the institution that acts in a capacity 
that involves the administration of the Title IV, HEA programs, or the 
receipt of funds under those programs, may have engaged in fraud, 
misrepresentation, conversion or breach of fiduciary responsibility, or 
other illegal conduct involving the Title IV, HEA programs. The type of 
information that an institution must refer is that which is relevant to 
the eligibility and funding of the institution and its students through 
the Title IV, HEA programs;
    (h) Provides adequate financial aid counseling to eligible students 
who apply for Title IV, HEA program assistance. In determining whether 
an institution provides adequate counseling, the Secretary considers 
whether its counseling includes information regarding--
    (1) The source and amount of each type of aid offered;
    (2) The method by which aid is determined and disbursed, delivered, 
or applied to a student's account; and
    (3) The rights and responsibilities of the student with respect to 
enrollment at the institution and receipt of financial aid. This 
information includes the institution's refund policy, its standards of 
satisfactory progress, and other conditions that may alter the 
student's aid package;
    (i) Has and implements a plan, designed by the institution for the 
student population served by the institution, that demonstrates that 
for an institution that enrolls a significant number of students with 
special support service needs (including, but not limited to, child 
care and transportation), the institution has provided these students 
with information about how to access to appropriate support services 
that will foster the students' opportunity to complete the educational 
program;
    (j) Has procedures for receiving, investigating, and resolving 
student complaints;
    (k) If the stated objectives of an educational program of the 
institution are to prepare a student for gainful employment in a 
recognized occupation--
    (1) Demonstrates a reasonable relationship between the length of 
the program and entry level requirements for the recognized occupation 
for which the program prepares the student. The Secretary considers the 
relationship to be reasonable if the number of clock hours provided in 
the program does not exceed by more than 50 percent the minimum number 
of clock hours required for training in the recognized occupation for 
which the program prepares the student, as established by the State in 
which the program is offered, if the State has established such a 
requirement; and
    (2) Establishes the need for the training for the student to obtain 
employment in the recognized occupation for which the program prepares 
the student;
    (l) Makes readily available to students information on--
    (1) Market and job availability for occupational, professional, and 
vocational educational programs offered by the institution; and
    (2) The relationship of mandatory and elective course components of 
occupational, professional, and vocational educational programs to 
specific licensure standards of the State in which the institution is 
located in specific occupations;
    (m) Has advertising, promotion, and student recruitment practices 
that accurately reflect the content and objectives of the educational 
programs offered by the institution;
    (n) Has provided all program and fiscal reports and financial 
statements required for compliance with the provisions of this part and 
the individual program regulations in a timely manner;
    (o) Has no outstanding liabilities owed to the Secretary, unless 
the institution has made satisfactory arrangements to repay those 
liabilities and is honoring those arrangements;
    (p) Shows no evidence of significant problems identified in--
    (1) Reviews of the institution conducted by the Secretary, the 
Department of Education's Office of Inspector General, nationally 
recognized accrediting agencies, guaranty agencies as defined in 34 CFR 
part 682, State postsecondary review entities designated under subpart 
1 of part H of Title IV of the HEA, the State agency or official by 
whose authority the institution is legally authorized to provide 
postsecondary education, or any other law enforcement agency; or
    (2) Any findings made in any criminal, civil, or administrative 
proceeding;
    (q) Is not, and does not have any principal or affiliate of the 
institution (as those terms are defined in 34 CFR part 85) that is--
    (1) Debarred or suspended under Executive Order (E.O.) 12549 (3 
CFR, 1986 Comp., p. 189) or the Federal Acquisition Regulations (FAR), 
48 CFR part 9, subpart 9.4; or
    (2) Engaging in any activity that is a cause under 34 CFR 85.305 or 
85.405 for debarment or suspension under E.O. 12549 (3 CFR, 1986 Comp., 
p. 189) or the FAR, 48 CFR part 9, subpart 9.4;
    (r) Complies with any standards established by the State in which 
the institution is located or, if no standards exist in the State in 
which the institution is located, by the Secretary regarding completion 
rates, placement rates, and pass rates on required State examinations;
    (s) Has a cohort default rate--
    (1) As defined in Sec. 668.17, on loans made under the Federal 
Stafford Loan and Federal SLS programs to students for attendance at 
that institution that does not exceed 20 percent; and
    (2) As defined in 34 CFR 674.5, on loans made under the Federal 
Perkins Loan Program to students for attendance at that institution 
that does not exceed 15 percent;
    (t)(1) For an institution that has a common academic year for a 
majority of its students, does not have more than 33 percent of the 
regular students who are enrolled on the first day of classes of an 
academic year withdraw from enrollment at that institution during that 
academic year; or
    (2) For an institution that does not have a common academic year 
for a majority of its students, does not have more than 33 percent of 
the regular students who are enrolled on the first day of classes of 
any eight-month period withdraw during that period; and
    (u) Does not otherwise appear to lack the ability to administer the 
Title IV, HEA programs competently.

(Authority: 20 U.S.C. 1082, 1085, 1094, 1099c; Section 4 of Pub. L. 
95-452, 92 Stat. 1101-1109; E.O. 12549 (3 CFR, 1986 Comp., p. 189), 
12689 (3 CFR, 1989 Comp., p. 235)

    11. Newly designated Sec. 668.17 is revised to read as follows:


Sec. 668.17  Default reduction measures.

    (a) Default rates. If the Federal Stafford loan and Federal SLS 
cohort default rate for an institution exceeds 20 percent for any 
fiscal year, the Secretary notifies the institution of that rate and 
may, after consultation as the Secretary deems appropriate with 
cognizant guaranty agencies take one or more of the following actions:
    (1) Initiate a proceeding under Subpart G of this part to limit, 
suspend, or terminate the participation of the institution in the Title 
IV, HEA programs, if--
    (i) The institution's Federal Stafford loan and Federal SLS cohort 
default rate exceeds 40 percent for any fiscal year after 1989 and has 
not been reduced by an increment of at least 5 percent from its rate 
for the previous fiscal year (e.g., a 50-percent rate was not reduced 
to 45 percent or below); or
    (ii) The institution's Federal Stafford loan and Federal SLS cohort 
default rate exceeds--
    (A) 60 percent for fiscal year 1989;
    (B) 55 percent for fiscal year 1990;
    (C) 50 percent for fiscal year 1991;
    (D) 45 percent for fiscal year 1992; or
    (E) 40 percent for any fiscal year after fiscal year 1992.
    (2) To help the Secretary make a preliminary determination as to 
the appropriate action to be taken by the Secretary regarding the 
institution, require the institution to submit to the Secretary and one 
or more guaranty agencies, as defined in 34 CFR 682, any information 
relating to that determination, as reasonably required by the 
Secretary, within a time frame specified by the Secretary.
    (b) Default management plan. If the Federal Stafford loan and 
Federal SLS cohort default rate for an institution--
    (1) Is greater than 20 percent but less than or equal to 40 
percent, the institution must submit a default management plan that 
implements the measures described in appendix D of this part. An 
institution that wishes to submit a default management plan that 
deviates from the measures described in appendix D of this part must 
submit a justification for the deviation that includes a rationale 
explaining why the measures from which the plan deviates are not 
appropriate for the institution's specific situation. The institution 
must implement the default management plan upon notification from the 
Secretary that the plan has been approved; or
    (2) Exceeds 40 percent for any fiscal year, the institution must 
implement all of the default management reduction measures described in 
appendix D of this part no later than 60 days after the institution 
receives the Secretary's notification of the institution's cohort 
default rate. An institution is not required to submit any written 
plans to the Secretary or a guaranty agency unless the Secretary or 
guaranty agency specifically requests the institution to do so.
    (c) End of participation. (1) Except as provided in paragraph 
(c)(6) of this section, an institution's participation in the FFEL 
programs ends if the Secretary determines that the institution's cohort 
default rate, for each of the three most recent fiscal years for which 
the Secretary has determined the institution's rate, is equal to or 
greater than the applicable threshold rates.
    (2) For purposes of the determinations made under paragraph (c)(1) 
of this section, the threshold rates are--
    (i) 35 percent for each of fiscal years 1991 and 1992;
    (ii) 30 percent for fiscal year 1993; and
    (iii) 25 percent for fiscal year 1994 and all subsequent fiscal 
years.
    (3) Except as provided in paragraph (c)(7) of this section, an 
institution whose participation ends under paragraph (c)(1) of this 
section may not participate in the FFEL programs beginning with the 
date that the institution receives notification from the Secretary that 
its cohort default rate exceeds the thresholds specified in paragraph 
(c)(2) of this section and continuing--
    (i) For the remainder of the fiscal year in which the Secretary 
determines that the institution's participation has ended under 
paragraph (c)(1) of this section; and
    (ii) For the two subsequent fiscal years.
    (4) An institution whose participation in the FFEL programs ends 
under paragraph (c)(1) of this section may not participate in the FFEL 
programs until the institution--
    (i) Receives notification from the Secretary that the notice ending 
the institution's participation is withdrawn pursuant to paragraph 
(d)(6) of this section; or
    (ii) Following the period described in paragraph (c)(3) of this 
section, satisfies the Secretary that the institution meets all 
requirements for participation in the FFEL programs and executes a new 
agreement with the Secretary for participation in the FFEL programs.
    (5) If the Secretary withdraws the notification of an institution's 
loss of participation pursuant to paragraph (d)(6) of this section, the 
participation of the institution is restored effective as of the date 
that the institution received notification from the Secretary of the 
loss of participation.
    (6) Until July 1, 1994, the provisions of paragraph (c)(1) of this 
section do not apply to a historically black college or university 
within the meaning of section 322(2) of the HEA, a tribally controlled 
community college within the meaning of section 2(a)(4) of the Tribally 
Controlled Community College Assistance Act of 1978 (25 U.S.C. 
1801(a)(4)), or a Navajo community college under the Navajo Community 
College Act (25 U.S.C. 640a-640c).
    (7)(i) If the Secretary's designated department official receives 
written notice from an institution whose participation ends under 
paragraph (c)(1) of this section, within seven calendar days from the 
date on which the institution receives notification from the Secretary 
that its cohort default rate exceeds the thresholds specified in 
paragraph (d)(2) of this section, that the institution intends to 
appeal the end of participation under paragraph (d) of this section, 
the institution may, notwithstanding Sec. 668.26(d) continue to 
participate in the FFEL programs until no later than the 30th calendar 
day following the date on which the institution receives notification 
from the Secretary that its cohort default rate exceeds the thresholds 
specified in paragraph (c)(2) of this section, except as provided in 
paragraph (c)(7)(ii) of this section.
    (ii) If an institution satisfies the conditions in paragraph 
(c)(7)(i) of this section for participating in the FFEL programs until 
the 30th calendar day following the date on which the institution 
receives notification from the Secretary that its cohort default rate 
exceeds the thresholds specified in paragraph (c)(2) of this section, 
the institution may, notwithstanding Sec. 668.26(d), continue to 
participate in the FFEL programs after that date, until the Secretary 
issues a decision on the institution's appeal, if the institution, by 
the 30th calendar day following the date on which the institution 
receives notification from the Secretary that its cohort default rate 
exceeds the thresholds specified in paragraph (c)(2) of this section, 
files an appeal that is complete in all respects in accordance with 
paragraph (d) of this section. However, the appeal of an institution 
relying on paragraph (d)(1)(i) of this section is not considered 
incomplete by virtue of a guaranty agency's not having yet complied 
with--or having failed to comply with--34 CFR 682.401(b)(14), which 
requires the agency to respond to an institution's request for 
verification of data within 15 working days, if the institution 
submitted that request within 10 working days from the date on which 
the institution received notification from the Secretary that its 
cohort default rate exceeds the thresholds specified in paragraph 
(c)(2) of this section, and the institution simultaneously submitted a 
copy of that request to the Secretary's designated Department official. 
When the institution receives the guaranty agency's response, to 
complete its appeal, the institution must submit the verified data to 
the Secretary's designated Department official within five working days 
in order to continue participating in the FFEL programs until the 
Secretary issues a decision on the institution's appeal.
    (d) Appeal procedures. (1) An institution may appeal the loss of 
participation in the FFEL programs under paragraph (c)(1) of this 
section by submitting an appeal in writing to the Secretary's 
designated Department official that is postmarked no later than 30 days 
after it receives notification of its loss of participation. The 
institution may appeal on the grounds that--
    (i)(A) The calculation of the institution's cohort default rate for 
any of the three fiscal years relevant to the end of participation is 
not accurate; and
    (B) A recalculation with corrected data verified by the cognizant 
guaranty agency or agencies would produce a cohort default rate for any 
of those fiscal years that is below the threshold percentage specified 
in paragraph (c)(2) of this section;
    (ii) The institution meets the following criteria:
    (A)(1) Fifteen percent or fewer of the institution's students who 
are enrolled on at least a half-time basis receive Federal Stafford or 
Federal SLS loans for any twenty-four month period ending not more than 
six months prior to the date the institution submits its appeal; or
    (2) For any twenty-four month period ending not more than six 
months prior to the date the institution submits its appeal, two-thirds 
or more of the institution's students who are enrolled on at least a 
half-time basis are individuals from disadvantaged economic 
backgrounds, as established by documentary evidence submitted by the 
institution. Such evidence must relate to qualification by those 
students for an Expected Family Contribution (EFC) (formerly 
institutions were required to use the Pell Grant index), as defined in 
34 CFR 690.2, of zero for the applicable award year or attribution to 
those students of an adjusted gross income of the student and his or 
her parents or spouse, if applicable, reported for the applicable award 
year of less than the poverty level, as determined under criteria 
established by the Department of Health and Human Services; and
    (B)(1) Two-thirds or more of the institution's students who were 
enrolled on a full-time basis in any twenty-four month period ending 
not more than six months prior to the date the institution submits its 
appeal completed the educational programs in which they were enrolled. 
This rate is calculated by comparing the number of students who were 
classified as full-time at their initial enrollment in the institution, 
and were originally scheduled, at the time of enrollment, to complete 
their programs within the relevant twenty-four month period, with the 
number of these students who received a degree, certificate, or other 
recognized educational credential from the institution; transferred 
from the institution to a higher level educational program at another 
institution for which the prior program provided substantial 
preparation; or, at the end of the twenty-four month period, remained 
enrolled and were making satisfactory academic progress toward 
completion of their educational programs. The calculation does not 
include students who did not complete their programs because they left 
the institution to serve in the armed forces; and
    (2) The institution had a placement rate of two-thirds or more with 
respect to its former students who received a degree, certificate, or 
other recognized educational credential from the institution in any 
twenty-four month period ending not more than six months prior to the 
date the institution submits its appeal. This rate is calculated by 
determining the percentage of all those students who, based on evidence 
submitted by the institution, are on that date employed, or had been 
employed for at least 13 weeks following receipt of the credential from 
the institution, in the occupation for which the institution provided 
training, or are enrolled or had been enrolled for at least 13 weeks 
following receipt of the credential from the institution, in a higher 
level educational program at another institution for which the prior 
educational program provided substantial preparation.
    (2) For purposes of paragraph (d)(1)(iii)(A) of this section, a 
student is originally scheduled, at the time of enrollment, to complete 
the educational program on the date when the student will have been 
enrolled in the program for the amount of time normally required to 
complete the program. The ``amount of time normally required to 
complete the program'' is the period of time specified in the 
institution's enrollment contract, catalog, or other materials, for 
completion of the program by a full-time student, or the period of time 
between the date of enrollment and the anticipated graduation date 
appearing on the student's loan application, if any, whichever is less.
    (3) An appeal submitted under paragraph (d)(1)(i) of this section 
is considered to be filed in a timely manner if the institution submits 
a letter of appeal by the 30-day deadline notifying the Secretary's 
designated department official that it is appealing on this basis, 
including with that letter a copy of the institution's request to each 
cognizant guaranty agency for verification of the cohort default rate 
data, and submits the verified data to the Secretary's designated 
Department official within five working days of its receipt from the 
guaranty agency. For purposes of paragraph (d)(4) of this section, the 
institution's appeal is not considered complete until the institution 
submits the verified data to the Secretary's designated Department 
official.
    (4) The Secretary issues a decision on the institution's appeal 
within 45 days after the institution submits a complete appeal that 
addresses the applicable criteria in paragraphs (d)(1)(i) through (iii) 
of this section to the Secretary's designated Department official.
    (5) The Secretary's decision is based on the consideration of 
written material submitted by the institution. No oral hearing is 
provided.
    (6) The Secretary withdraws the notification of loss of 
participation in the FFEL programs sent to an institution under 
paragraph (c)(1) of this section, if the Secretary determines that the 
institution's appeal satisfies one of the grounds specified in 
paragraphs (d)(1) (i) through (iii) of this section.
    (7) (i) An institution that appeals under paragraph (d)(1)(i) of 
this section must submit a written request to the guaranty agency or 
agencies that guaranteed the loans used in the calculation of its 
cohort default rate to verify the data used to calculate its cohort 
default rate and simultaneously provide a copy of that request to the 
Secretary's designated Department official.
    (ii) The written request must include the names and social security 
numbers of the borrowers the institution wishes the agency to verify 
and detailed information on the nature of the suspected inaccuracy in 
the data the institution is requesting the agency to verify.
    (8) An institution must include in its appeal a certification by 
the institution's chief executive officer that all information provided 
by the institution in support of its appeal is true and correct.
    (9) An institution that appeals on the ground that it meets the 
criteria contained in paragraph (d)(1)(iii) of this section must 
include in its appeal the following information:
    (i) For purposes of paragraph (d)(1)(iii)(A)(1) of this section--
    (A) The number of students who were enrolled on at least a half-
time basis at the institution in the relevant twenty-four month period; 
and
    (B) The name, address, and social security number of each of the 
institution's current and former students who received Federal Stafford 
or Federal SLS loans during that twenty-four month period.
    (ii) For purposes of paragraph (d)(1)(iii)(A)(2) of this section:
    (A) The number of students who were enrolled on at least a half-
time basis at the institution in the relevant twenty-four month period; 
and
    (B) The name, address, social security number and Expected Family 
Contribution (EFC) (formerly institutions were required to use the Pell 
Grant index), if applicable, of each student from a disadvantaged 
economic background who was enrolled on at least a half-time basis at 
the institution in the relevant twenty-four month period and the 
measure and data used to determine that the student is from a 
disadvantaged economic background.
    (iii) For purposes of paragraph (d)(1)(iii)(B)(1) of this section--
    (A) The number of students who were enrolled on a full-time basis 
at the institution in the relevant twenty-four month period;
    (B) For each of those former students who received a degree, 
certificate, or other recognized educational credential from the 
institution, the student's name, address, and social security number;
    (C) For each of those former students who transferred to a higher 
level educational program at another institution, the name, address, 
social security number of the student, and the name and address of the 
institution to which the student transferred and the name of the higher 
level program; and
    (D) For each of those students who remained enrolled and was making 
satisfactory academic progress toward completion of the educational 
program, the student's name, address, and social security number.
    (iv) For purposes of paragraph (d)(1)(iii)(B)(2) of this section--
    (A) The number of students who received a degree, certificate, or 
other recognized educational credential at the institution in the 
relevant twenty-four month period;
    (B) For each of those former students who is employed or had been 
employed for at least 13 weeks following receipt of a degree, 
certificate or other credential from the institution, the student's 
name, address, and social security number, the employer's name and 
address, the student's job title, and the dates the student was so 
employed; and
    (C) For each of those former students who enrolled in a higher 
level educational program at another institution for which the 
appealing institution's educational program provided substantial 
preparation, the former student's name, address, and social security 
number, the subsequent institution's name and address, the name of the 
educational program, and the dates the former student was so enrolled.
    (e) Definitions. The following definitions apply to this section 
and Sec. 668.90:
    (1)(i)(A) For purposes of the Federal Stafford loan and Federal SLS 
cohort default rate, except as provided in paragraph (e)(1)(ii) of this 
section, the term cohort default rate means--
    (1) For any fiscal year in which 30 or more current and former 
students at the institution enter repayment on Federal Stafford loans 
or Federal SLS loans (or on the portion of a Federal Consolidation Loan 
that is used to repay such loans) received for attendance at the 
institution, the percentage of those current and former students who 
enter repayment in that fiscal year on such loans who default before 
the end of the following fiscal year; and
    (2) For any fiscal year in which fewer than 30 of the institution's 
current and former students enter repayment on Federal Stafford loans 
or Federal SLS loans (or on the portion of a Federal Consolidation Loan 
that is used to repay such loans) received for attendance at the 
institution, the percentage of those current and former students who 
entered repayment on Federal Stafford loans or Federal SLS loans in any 
of the three most recent fiscal years, who default before the end of 
the fiscal year immediately following the year in which they entered 
repayment.
    (B) In determining the number of students who default before the 
end of that following fiscal year, the Secretary includes only loans 
for which the Secretary or a guaranty agency has paid claims for 
insurance.
    (ii) (A) In the case of a student who has attended and borrowed at 
more than one institution, the student (and his or her subsequent 
repayment or default) is attributed to each institution for attendance 
at which the student received a loan that entered repayment in the 
fiscal year.
    (B) A loan on which a payment is made by the institution, its 
owner, agent, contractor, employee, or any other affiliated entity or 
individual, in order to avoid default by the borrower, is considered as 
in default for purposes of this definition.
    (C) Any loan that has been rehabilitated under section 428F of the 
HEA before the end of that following fiscal year is not considered as 
in default for purposes of this definition.
    (D) For the purposes of this definition, a loan made in accordance 
with section 428A of the HEA (or a Federal Consolidation Loan a portion 
of which is used to repay a Federal SLS loan) shall not be considered 
to enter repayment until after the borrower has ceased to be enrolled 
in an educational program leading to a degree, certificate, or other 
recognized educational credential at the participating institution on 
at least a half-time basis (as determined by the institution) and 
ceased to be in a period of forbearance based on such enrollment. Each 
eligible lender of a loan made under section 428A (or a Federal 
Consolidation Loan a portion of which is used to repay a Federal SLS 
loan) of the HEA shall provide the guaranty agency with the information 
necessary to determine when the loan entered repayment for purposes of 
this definition, and the guaranty agency shall provide that information 
to the Secretary.
    (iii) (A) A cohort default rate of an institution applies to all 
locations of the institution as the institution exists on the first day 
of the fiscal year for which the rate is calculated.
    (B) A cohort default rate of an institution applies to all 
locations of the institution from the date the institution is notified 
of that rate until the institution is notified by the Secretary that 
the rate no longer applies.
    (iv) (A) For an institution that changes its status from that of a 
location of one institution to that of a free-standing institution, the 
Secretary determines the cohort default rate based on the institution's 
status as of October 1 of the fiscal year for which a cohort default 
rate is being calculated.
    (B) For an institution that changes its status from that of a free-
standing institution to that of a location of another institution, the 
Secretary determines the cohort default rate based on the combined 
number of students who enter repayment during the applicable fiscal 
year and the combined number of students who default during the 
applicable fiscal years from both the former free-standing institution 
and the other institution. This cohort default rate applies to the new, 
consolidated institution and all of its current locations.
    (C) For free-standing institutions that merge to form a new, 
consolidated institution, the Secretary determines the cohort default 
rate based on the combined number of students who enter repayment 
during the applicable fiscal year and the combined number of students 
who default during the applicable fiscal years from all of the 
institutions that are merging. This cohort default rate applies to the 
new consolidated institution.
    (D) For a location of one institution that becomes a location of 
another institution, the Secretary determines the cohort default rate 
based on the combined number of students who enter repayment during the 
applicable fiscal year and the number of students who default during 
the applicable fiscal years from both of the institutions in their 
entirety, not limited solely to the respective locations.
    (2) Fiscal year means the period from and including October 1 of a 
calendar year through and including September 30 of the following 
calendar year.
    (i) Federal SLS Program participation. An institution loses its 
participation in the Federal SLS Program if the Secretary determines 
that the institution's cohort default rate for the most recent fiscal 
year for which that rate is available is equal to or greater than 30 
percent. However, the institution's loss of participation does not 
apply to a student who is not an undergraduate student or who has 
received a Federal SLS loan previously for enrollment in the same 
educational program at the institution (except that previous receipt of 
a Federal SLS loan shall not qualify a student for a Federal SLS loan 
with respect to an extension of the duration of that educational 
program that was effected on or after November 8, 1989).

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

    12. Section 668.22 is revised to read as follows:


Sec. 668.22  Institutional refunds and repayments.

    (a) General. (1) An institution shall have a fair and equitable 
refund policy under which the institution makes a refund of unearned 
tuition, fees, room and board, and other charges to a student who 
received Title IV, HEA program assistance, or whose parent received a 
Federal PLUS loan on behalf of the student if the student--
    (i) Does not register for the period of enrollment for which the 
student was charged; or
    (ii) Withdraws, drops out, is expelled from the institution or 
otherwise fails to complete the program on or after his or her first 
day of class of the period of enrollment for which he or she was 
charged.
    (2) The institution shall provide a clear and conspicuous written 
statement containing its refund policy, including the allocation of 
refunds and repayments to sources of aid, together with examples of the 
application of this policy, to a prospective student prior to the 
earlier of the student's enrollment or the execution of the student's 
enrollment agreement. The institution shall make its policy known to 
currently enrolled students. The institution shall include in its 
statement the procedures that a student must follow to obtain a refund, 
but the institution shall return the portion of a refund allocable to 
the Title IV, HEA programs in accordance with paragraph (f) of this 
section whether the student follows those procedures or not. If the 
institution changes its refund policy, the institution shall ensure 
that all students are made aware of the new policy.
    (3) The institution shall publish the costs of required supplies 
and equipment and shall substantiate to the Secretary upon request that 
the costs are reasonably related to the cost of providing the supplies 
and equipment to students.
    (b) Fair and equitable refund policy. (1) For purposes of paragraph 
(a) of this section, an institution's refund policy is fair and 
equitable if the policy provides for a refund of at least the larger of 
the amount provided under--
    (i) The requirements of applicable State law;
    (ii) The specific refund standards established by the institution's 
nationally recognized accrediting agency if those standards are 
approved by the Secretary;
    (iii) The pro rata refund calculation described in paragraph (c) of 
this section, for any student attending the institution for the first 
time whose withdrawal date is on or before the 60 percent point in time 
in the period of enrollment for which the student has been charged; or
    (iv) For purposes of determining a refund when the pro rata refund 
calculation under paragraph (b)(1)(iii) of this section does not apply, 
and no standards for refund calculations exist under paragraph (b)(1) 
(i) and (ii) of this section, the larger of--
    (A) The specific refund standards contained in Appendix A to this 
part; or
    (B) The institution's refund policy.
    (2) For purposes of paragraph (b)(1)(iii) of this section, ``the 60 
percent point in time in the period of enrollment for which the student 
has been charged'' is--
    (i) In the case of an educational program that is measured in 
credit hours, the point in calendar time when 60 percent of the period 
of enrollment for which the student has been charged, as defined in 
paragraph (d) of this section, has elapsed; and
    (ii) In the case of an educational program that is measured in 
clock hours, the point in time when the student completes 60 percent of 
the clock hours scheduled for the period of enrollment for which the 
student is charged as defined in paragraph (d) of this section.
    (3) The institution must determine which policy under paragraph 
(b)(1) of this section provides for the largest refund to that student.
    (c) Pro rata refund. (1) Pro rata refund, as used in this section, 
means a refund by an institution to a student attending that 
institution for the first time of not less than that portion of the 
tuition, fees, room, board, and other charges assessed the student by 
the institution equal to the portion of the period of enrollment for 
which the student has been charged that remains on the withdrawal date, 
rounded downward to the nearest 10 percent of that period, less--
    (i) (A) Any unpaid amount of a scheduled cash payment for the 
period of enrollment for which the student has been charged. A 
scheduled cash payment is the amount of institutional charges that is 
not paid for by financial aid for the period of enrollment for which 
the student has been charged exclusive of--
    (1) Any amount scheduled to be paid by Title IV, HEA program 
assistance that the student has been awarded that is payable to the 
student even though the student has withdrawn; and
    (2) Late disbursements of loans made under the Federal Stafford 
Loan, Federal SLS, and Federal PLUS programs in accordance with 34 CFR 
682.207(d).
    (B) The unpaid amount of a scheduled cash payment is computed by 
subtracting the amount paid by the student for the period of enrollment 
for which the student has been charged from the scheduled cash payment 
for the period of enrollment for which the student has been charged;
    (ii) A reasonable administrative fee not to exceed the lesser of--
    (A) Five percent of the tuition, fees, room and board, and other 
charges assessed the student; or
    (B) One hundred dollars;
    (iii) Any application fee charged by the institution; and
    (iv) The portion of ``board'' charges (i.e., meal tickets) that 
have been expended by the student that exceed the portion attributable 
to the period for which the student attended at the time of withdrawal. 
The institution must include in the refund any unexpended ``board'' 
credits.
    (2) (i) For purposes of this section, ``other charges assessed the 
student by the institution'' include, but are not limited to, charges 
for any equipment (including books and supplies) issued by an 
institution to the student. The institution may deduct from the refund 
owed under this paragraph the documented cost to the institution of 
equipment issued to the student if the institution specifies in the 
enrollment agreement a separate charge for equipment which the student 
actually obtains or if the institution refers the student to a vendor 
operated by an affiliated or related entity and the student does not 
return the equipment in good condition, allowing for reasonable wear 
and tear, within 20 days following the date of the student's 
withdrawal. The student shall be liable for the amount, if any, by 
which the documented cost for equipment not returned in good condition 
exceeds the refund under this paragraph. Equipment is not considered to 
be returned in good condition if the equipment cannot be reused because 
of clearly recognized health and sanitary reasons, and this fact is 
clearly and conspicuously disclosed in the enrollment agreement.
    (ii) An institution may not delay its payment of the portion of a 
refund allocable under this section to a Title IV, HEA program or a 
lender under 34 CFR 682.607 by reason of the process for return of 
equipment prescribed in paragraph (c)(4)(i) of this section.
    (3) For purposes of this section--
    (i) ``Room'' charges do not include charges that are passed through 
the institution from an entity that is not under the control of, 
related to, or affiliated with the institution; and
    (ii) ``Other charges assessed the student by the institution'' do 
not include fees for group health insurance, if this insurance is 
required for all students and the purchased coverage remains in effect 
for the student throughout the period for which the student was 
charged.
    (4) (i) For purposes of this section, a student attending an 
institution for the first time is a student who--
    (A) Has not previously attended at least one class at the 
institution; or
    (B) Received a refund of 100 percent of his or her tuition and fees 
(less any permitted administrative fee) under the institution's refund 
policy for previous attendance at the institution.
    (ii) A student remains a first-time student until the student 
either--
    (A) Withdraws, drops out, or is expelled from the institution after 
attending at least one class; or
    (B) Completes the period of enrollment for which he or she has been 
charged.
    (5) For purposes of paragraph (c)(1) of this section, ``the portion 
of the period of enrollment for which the student has been charged that 
remains'' is determined--
    (i) In the case of an educational program that is measured in 
credit hours, by dividing the total number of weeks comprising the 
period of enrollment for which the student has been charged into the 
number of weeks remaining in that period as of the student's withdrawal 
date;
    (ii) In the case of an educational program that is measured in 
clock hours, by dividing the total number of clock hours comprising the 
period of enrollment for which the student has been charged into the 
number of scheduled clock hours remaining to be completed by the 
student in that period as of the student's withdrawal date; and
    (iii) In the case of an educational program that consists 
predominantly of correspondence courses, by dividing the total number 
of lessons comprising the period of enrollment for which the student 
has been charged into the number of lessons not submitted by the 
student.
    (d) Period of enrollment for which the student has been charged. 
(1) For purposes of this section, ``the period of enrollment for which 
the student has been charged,'' means the actual period for which an 
institution charges a student, except that the minimum period must be--
    (i) In the case of an educational program that is measured in 
credit hours and uses semesters, trimesters, quarters, or other 
academic terms, the semester, trimester, quarter or other academic 
term; or
    (ii) In the case of an educational program that is measured in 
credit hours and does not use semesters, trimesters, quarters, or other 
academic terms, or an educational program that is measured in clock 
hours, the lesser of the length of the educational program or an 
academic year.
    (2) If an institution charges by different periods for different 
charges, the ``period of enrollment for which the student has been 
charged'' for purposes of this section is the longest period for which 
the student is charged. The institution must include any charges 
assessed the student for the period of enrollment or any portion of 
that period of enrollment when calculating the refund.
    (e) Overpayments. (1) An institution shall determine whether a 
student has received an overpayment for noninstitutional costs for the 
period of enrollment for which the student has been charged if--
    (i) The student officially withdraws, drops out, or is expelled on 
or after his or her first day of class of that period; and
    (ii) The student received Title IV, HEA program assistance other 
than from the FWS, Federal Stafford Loan, Federal PLUS, or Federal SLS 
Program for that period.
    (2) (i) To determine if the student owes an overpayment, the 
institution shall subtract the noninstitutional costs that the student 
incurred for that portion of the period of enrollment for which the 
student has been charged from the amount of all assistance (other than 
from the FWS, Federal Stafford Loan, Federal PLUS, or Federal SLS 
Program) that the institution disbursed to the student.
    (ii) Noninstitutional costs may include, but are not limited to, 
room and board for which the student does not contract with the 
institution, books, supplies, transportation, and miscellaneous 
expenses.
    (f) Repayments to Title IV, HEA programs of institutional refunds 
and overpayments. (1)(i) An institution shall return a portion of the 
refund calculated in accordance with paragraph (b) of this section to 
the Title IV, HEA programs if the student to whom the refund is owed 
received assistance under any Title IV, HEA program other than the FWS 
Program.
    (ii) The portion of the refund that an institution shall return to 
the Title IV, HEA programs may not exceed the amount of assistance that 
the student received under the Title IV, HEA programs other than under 
the FWS Program for the period of enrollment for which the student has 
been charged.
    (2) For purposes of this section, except for the calculation of a 
pro rata refund required under paragraph (b)(1)(iii) of this section--
    (i) An institutional refund means the amount paid for institutional 
charges for the period of enrollment for which the student has been 
charged minus the amount that the institution may retain under 
paragraph (f)(2)(iii) of this section for the portion of the period of 
enrollment for which the student has been charged that the student was 
actually enrolled at the institution;
    (ii) An institution may not include any unpaid amount of a 
scheduled cash payment in determining the amount that the institution 
may retain for institutional charges. A scheduled cash payment is the 
amount of institutional charges that has not been paid by financial aid 
for the period of enrollment for which the student has been charged, 
exclusive of--
    (A) Any amount scheduled to be paid by Title IV, HEA program 
assistance that the student has been awarded that is payable to the 
student even though the student has withdrawn; and
    (B) Late disbursements of loans made under the Federal Stafford, 
Federal SLS, and Federal PLUS programs in accordance with 34 CFR 
682.207(d);
    (iii) In determining the amount that the institution may retain for 
the portion of the period of enrollment for which the student has been 
charged during which the student was actually enrolled, an institution 
shall--
    (A) Compute the unpaid amount of a scheduled cash payment by 
subtracting the amount paid by the student for that period of 
enrollment for which the student has been charged from the scheduled 
cash payment for the period of enrollment for which the student has 
been charged; and
    (B) Subtract the unpaid amount of the scheduled cash payment from 
the amount that may be retained by the institution according to the 
institution's refund policy; and
    (iv) An institution shall return the total amount of Title IV, HEA 
program assistance (other than amounts received from the FWS Program) 
paid for institutional charges for the period of enrollment for which 
the student has been charged if the unpaid amount of the student's 
scheduled cash payment is greater than or equal to the amount that may 
be retained by the institution under the institution's refund policy.
    (3)(i) A student must repay to the institution or to the Title IV, 
HEA programs a portion of the overpayment as determined according to 
paragraph (e) of this section. The institution shall make every 
reasonable effort to contact the student and recover the overpayment in 
accordance with program regulations (34 CFR parts 673, 674, 675, 676, 
690, and 691).
    (ii) The portion of the overpayment that the student or the 
institution (if the institution recovers the overpayment) shall return 
to the Title IV, HEA programs may not exceed the amount of assistance 
received under the Title IV, HEA programs other than the FWS, Federal 
Stafford Loan, Federal PLUS, or Federal SLS Program for the period of 
enrollment for which the student has been charged.
    (iii) Unless otherwise provided for in applicable program 
regulations--
    (A) If the amount of the overpayment is less than $100, the student 
is considered not to owe an overpayment, and the institution is not 
required to contact the student or recover the overpayment; and
    (B) If the amount of the refund is $25 or less, the institution is 
not required to pay the refund.
    (g) Allocation of refunds and overpayments. (1) Except as provided 
in paragraph (g)(2) of this section, if a student who received Title 
IV, HEA program assistance (other than assistance under the FWS 
Program) is owed a refund calculated in accordance with paragraph (b) 
of this section, or if a student who received Title IV, HEA program 
assistance (other than assistance under the FWS, Federal Stafford Loan, 
Federal PLUS, or Federal SLS Program) must repay an overpayment 
calculated in accordance with paragraph (e) of this section, an 
institution shall allocate that refund and any overpayment collected 
from the student in the following order:
    (i) To eliminate outstanding balances on Federal SLS loans received 
by the student for the period of enrollment for which he or she was 
charged.
    (ii) To eliminate outstanding balances on unsubsidized Federal 
Stafford loans received by the student for the period of enrollment for 
which he or she was charged.
    (iii) To eliminate outstanding balances on subsidized Federal 
Stafford loans received by the student for the period of enrollment for 
which he or she was charged.
    (iv) To eliminate outstanding balances on Federal PLUS loans 
received on behalf of the student for the period of enrollment for 
which he or she was charged.
    (v) To eliminate outstanding balances on Federal Direct Stafford 
loans received by the student for the period of enrollment for which he 
or she was charged.
    (vi) To eliminate outstanding balances on Federal Direct PLUS loans 
received on behalf of the student for the period of enrollment for 
which he or she was charged.
    (vii) To eliminate outstanding balances on Federal Perkins loans 
received by the student for the period of enrollment for which he or 
she was charged.
    (viii) To eliminate any amount of Federal Pell Grants awarded to 
the student for the period of enrollment for which he or she was 
charged.
    (ix) To eliminate any amount of Federal SEOG Program aid awarded to 
the student for the period of enrollment for which he or she was 
charged.
    (x) To eliminate any amount of other assistance awarded to the 
student under programs authorized by Title IV of the HEA for the period 
of enrollment for which he or she was charged.
    (xi) To repay required refunds of other Federal, State, private, or 
institutional student financial assistance received by the student.
    (xii) To the student.
    (2) The institution must apply the allocation policy described in 
paragraph (g)(1) of this section consistently to all students who have 
received Title IV, HEA program assistance and must conform that policy 
to the following:
    (i) No amount of the refund or of the overpayment may be allocated 
to the FWS Program.
    (ii) No amount of overpayment may be allocated to the Federal 
Stafford Loan, Federal PLUS, or Federal SLS Program.
    (iii) The amount of the Title IV, HEA program portion of the refund 
allocated to the Federal Stafford Loan, Federal PLUS, and Federal SLS 
programs must be returned to the appropriate borrower's lender by the 
institution in accordance with program regulations (34 CFR part 682).
    (iv) The amount of the Title IV, HEA program portion of the refund 
allocated to the Title IV, HEA programs other than the FWS, Federal 
Stafford Loan, Federal PLUS, and Federal SLS programs must be returned 
to the appropriate program account or accounts by the institution 
within 30 days of the date that the student officially withdraws or is 
expelled or the institution determines that a student has unofficially 
withdrawn.
    (v) The amount of the Title IV, HEA program portion of the 
overpayment allocated to the Title IV, HEA programs other than the FWS, 
Federal Stafford Loan, Federal PLUS, and Federal SLS programs must be 
returned to the appropriate program account or accounts within 30 days 
of the date that the student repays the overpayment.
    (h) Financial aid. For purposes of this section ``financial aid'' 
is assistance that a student has been or will be awarded (including 
Federal PLUS loans received on the student's behalf) from Federal; 
State; institutional; or other scholarship, grant, or loan programs.
    (i) Refund dates--(1) Withdrawal date. (i) Except as provided in 
paragraphs (i)(1) (ii) and (iii) of this section, a student's 
withdrawal date is the earlier of--
    (A) The date that the student notifies an institution of the 
student's withdrawal, or the date of withdrawal specified by the 
student, whichever is later; or
    (B) If the student drops out of the institution without notifying 
the institution (does not withdraw officially), the last recorded date 
of class attendance by the student, as documented by the institution.
    (ii) If the student has not returned to the institution at the 
expiration of a leave of absence approved under paragraph (i)(2) of 
this section, the student's withdrawal date is the last recorded date 
of class attendance by the student, as documented by the institution. 
If the student returns to the institution after the expiration of the 
leave of absence but during the award year or (for the Federal Stafford 
Loan, Federal PLUS, and Federal SLS programs) during the period of 
enrollment in which the student was granted the leave of absence, the 
student may not receive additional Title IV, HEA program assistance for 
coursework that he or she has not completed.
    (iii) If the student is enrolled in an educational program that 
consists predominantly of correspondence courses, the student's 
withdrawal date is normally the date of the last lesson submitted by 
the student, if the student failed to submit the subsequent lesson in 
accordance with the schedule for lessons established by the 
institution. However, if the student establishes in writing, within 60 
days of the date of the last lesson that he or she submitted, a desire 
to continue in the program and an understanding that the required 
lessons must be submitted on time, the institution may restore that 
student to ``in school'' status for purposes of funds received under 
the Title IV, HEA programs. The institution may not grant the student 
more than one restoration to ``in school'' status on this basis.
    (2) Leaves of absence. A student who has been absent from an 
institution and has been granted a leave of absence by the institution, 
in accordance with this paragraph, is not considered to have withdrawn 
from the institution for purposes of this section. In any twelve-month 
period, an institution may grant a single leave of absence to a student 
provided that--
    (i) The student has made a written request to be granted a leave of 
absence;
    (ii) The leave of absence involves no additional charges by the 
institution to the student; and
    (iii) The leave of absence does not exceed--
    (A) Sixty days;
    (B) Six months, under either of the following circumstances:
    (1) The student's educational program does not consist 
predominantly of correspondence courses, and the institution's next 
period of enrollment after the start of the leave of absence would 
begin more than 60 days after the first day of the leave of absence.
    (2) The leave of absence is requested because of the student's 
medically determinable condition, in which case the student must 
provide the institution with a written recommendation from a physician 
for a leave of absence longer than 60 days; or
    (C) The length of time between the beginning of the leave of 
absence and the institution's next period of enrollment, under the 
following circumstance: The institution's next period of enrollment 
after the start of the leave of absence begins more than thirty days 
after the beginning of the leave of absence, and a corresponding period 
of nonenrollment (i.e., summer break) prevents a student from enrolling 
in any coursework.
    (3) Timely payment. An institution shall pay a refund that is due--
    (i) If a student officially withdraws or is expelled, within 30 
days after the student's withdrawal date;
    (ii) If a student drops out, within 30 days of the earliest of 
the--
    (A) Date on which the institution determines that the student 
dropped out;
    (B) Expiration of the academic term in which the student withdrew; 
or
    (C) Expiration of the period of enrollment for which the student 
has been charged; or
    (iii) If a student does not return to the institution before the 
expiration of an approved leave of absence under paragraph (i)(2) of 
this section, within 30 days after the last day of the leave of 
absence.

(Authority: 20 U.S.C. 1091b, 1092, 1094)

    13. Section 668.23 is revised to read as follows:


Sec. 668.23  Audits, records, and examinations.

    (a) An institution or a foreign institution as defined 34 CFR 
600.52 that participates in the Federal Perkins Loan, FWS, FSEOG, 
Federal Stafford Loan, Federal PLUS, Federal Pell Grant, PAS, or FDSL 
Program shall comply with the regulations for that program concerning--
    (1) Fiscal and accounting systems;
    (2) Program and fiscal recordkeeping; and
    (3) Record retention.
    (b) (1) An institution or a foreign institution as defined 34 CFR 
600.52 that participates in any Title IV, HEA program shall cooperate 
with an independent auditor, the Secretary, the Department of 
Education's Inspector General, the Comptroller General of the United 
States, or their authorized representatives, a guaranty agency in whose 
program the institution participates, and the appropriate State 
postsecondary review entity designated under subpart 1 of part H of 
Title IV of the HEA, in the conduct of audits, investigations, and 
program reviews authorized by law.
    (2) A third-party servicer shall cooperate with an independent 
auditor, the Secretary, the Department of Education's Inspector 
General, and the Comptroller General of the United States, or their 
authorized representatives, a guaranty agency in whose program the 
institution contracting with the servicer participates, and the State 
postsecondary review entity designated under subpart 1 of part H of 
Title IV of the HEA, in the conduct of audits, investigations, and 
program reviews authorized by law.
    (3) The institution's or servicer's cooperation must include--
    (i) Providing timely access, for examination and copying, to the 
records (including computerized records) required by the applicable 
regulations and to any other pertinent books, documents, papers, 
computer programs, and records;
    (ii) Providing reasonable access to personnel associated with the 
institution's or servicer's administration of the Title IV, HEA 
programs for the purpose of obtaining relevant information. In 
providing reasonable access, the institution or servicer shall not--
    (A) Refuse to supply any relevant information;
    (B) Refuse to permit interviews with those personnel that do not 
include the presence of the institution's or servicer's management; and
    (C) Refuse to permit interviews with those personnel that are not 
tape recorded by the institution or servicer.
    (c)(1)(i) An institution or a foreign institution as defined 34 CFR 
600.52 that participates in the FDSL, Federal Perkins Loan, FWS, FSEOG, 
Federal Stafford Loan, Federal PLUS, Federal SLS, Federal Pell Grant, 
or PAS Program shall have performed a financial and compliance audit of 
its Title IV, HEA programs.
    (ii) A third-party servicer that administers funds or determines 
student eligibility shall have a financial and compliance audit 
performed of every aspect of the servicer's administration of the 
participation in the Title IV, HEA programs of each institution with 
which the servicer has a contract, unless--
    (A) The servicer contracts with only one participating institution; 
and
    (B) The audit of that institution's participation involves every 
aspect of the servicer's administration of that Title IV, HEA program.
    (iii) To meet the requirements of paragraph (c)(1)(ii) of this 
section, a third-party servicer that contracts with more than one 
participating institution may submit a single financial and compliance 
audit report that covers every aspect of the servicer's administration 
of the participation in the Title IV, HEA programs for each institution 
with which the servicer contracts.
    (iv) The audit required under paragraph (c)(1) (i) or (ii) of this 
section shall be conducted by an independent auditor in accordance with 
the general standards and the standards for financial and compliance 
audits in the U.S. General Accounting Office's (GAO's) Standards for 
Audit of Governmental Organizations, Programs, Activities, and 
Functions. (This publication is available from the Superintendent of 
Documents, U.S. Government Printing Office, Washington, DC 20402.)
    (2) (i) The institution shall have an audit performed at least once 
every year.
    (ii) The servicer shall have an audit performed at least once every 
year.
    (3) If the institution is participating in the Title IV, HEA 
programs for the first time, the institution shall have the audit 
performed at least once every year for the first five years of the 
institution's participation.
    (4) Notwithstanding paragraph (c)(2) of this section--
    (i) The institution shall have an audit performed at least once 
every two years if--
    (A) The institution receives less than $100,000 in total annual 
funding under the Title IV, HEA programs for the period covered by the 
audit; or
    (B) The institution had no deficiencies identified in its most 
recently submitted audit report and that report was submitted in a 
timely fashion; and
    (ii) The servicer shall have an audit performed at least once every 
two years if--
    (A) The servicer administers less than $1,000,000 under the Title 
IV, HEA programs for the period covered by the audit; or
    (B) The servicer had no material exceptions identified in the 
servicer's most recently submitted audit report and that report was 
submitted in a timely fashion.
    (5) (i) The institution is not required to have an audit performed 
for any year in which the institution receives less than $25,000 in 
total annual funding under the Title IV, HEA programs.
    (ii) The servicer is not required to have an audit performed for 
any year in which the servicer administers less than $250,000 under the 
Title IV, HEA programs.
    (6) (i) The institution's first audit must cover the institution's 
activities for the entire period of time since the institution began to 
participate in the Title IV, HEA program for which the audit is 
performed. Each subsequent audit must cover the institution's 
activities for the entire period of time since the preceding audit.
    (ii) The servicer's first audit must cover the servicer's 
activities for its first full fiscal year beginning after the effective 
date of these regulations, and include any period from the effective 
date to the beginning of the first full fiscal year. Each subsequent 
audit that the servicer has performed must cover the servicer's 
activities for the entire period of time since the servicer's preceding 
audit.
    (7) Notwithstanding paragraph (c) (4) and (5) of this section, the 
Secretary may, as the Secretary deems necessary, request any 
institution or third-party servicer to have an audit performed on an 
annual basis.
    (8) The institution or servicer, as applicable, shall submit its 
audit report to the Department of Education's Inspector General in 
accordance with the deadlines established in audit guides developed by 
the Department of Education's Office of Inspector General.
    (9) The Secretary may require the institution or servicer to 
provide, upon request, to cognizant guaranty agencies and eligible 
lenders under the FFEL programs, State agencies, nationally recognized 
accrediting agencies, and State postsecondary review entities 
designated under subpart 1 of part H of Title IV of the HEA, the 
results of any audit conducted under this section.
    (d) Procedures for audits are contained in audit guides developed 
by, and available from, the Department of Education's Office of 
Inspector General. These audit guides do not impose any requirements 
beyond those imposed under applicable statutes and regulations and 
GAO's Standards for Audit of Governmental Organizations, Programs, 
Activities, and Functions.
    (e) (1) An institution, a foreign institution as defined 34 CFR 
600.52, or a third-party servicer that has an audit conducted in 
accordance with this section shall--
    (i) Give the Secretary and the Inspector General access to records 
or other documents necessary to review the audit; and
    (ii) Include in any arrangement with an individual or firm 
conducting an audit described in this section a requirement that the 
individual or firm shall give the Secretary and the Inspector General 
access to records or other documents necessary to review the audit.
    (2) A third-party servicer shall give the Secretary and the 
Inspector General access to records or other documents necessary to 
review an institution's audit.
    (3) An institution shall give the Secretary and the Inspector 
General access to records or other documents necessary to review a 
third-party servicer's audit.
    (f) The Secretary considers the audit requirement in paragraph (c) 
of this section to be satisfied by an audit conducted in accordance 
with--
    (1) The Single Audit Act (Chapter 75 of title 31, United States 
Code); or
    (2) Office of Management and Budget Circular A-133, ``Audits of 
Institutions of Higher Education and Other Nonprofit Organizations.''
    (g) Upon written request, an institution, a foreign institution as 
defined 34 CFR 600.52, or a third-party servicer shall give the 
Secretary access to all Title IV, HEA program and fiscal records, 
including records reflecting transactions with any financial 
institution with which the institution or servicer deposits or has 
deposited any Title IV, HEA program funds.
    (h)(1) In addition to the records required under the applicable 
program regulations and this part, for each recipient of Title IV, HEA 
program assistance, the institution or foreign institution as defined 
34 CFR 600.52 shall establish and maintain, on a current basis, records 
regarding--
    (i) The student's admission to, and enrollment status at, the 
institution;
    (ii) The educational program and courses in which the student is 
enrolled;
    (iii) Whether the student is maintaining satisfactory progress in 
his or her educational program;
    (iv) Any refunds due or paid to the student, the Title IV, HEA 
program or accounts, and the student's lender under the Federal 
Stafford Loan, Federal PLUS, and Federal SLS programs;
    (v) The student's placement by the institution in a job if the 
institution provides a placement service and the student uses that 
service;
    (vi) The student's prior receipt of financial aid (see 
Sec. 668.19);
    (vii) The verification of student aid application data; and
    (viii) Financial and other institutional records necessary to 
determine the institutional eligibility, financial responsibility, and 
administrative capability of the institution.
    (2)(i) An institution or a foreign institution as defined 34 CFR 
600.52 shall establish and maintain records regarding the educational 
qualifications of each regular student it admits, whether or not the 
student receives Title IV, HEA program assistance, that are relevant to 
the institution's admission standards.
    (ii) An institution or a foreign institution as defined 34 CFR 
600.52 at which only certain educational programs have been determined 
eligible shall establish and maintain records regarding the admission 
requirements and educational qualifications of each regular student 
enrolled in the eligible program or programs, whether the student 
received Title IV, HEA program assistance or not.
    (3) Records required under applicable program regulations and this 
part shall be--
    (i) Systematically organized;
    (ii) Readily available for review by the Secretary at the 
geographical location where the student will receive his or her degree 
or certificate of program or course completion; and
    (iii) Retained by the institution for the longer of at least five 
years from the time the record is established or the period of time 
required under the applicable program regulations of this part.

(Authority: 20 U.S.C. 1088, 1094, 1099c, 1141 and section 4 of Pub. 
L. 95-452, 92 Stat. 1101-1109)

    14. Section 668.26, as proposed to be redesignated in a Notice of 
Proposed Rulemaking published on February 17, 1994 (59 FR 8061), is 
revised to read as follows:


Sec. 668.26  End of an institution's participation in the Title IV, HEA 
programs.

    (a) An institution's participation in a Title IV, HEA program ends 
on the date that--
    (1) The institution closes or stops providing educational programs 
for a reason other than a normal vacation period or a natural disaster 
that directly affects the institution or the institution's students;
    (2) The institution loses its institutional eligibility under 34 
CFR part 600;
    (3) The institution's participation is terminated under the 
proceedings in subpart G of this part;
    (4) The institution's period of participation, as specified under 
Sec. 668.13, expires, or the institution's provisional certification is 
revoked under Sec. 668.13;
    (5) The institution's program participation agreement is terminated 
or expires under Sec. 668.14;
    (6) The institution's participation ends under Sec. 668.17(c); or
    (7) The Secretary receives a notice from the appropriate State 
Postsecondary Review Entity designated under subpart 1 of part H of 
Title IV of the HEA that the institution's participation should be 
withdrawn.
    (b) If an institution's participation in a Title IV, HEA program 
ends, the institution shall--
    (1) Immediately notify the Secretary of that fact;
    (2) Submit to the Secretary within 45 days after the date that the 
participation ends--
    (i) All financial, performance, and other reports required by 
appropriate Title IV, HEA program regulations; and
    (ii) A letter of engagement for an independent audit of all funds 
that the institution received under that program, the report of which 
shall be submitted to the Secretary within 45 days after the date of 
the engagement letter;
    (3) Inform the Secretary of the arrangements that the institution 
has made for the proper retention and storage for a minimum of five 
years of all records concerning the administration of that program;
    (4) If the institution's participation in the Federal Perkins Loan 
or FDSL Program ended, inform the Secretary of how the institution will 
provide for the collection of any outstanding loans made under that 
program;
    (5) If the institution's participation in the NEISP or SSIG Program 
ended--
    (i) Inform immediately the State in which the institution is 
located of that fact; and
    (ii) Notwithstanding paragraphs (c) through (e) of this section, 
follow the instructions of that State concerning the end of that 
participation;
    (6) If the institution's participation in all the Title IV, HEA 
programs ended, inform the Secretary of how the institution will 
provide for the collection of any outstanding loans made under the 
National Defense/Direct Student Loan and ICL programs; and
    (7) Continue to distribute refunds according to Sec. 668.22.
    (c) If an institution closes or stops providing educational 
programs for a reason other than a normal vacation period or a natural 
disaster that directly affects the institution or the institution's 
students, the institution shall--
    (1) Return to the Secretary, or otherwise dispose of under 
instructions from the Secretary, any unexpended funds that the 
institution has received under the Title IV, HEA programs for 
attendance at the institution, less the institution's administrative 
allowance, if applicable; and
    (2) Return to the appropriate lenders any Federal Stafford Loan and 
Federal SLS program proceeds that the institution has received but not 
delivered to, or credited to the accounts of, students attending the 
institution.
    (d)(1) An institution may use funds that it has received under the 
Federal Pell Grant or PAS Program or a campus-based program or request 
additional funds from the Secretary, under conditions specified by the 
Secretary, if the institution does not possess sufficient funds, to 
satisfy any unpaid commitment made to a student under that Title IV, 
HEA program only if--
    (i) The institution's participation in that Title IV, HEA program 
ends during a payment period;
    (ii) The institution continues to provide, from the date that the 
participation ends until the scheduled completion date of that payment 
period, educational programs to otherwise eligible students enrolled in 
the formerly eligible programs of the institution;
    (iii) The commitment was made prior to the end of the 
participation; and
    (iv) The commitment was made for attendance during that payment 
period or a previously completed payment period.
    (2) An institution may credit to a student's account or deliver to 
the student the proceeds of a disbursement of a Federal Stafford or 
Federal SLS loan to satisfy any unpaid commitment made to the student 
under the Federal Stafford Loan or Federal SLS Program only if--
    (i) The institution's participation in that Title IV, HEA program 
ends during a period of enrollment;
    (ii) The institution continues to provide, from the date that the 
participation ends until the scheduled completion date of that period 
of enrollment, educational programs to otherwise eligible students 
enrolled in the formerly eligible programs of the institution;
    (iii) The commitment was made prior to the end of the 
participation;
    (iv) The commitment was made for attendance during that period of 
enrollment; and
    (v) The proceeds of the first disbursement of the loan were 
delivered to the student or credited to the student's account prior to 
the end of the participation.
    (3) An institution may use funds that it has received under the 
FDSL Program or request additional funds from the Secretary, under 
conditions specified by the Secretary, if the institution does not 
possess sufficient funds, to credit to a student's account or deliver 
to the student the proceeds of a disbursement of a Federal Direct 
Student loan only if--
    (i) The institution's participation in the FDSL Program ends during 
a period of enrollment;
    (ii) The institution continues to provide, from the date that the 
participation ends until the scheduled completion date of that period 
of enrollment, educational programs to otherwise eligible students 
enrolled in the formerly eligible programs of the institution;
    (iii) The loan was made for attendance during that period of 
enrollment; and
    (iv) The proceeds of the first disbursement of the loan were 
delivered to the student or credited to the student's account prior to 
the end of the participation.
    (e) For the purposes of this section--
    (1) A commitment under the Federal Pell Grant and PAS programs 
occurs when a student is enrolled and attending the institution and has 
submitted a valid Student Aid Report to the institution or when an 
institution has received a valid institutional student information 
report;
    (2) A commitment under the campus-based programs occurs when a 
student is enrolled and attending the institution and has received a 
notice from the institution of the amount that he or she can expect to 
receive and how and when that amount will be paid; and
    (3) A commitment under the Federal Stafford and Federal SLS 
programs occurs when the Secretary or a guaranty agency notifies the 
lender that the loan is guaranteed.


(Authority: 20 U.S.C. 1094, 1099a-3)


    15. Section 668.81, as proposed to be amended in a Notice of 
Proposed Rulemaking published on February 17, 1994 (59 FR 8062), is 
further amended by removing paragraph (a)(2); redesignating paragraph 
(a)(1) introductory text as paragraph (a) introductory text; 
redesignating paragraphs (a)(1)(i) through (iv) as paragraphs (a)(1) 
through (4), respectively; removing the word ``or'' after the semi-
colon in paragraph (c)(1); revising paragraph (c)(2); adding paragraphs 
(c)(3) and (4); and revising paragraph (d) to read as follows:


Sec. 668.81  Scope and special definitions.

* * * * *
    (c) * * *
    (2) An institution fails to qualify for initial certification or 
provisional certification to participate in any Title IV, HEA program 
because the institution does not meet the factors of financial 
responsibility and standards of administrative capability contained in 
subpart B of this part;
    (3) A participating institution's or a provisionally certified 
participating institution's period of participation, as specified under 
Sec. 668.13, has expired; or
    (4) A participating institution's provisional certification is 
revoked under the procedures in Sec. 668.13.
    (d) This subpart does not apply to a determination by the Secretary 
of the system to be used to disburse Title IV, HEA program funds to a 
participating institution (i.e., advance payments and payments by way 
of reimbursements).
* * * * *
    16. A new Appendix A to Part 668 is added to read as follows:

Appendix A to Part 668--Standards for Acceptable Refund Policies by 
Participating Institutions

    For purposes of Sec. 668.22(b)(1)(iv)(A), the Secretary 
considers an institution to have a fair and equitable refund policy 
if the institution uses a policy that meets the minimum requirements 
of this appendix. These requirements are a modified version of 
guidelines developed by the National Association of College and 
University Business Officers. These requirements do not affect an 
institution's obligation to comply with other Department of 
Education regulations.
    (I) The governing board of the institution must review and 
approve the schedule of all institutional charges and refund 
policies applicable to students. The pricing of services and refund 
policies have important consequences to students, parents, the 
institution, and society; as such, pricing and refund policies must 
receive board attention and approval.
    (II) The institution must seek consumer views in the process of 
establishing and amending charge and refund structures. Decisions 
regarding institutional funds are ultimately the sole responsibility 
of the institution's legally designated fund custodians. However, 
consumer concerns do affect decision making, and involving consumers 
in decision making related to charges and refunds is an essential 
approach for assessing student needs and creating public awareness 
of institutional requirements.
    (III) The institution must publish a current schedule of all 
student charges (including the costs of required supplies and 
equipment), publish a statement of the purpose for such charges and 
related refund policies, have those statements readily available 
free of charge to current and prospective students, and substantiate 
that the costs of required supplies and equipment are reasonably 
related to the cost of providing the supplies and equipment to the 
students. Students and parents have a right to know what charges 
they will be expected to pay and what will or will not be refunded. 
They also have a right to know what services accompany payment of 
the charges. Informational materials published free for students and 
prospective students are ideal for this purpose.
    (IV) The institution must clearly designate all optional charges 
as ``optional'' in all published schedules and related materials. 
Charges that are mandatory and charges that are optional must be 
plainly differentiated in all printed materials. Statements 
accompanying the schedule may include institutional endorsements of 
the optional program or service. The institution must state clearly 
in its schedule if a charge is optional for some students but 
required for others.
    (V) The institution must clearly identify charges and deposits 
that are nonrefundable as ``nonrefundable'' on all published 
schedules. Institutions determine on an individual basis which of 
their charges are refundable or nonrefundable. In general, admission 
fees, application fees, laboratory fees, facility and student 
activity fees, and other similar charges are not refundable. These 
fees are generally charged to cover the cost of activities such as 
processing applications and other student information, reserving 
academic positions and establishing the limits of institutional 
programs and services, reserving housing space, and otherwise 
setting the fixed costs of the institution for the coming academic 
periods.
    Institutions determine on an individual basis which of their 
deposits are refundable or nonrefundable. Some deposits will be 
nonrefundable or will be credited to a student's account (e.g., 
tuition deposits). Others are refundable according to the terms of 
the deposit agreement (e.g., deposits for breakage).
    (VI) The institution must refund housing rental charges, less a 
deposit, as long as written notification of cancellation is made 
prior to a well-publicized date that provides reasonable opportunity 
to make the space available to other students. Written notification 
on or before the beginning of the term of the contract is necessary 
to ensure utilization of housing units. During the term of the 
contract, room charges are generally not refundable. However, based 
on the program offered, space availability, debt service 
requirements, State and local laws, and other individual 
circumstances, institutions may provide for some more flexible 
refund guideline for housing.
    (VII) The institution must refund board charges in full, less a 
deposit, if written notification of cancellation is made prior to a 
well-publicized date that falls on or before the beginning of the 
term of the contract. Subsequent board charges should be refunded on 
a pro rata basis. It is reasonable to make a refund for those goods 
and services not consumed. The deposit should reflect that portion 
of an institution's costs that are fixed for the term of the 
contract.
    (VIII) The institutional refund policy must include the 
following requirements: 
    A. The institution must refund 100 percent of the tuition 
charges, less an administrative fee that does not exceed the lesser 
of $100 or 5 percent of the tuition, if the student submits written 
notice of cancellation on or before one week preceding the first day 
of classes for the period of enrollment for which the student was 
charged.
    B. The institution must refund at least 90 percent of the 
tuition charges if the student submits written notice of 
cancellation between the end of the period of time specified in 
(VIII) A. and the end of the first 10 percent (in time) of the 
period of enrollment for which the student was charged.
    C. The institution must refund at least 50 percent of the 
tuition charges if the student submits written notice of 
cancellation between the end of the first 10 percent (in time) of 
the period of enrollment for which the student was charged and the 
end of the first 25 percent (in time) of that period of enrollment.
    D. The institution must refund at least 25 percent of the 
tuition charges if the student submits written notice of 
cancellation between the end of the first 25 percent (in time) of 
the period of enrollment for which the student was charged and the 
end of the first 50 percent (in time) of the period of enrollment.
    E. The institution may deduct from the refund owed under this 
paragraph the documented cost to the institution of equipment issued 
to the student if the institution specifies in the enrollment 
agreement a separate charge for equipment that the student actually 
obtains or if the institution refers the student to a vendor 
operated by an affiliated or related entity and the student does not 
return the equipment in good condition, allowing for reasonable wear 
and tear, within 20 days following the date of the student's 
withdrawal. The student shall be liable for the amount, if any, by 
which the documented cost for equipment exceeds the refund under 
this paragraph. Equipment is not considered to be returned in good 
condition if the equipment cannot be reused because of clearly 
recognized health and sanitary reasons, and this fact is clearly and 
conspicuously disclosed in the enrollment agreement.
    (IX) The institution must assess no penalty charges where the 
institution, as opposed to the student, is in error. Penalty 
charges, such as those involving late registration fees, change-of-
schedule fees, and late payment fees, must not be assessed if it is 
determined that the student is not responsible for the action 
causing the charges to be levied.
    (X) The institution must advise students that any notifications 
of withdrawal or cancellation and requests for refund must be in 
writing and addressed to the designated institution officer. A 
student's written notification of withdrawal or cancellation and 
request for a refund provides an accurate record of transactions and 
also ensures that the request will be processed on a timely basis. 
Acceptance of oral requests is an undesirable practice.
    (XI) The institution must pay or credit refunds due in 
accordance with Sec. 668.22(h)(4).
    (XII) The institution must publicize, as a part of its 
dissemination of information on charges and refunds, that an appeals 
process exists for students or parents who believe that individual 
circumstances warrant exceptions from published policy. The 
informational materials must include the name, title, and address of 
the official responsible for handling appeals. Although charges and 
refund policies should reflect extensive consideration of student 
and institutional needs, it will not be possible to encompass in 
these structures the variety of personal circumstances that may 
exist or develop. Institutions are required to provide a system of 
due process to their students, and charges and refund policies are 
legitimately a part of that process. Students and parents should be 
informed regularly of procedures for requesting information 
concerning exceptions to published policies.

PART 690--FEDERAL PELL GRANT PROGRAM

    17. The heading for part 690 is revised to read as set forth above.
    18. The authority citation for part 690 continues to read as 
follows:

    Authority: 20 U.S.C. 1070a through 1070a-6, unless otherwise 
noted.

    19. Section 690.83 is amended by adding a new paragraph (e) to read 
as follows:


Sec. 690.83  Submission of reports.

* * * * *
    (e) (1) Notwithstanding paragraphs (a), (b), (c) (1) or (2), or (d) 
of this section, if an institution demonstrates to the satisfaction of 
the Secretary that the institution has provided Federal Pell Grants in 
accordance with this part but has not received credit or payment for 
those grants, the institution may receive payment or a reduction in 
accountability for those grants in accordance with paragraph (e) of 
this section.
    (2) The institution must demonstrate that it qualifies for a credit 
or payment by means of a finding contained in an audit report as 
initially submitted to the Department that was conducted after December 
31, 1988 and timely submitted in accordance with 34 CFR 668.23(c), with 
respect to grants made during the period of that audit.
    (3) In determining whether the institution qualifies for a payment 
or reduction in accountability, the Secretary takes into account any 
liabilities of the institution arising from that audit or any other 
source. The Secretary collects those liabilities by offset in 
accordance with 34 CFR part 30.
* * * * *
(Authority: 20 U.S.C. 1070a, 1094, 1226a-1)

    Note: This appendix will not appear in the Code of Federal 
Regulations.

Appendix to Preamble

Subparts A and B of the Student Assistance General Provisions 
Regulations

I. Academic Year

    A. Section 481(d)(2) of the HEA provides that an ``academic 
year'' must require a minimum of 30 weeks of instruction time in 
which a student is expected to complete at least 24 semester or 
trimester hours or 36 quarter hours at an institution that measures 
program length in credit hours or at least 900 clock hours at an 
institution that measures program length in clock hours.
    Issues that the community was asked to address and the 
community's views:
    1. How should prorations be calculated? For example, if 22 weeks 
are offered, how does an institution determine the portion of an 
academic year that applies?
     Prorations of an academic year in educational programs 
shorter than an academic year should be based solely on the number 
of credit or clock hours provided, without regard to the number of 
weeks required. Proration should not be used for educational 
programs of one academic year or longer. Attempts to prorate the 
length of an academic year using both weeks and credit or clock 
hours would be inconsistent and confusing, because credit or clock 
hours are not always evenly distributed over the calendar length of 
an educational program. [Kansas City]
     Prorations should be based on the minimum number of 
clock or credit hours that a full-time student in an eligible 
program is scheduled to take in an academic year. Prorations should 
not be based on the number of weeks in the academic year. A minority 
opposed inclusion of a reference to ``eligible program'' in this 
recommendation. [Atlanta]
    2. What is a week? How should portions of a week be treated?
     A week should include any week during a portion of 
which the educational process takes place. [Kansas City]
     A majority of participants recommended that an 
instructional week be defined in terms of a fixed standard of clock 
hours of instruction. Thus, for example, if regulations define an 
instructional week as the completion of 30 clock hours, a student 
who completes 90 clock hours of instruction in two calendar weeks 
should be considered to have completed the equivalent of three 
instructional weeks. [New York]
     A week should be defined as a seven-day period that can 
begin on any day of the week. The seven-day periods continue for 30 
periods of time. [San Francisco]
     A ``week'' should be defined as either each seven-day 
period within an enrollment period; or each seven-day period (within 
an enrollment period) during which any instruction occurred. 
[Atlanta]
    3. What is instructional time? Should periods provided for 
orientation, testing, and vacation count?
     Instructional time should be measured on the basis of 
calendar weeks that begin on Monday and end on Sunday. Instructional 
time should consist of a period of continuous enrollment beginning 
with the first week of classes and ending with the conclusion of the 
period of enrollment, including any normally scheduled breaks in the 
academic calendar. [Kansas City]
     Instructional time should include time spent reading 
and taking examinations. [New York]
     The interests of students, institutions, and other 
constituents need to be considered in determining instructional 
time. Some participants recommended that the determination be left 
to accrediting agencies. Other participants recommended that the 
determination be left to the Secretary. [San Francisco]
    4. What consideration should be given to programs with condensed 
class schedules, or to weekend programs?
     Because instructional time should be measured on the 
basis of periods of continuous enrollment, special consideration for 
condensed schedules or weekend programs is unnecessary. [Kansas 
City]
     The interests of students, institutions, and other 
constituents need to be considered in determining how to treat 
condensed schedules and weekend programs. Some participants 
recommended that the determination be left to accrediting agencies. 
Other participants recommended that the determination be left to the 
Secretary. [San Francisco]
     Condensed programs that include the equivalent of the 
workload of a regular academic-year program should be considered to 
meet the definition of academic year. [Atlanta]
    5. How does the new definition affect less-than-full-time 
students?
     The definition does not affect part-time students. 
[Kansas City]
     A student who completes fewer than the required minimum 
number of clock or credit hours during the 30-week period should be 
considered less-than-full-time. [San Francisco]
     The length of the academic year is irrelevant to 
determining the enrollment status of students. Enrollment status is 
determined by the length of time (in terms of credit or clock hours) 
that a student takes to complete a ``program.'' [Atlanta]

II. Eligible Program

    A. Effective July 1, 1993, section 481(b) and (c) of the HEA 
require a proprietary institution of higher education or a 
postsecondary vocational institution to provide an eligible program 
of training that prepares students for gainful employment in a 
recognized occupation. Section 481(e) of the HEA requires an 
eligible program to consist of at least 600 clock hours, 16 semester 
hours, or 24 quarter hours offered during a minimum of 15 weeks, if 
the program admits students who have not completed the equivalent of 
an associate degree. An eligible program must consist of at least 
300 clock hours, eight semester hours, or 12 quarter hours offered 
during a minimum of ten weeks, if the program is an undergraduate 
program requiring the equivalent of an associate degree for 
admission or if the program is a graduate or professional program.
    The Secretary is required to develop regulations to determine 
the quality of educational programs of less than 600 clock hours. 
Those regulations must, at a minimum, require those educational 
programs to have verified completion and placement rates of at least 
70 percent. An educational program of more than 300 clock hours and 
less than 600 clock hours that meets the Secretary's regulations 
qualifies for eligibility under the Federal Family Education Loan 
programs even if the educational program is not an undergraduate 
program requiring the equivalent of an associate degree for 
admission, and even if the educational program is not a graduate or 
professional program.
    Issues that the community was asked to address and the 
community's views:
    1. What is the equivalent of an associates degree?
     An associates degree should be a degree which meets the 
degree requirements of any State for an associate degree. [Kansas 
City]
     An associates degree should represent the completion of 
any educational program that meets State licensure requirements and 
that equals at least the length of a typical associate degree 
program. [Kansas City]
     An associates degree should represent the completion of 
any educational program leading to a vocational objective if the 
program is at least 1,800 clock hours, (60 or 48) semester hours, or 
(90 or 64) quarter hours. (The variation in credit hours depends on 
whether the negotiators decide to use the number of credits required 
to earn an associate degree or the number of credits required for 
completion of at least two academic years.) [Kansas City]
     An associates degree should represent the completion of 
an educational program that is at least two academic years in 
length. [Kansas City]
     An associates degree should represent the completion of 
an educational program leading to licensure in an occupation, if a 
community college offers an associate degree program for that 
occupation. [Kansas City]
     An associates degree should be determined by the 
professional judgment of the Secretary. [Kansas City]
     An associates degree should be determined by an 
institution's State licensing agency. [Kansas City]
     An associates degree should consist of previous 
training in the same field of study as that for which the eligible 
program prepares training. [Kansas City]
     An associates degree should, for occupations with 
apprenticeship programs, require the completion of five-year 
apprenticeship programs. [Kansas City]
     An associates degree should represent the completion of 
the equivalent of two years of successful academic work in a 
postsecondary environment or a professional license that required a 
specific period of training and perhaps work experience. [New York]
     An associates degree should represent the completion of 
the equivalent of at least two academic years of study, subject to 
compliance with applicable State laws and regulations. [San 
Francisco]
     An associates degree should represent the completion of 
60 semester hours or the equivalent. [Atlanta]
    2. What are other measures of ``quality'' for programs of less 
than 600 hours?
     An educational program should be considered to satisfy 
the Secretary's quality measures if a program that prepares students 
for State licensure in an occupation; a program that prepares 
students for certification by a nationally recognized professional 
or industry association; or a program that is approved by a 
nationally recognized accrediting agency or association. [Kansas 
City]
     No additional measures should be included. [New York, 
Atlanta]
    3. How should the required job placement and graduation rates be 
calculated? How often should the rates be calculated?
     The methodology and timing for the calculations should 
be identical to those required under the Carl D. Perkins Vocational 
and Applied Technology Education Act and the Student Right-to-Know 
and Campus Security Act. [Kansas City]
     Calculation of completion rates should be based on the 
formula used under the Student Right-to-Know and Campus Security 
Act, except that the calculation should not include time-specific 
constraints. [New York]
     Calculation of placement rates should be based on the 
formula used under the Student Right-to-Know and Campus Security 
Act, except that only completers should be counted in the 
denominator. No time frame should be used in the calculation. [New 
York]
     Regulations should define completion rate, graduation 
rate, and full-time employment (which should specify a period of 
time in a job). [San Francisco]
     Calculations should be based over a two-three year 
period to reflect long-term trends and avert the adverse impact of 
short-term problems such as those caused by economic conditions. 
Institutions that fall below the minimum rates ought to be provided 
appeal procedures. [San Francisco]
     Because there are many State regulations and 
accrediting agency standards governing this area, institutions 
should be allowed to follow the most restrictive ones. Institutions 
following the most restrictive regulations and standards should not 
be required to maintain multiple sets of documentation demonstrating 
compliance with a variety of regulations and standards. [San 
Francisco]
     The cohort for calculation of placement rates should 
include placement in jobs related to the occupation for which 
students are trained. [San Francisco]
     In calculating placement rates, students should be 
counted as employed if they obtain jobs within 180 days of 
graduation. Students should be counted as employed if they obtain 
jobs in the field for which they were trained or a related field. 
Students (such as those in continuing education or in the military) 
who are not looking for a job should be excluded from the 
calculation. The calculation should be based on a percentage of 
graduates. Incarcerated or physically incapacitated students should 
be excluded from the calculation. [Atlanta]
    4. What documentation is required to support the institution's 
completion and job placement rates?
     Documentation should be identical to that required 
under the Carl D. Perkins Vocational and Applied Technology 
Education Act and the Student Right-to-Know and Campus Security Act. 
[Kansas City]
     Documentation should be any documentation required by 
the institution's State or accrediting agency. The rates can be 
verified through required compliance audits. [New York]
    Calculations should be included in the Fiscal Operations Report 
and Application to Participate (FISAP) for the campus-based 
programs. The time-frame for reporting this data should be 
relatively short, to ensure that the data is relevant. [San 
Francisco]
     A student's placement information should be maintained 
in each student's file. Placement information should be available 
for the purposes of audits. [San Francisco]
     Institutions should maintain employment records on file 
to confirm placements. Employment records should not be submitted to 
the Department of Education. [Atlanta]

III. Program Participation Agreement

    A. Section 487(a)(5) requires an institution to provide 
assurances that the institution will provide, upon request and in a 
timely fashion, information relating to its administrative 
capability and financial responsibility to the Secretary, the 
designated State postsecondary review entity designated under 
subpart 1 of part H of Title IV of the HEA, the appropriate guaranty 
agency, and accrediting agency or association.
    Issues that the community was asked to address and the 
community's views:
    1. How should agencies obtain this information from 
institutions?
     Other agencies should obtain the information through 
IPEDS or accrediting agency annual reports. [San Francisco]
     Requests should be made in writing to the Chief 
Executive Officer and the Chief Financial Officer of the 
institution. [Kansas City]
    2. Should there be a standard information-sharing format?
     There should be a standard information sharing format 
provided that the institution is allowed to report using its 
accounting system. [Kansas City]
     There needs to be a standard information sharing format 
that can be completed readily and corresponds to the institution's 
fiscal year. [New York]
     The Department should provide a single form that can be 
used for all agencies. [Atlanta]
    B. Section 487(a)(8)(B) requires institutions that advertise job 
placement rates to make available to prospective students relevant 
State licensing requirements for any job for which the course of 
instruction is designed to prepare the student.
    Issues that the community was asked to address and the 
community's views:
    1. How often should institutions be required to update licensing 
data?
     Institutions should update the data whenever State 
licensing agencies require that updates or regulation must occur. 
[San Francisco, Kansas City, Atlanta]
     Information always needs to be current. [New York]
    2. Should there be a standard format for providing this 
information to prospective students?
     A typical brochure should be used to convey information 
to students. [San Francisco]
     There should not be a standard format for providing 
this information to prospective students. [Kansas City, New York, 
Atlanta]
     The institution should use the States required format 
for providing consumer data to students. If the Secretary requires 
additional information, the information should be consistent with 
the formats that the institution already uses. [Kansas City]
    C. Section 487(a)(13) provides that an institution may not deny 
Federal financial aid to an eligible student because the student is 
studying abroad in a program approved for credit by the home 
institution.
    Issues that the community was asked to address and the 
community's views:
    1. Should a consortium agreement be required?
     A consortium agreement should not be required. [Kansas 
City, San Francisco]
     A consortium agreement should be used for pre-approved 
work. Institutions need to ensure that two institutions are not 
giving aid at the same time. [New York]
     A consortium agreement should be required if the 
student is paying tuition at the home institution and a second 
institution is involved. Otherwise no consortium agreement should be 
required. [Atlanta]
    2. Does the study-abroad program have to be part of the 
student's program at the home institution?
     The study abroad program need not be a part of the 
student's program at the home institution, but must count toward a 
degree at the institution. [Kansas City]
     The study abroad program should be a part of the 
student's home program. [San Francisco, Atlanta]
     An institution should not be obligated to enter into an 
agreement with a student who wants to study abroad. [New York]
    3. How should the term ``approved for credit'' be defined?
     The term ``approved for credit'' should mean that 
credits are fully transferable (accepted for credit) into an 
eligible program offered by the home institution. [Kansas City]
     ``Approved for credit'' should mean used toward a 
degree as defined by the institution. [San Francisco]
     ``Approved for credit'' should mean that it is 
determined in advance that the credit is accepted at the home 
institution. [Atlanta]
    4. Should a standard format be developed for institutions to 
report study abroad programs?
     A standard format for institutions to report study 
abroad programs is not needed. It does not appear that any reporting 
is required. [Kansas City, New York, San Francisco, Atlanta]
    D. Section 487(a)(14)(A) requires a new institution or an 
institution that undergoes a change of ownership or changes its 
status as a parent or subordinate institution to develop a Default 
Management Plan to participate in the FFEL program. The Secretary 
must approve the plan and the plan must be implemented for two years 
after the institution is initially certified as an eligible 
institution or for two years after its change of ownership or 
status.
    Issues that the community was asked to address and the 
community's views:
    1. Should the criteria in Appendix D of current regulations be 
used as the basis for the Secretary's approval of default plans?
     Unless otherwise required, an institution should use 
Appendix D or submit any other approved default management plan. 
[Kansas City, Atlanta]
     If a new institution uses Appendix D, it is subject to 
things it can't do as a new institution. What is in Appendix D that 
isn't in the new regulations already? New institutions will certify 
that they will adopt the stipulated plan they have in place (that 
has approval from the appropriate State and or accrediting body.) 
[New York]
    2. Should there be other criteria?
     Other criteria should include: a) more follow up once 
the student leaves the institution; and b) additional cooperation 
with all partners in the program, i.e., lenders, institutions, and 
secondary markets. The Department should reassess the method for 
determining cohort default rate. It is not fair for most 
institutions. [San Francisco]
     No other criteria is needed. [Atlanta]
    E. Section 487(a)(18)(A) requires an institution that offers 
athletically-related student aid to compile annually data on 
expenses and revenues of athletic activities and expenses and 
revenues of the institution.
    1. How should the terms ``revenues'' and ``expenses'' be 
defined?
     There should be coordination with NCAA regulations and 
audit guides. [San Francisco]
     Institutions should be allowed to use the accounting 
principles and terms they are currently using to define ``revenues'' 
and ``expenses.'' [Kansas City]
    F. Section 487(a)(19) provides that if a student is unable to 
meet his or her financial obligation to the institution because of a 
delay in the disbursement of proceeds of a Title IV, HEA program 
loan (due to compliance with Title IV requirements or delays 
attributable to the institution), the institution may not penalize 
the student in any way, including assessing a late fee; denying the 
student access to class, the library, or other facilities; or 
requiring that the student borrow additional funds.
    1. How should the term ``denial of access to classes'' be 
interpreted?
     ``Denial of access'' should mean the student is not 
given access to equipment or supplies. [San Francisco]
    2. What should be considered as a condition to meet the 
definition of a ``delay in the delivery of proceeds?''
     This section should not apply to: 1) delays by lenders 
or guarantors in delivering loan proceeds which are not caused by 
the necessity of complying with Title IV requirements; and 2) delays 
attributable to the student's not providing information by known, 
published, or noticed deadlines, that the institution, lender, or 
guarantor must have in order to comply with Title IV requirements. 
(Example, IRS 1040 forms for verification.)
    The Secretary should regulate in such a way that it is clear 
that institutions may charge reasonable interest on unpaid bills 
where the delay in Title IV delivery is attributed to the student or 
an agency other than the institution. [Kansas City]
     This section does not address delays for which the 
student has not met public deadlines or performed all obligations 
necessary to ensure the delivery of timely aid. [Kansas City]
     If the student does not provide documents, it is not 
applicable. It should relate only to a 30 day delayed disbursement. 
[Atlanta]
     No constraints should be put on a student for the delay 
of that portion of tuition covered by the first-time Stafford loan 
or in the case of institutional delay. [New York]
     Consideration should be given to the laws of various 
states since they differ as to when a student must meet his or her 
financial obligation at an institution. [San Francisco]
    3. If a delay is caused by the lender or institution can the 
guarantee agency take actions that are prohibited under other 
circumstances?
     No, a guaranty agency should not be allowed to take 
action if the delay is caused by the lender or institution. [New 
York]
     G. Section 487(a)(20) prohibits an institution from 
paying a commission, bonus or other incentive payment based directly 
or indirectly on success in securing enrollments or financial aid to 
any person or entity engaged in any student recruiting or admission 
activities or in making decisions regarding the awarding of student 
financial assistance.
    Issues that the community was asked to address and the 
community's views:
    1. How should the Department determine that an institution is 
not providing commissions, bonuses, and other incentive payments?
     Compliance should be determined through the audit 
process. Auditors check employment and payroll records. [San 
Francisco, Atlanta]
    2. If an institution awards merit pay to salaried employees in 
increments as the student successfully completes portions of the 
course, graduates, or gets placed in a job, would the institution be 
in compliance?
     Institutions should be allowed to provide merit 
incentives to employees as long as it cannot be attached to the 
enrollment process (i.e., servicing retaining, and placing students 
after the first day of class at the institution.) [Kansas City]
    Salaried employees should be rewarded for retention. Any 
compensation (non-salaried) for the enrollment of financial aid 
students is illegal. There appears to be opposition to compensating 
for the ``warm body count'' and financial aid packages, but it does 
seem that the statute allows for a legitimate basis for compensation 
above base salary for areas such as retention, however defined, and/
or completion rates. [New York]
     As the intent appears to be elimination of head count 
recruitment commissions, bonuses on merit pay may be made as long as 
they are not made solely as the basis of recruitment of the student. 
The Department should define who is an employee. [Atlanta]
     The institution would be in compliance if an 
institution awards merit pay to salaried employees in increments as 
the student successfully completes portions or the course, 
graduates, or gets placed in a job. [Kansas City]

IV. Annual Audits

    A. The Secretary is authorized to prescribe regulations for 
institutional and third-party servicer audits. Section 
487(c)(1)(A)(i) requires an annual audit of the financial condition 
of the institution in its entirety and an annual audit of the 
institution's compliance with the requirements governing the Title 
IV programs. The institution must make these audits available to 
cognizant guaranty agencies, eligible lenders, State agencies, and 
the State review entities designated under subpart 1 of part H of 
Title IV of the HEA.
    Issues that the community was asked to address and the 
community's views:
    1. To what extent, if any, should the annual audit requirement 
be waived or limited? Should this requirement for annual audits be 
waived for institutions participating in the Quality Assurance 
Program?
     Annual financial audit should be waived in all 
instances except in the case of new institutions, institutions 
undergoing a change in ownership, institutions with a cohort default 
rate in excess of 25 percent for one year, and institutions that did 
not satisfy all factors of financial responsibility in their most 
recent financial statement issued to the Department. Furthermore, 
institutions would be required to submit no more than two 
consecutive annual audits before being considered released from the 
annual audit requirement.
    Annual compliance audit should be waived for all institutions 
except in the case of new institutions, institutions undergoing a 
change of ownership, and institutions which have undergone a 
compliance audit within the past three years which resulted in Title 
IV liabilities in excess of one percent of Title IV funds disbursed.
    A further suggestion was made to truncate the audit requirements 
if the Secretary continues to require an annual audit. A minority of 
the group felt that annual audits, both financial and compliance, 
should be required and not waived. Those institutions that meet 
quality assurance criteria would be required to submit a short form 
audit on a biannual basis. [Atlanta]
     No further burden should be placed on institutions than 
their State already requires or than the IRS requires of them. If 
someone else wants the audit, the Department should be responsible 
for distributing them. There should be diminishing filing 
requirements based upon performance evaluation factors and general 
longevity of institutions to exempt an institution from an annual 
audit. A minority suggested that pledged assets be accepted at some 
level in lieu of a certified annual audit. [New York]
     The annual audit requirement could be waived in certain 
areas, e.g., the institution could be exempt from the student 
compliance components but not from a financial audit if the 
institution is in the quality assurance program. [San Francisco]
     The Department should develop a set of guidelines that 
would permit exemptions. [Atlanta]
    2. How should guaranty agencies, lenders, and other parties 
request audit information from institutions?
     An audit correction action plan should be sent to 
guaranty agencies and lenders. Requests should be in writing with 
explanations of why the request is made. Freedom of Information Act 
procedures could be used. Requests should be made to the appropriate 
official on campus. Information may not be given to any third-party 
without the approval of the institution. [San Francisco]
     Requests should be in writing to the Chief Executive 
Officer and the Chief Financial Officer. A minority of the group 
believed that all requests should be made in writing to the Chief 
Financial Officer only. [Kansas City]
     Institutions should be notified of any requests for 
information and when information is released to appropriate 
agencies. The information should be released only to the parties 
already listed in the statute. [Kansas City]
     Information should be provided to guaranty agencies, 
lenders, and other parties upon request. [Atlanta]
    B. In matters not governed by specific provisions, section 
487(c)(1)(B) provides for the establishment of standards of 
financial responsibility and administrative capability that include 
any matter the Secretary deems necessary for the sound 
administration of the financial aid programs (such as the pertinent 
actions of any owner, shareholder, or person exercising control over 
an eligible institution.)
    Issues that the community was asked to address and the 
community's views:
    1. What other administrative capability or financial 
responsibility standards should be considered?
     Agencies other than the Department that are permitted 
to request the same information should only be allowed to request 
documents used by the Department. [New York]
     No other standards of financial responsibility should 
be considered. [Kansas City, San Francisco]

V. Institutional Refund Policy

    Section 484B(b)(2) requires that each institution participating 
in any Title IV, HEA program shall have a fair and equitable refund 
policy under which the institution refunds unearned tuition, fees, 
room and board, and other charges, to a student who received Title 
IV assistance (including Federal PLUS loans received on the 
student's behalf) for a student who does not register for the period 
of attendance for which assistance was intended or withdraws or 
otherwise fails to complete the period of enrollment for which 
assistance is provided.
    An institution's refund policy is considered to be fair and 
equitable if the policy provides for a refund in an amount of at 
least the largest of the amounts provided under--
    (1) The requirements of applicable State law;
    (2) The specific refund standards established by the 
institution's nationally recognized accrediting agency if those 
standards are approved by the Secretary;
    (3) The pro rata refund calculation described in the statute for 
any student whose withdrawal date is on or before the 60 percent 
point in time in the period of enrollment for which the student has 
been charged.
    The term ``pro rata refund,'' means a refund by the institution 
to a student attending that institution for the first time of not 
less than that portion of the tuition, fees, room, board, and other 
charges assessed the student by the institution equal to the portion 
of the period of enrollment for which the student has been charged 
that remains on the last recorded day of attendance by the student, 
rounded downward to the nearest 10 percent of that period, less any 
unpaid charges owed by the student for the period of enrollment for 
which the student has been charged, and less a reasonable 
administrative fee not to exceed the lesser of five percent of the 
tuition, fees, room and board, and other charges assessed the 
student, or $100.
    ``The portion of the period of enrollment for which the student 
has been charged that remains,'' is determined--
    (1) In the case of an educational program that is measured in 
credit hours, by dividing the total number of weeks comprising the 
period of enrollment for which the student has been charged into the 
number of weeks remaining in that period as of the last recorded day 
of attendance by the student;
    (2) In the case of an educational program that is measured in 
clock hours, by dividing the total number of clock hours comprising 
the period of enrollment for which the student has been charged into 
the number of clock hours remaining to be completed by the student 
in that period as of the last recorded day of attendance by the 
student; and
    (3) In the case of a correspondence program, by dividing the 
total number of lessons comprising the period of enrollment for 
which the student has been charged into the number of lessons not 
submitted by the student.
    Issues that the community was asked to address and the 
community's views:
    1. How should the ``60 percent point in time'' be determined? 
Should this be based on scheduled time in the program or actual 
attendance?
     The ``60 percent point in time'' should be based on 
scheduled time in the program, not on actual attendance. [Kansas 
City, San Francisco, Atlanta]
     In the absence of formal withdrawal by the student, it 
is up to the institution to devise a mechanism to determine the last 
date of attendance. [Kansas City]
    2. How should the term ``student who is attending the 
institution for the first time'' be defined? Should this mean the 
first time ever or the first time at the institution?
     Only first year, first-time students should be 
considered ``first time.'' [San Francisco]
     ``A student who is attending such institution for the 
first time'' should be defined as the first time ever rather than 
the first time at an institution. Some attendees favored defining 
``first time'' as the first time at the institution. Pro ration 
should continue until the student finishes his or her first period 
of enrollment for which they have been charged, or until the student 
has withdrawn from that term, class, or program for which they have 
been charged. If the student re-enters the institution, they would 
not be considered a first time student. [Kansas City]
     ``First-time student'' is a student at that particular 
institution in their first scheduled period of enrollment for which 
the student has been charged. [New York, Atlanta]
     ``First-time student'' should be defined as a student 
enrolled for the first time at the institution in an eligible 
program. [Atlanta]
     The regulations should not determine a minimum program 
length to consider a student as attending at a prior institution or 
current institution. [Kansas City]
     If a student enrolls for any period of time, drops out, 
then returns, they are not considered enrolled for the first time 
for the second enrollment period. If standard terms of enrollment 
are used, the student should be considered first time for the first 
term of enrollment for which they were charged. If standard terms 
are not used, the lesser of 60 percent of the first academic year or 
60 percent of the program should be used. [Atlanta]
    3. How should the term ``period of enrollment for which the 
student has been charged'' be defined?
     The term ``period of enrollment for which the student 
has been charged'' should be left to the institution to define based 
on scheduled time. [New York]
     The ``period of enrollment for which the student has 
been charged'' should be defined based on full charges for the 
increment of the enrollment period defined by the institution as the 
``period for charges.'' [Kansas City]
     The ``period of enrollment for which the student has 
been charged'' should be defined as the length of time for which the 
student was initially charged. For example, for an institution that 
charges by semester, the first semester the student was charged is 
the relevant period of enrollment. [Atlanta]
     The ``period of enrollment for which the student has 
been charged'' should be defined as a minimum of one academic term, 
quarter, or semester or, for clock hour institutions, as a minimum 
of one-third of an academic year. If the institution charges for a 
full program, the length of the program should be defined as an 
academic period. [Kansas City]
     The ``period of enrollment for which the student has 
been charged'' should be defined as the length for which a student 
would be eligible to receive Title IV assistance. [San Francisco]
    4. Should the regulations address specific requirements 
regarding the treatment of equipment or book costs to be included in 
pro rata refund calculations?
     Books and supplies should be excluded from the pro rata 
calculation. Only fees for services rendered over time, e.g., lab 
fees, should be included. Exclude ``up front'' fees (application) 
and books, supplies, and equipment up to a certain dollar amount. 
There is a difference between a service fee and a purchase of 
supplies, equipment, and books. Purchases should be excluded. [New 
York]
     The regulations should state that equipment, books 
supplies, telephone charges, parking fines, etc. should not be 
included with pro rata requirements. [Kansas City, Atlanta]
     Charges for equipment, instructional materials, etc. 
should not be included in the calculation for refund purposes if 
separately charged by the institution. [San Francisco]
     If books and supplies are provided by the institution 
and the institution has delivered the books and supplies to the 
student, the books and supplies should be excluded from the pro rata 
refund policy. [Kansas City]
     Certain fees assessed by the institution should be 
included in the pro rata refund where the students do not realize 
the benefits over the enrollment period to include one time charges, 
i.e., application fee, orientation charges, testing fees, and 
deferred payment fees. Other charges assessed by the institution 
should be excluded from the pro rata refund when the student does 
not realize the benefit over the enrollment period to include fines, 
penalties, and individual charges (i.e., parking fines, and health 
center charges.) Books and supplies should not be included in pro 
rata refund unless they are considered a mandatory charge by the 
institution (i.e, not when the student has the option of buying from 
the institution or some other source.) [Atlanta]
     If all equipment and books are purchased at one time or 
issued to the student before he or she terminates his or her 
enrollment, the cost should be included in the refund. The 
institution should charge the whole amount which is not returnable. 
Equipment must be returned and able to be used again. If equipment 
has not yet been issued, the student would be eligible for a 100 
percent refund. [San Francisco]
    5. Should the regulations address a time frame for student 
refunds? Should the regulations have a minimum program length that a 
student must complete before the student will not be considered to 
be attending ``for the first time?''
     The time frame for all refunds should be uniformly 60 
days from the date the institution becomes aware that a student has 
withdrawn. [San Francisco]
     The regulations should indicate the time frame for 
issuing student refunds to be the same as current refund 
requirements- within 60 days of determination that a refund is in 
order. [Kansas City]
     Refunds should be made 30 days from date of 
determination. [San Francisco]
     Regulations should not address a time frame for refunds 
since it is already addressed by the State or accrediting agencies. 
[Atlanta]
    6. Should the regulations address how institutions will account 
for credit balances? Should these funds be kept in a restrictive 
account rather than the institution's general operating account?
     The regulations should not address how institutions 
account for credit balances nor restrictive or general operating 
accounts. A minority of the group felt that students with a 
baccalaureate degree should be exempt from the language. [Kansas 
City]
     The group recommends that regulations remain silent on 
the method by which institutions account for credit balances. [San 
Francisco, Atlanta]
     After all returns have been made to the Federal program 
from which the funds came, there should be a reasonable period of 
time for the student to request his account balance if there are 
educational costs outstanding. [San Francisco]
    7. Since the statute would imply than an institution is required 
to calculate all three policies and make the payment on the one most 
generous, should the institution be allowed to determine which is 
generally most generous an make that the official refund policy?
     Institutions should be allowed to determine the refund 
policy that is generally most generous and use that policy. 
Institutions would define ``generally most generous.'' [Kansas City, 
San Francisco, Atlanta]
     The Department should issue guidelines for institutions 
to use in determining which method to use. If the institutions use 
average costs in awarding and packaging, average costs should be 
used in refunds. [San Francisco]
     Institutions should not be allowed to determine which 
refund is ``generally most generous.'' This is inconsistent with the 
statute. The statute does, however, permit institution to develop an 
algorithm that integrates the three refund policies and yields the 
calculation ``most generous'' to each individual student. The 
requirements should apply only to the calculation of refunds for 
students who are recipients of financial aid under Title IV. [Kansas 
City]
    8. How should ``fair and equitable'' be defined?
     Fair and equitable'' should be defined as most generous 
to the student. [San Francisco]
     It is not necessary to define ``fair and equitable'' 
separately from the requirements of the statute and the regulations. 
The Student Commission addresses adequately the definition of ``fair 
and equitable.'' [Kansas City, Atlanta]
     The statutory mandates requiring pro rata refund should 
be viewed as a limitation and not as an example for the purposes of 
Title IV refund only. [Kansas City]

VI. Student Consumerism Requirements

    A. Under section 485(a), additional provisions have been added 
to the list of information an institution must disclose, upon 
request, to students and prospective students as part of the student 
consumerism requirements.
    The institution's refund policy must identify that refunds will 
be credited in the following order:
    (a) To outstanding balances on Federal Family Education Loans;
    (b) To outstanding balances on Federal Direct Loans;
    (c) To outstanding balances on Federal Perkins Loans;
    (d) To awards under Federal Pell Grants program;
    (e) To awards under Federal SEOG program;
    (f) To awards under Federal Work Study program;
    (g) To other Title IV assistance; and
    (h) To the student.
    Issues that the community was asked to address and the 
community's views:
    1. Should regulations require institutions to publicize how 
refunds will be processed and what refunds students are entitled to 
receive in the event that the institution closes?
     Regulations should require institutions to publicize 
how refunds will be processed and what funds students are entitled 
to receive in the event the institution closes. [Kansas City]
     Institutions should not have to publicize how refunds 
will be processed and what funds students are entitled to receive in 
the event the institution closes. This is not a consumer information 
issue. This is information to be disbursed if the institution 
closes. Information should be available to students upon request. A 
statement could be put in the catalog that will lead the student to 
ask relevant questions. The Department should work with State 
Agencies to develop plans that should be made available to students 
on request. There is very little probability that certain strong 
institutions will close. All institutions should not be required to 
disclose this. [San Francisco, Atlanta]
    2. Should consumer information address teachouts or other State 
or accrediting agency mandated requirements to protect student 
consumers in the case of school closure?
     Consumer information should not address teachouts or 
other state or accrediting agency mandated requirements to protect 
student consumers in the case of institution closure. [Kansas City, 
Atlanta]
    3. Should institutional discretion be permitted when determining 
the order in which loan funds under the FFEL program are returned?
     Institutional discretion should be permitted when 
determining the order in which loan funds under the FFEL program are 
returned. [Kansas City, San Francisco, Atlanta]
    4. Should guarantee and origination fees be included in the 
refund to totally pay off a FFEL program loan?
     Guaranty and origination fees should not be included in 
the refund to totally payoff an FFEL program loan. [Kansas City]
     Guaranty and origination fees should be included in the 
refund to totally payoff an FFEL program loan. [Atlanta]
     The full amount should be included in the refund as a 
deterrent to default on the small remaining amount. This should be 
done at the institution's discretion. Institutions should not be 
required to pay back money they have not received, i.e., guaranty 
and origination fees. Institution should be permitted to include 
these fees if they choose. [San Francisco]
    5. How should the guaranty agencies monitor students to ensure 
that multiple FFEL funds are treated as one for the purposes of 
billing and deferments from one lender?
     Guaranty agency monitoring of students to ensure that 
multiple FFEL funds are treated as one for the purpose of billing 
and deferments from one lender should be handled under the FFEL 
program. This is not a consumer information issue. [Kansas City, San 
Francisco]
     Guaranty agency monitoring of students to ensure that 
multiple FFEL funds are treated as one for the purpose of billing 
and deferments from one lender should be done through the National 
Student Loan Data Bank. Agencies should identify all loans obtained 
through that agency. [Atlanta]
    VII. Institutional Eligibility and Certification Procedures--
Part H, Subpart 3
    A. Section 498(a), (b), and (f) of the HEA establish application 
requirements and procedures for the Secretary to use to determine an 
institution's legal authority to operate within a State, 
accreditation, financial responsibility, and administrative 
capability.
    Issues that the community was asked to address and the 
community's views:
    1. What information should the Secretary require on the form to 
supplement the specific information required by the statute?
     Information should include documentation of an 
institution's accreditation or preaccreditation, degree-granting 
authority, authority to provide postsecondary education, and State 
licensure. [Kansas City]
     With one exception, participants were satisfied that 
information currently collected on the Department's application 
forms is adequate, and new requirements would needlessly add burden. 
One participant recommended a separate application for proprietary 
institutions. [New York]
     Specific categories should be established for different 
types of institutions and academic functions. Information should 
include the names and social security numbers of key administrative 
personnel and board members. [San Francisco]
     Provided that new information required by statute is 
collected (financial statements, description of student aid 
processing at the institution, information on main and branch 
campuses, and information on the institution's third-party 
servicers), information currently collected is sufficient. However, 
additional information should be collected on whether an 
institution's owner has had substantial control over a closed 
institution that owes refunds to students or lenders. [Atlanta]
    2. Should the Audit Guide be revised to require the auditor to 
verify the information on the application form?
     Participants recommended no changes in the audit guide. 
[Kansas City, New York, San Francisco, Atlanta]
     A minority of participants indicated that there should 
be changes, without specifying what changes are needed. [Kansas 
City]
    B. Section 498(c)(1) addresses financial responsibilities and 
requires an institution to show that it is able to provide promised 
services, to provide administrative resources necessary to Title IV 
duties, and the meet all of its financial obligations including 
refunds and repayments to the Secretary for Title IV liabilities.
    Issues that the community was asked to address and the 
community's views:
    1. What information should be required from an institution to 
permit the Secretary to determine that the institution provides the 
services described in its official publications and statements?
     No additional information needs to be collected from 
institutions. [Kansas City, San Francisco]
     If the Secretary needs additional information, the 
Secretary should be able to collect it from data made available 
through State and accrediting functions. [Kansas City, New York, 
Atlanta]
     The best way to obtain information would be through 
site visits. [New York, Atlanta]
     The Department needs to take action on institutions 
with failing financial statements, rather than simply collect them. 
[New York]
     The establishment of uniform financial standards would 
be difficult, because different standards need to apply to different 
types of institutions. [New York]
    2. What supporting information should be submitted to establish 
that an institution has the administrative resources to comply with 
its program responsibilities?
     The financial information concerning each branch campus 
of an institution should be evaluated, without simply relying on the 
financial information of an institution as a whole. [New York]
     Employee biographies with social security numbers 
should be provided. [San Francisco]
    3. What level of financial resources are needed to demonstrate 
that an institution can meet potential refund and repayment 
obligations, and should institutions be required to set aside funds 
for these purposes?
     An institution should be able to provide for the 
payment of refunds that could occur over a 30-day period, but the 
institution should not be required to set aside funds specifically 
for this purpose. [Kansas City]
     The statutory provisions for institutions to maintain 
cash reserves unless they are covered by State tuition recovery 
plans should be sufficient. [New York]
     No requirements are necessary. The Department should 
have the discretion to review and establish amounts when necessary. 
[San Francisco]
    C. Section 498(c)(2) requires that, notwithstanding section 
498(c)(1), if an institution fails to meet the criteria prescribed 
by the Secretary with respect to operating losses, net worth, asset-
to-liabilities ratios, or operating fund deficits, the institution 
must provide the Secretary with satisfactory evidence of its 
financial responsibility in accordance with section 498(c)(3).
    Issues that the community was asked to address and the 
community's views:
    1. What standards should be set for each of these criteria?
     One standard should not be applicable to all 
institutions. [New York]
     Institutions should be allowed to explain their 
financial statements before decisions in this area are reached. [New 
York]
     The institutions financial condition should be examined 
over a certain time period so that decisions regarding its financial 
responsibility are based on a trend. [New York]
     The Department should particularly consider an 
institution's statement of cash flow. [New York]
     Ratios that are used to measure stability in the 
business world should be used. [New York]
     Current standards should be used with Departmental 
discretion. [San Francisco]
     Standards for these criteria should be: a ratio of 
assets to liabilities of 1:1, showing a positive net worth, and not 
having two consecutive years of negative operating cash flow or its 
equivalent for fund accounting purposes. These should be indicators 
of financial responsibility, not absolute minimums. The importance 
of each criteria should be given its proper weight. [Atlanta]
    D. Section 498(c)(3) provides that the Secretary may find an 
institution to be financially responsible, notwithstanding failure 
under 498(c)(1) and 498(c)(2), if the institution; (1) Provides 
third-party guarantees of at least one-half of annual potential 
liabilities, (2) is backed by the full faith and credit of a State 
or its equivalent, (3) establishes that it is a going concern 
capable of meeting all its obligations, or (4) has met comparable 
standards set by the Secretary.
    Issues that the community was asked to address and the 
community's views:
    1. What type of third-party guarantees will be acceptable to the 
Secretary?
     Acceptable third-party guarantees should include bonds, 
institutional collateral, or a tuition recovery fund. [New York]
     Acceptable third-party guarantees should include 
performance bonds, letters of credit, or other comparable 
instruments. [Kansas City, Atlanta]
     Acceptable third-party guarantees should include 
performance bonds, letters of credit, third-party escrow 
arrangements, and certificates of deposit. [San Francisco]
    2. Under what conditions will each type of instrument be used?
     These measures should be used for institutions that 
close or institutions that don't properly repay any required 
refunds. [New York]
     These measures should be used only if the institution 
can find no other way to prove its financial status. The institution 
should have an opportunity to negotiate with the Department before 
the third-party guarantees are imposed. [Kansas City]
     These measures should be used anytime the Secretary 
determines that the institution is not meeting its financial 
responsibilities. [San Francisco]
     These measures should be used if an institution fails 
to satisfy a liability established by the Secretary after an 
administrative review process. [Atlanta]
    3. How does the Secretary determine the amount equal to one-half 
of the annual potential liabilities of an institution, which is the 
minimum guarantee amount?
     This should be determined based on the institution's 
retention or refund history. [New York]
     The annual potential liability should be defined as the 
sum of the difference between charges paid by the student 
(regardless of the source of payment) and the pro rata amounts 
earned by the institution according to its applicable refund policy. 
[Atlanta]
     The annual potential liability should be based upon the 
institution's annual Title IV funds multiplied by one-half of its 
withdrawal rate. [San Francisco]
    4. What standards will be used to determine when guarantees in 
excess of the minimum amount will be required for an institution 
that fails to demonstrate financial responsibility?
     Guarantees in excess of the minimum amount should be 
required if the institution must also have funds to make teach out 
arrangements. [New York]
     Guarantees in excess of the minimum amount should not 
be imposed. [Kansas City, Atlanta]
     Guarantees in excess of the minimum amount should be 
required when the institution cannot meet its current financial 
obligations. [Atlanta]
    5. How can an institution that does not demonstrate financial 
responsibility otherwise show that it is capable of meeting all of 
its financial obligations.
     All factors must be analyzed as a whole. [New York]
     The Department should use the process used by 
accrediting agencies to determine financial responsibility. [New 
York]
     Institutions should be considered financially 
responsible if they are on reimbursement. [Kansas City, Atlanta]
     Institutions should be considered financially 
responsible if they are funded through an escrow arrangement. [San 
Francisco, Atlanta]
    E. Section 498(c)(4) provides that the determination that an 
institution has met certain standards of financial responsibility 
will be based on an audited and certified financial statement, done 
in accordance with standards of the American Institute of Certified 
Public Accountants. Additional audits may be required.
    Issues that the community was asked to address and the 
community's views:
    1. When would the Secretary require additional audits, and what 
additional items should be required for such audits?
     The Department should be able to request a more 
detailed audit of a particular segment of the audited financial 
statement. [New York]
     The Department should take into account the cost of 
requests for additional information. [New York]
     The Department should be able to request the more 
frequent submission of audited financial statements in cases of 
fraud, abuse, or a negative program review finding. For additional 
submissions requested at the Secretary's discretion, it is suggested 
that the Secretary be willing to look at something other than a full 
audited financial statement. [Kansas City]
     At the discretion of the Secretary, additional reports 
could include CPA prepared pro forma statements, cash forecasts, 
enrollment forecasts, and operating budgets with comparisons of 
actual to budget. [San Francisco]
     There should be no need for interim reports since they 
are now required annually. If interim information is requested, it 
should be unaudited. However, if an institution is seeking relief 
from a previously imposed fiscal restriction before its next 
scheduled statement, the interim statement should be audited. 
[Atlanta]
    2. What guidelines and time periods should be set for 
provisional certification?
     Each institution should be treated on a case-by-case 
basis subject to the Secretary's discretion. [New York]
     A two-year time period should be used for provisional 
certification. [New York]
     The time period should not exceed three-years and the 
institution should have the ability to achieve full certification 
sooner. [San Francisco]
    F. Section 498(c)(5) provides that an institution must maintain 
sufficient cash reserves to ensure repayment of any required 
refunds. Institutions that participate in and contribute to a State 
tuition recovery fund would be exempt from this requirement.
    Issues that the community was asked to address and the 
community's views:
    1. What are sufficient cash reserves? How are they measured, 
what types of funds may be included, and how are they protected from 
use for other purposes?
     Sufficient cash reserves should be defined as a certain 
percent of unearned tuition based on the institution's refund 
history and established only when there is an indication of a 
problem or high-risk institution. This could be part of provisional 
certification. [New York]
     Sufficient cash reserves should be defined as 100 
percent of any unearned tuition liability from Title IV awards. A 
minority of the group thought an amount to cover loans where the 
loan guarantee might be invalidated because of fraud should also be 
included. Cash reserves should include cash, accounts receivable, 
and liquid assets that can be converted to cash within 30 days. 
[Kansas City]
     If the institution has been timely (60 days) in 
processing refunds for one year, no cash reserves should be 
required. If the institution has not been timely, an increasing 
percentage should be reserved based on the total Title IV funds 
processed by the institution. The regulations should be written to 
provide incentives for institutions with a good performance record. 
The Department should take into account whether the refunds were 
delinquent because of personnel problems as compared to a poor 
financial position. When an institution is required to reserve cash, 
any earnings should accrue to the institution. Letters of credit 
should be permitted as a substitute for a cash reserve. [San 
Francisco]
     A cash reserve is sufficient if it equals anticipated 
refund to be paid during a 30 day period based on the average of 
refunds paid during the preceding 12 month period. Cash reserves are 
defined as cash and cash equivalents plus other current assets that 
can be converted to cash within 30 days. Segregation of the cash 
reserve is not required by law nor is it desirable. [Atlanta]
    2. What are the components of a state tuition recovery fund that 
demonstrates that an institution contributing to the fund will be 
able to pay refunds?
     If an institution contributes to a State tuition 
recovery fund they should be exempt automatically from this 
requirement. [New York]
     The components of a State tuition recovery fund that 
will demonstrate that an institution contributing to the fund will 
be able to pay refunds are those tuition recovery components that 
will pay a lender the required refund and/or pay the student the 
required refund. [Atlanta]
    3. What information must institutions provide to permit the 
Secretary to determine that an institution will be able to use the 
tuition recovery fund to pay refunds if the institution itself is 
unable to do so?
     An institution should provide a letter from the State 
that confirms that they will be able to use the State tuition 
recovery fund to pay refunds. [New York]
     An institution should provide a description of the 
legal structure of the fund and audited financial statements so the 
Secretary may determine that the institution will be able to use the 
tuition recovery fund. [San Francisco]
    4. Should the Secretary compile and maintain a list of State 
tuition recovery funds if that meets the requirements that permit an 
institution's participation in that fund to operate in lieu of its 
cash reserve requirements?
     The Secretary should compile and maintain a list of 
State tuition recovery funds that meet the requirements that permit 
an institution's participation in that fund to operate in lieu of 
the cash reserve requirements. [New York, San Francisco, Atlanta]
     An institution should provide the name and address of 
the State tuition recovery fund to confirm that they will be able to 
use the State tuition recovery fund to pay refunds. [Atlanta]
    G. Section 498(d) authorizes the Secretary to establish 
procedures and standards relating to administrative capability, 
including the consideration of past performance of institutions or 
individuals in control of such institutions and maintenance of 
records.
    Issues that the community was asked to address and the 
community's views:
    1. What measures of past performance will be used, and what time 
periods should be included in the review?
     No other standards of administrative capability or 
financial responsibility should be considered. There is an 
inundation of oversight responsibility and the requirements placed 
on institutions is sufficient. [Kansas City, San Francisco, Atlanta]
     In certain cases, institutional administrators should 
meet a minimum experience requirement (e.g., five years of prior 
experience in administration.) [San Francisco]
     School owners, corporate directors and officers, and 
the chief school administrator should be required to monitor and 
investigate school compliance, take whatever steps are within the 
person's authority to effect the correction of non-compliance, and 
report to the Department, the accrediting agency, and the State 
licensing agency any non-compliance that has not been corrected. 
California law requires this. [San Francisco]
     The current Sec. 668.14 and Sec. 668.15 should be used 
to measure administrative capability with the exception of the 
withdrawal rates. [Kansas City]
     A minority of the group recommended that the Secretary 
look into all complaints filed against institutions with the local 
law enforcement authorities even though the complaint may not 
warrant pulling of an institution's license or loss of 
accreditation. [Kansas City]
     The Department should look at the past two audits to 
see that performance reviews have corrected all the deficiencies as 
a basis that the institution is administratively capable. This 
should not be determined arbitrarily, but should be determined by a 
review. [New York]
     Research data is needed to establish a basis for past 
performance. Other measures of past performance that should be used: 
Placement, default and withdrawal rates, past performance reviews 
and implementation of recommendations, personnel turnover, and 
faculty/student ratio. [San Francisco]
     Default rates, course completion and withdrawal rates, 
and job placement rates must be considered together. These should be 
triggers that, in certain combinations, should cause more review of 
administrative capability. Mitigating circumstances must be 
considered. [New York]
     Standards for default rates, course completion and 
withdrawal rates, and job placement rates should be applicable to 
all institutions. No new standards should be set without historical 
data. [San Francisco]
     Student or consumer complaints against an institution 
should be taken into consideration if a pattern of legitimate 
complaints indicate a need for review by an outside entity. [New 
York]
     There should be no standard measure of an institution's 
administrative capability with respect to student or consumer 
complaints against an institution. The Department should review 
trends and the nature of complaints. [San Francisco]
    H. Section 498(g) provides that the Secretary may certify an 
institution's eligibility for a period not to exceed four years.
    Issues that the community was asked to address and the 
community's views:
    1. Should the Secretary adopt rules addressing the length of a 
period of eligibility and if so what should these standards be?
     The four-year periods of eligibility should be based on 
award years. [Kansas City]
     Any schedule developed for the review of institutions 
for this purpose should be published. [New York]
     Regulations and standards in this area are not 
necessary; the statute is specific enough. [San Francisco]
     In cases where the eligibility process requires a site 
visit, and the Secretary is unable to perform the site visit in a 
timely manner, eligibility should continue beyond the expiration 
date until the eligibility process is completed. [Atlanta]
    I. Section 498(h) provides that the Secretary may provisionally 
certify an institution for not more than one year for initial 
certification, or three years under certain conditions. Provisional 
certification may be withdrawn if the institution is unable to meet 
its responsibilities. Also, if an accrediting agency's recognition 
is withdrawn, the Secretary may continue the eligibility of 
accredited institutions for up to 18 months.
    Issues that the community was asked to address and the 
community's views:
    1. What standards should be used to determine whether an 
institution may be granted provisionally certification?
     An institution could be provisionally certified if it 
does not meet the third criterion for financial responsibility in 
section 498(c) of the HEA. [Kansas City]
     For an initial application, the Secretary should rely 
on the statutory language. [New York]
     An institution should be provisionally certified if it 
is unable to meet a regulatory standard for a reason beyond the 
institution's control. [New York]
     The Secretary should use the same standards that are 
used for determining financial responsibility and administrative 
capability. [San Francisco]
     An institution that meets all requirements for 
certification other than the completion of a required site visit 
should be provisionally certified if the Secretary is unable to 
conduct the site visit in a timely manner. [Atlanta]
    2. What procedures and standards should the Secretary use to 
decide whether an institution that has received provisional 
certification is unable to meet its responsibilities?
     Before revoking an institution's participation, the 
Secretary should conduct proceedings for a hearing, and should 
provisionally certify an institution until the completion of those 
proceedings. [New York]
     The Secretary should use the same standards that are 
used for determining financial responsibility and administrative 
capability. [San Francisco]
     The Secretary should use the results of audits, audited 
financial statements, and program reviews to determine whether to 
certify an institution provisionally and conduct a site visit at the 
institution. [Atlanta]
    3. Under what circumstances should the Secretary continue the 
eligibility of accredited institutions where their accrediting 
agency loses its recognition? Should the period of extension be the 
same for all institutions?
     According to a minority of participants, an institution 
identified as having administrative capability problems should be 
provisionally certified for no more than one year. [Kansas City]
     All institutions should be provisionally certified for 
18 months, and the Secretary should ensure that a process is 
available for such institutions to become accredited by another 
agency. [San Francisco]
     Eligibility should be continued in all cases and for 
the same period of time for all institutions. The Secretary should 
notify an institution promptly of the Secretary's action, the 
institution should promptly apply for accreditation with another 
agency and notify the institution of that fact, and the institution 
should make a good-faith effort to expedite its accreditation. 
[Atlanta]

[FR Doc. 94-3879 Filed 2-25-94; 8:45 am]
BILLING CODE 4000-01-P