[Federal Register Volume 59, Number 82 (Friday, April 29, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-10139]


[[Page Unknown]]

[Federal Register: April 29, 1994]


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Part VII





Department of Education





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34 CFR Part 600




Institutional Eligibility Under the Higher Education Act of 1965, as 
Amended; Final Rule
DEPARTMENT OF EDUCATION

34 CFR Part 600

RIN 1840-AB87

 
Institutional Eligibility Under the Higher Education Act of 1965, 
as Amended

AGENCY: Department of Education.

ACTION: Final regulations.

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

SUMMARY: The Secretary amends the regulations governing institutional 
eligibility under the Higher Education Act of 1965, as amended (HEA). 
The regulations implement new HEA statutory provisions that were added 
by the Higher Education Amendments of 1992 and the Higher Education 
Technical Amendments of 1993. In general, these new statutory 
provisions tightened the eligibility requirements for institutions 
participating in the student financial assistance programs authorized 
under title IV of the HEA (title IV, HEA programs). The regulations 
also clarify existing provisions, and, in keeping with the statutory 
changes, tighten procedures governing institutional eligibility 
determinations.

EFFECTIVE DATE: These regulations take effect on July 1, 1994, with the 
exception of Secs. 600.5, 600.7, 600.10, 600.20, 600.30, 600.31 which 
will become effective after the information collection requirements 
contained in these sections have been submitted by the Department of 
Education and approved by the Office of Management and Budget under the 
Paperwork Reduction Act of 1980. If you want to know the effective date 
of these provisions of the regulations, call or write the Department of 
Education contact person. A document announcing the effective date will 
be published in the Federal Register.

FOR FURTHER INFORMATION CONTACT: Ms. Cheryl Leibovitz, U.S. Department 
of Education, 400 Maryland Avenue, SW., room 4318, Regional Office 
Building 3, Washington, DC 20202. 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 8 p.m., Eastern time, Monday through Friday.

SUPPLEMENTARY INFORMATION: The Institutional Eligibility regulations 
contain requirements that apply to all postsecondary educational 
institutions that seek initial or continued eligibility to apply to 
participate in the programs authorized by the HEA.
    On February 10, 1994, the Secretary published a notice of proposed 
rulemaking (NPRM) for this part in the Federal Register, 59 FR 6446-
6465. The NPRM included a discussion of major issues surrounding the 
proposed changes that will not be repeated here. The following list 
summarizes those issues and identifies the pages of the preamble to the 
NPRM on which a discussion of those issues can be found.
    Definitions in Sec. 600.2 (pages 6446-6447).
    Institution of higher education in Sec. 600.4 (pages 6447-6448).
    Proprietary institution of higher education in Sec. 600.5 (pages 
6448-6450).
    Conditions of institutional ineligibility in Sec. 600.7 (pages 
6450-6451).
    Treatment of a branch campus in Sec. 600.8 (page 6451).
    Written agreement between an eligible institution and another 
institution or organization in Sec. 600.9 (page 6451).
    Date, extent, duration, and consequence of eligibility in 
Sec. 600.10 (pages 6451-6452).
    Special rules regarding institutional accreditation or 
preaccreditation in Sec. 600.11 (page 6452).
    Change in ownership resulting in a change of control in Sec. 600.31 
(pages 6452-6454).
    Eligibility of additional locations in Sec. 600.32 (page 6454).
    Loss of eligibility in Sec. 600.40 (page 6454).
    Termination and emergency action proceedings in Sec. 600.41 (page 
6454).
    The following discussion describes the significant changes since 
publication of the NPRM and the manner in which certain critical 
provisions will be initially implemented. They are discussed in the 
order in which they appear in the text of the regulations. If a 
provision applies 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.

Section 600.5  Proprietary Institution of Higher Education

    With regard to the two-year rule, the Secretary provides exceptions 
to the requirement that the program an institution lists on its initial 
eligibility application be substantially the same as the program it 
offered for two years preceding that application. An institution may 
satisfy the two-year rule even if it substantially changed the subject 
matter of its program over the two-year period if that change was made 
because of new technology or the requirements of other Federal 
agencies. In addition, an applicant institution may count as part of 
the two-year rule any period during which it was a branch campus.
    These changes also apply to the two-year rule for postsecondary 
vocational institutions in Sec. 600.6.
    The Secretary changed the manner in which an institution calculates 
whether it satisfies the 85 percent rule. Instead of determining the 
amount of title IV, HEA program funds it received over an award year 
and the amount of revenues it received over a fiscal year in the 
fraction set forth in Sec. 600.5(d), institutions will use their latest 
fiscal year to determine both amounts. Instead of determining the 
amount of title IV, HEA program funds received on a cash basis of 
accounting and the amount of revenue received on an accrual basis of 
accounting, institutions will use a cash basis of accounting for both 
title IV, HEA program funds and revenues. Institutions must report to 
the Department of Education that they do not satisfy the 85 percent 
rule no later than 90 days after the last day of their fiscal year, and 
institutions that fail to satisfy the 85 percent rule will become 
ineligible on the last day of their fiscal year.
    Institutions may choose to have either the auditor who prepares its 
financial statement audit or the auditor who prepares its title IV, HEA 
program compliance audit certify to the accuracy of its computations 
under the 85 percent rule, and the auditor must submit that 
certification as part of that audit report. If the auditor determines 
that the institution did not accurately calculate whether it satisfied 
the 85 percent rule, the auditor must include in the audit the correct 
amount of title IV, HEA program funds and revenues the institution 
received in the fiscal year, and the correct ratio under Sec. 600.5(d).
    The Secretary proposed in Sec. 600.5(d)(2)(v) that title IV, HEA 
program funds will be presumed to be used to satisfy tuition, fees and 
other institutional charges unless these charges were satisfied with 
grant funds provided by sources independent of the institution. This 
provision is changed so that the presumption would also not apply to 
institutional charges that were satisfied with money provided through 
job training contracts under Federal, State, and local training 
programs described in Sec. 600.7(d).
    When these regulations become effective on July 1, 1994, a 
proprietary institution must determine whether it qualifies as an 
eligible proprietary institution for award year 1994-95 under the 85 
percent rule. The Secretary has developed special rules for this 
initial determination.
    If an institution's latest complete fiscal year ended during the 
period of October 1, 1993 through June 30, 1994, the institution shall 
use that fiscal year to determine whether the institution satisfies the 
85 percent rule. Such an institution must notify the Secretary no later 
than September 30, 1994 if it fails to satisfy the 85 percent rule, and 
if the institution fails to satisfy that rule, it becomes ineligible on 
June 30, 1994. Therefore, as a general matter, it will be liable for 
all title IV, HEA program funds it disbursed to its students for award 
year 1994-95.
    If an institution's latest complete fiscal year ends before October 
1, 1993, the institution shall use the fiscal year that ends between 
July 1, 1994 and September 30, 1994 as its latest fiscal year to 
determine whether the institution satisfies the 85 percent rule. The 
institution must notify the Secretary if it fails to satisfy the 85 
percent rule within 90 days following the end of that fiscal year, and 
if it fails to satisfy that rule, it becomes ineligible on the last day 
of its fiscal year.

Section 600.7  Conditions of Institutional Ineligibility

    In order to qualify as an eligible institution, starting in award 
year 1994-95, an institution must not, inter alia, be in violation of 
the limitations set forth in Sec. 600.7. The provisions in that section 
implement the provisions in sections 481(a)(3) and 481(a)(4) of the 
HEA. The former section was effective on October 1, 1992 while the 
latter section was effective on July 23, 1992. Accordingly, 
institutions were subject to those provisions as of those dates. Until 
July 1, 1994, the Secretary will view an institution as not violating 
those statutory limitations if the institution can demonstrate, under a 
plausible interpretation of those statutory provisions, that it did not 
violate those limitations.
    Section 600.7 becomes effective on July 1, 1994, and 
Sec. 600.7(a)(1)(i) implements section 481(a)(3). Under 
Sec. 600.7(a)(1)(i), the Secretary evaluates an institution's 
eligibility on the basis of the institution's actions over the latest 
complete award year. Accordingly, as of July 1, 1994, the latest 
complete award year is the 1993-94 award year. Thus, for determining 
whether an institution qualifies as an eligible institution during 
award year 1994-95, the institution will use award year 1993-94 for 
purposes of determining whether more than 50 percent of its courses 
were correspondence courses, whether 50 percent or more of its enrolled 
regular students were enrolled in correspondence courses, whether 25 
percent or more of its enrolled regular students were incarcerated, and 
whether 50 percent or more of its enrolled regular students had neither 
a high school diploma or its recognized equivalent.

Waivers

    An institution loses its eligibility if more than 50 percent of its 
regular students are enrolled in correspondence courses. However, an 
institution that offers a 2-year associate-degree or 4-year bachelor's-
degree program may receive a waiver of that limitation for ``good 
cause.'' To receive a waiver, an institution can demonstrate ``good 
cause'' if the students enrolled in the institution's correspondence 
courses receive no more than five (5) percent of the title IV, HEA 
program funds received by all the students at that institution during 
its latest award year.
    An institution loses its eligibility if more than 50 percent of its 
regular students do not have a high school diploma or its recognized 
equivalent (ability to benefit [ATB] students). However, a nonprofit 
institution may receive a waiver of this limitation if its enrollment 
of ATB students exceeded 50 percent of its total enrollment because it 
served a substantial number of ATB students through contracts with 
Federal, State, or local government agencies during its latest complete 
award year.
    To receive a waiver, the contract must provide job training for 
low-income individuals who are in need of that training. An example of 
such a contract is a job training contract under the Job Training 
Partnership Act (JTPA).
    In addition, an institution may receive a waiver only if no more 
than 40 percent of its enrollment of regular students consists of ATB 
students who are not being served under the above-described contracts.
    If the Secretary grants a waiver to an institution under 
Sec. 600.7, the waiver will extend indefinitely provided that the 
institution satisfies the waiver requirements in each award year. If an 
institution fails to satisfy the waiver requirements for an award year, 
the institution becomes ineligible on June 30 of that award year.

Section 600.9  Written Agreements

    This section has been changed to provide that an eligible 
institution may not contract with an ineligible institution for the 
latter to provide any portion of an educational program if the 
ineligible institution had ever been terminated from participation in 
the title IV, HEA programs, or had ever withdrawn from such 
participation while under a termination, show-cause, suspension, or 
similar type proceeding initiated by a State licensing agency, 
accrediting agency, guaranty agency, or the Department of Education.

Section 600.30  Institutional Notification Requirements

    A substantial number of institutions are structured as, or owned 
by, partnerships or limited partnerships. Customarily, the governance 
of a partnership is vested in the ``general partners'' rather than in a 
``board of directors,'' and the management is under the control of one 
or more of the general partners rather than under an ``executive 
officer.'' Accordingly, the term ``a general partner'' is added to 
Sec. 600.30(a)(7)(iv) to clarify that the Secretary considers a person 
who is a general partner to be exercising substantial control over the 
institution.

Section 600.31  Change of Ownership Resulting in a Change in Control

    Commenters expressed apprehension about how the change of ownership 
rules affect sales in which the parties make the sale conditional upon 
securing the Department of Education's certification for the 
institution under the new ownership. The regulation has been changed to 
provide that the Secretary will review an application filed with 
respect to a transfer that is subject to any contingency, provided that 
the sale was otherwise completed. A transfer that is otherwise final is 
considered completed even if the seller retains a security interest in 
the institution or its assets to assure satisfaction of payment of the 
purchase price.
    Section 498(i)(3) of the HEA provides that the transfer of the 
interest of an owner upon his or her death to a family member or to a 
current owner may be excluded from its purview. This exclusion would 
apply readily to the kind of unexpected transfers of control that would 
occur of necessity upon the death of an actively-managing principal of 
an institution owned by a closely-held corporation. The regulation is 
changed to adopt the same description of the family of the owner as 
that used in Sec. 600.30(f).
    The regulation is modified to state that a change of ownership and 
control of a closely-held corporation occurs when a person who holds or 
acquires a legal or beneficial ownership interest in that corporation 
acquires or relinquishes control of 50 percent or more of the total 
outstanding voting stock of the corporation.
    The regulation treats the change of control of a registrant with 
the Securities and Exchange Commission (SEC) as a change of ownership 
and control within the meaning of section 498(i) of the HEA. For other 
corporations not closely held, the regulation treats as a change of 
ownership and control any action by which a person who has or thereby 
acquires a legal or beneficial ownership interest in that corporation 
obtains both ownership of 25 percent of the voting stock of the 
corporation, or the right under a proxy, power of attorney, or similar 
agreement to vote that share, and actual control. Conversely, 
relinquishing that control would also constitute a change within the 
meaning of this section.
    The regulation clarifies that a change from a taxable to a tax-
exempt entity that qualifies under section 501(c)(3) of the Internal 
Revenue Code, or vice versa, constitutes a change of ownership and 
control under this section of the regulations.

Section 600.32  Eligibility of Additional Locations

    Section 600.32 has been revised to clarify that the provisions of 
Secs. 600.8 and 600.10 also apply to the eligibility of additional 
locations.

Section 600.40  Loss of Eligibility

    The loss of eligibility because of a violation of the 85 percent 
rule was discussed earlier in connection with Sec. 600.5.

Analysis of Comments and Changes

    In response to the Secretary's invitation in the NPRM, 546 parties 
submitted comments on the proposed regulations. An analysis of the 
comments and of the changes in the regulations since publication of the 
NPRM follows. Substantive issues are discussed under the section of the 
regulations to which they pertain.
    Technical and other minor changes--and suggested changes the 
Secretary is not legally authorized to make under applicable statutory 
authority--are not addressed.

Comments and Responses

Section 600.2.  Definitions

Branch Campus
    Comments: Nearly all commenters confused the definition of the term 
``branch campus'' with the provisions governing additional locations. 
One commenter asked whether an institution's branch campus could be 
located in a foreign country.
    Discussion: The Secretary defined the term ``branch campus'' 
narrowly in the NPRM and in this final regulation to enable 
institutions to expand to serve the legitimate needs of students and 
communities not in close proximity to their main campuses without 
having to undergo a full certification review. Under section 498(j) of 
the HEA, as amended by the Higher Education Technical Amendments of 
1993, to participate in the title IV, HEA programs, a branch campus 
must be certified by the Secretary under the provisions of subpart 3 of 
part H of title IV of the HEA. Thus, it must separately meet all of the 
applicable requirements for participation contained in the Student 
Assistance General Provisions regulations, 34 CFR part 668. Because a 
full certification review is a complicated and lengthy process, the 
Secretary believes that a broad definition of branch campus would 
capture numerous off-campus sites of institutions and would seriously 
deter institutions from expanding to serve the legitimate needs of 
students and communities not in close proximity to their main campuses. 
The narrow definition avoids this adverse impact. Instead, additional 
locations of an institution will not necessarily be treated as branch 
campuses and thus will be subject to more moderate provisions elsewhere 
in this part, including in Sec. 600.32.
    A branch campus located in a foreign country may not qualify as an 
eligible branch campus under the HEA because one of the statutory 
requirements for eligibility (other than for purposes of the Federal 
Family Education Loan programs) is that the branch be located in a 
State.
    Changes: None.
Correspondence Course
    Comments: A commenter suggested that the Secretary classify a 
course offered partly by correspondence and partly in residential 
training as a correspondence course only if the course is more than 50 
percent correspondence.
    Discussion: In the preamble to the NPRM, the Secretary indicated 
that a program that is part correspondence and part residential is 
considered to be a correspondence program because ``This 
straightforward interpretation eliminates the need for the Secretary to 
address all the troublesome issues involving the quantity of education 
that an institution claims to provide in a correspondence program.'' 
The Secretary is still of that view.
    Changes: None.
Incarcerated Student
    Comments: Two commenters commended the Secretary's exclusion of 
persons in half-way houses or home detention or sentenced to serve on 
weekends from the definition of ``incarcerated student.'' They noted 
that this exclusion helps to reduce burden by eliminating the need to 
identify and track these individuals.
    Discussion: The Secretary appreciates the support for this 
provision.
    Changes: None.
Recognized Equivalent of a High School Diploma
    Comments: A few commenters suggested broadening the definition of 
students who excelled academically in high school. They suggested that 
persons in the upper quartile of their high school graduating class and 
persons who have passed standardized tests be considered as having 
excelled in high school. One commenter asked the Secretary to remove 
this provision because it could potentially be open to abuse.
    Other commenters noted that the Secretary proposed to consider an 
academic transcript resulting from the successful completion of a two-
year transfer program to be the recognized equivalent of a high school 
diploma and suggested that the following transcripts also be so 
recognized: the transcript of a student who completed at least one 
semester or quarter of a two-year transfer program; and the transcript 
of a student enrolled in a two-year program if most of the credits in 
that program could be transferred to a bachelor's degree program.
    Discussion: The Secretary believes that the recognized equivalent 
of a high school diploma is generally a GED and the two provisions 
discussed by the commenter apply only in exceptionally limited 
circumstances. Therefore, the Secretary does not believe it useful to 
expand either provision at this time. The Secretary has reconsidered 
his position and no longer believes that a student's class standing in 
high school is an adequate indication that the student excelled in high 
school. The final rules reflect the Secretary's current policy in this 
area.
    Changes: None.

Sections 600.4, 600.5, and 600.6  Institution of Higher Education, 
Proprietary Institution of Higher Education, and Postsecondary 
Vocational Institution

    Comments: Several commenters noted that while section 496(e) of the 
HEA required an institution to submit a dispute with an accrediting 
agency regarding its loss of accreditation to initial arbitration prior 
to bringing other legal action, the NPRM proposed requiring the 
institution to agree to binding arbitration. Most of these commenters 
were concerned that requiring binding arbitration would violate an 
institution's right to have its case reviewed in court. Other 
commenters noted that while institutions have to agree to binding 
arbitration, accrediting agencies do not have to so agree. Another 
commenter asked whether an institution would retain its institutional 
eligibility under this part while it undergoes binding arbitration.
    Discussion: In the NPRM, the Secretary stated that he proposed that 
an institution agree to binding arbitration ``so that any legal action 
after arbitration would be limited to whether the arbitrator's decision 
was arbitrary or capricious. The Secretary believes that this approach 
best carries out the purpose of section 496(e) by limiting, to the 
maximum extent possible, litigation in this area.'' The Secretary is 
still of this view.
    The Secretary recognizes that the HEA does not specifically require 
an accrediting agency to agree to binding arbitration but anticipates 
that accrediting agencies will agree to such arbitration without the 
necessity of a regulatory requirement since it significantly limits the 
cost and length of appeals of their final decisions. Moreover, if an 
accrediting agency does not agree to binding arbitration, institutions 
will be free to appeal their final adverse decisions in federal courts.
    If an institution loses its accreditation as a result of a final 
accrediting agency action, it loses its eligibility under this part 
because of its lack of accreditation. If it takes that accrediting 
agency to binding arbitration, it will not regain that eligibility 
unless the arbitrator requires the agency to restore the institution's 
accreditation.
    Changes: None.

Section 600.5  Proprietary Institution of Higher Education

Two-year rule
    Comment: Several commenters questioned how the Secretary would 
determine whether a program offered for two years prior to an 
institution's initial eligibility application was substantially the 
same as a program it listed in its application for approval.
    Other commenters were concerned that a new institution would not be 
able to make substantive changes in curriculum to keep up with new 
technology and changes in industry and marketplace requirements. One 
commenter explained that other Federal agencies may have regulations 
that affect course content and length and suggested that if the 
Secretary retained language prohibiting institutions from changing 
courses substantially in content and length, the provision be revised 
to allow for course content and length changes necessitated by 
regulations of other Federal agencies. Another commenter was concerned 
that a new institution would never be able to change its courses. Other 
commenters suggested that accrediting agencies and State Postsecondary 
Review Entities (SPREs) would monitor program integrity and quality and 
a shorter period than two years could be used.
    Discussion: As the Secretary indicated in the preamble to the NPRM, 
the purpose behind this provision is to prevent an institution from 
offering a minimal program during the first two years of its existence 
and then expanding its programs when it becomes eligible to participate 
in the title IV, HEA programs. The Secretary believes that the best way 
to support this purpose is to require an institution to offer over the 
two-year period a training program that is substantially the same in 
terms of subject matter and length as the training program it offers 
when it applies for institutional eligibility. However, the Secretary 
agrees with the point made by some commenters that some flexibility 
should be provided with regard to the subject matter of a program to 
take into account new technology and requirements of other Federal 
agencies. The Secretary does not agree with the suggestion that an 
institution should be able to make substantive changes in the subject 
matter of a program because of changes in market conditions.
    The Secretary considers programs to be substantially the same if 
they are listed within the same generic series and codes defined in 
Chapter I, Academic and Occupationally Specific Programs, published by 
the Secretary in the Classification of Instructional Programs, Second 
Edition (1990).
    The Secretary considers a program to be substantially the same in 
terms of length as the program the institution is currently offering if 
the program offered over the two-year period would qualify the 
applicant to be an eligible proprietary institution of higher education 
or eligible postsecondary vocational institution. Thus, in general, the 
program must provide at least 20 weeks of instructional time and at 
least 16 semester hours, 24 quarter hours, or 600 clock hours.
    Changes: The Secretary will permit an institution to demonstrate 
that the subject matter of its program changed substantially over the 
two-year period because of new technology or the requirements of other 
Federal agencies.
    Comment: A number of commenters suggested that the institutional 
portions of programs, such as the Federal SEOG and Federal Perkins 
programs, should not be included in the numerator since the money comes 
from the institution and not the Federal Government.
    Discussion: The Secretary agrees. An institution should not include 
institutional matching funds in the numerator as part of its title IV, 
HEA program funds.
    Changes: None.
    Comment: A number of commenters discussed the presumption that 
title IV, HEA program funds are used to satisfy tuition, fees and other 
institutional charges unless these charges were satisfied with grant 
funds provided by sources independent of the institution. Commenters 
suggested that the above presumption should not apply if the tuition, 
fees and other institutional charges were satisfied with money provided 
by other Federal agencies, such as the Department of Veterans Affairs, 
or through job training contracts under Federal, State, or local 
training programs, such as the Job Training Partnership Act (JTPA).
    Discussion: The Secretary agrees with the commenters with regard to 
funds received by an institution under a job training contract under 
Federal, State, or local training programs since the Congress in the 
Higher Education Technical Amendments of 1993 provided for an exception 
to the ability to benefit (ATB) enrollment limitation for institutions 
serving ATB students under such contracts.
    Changes: Section 600.5(d)(2)(v) has been amended to allow an 
institution to consider that a student's tuition, fees and other 
institutional charges were satisfied from funds provided under 
contracts described in Sec. 600.7(d).
    Comment: A number of commenters suggested that the definition of 
``revenue'' in the denominator used in Sec. 600.5(d)(1) is too narrow 
and should be expanded.
    Discussion: As indicated in the preamble to the NPRM, the Secretary 
believes the definition of the term ``revenue'' establishes a 
reasonable middle ground between counting only the income received from 
students' tuition and fees and counting as revenue income from 
businesses that are owned and operated by the institution, regardless 
of the relationship between the educational institution and the 
businesses.
    Changes: None.
    Comment: A number of commenters suggested that revenue from 
contract training (on or off-site) provided by the institution to 
business and industry be included as revenue in the denominator in 
Sec. 600.5(d)(1) since this type of training is directly related to the 
curriculum offered by the institution.
    Discussion: An institution can count as revenue only tuition, fees, 
and institutional charges for students enrolled in eligible programs at 
the institution, and funds received for activities that are necessary 
to the education or training of those students enrolled in eligible 
programs. Therefore, whether an institution can count as revenue in the 
denominator of the fraction in Sec. 600.5(d)(1) the revenue described 
by the commenters depends on whether an institution's contract training 
programs qualify as eligible programs.
    Changes: Section 600.5(d)(1) has been amended to clarify this 
requirement.
    Comment: Several commenters suggested that an institution should be 
allowed to include institutional charges that were paid by 
institutional scholarships and loans as revenue in the denominator of 
the fraction contained in Sec. 600.5(d)(1). One commenter said that his 
school awarded $1,000 institutional scholarships to all students in the 
second year of their program. The commenter felt strongly that his 
institution should be able to include these scholarships as 
institutional revenues.
    Discussion: An institution is not prohibited from including 
institutional charges that were paid by institutional scholarships and 
institutional loans as revenue in the denominator of the fraction 
contained in Sec. 600.5(d)(1), provided that the scholarships and loans 
are valid and not just part of a scheme to artificially inflate an 
institution's tuition and fee charges. For this purpose, the Secretary 
does not consider institutional loans to be real unless such loans are 
routinely repaid by the student borrowers. The Secretary does not 
consider institutional scholarships to be valid if every student 
receives such a scholarship so that no student ever pays the claimed 
tuition and fee charges. The Secretary considers the above-described 
practice of the commenter to be a classic example of this scheme.
    In this connection, the Secretary will scrutinize institutions that 
raise their tuition and fee charges to avoid the 85 percent rule but 
can show no actual payment of those additional charges, or payment 
through ``artificial'' institutional scholarships and loans.
    Changes: None.
    Comment: A number of commenters suggested that non-need-based title 
IV, HEA program assistance, such as funds under the Federal PLUS Loan 
Program, the Federal SLS Program, and the unsubsidized Federal Stafford 
Loan Program, should not be included in the numerator of the 85 percent 
rule calculation because it is unrealistic to penalize an institution 
whose students chose to borrow under these programs.
    Discussion: The statutory provision that established the 85 percent 
rule, section 481(b)(6) of the HEA, provides that an eligible 
proprietary institution must have at least 15 percent of its revenues 
that ``are not derived from funds provided under this title,'' i.e., 
title IV of the HEA. Section 481(b)(6) does not differentiate between 
``need-based'' title IV, HEA program funds and non-need-based title IV, 
HEA program funds. However, when determining the amount of title IV, 
HEA program funds derived from FFEL programs or the Federal Direct Loan 
Program, the institution should only include loan proceeds disbursed to 
students. It should not include the face amount of a loan because that 
amount includes loan origination fees and loan guarantee fees that are 
not disbursed to students.
    Changes: None.
    Comment: A number of commenters pointed out problems with the 
fraction the Secretary proposed to determine whether an institution 
satisfies the 85 percent rule. The commenters noted that the title IV, 
HEA program funds in the numerator were reported on an award year basis 
but the revenues in the denominator were reported on a fiscal year 
basis. The commenters indicated that when the institution's fiscal year 
does not coincide with an award year, the computation would not provide 
reliable results.
    In addition, a number of commenters raised concerns that the 
information reported in the numerator and denominator would be produced 
under two different methods of accounting. Several auditing 
organizations noted that the title IV, HEA program funds must be 
reported in the numerator on a cash basis of accounting (received). 
They further noted that the revenue figure in the denominator would be 
verified through the use of a financial statement audit, and in 
accordance with Generally Accepted Accounting Principles (GAAP), 
financial statements are prepared on an accrual basis of accounting. 
The commenters concluded that it does not make sense to compare the 
amount determined in the numerator with the amount determined in the 
denominator when each number is determined under a different basis of 
accounting.
    Discussion: The Secretary agrees with the commenters about the 
deficiencies in the proposed rule and has made the following changes. 
First, the Secretary agrees that there should be a common reporting 
period for the numerator and the denominator. The Secretary will not 
require institutions to change their fiscal year to parallel an award 
year. Therefore, although the Secretary will be giving up a degree of 
oversight, the Secretary will allow institutions to use their fiscal 
year as the reporting period for the numerator as well as the 
denominator.
    Second, since institutions must report and account for title IV, 
HEA program funds on a cash basis, the institution must also account 
for revenue in the denominator on a cash basis. Under a cash basis of 
accounting, the institution reports revenues on the date that the 
revenues are actually received.
    An institution's computation must be verified as part of the 
institution's title IV, HEA program compliance audit or as part of its 
financial statement audit. The institution may choose which audit will 
include the verification.
    Changes: Section 600.5 is amended as follows: institutions will 
report title IV, HEA program funds in the numerator of the fraction set 
forth in Sec. 600.5(d) on a fiscal year basis and that fiscal year will 
be the same fiscal year used to report revenues in the denominator of 
that fraction; institutions will report revenues in the denominator on 
a cash basis of accounting; and institutional computations will be 
verified in financial statement audits or title IV, HEA program 
compliance audits.
    Comment: Several commenters suggested that 30 or 60 days after an 
award year or fiscal year does not provide enough time for an 
institution to compute its percentage of title IV, HEA program funds 
because of possible year-end adjustments and because the institution's 
computation must be verified by the financial audit.
    Discussion: The Secretary agrees with the commenters that 
institutions may need an additional period to take possible year-end 
adjustments into account. Therefore, the Secretary will allow an 
institution up to 90 days from the last day of its fiscal year to 
report that it fails to satisfy the 85 percent rule. However, if an 
institution determines that it fails to satisfy the 85 percent rule, it 
will be ineligible as of the last day of that fiscal year; therefore 
the longer an institution takes to report its ineligibility, the 
greater its potential liability for improperly disbursed title IV, HEA 
program funds.
    The Secretary believes that an institution does not need to wait 
for an audit to determine the percent of its revenue that was derived 
from title IV, HEA program funds. The institution should be keeping 
track of these amounts over the course of its fiscal year to avoid 
becoming ineligible. Moreover, since an institution must now determine 
its revenues on a cash accounting basis, it is relatively easy for an 
institution to know its position relative to the 85 percent rule.
    Changes: An institution will have 90 days from the last day of its 
fiscal year to report its ineligibility to the Department of Education 
under the 85 percent rule.
    Comment: A number of commenters suggested that although an 
institution may give its best efforts to track revenues and keep within 
the guidelines of the 85 percent rule, the institution will not know 
positively of the result until its annual audited financial statement 
is completed. The commenters suggested that given the dire consequences 
of having title IV, HEA program funds exceed 85 percent of its 
revenues, and the fact that a great many students could be potentially 
harmed by such precipitous action, the Secretary should add a provision 
that allows an institution to voluntarily refund any excess money to 
bring its percentage in compliance with the 85 percent rule.
    Discussion: The purpose of the 85 percent rule is to preclude the 
participation in the title IV, HEA programs of proprietary institutions 
of higher education whose overwhelming source of revenue is title IV, 
HEA program funds. The repayment of title-IV, HEA program funds to the 
Department of Education is not consistent with that statutory purpose. 
Moreover, since a refund of title IV, HEA program funds would reduce 
both the numerator and denominator of the fraction used to determine 
this rule, any conforming refund would involve a significantly large 
amount of money.
    Changes: None.

Section 600.7  Conditions of Institutional Ineligibility

    Comment: As a general rule, an institution may not have 50 percent 
or more of its students enrolled in correspondence courses and retain 
its eligibility under the HEA. However, as a result of the Higher 
Education Technical Amendments of 1993, the Secretary may waive this 
requirement for an institution that offers a 2-year associate-degree or 
4-year bachelor's-degree program for ``good cause.'' In the NPRM, the 
Secretary solicited comments as to what should be considered ``good 
cause''.
    One comment was received on this provision. The commenter suggested 
that a waiver should be granted for ``good cause'' only if the students 
attending the institution's correspondence courses received a minimal 
percent of the title IV, HEA programs at that institution.
    Discussion: The Secretary agrees with the commenter's suggestion.
    Changes: Section 600. 7(b)(3) has been amended to provide that the 
Secretary will waive this requirement for an institution that offers a 
2-year associate-degree or 4-year bachelor's-degree program if the 
students enrolled in the institution's correspondence courses receive 
no more than 5 percent of the title IV, HEA program funds received by 
students at that institution.
    Comment: One commenter suggested that an institution should not 
permanently lose its eligibility if its current owner or Chief 
Executive Officer (CEO) has been found guilty of a crime involving 
title IV, HEA program funds and that owner or CEO disassociates himself 
or herself from the institution. The commenter also asked for 
clarification as to what is meant by ``judicially determined to have 
committed fraud.''
    Discussion: The Secretary believes that if the current owner or CEO 
of an institution has been found guilty of a crime involving title IV, 
HEA program funds, that institution should no longer be eligible to 
participate in the title IV, HEA programs. The phrase ``judicially 
determined to have committed fraud'' means that a court of competent 
jurisdiction has made such a finding.
    Changes: None.
    Comment: Section 481(a)(3)(D) of the HEA provides that an 
institution that does not offer an associate or bachelor's degree is 
not an eligible institution if more than 50 percent of its enrollment 
consists of students without a high school diploma or its recognized 
equivalent (ATB students). As a result of an amendment by the Higher 
Education Technical Amendments of 1993, the Secretary may waive the 
limitation for nonprofit institutions. However, to receive a waiver, 
the institution must demonstrate to the satisfaction of the Secretary 
that it exceeds the limitation because it serves, through contracts 
with Federal, State, or local government agencies, significant numbers 
of ATB students.
    In the NPRM, the Secretary requested comments regarding the 
conditions under which the Secretary should grant this waiver. Comments 
were particularly requested on the purpose of the referenced contracts, 
what constitutes a ``significant'' number of ATB students, and the 
duration of a waiver.
    Two commenters suggested that an institution should receive a 
waiver if the purpose of the referenced contracts is to provide job 
training for low-income people who are in need of such services.
    One commenter suggested that 20 to 25 percent of an institution's 
enrollment constitutes a significant number, another suggested 40 
percent, and yet another suggested 50 percent.
    One commenter suggested that a waiver should be issued for a period 
of one year at a time, renewable on a yearly basis, depending upon 
graduation and employment rates. A second commenter suggested that a 
waiver should be issued for the duration of the certification agreement 
period. A third commenter suggested that the waiver should be issued 
for the period in which the institution is in good standing with its 
accrediting agency.
    Discussion: For purposes of granting this waiver, the Secretary 
agrees with the commenters regarding the type of contract that supports 
a waiver. The Secretary thus agrees that the contracts must provide job 
training for low-income individuals who are in need of such services. 
An example of such a contract is a job training contract under the Job 
Training Partnership Act (JTPA).
    Further, to receive a waiver, an institution must demonstrate that 
its enrollment of ATB students exceeded 50 percent of its total 
enrollment because it served a substantial number of those students 
through contracts. That is, the institution must demonstrate cause and 
effect; it exceeded the statutory limit because it served a significant 
number of ATB students through contracts.
    An institution cannot satisfy this waiver provision simply by 
demonstrating it served a large number of ATB students under a 
contract. For example, if an institution's enrollment of ATB students 
who were not served under contract exceeded 51 percent of its total 
enrollment, that institution would not satisfy the waiver requirement 
regardless of the number of additional ATB students it served under 
contract. Similarly, if an institution's enrollment of ATB students who 
were not served under contract equaled 50 percent of its total 
enrollment, so that one additional ATB student would put the 
institution over the 50 percent limitation, the institution would not 
satisfy the waiver requirement regardless of the number of additional 
ATB students it served under contract. In neither case did the 
institution's enrollment of ATB students exceed 50 percent of its total 
enrollment because it served a significant number of ATB students under 
contract.
    In view of the above, the critical factor in whether an institution 
qualifies for a waiver is the percentage of its enrollment who are ATB 
students not being served under contract.
    An institution is evaluated to determine whether it falls within 
the limitation set forth in Sec. 600.7(a)(1)(i) on an award-year basis. 
If the Secretary grants a waiver to an institution under this section, 
the waiver will extend indefinitely provided that the institution 
satisfies the waiver requirements in each award year. If an institution 
fails to satisfy the waiver requirements for an award year, the 
institution becomes ineligible on June 30 of that award year. (This 
policy is applicable to all waivers provided for under Sec. 600.7.)
    Changes: An institution may receive a waiver if the contracts 
provide job training for low-income individuals who are in need of such 
services. An institution may not receive a waiver if its enrollment of 
ATB students who are not being served under contract exceeds 40 percent 
of its total enrollment. If the Secretary grants a waiver to an 
institution under this section, the waiver will extend indefinitely 
provided that the institution satisfies the waiver requirements in each 
award year. If an institution fails to satisfy the waiver requirements 
for an award year, the institution becomes ineligible on June 30 of 
that award year.

Section 600.9  Written Agreement Between an Eligible Institution and 
Another Institution or Organization

    Comment: One commenter suggested that the provision that requires 
an eligible institution to give credit to students enrolled in a 
contracted program on the same basis as if it provided that program 
itself be modified to make an exception in the case of study abroad 
programs approved for credit by the eligible institution.
    Discussion: The Secretary believes that this rule should apply to 
all contracted programs, including contracted programs involving study 
abroad.
    Changes: None.
    Comment: One commenter noted that this section prevents an eligible 
institution from entering into an agreement with an ineligible 
institution if that institution had its eligibility to participate in 
the title IV, HEA programs terminated by the Secretary. The commenter 
suggested that this provision be expanded to prevent an eligible 
institution from entering into an agreement with an ineligible 
institution that withdrew from participating in the title IV, HEA 
programs under a show-cause or suspension order issued by the 
institution's State licensing agency, accrediting agency, guarantor, 
State Postsecondary Review Entity (SPRE), or the Secretary. On the 
other hand, another commenter suggested removing this provision 
entirely since it could eliminate teachout agreements when institutions 
close and could prevent students from participating in valuable 
educational programs.
    Discussion: The Secretary agrees with the commenter's suggestion 
that it is inappropriate for an eligible institution to contract with 
an ineligible institution that had its eligibility to participate in 
the title IV, HEA programs terminated or that withdrew from 
participating in the title IV, HEA programs under a termination, show-
cause, suspension, or similar type proceeding initiated by the 
institution's State licensing agency, accrediting agency, guarantor, or 
SPRE, or by the Secretary. Moreover, the Secretary believes that this 
limitation should also apply to contracts under which the ineligible 
institution provides 25 percent or less of the eligible institution's 
program. The Secretary believes that there are a sufficient number of 
eligible institutions to allow teachouts of students whose institutions 
closed.
    Changes: Section 600.9 is amended to preclude an eligible 
institution from contracting any portion of its educational program to 
an ineligible institution that had its participation in the title IV, 
HEA programs terminated by the Secretary, or that withdrew from that 
participation under termination, show-cause, suspension, or similar 
type proceeding initiated by the institution's State licensing agency, 
accrediting agency, guarantor, or SPRE, or by the Secretary.

Section 600.10  Date, Extent, Duration, and Consequences of Eligibility

    Comment: Several commenters suggested that it is unfair to require 
that certain new educational programs have to be approved by the 
Secretary as eligible programs before students enrolled in those 
programs would be eligible to receive title IV, HEA program funds. The 
commenters felt that this would place an undue burden on the 
institution and the students the institution is attempting to serve by 
creating delays in new program implementation.
    Discussion: Prior to the issuance of the Institutional Eligibility 
regulations in April of 1988, it was the Secretary's practice to 
require institutions to apply to the Department of Education to have 
any new program designated as an eligible program before students 
enrolled in that program could receive title IV, HEA program funds. The 
Secretary changed this practice in the regulation to reduce the burden 
on institutions and the Department of Education.
    Under current regulations, an institution could determine on its 
own whether a new educational program qualified as an eligible program. 
However, the institution would be liable for all title IV, HEA program 
funds it disbursed to students enrolled in a new program if the 
institution incorrectly determined that the program qualified as an 
eligible program.
    The Secretary has found that this new practice has not worked out. 
The Secretary has found that when institutions have made incorrect 
determinations regarding whether a new educational program is an 
eligible program, the liability associated with that incorrect 
determination was usually too high to be repaid. Moreover, this 
practice is inconsistent with the new emphasis on ``gatekeeping'' as 
evidenced in Program Integrity Triad legislation, particularly with 
respect to the certification process.
    The Secretary has found that most problems in this area come from 
an institution offering new, short-term vocational programs. Therefore 
in the NPRM, the Secretary has not required preapproval for new 
programs leading to an associate degree or higher, or new vocational 
programs similar to the ones the institution already provides. The 
Secretary retains this position in the final rule and believes that 
this procedure provides a proper balance between the need of 
institutions to provide title IV, HEA program funds to students 
enrolled in new programs, and the need to limit abusive practices of 
certain institutions.
    Changes: None.

Section 600.20  Application Procedures

    Comment: Several commenters expressed concern about when and how to 
apply for renewal of eligibility. One commenter believed that 
institutions should have to apply to have eligibility extended to 
educational programs.
    Discussion: With regard to an institution's eligibility for 
purposes of the title IV, HEA programs, Sec. 600.10(d)(1) provides that 
an institution's eligibility designation for the title IV, HEA programs 
will expire when the institution's program participation agreement 
expires. Section 498(g) of the HEA requires the Secretary to establish 
a schedule for the expiration of those program participation 
agreements. When this schedule is established, the Secretary will 
notify each institution well in advance of the scheduled expiration of 
its program participation agreement of the need to reapply in order to 
continue its eligibility designation without interruption. Similarly, 
the Secretary will provide each institution with the necessary 
information about the forms to use and the date by which the 
application must be submitted.
    Once an institution has undergone a reapproval review, if it is 
approved, it will receive a program participation agreement with a 
specific expiration date. Thereafter, it is the institution's 
responsibility to reapply for approval to continue its eligibility to 
participate in the title IV, HEA programs beyond the expiration date.
    The Secretary has addressed the addition of new educational 
programs in connection with Sec. 600.10(c).
    Changes: None.

Section 600.30  Notification Requirements

    Comments: Several commenters noted that institutions would be 
required to notify the Secretary of certain changes within 10 days of 
occurrence, but that it was unclear whether such changes would 
necessitate the filing of a new application and reestablishing 
eligibility, especially with respect to such changes as changes in 
boards of directors and percent of ownership interest.
    Discussion: Section 600.30 specifies the institutional changes of 
which the Secretary must be advised. Upon receipt of the notification, 
the Secretary will advise the institution of any additional information 
that needs to be provided and whether the institution needs to file an 
application. Section 600.20 identifies those key circumstances in which 
an institution is always required to file an application. However, the 
Secretary retains the authority to request that an institution undergo 
a reevaluation of institutional eligibility and certification whenever 
warranted. It should be noted that the new institutional eligibility 
application will consist of a cover sheet plus separate schedules that 
deal with the institution's additional locations, educational programs, 
boards of directors, etc. Thus an institution that has a change in its 
board of directors or a change in the address of one of its locations 
may be asked to submit an application, but that application may consist 
only of the application cover sheet and the appropriate schedule(s).
    In summary, Secs. 600.20, 600.21, and 600.30 taken together explain 
what an institution is required to do and when.
    Changes: None.

Section 600.31  Change in Ownership Resulting in a Change in Control

    Comment: A commenter expressed the view that the statute did not 
require that divisions, mergers or consolidations of public or private 
non-profit institutions be treated as changes of ownership under 
section 498(i) of the HEA and objected to their inclusion in the 
requirements of this section of the regulation. The basis for the 
comment is the list of examples in section 498(e) of the HEA of an 
``ownership interest.'' The commenter noted that these examples are not 
typical of the ownership of public or non-profit entities.
    Discussion: The Secretary disagrees with the commenter. As 
indicated in section 498(e) of the HEA, the list of examples provided 
is not exclusive, and the examples of change of ownership and control 
included in section 498(i) of the HEA include transactions that public 
and non-profit institutions undergo, such as sales, mergers, and 
divisions. Therefore, such changes of ownership and control are covered 
by Sec. 600.31 and could cause the eligibility of those institutions to 
lapse.
    With regard to changes of ownership of non-profit institutions, 
where the non-profit institution is incorporated as a stock 
corporation, the same bright lines used to identify changes of 
ownership constituting changes of control for other stock corporations 
will apply. For non-profit institutions organized as member 
corporations, the corresponding interest is the membership interest, 
and those rules should apply in the same way to changes in the 
membership of the non-profit institutions. Changes of ownership and 
control also occur with regard to institutions that are owned by non-
profit corporations; changes in the persons or individuals who by 
virtue of their membership in the non-profit corporation own the 
institution can result in a change of ownership and control of that 
institution. The bright lines that identify changes of ownership and 
control of other corporations apply to changes in the membership of 
non-profit corporations as well.
    In connection with any change of ownership, whether a transfer of 
the assets and educational enterprise of an institution to another 
institution is a change within this section, or is subject to 
Sec. 600.32 turns on whether the institution continues to function as a 
separate educational enterprise after the transfer. If the entity that 
acquires the institution continues the operation of that institution 
not as a separate institution but as part of another institution, the 
transaction would be considered an acquisition of an additional 
location and would be subject to Sec. 600.32.
    Changes: None.
    Comment: Commenters expressed apprehension about how the change of 
ownership rules affect sales in which the parties make the sale 
conditional upon securing the Department's certification for the 
institution under the new ownership. Commenters believed that the 
proposal that the Department would not review the school under the new 
ownership until the sale has been completed would tend to foster 
undesirable disruption of title IV, HEA program funding and pose a 
threat to continued training of students enrolled at the time of the 
sale. Commenters urged adoption of a procedure in which the Department 
would review a proposed transfer of ownership before the consummation 
of the sale, so that the sale could be aborted if certification were 
denied. A commenter suggested consideration of a preapproval procedure 
described as used by other agencies in which the Department would 
review a proposed sale, and, if the institution under the new ownership 
would qualify for certification, offer the certification on the 
condition that the sale be fully consummated promptly.
    Discussion: The Secretary recognizes the importance of reducing 
possible interruption in funding to the extent consistent with the 
conduct of a responsible review of the financial and administrative 
capability of the school under new ownership.
    The Department currently reviews only transfers that have taken 
effect, and thereby have caused the eligibility and certification of 
the institution to lapse, even if the transfer is subject to a 
condition subsequent, such as obtaining the Department's approval and 
certification. The Department has taken this position because it 
ensures that the parties submit only transfers under which the 
purchaser has conducted the requisite due diligence to ensure that 
approval and certification will be granted. The Secretary believes this 
position is fair because the regulations state fully the standards 
under which the qualifications of the school for certification will be 
measured, and because virtually all the information on which approval 
of the institution under new ownership depends is fully available to, 
and in many instances derived directly from, the institution.
    The Secretary sees no reason why a purchaser should not be able and 
expected to have made a fully informed decision to purchase before 
submitting the application for certification. Unfortunately, in the 
past, purchasers have often engaged in wholly inadequate due diligence, 
given scant professional attention to the requirements for 
participation in the student assistance programs, and presented 
seriously deficient applications for approval. These deficiencies 
unnecessarily consume Department review resources and needlessly delay 
approval decisions for the institution. Lack of competent due diligence 
also results in other purchasers purporting to be unaware of problems 
with the qualifications of the institution they have purchased that are 
serious enough to make Department approval impossible. The Secretary's 
procedure for review of change of ownership applications will foster 
responsible and effective due diligence by the purchaser.
    Changes: The regulation provides that the Secretary will review an 
application filed with respect to a transfer that is subject to any 
contingency, provided that the sale was otherwise completed. A transfer 
that is otherwise final is considered completed even if the seller 
retains a security interest in the institution or its assets to assure 
satisfaction of payment of the purchase price.
    Comment: Several commenters believed that a transfer of ownership 
to a person who had been engaged in management of the school should not 
be considered a change within the meaning of section 498(i) of the HEA. 
Others urged excluding transfers of ownership interests among current 
shareholders, particularly if the institution was owned by a close 
corporation and the shareholders had held those interests for several 
years or the shareholder acquiring the controlling interest had been 
engaged in managing of that institution. Other commenters urged that 
transfers of controlling ownership interests from the owner upon 
retirement to a shareholder currently involved in management of the 
school be excluded from changes in ownership within the meaning of 
section 498(i) of the HEA.
    Discussion: Section 498(i) of the HEA requires an institution to 
reestablish its educational credentials and its administrative and 
financial capability after a change of ownership and control. Transfers 
of ownership commonly take place between those holding the controlling 
interest in the institution and individuals who have been managing the 
institution. While there may often be a continuity of management and 
administration through such transfers of ownership, the financial 
capability of the institution after the current managers assume 
controlling ownership interests may be dramatically different than 
under the prior owner, particularly where the transaction is structured 
as an asset sale rather than a stock transaction. The fact that the new 
owner already had an ownership interest, or was involved in management 
of the institution, or both, does not provide assurance that scrutiny 
can responsibly be waived for those reasons.
    Section 498(i)(3) of the HEA does provide that the transfer of the 
interest of an owner upon his or her death to a family member or to a 
current owner may be excluded from its purview. This exclusion would 
apply readily to the kind of unexpected transfers of control that would 
occur of necessity upon the death of an actively-managing principal of 
an institution owned by a closely-held corporation. However, the 
rationale for deferring to this humanitarian objective of facilitating 
a smooth transition in this narrow circumstance does not support 
waiving otherwise-mandated scrutiny in a broader range of transfers 
involving corporations that are not closely held, or planned transfers 
to those who have neither an ownership interest nor any managerial 
involvement in the institution. The Secretary considers it prudent to 
limit the waiver at this time only to those transfers of the interest 
of a deceased or retiring owner either to one who is a current manager 
and owner of the institution or to an immediate family member, and to 
evaluate the consequences of this kind of waiver, before considering 
further waivers.
    Changes: The regulation is changed to adopt the same description of 
the family of the owner as that used in Sec. 600.31(f).
    Comment: Most commenters welcomed the adoption of bright-line tests 
for identifying changes of ownership and control, and the use of the 
acquisition or relinquishment of a 50 percent interest in the 
institution or its owner was generally agreed as a suitable line. Some 
commenters stressed the importance of looking to control rather than 
simply percentage of ownership interest, and urged that a transfer of 
ownership interest between active and passive investors be disregarded 
if the transfer did not change the control of the institution.
    Discussion: In proposing that the term ``control'' as used in 
section 498(i) of the HEA and current regulations be interpreted with 
reference to SEC regulations, 17 CFR part 230.405, the Secretary 
intended to recognize that ``the power to direct or cause the direction 
of the management and policies, whether through the ownership of voting 
securities, by contract, or otherwise,'' included the power held by a 
managing partner or active investor to effectively direct the decisions 
and policies of the partnership or corporation. Therefore, the intent 
and effect of the proposed rule was to recognize that a transfer of an 
ownership interest to one who holds some ownership interest and who 
already had the power to direct the management of the entity does not 
constitute a change of ownership resulting in a change in control. Such 
transfers do not fall within the purview of this section.
    Although there appeared to be general support for adoption of the 
50 percent standard for identifying the possession of ownership and 
control of a closely-held corporation, the manner in which this was 
described suggested some need to reaffirm how the test would actually 
apply.
    In interpreting section 498(i) of the HEA, which does not itself 
define change of ownership resulting in a change in control, but gives 
as examples of such changes a list taken almost verbatim from 
Department regulations in effect for many years, the Secretary 
considers Congress to have intended that the mandate of section 498(i) 
of the HEA be applied in situations that would have triggered changes 
under the Department's regulations. Like the SEC definition of control, 
with which businessmen and practitioners can be expected to be already 
thoroughly familiar, both the proposed rule and current Department 
regulations focus on the acquisition--through ``any action''--of ``new 
authority to control the actions of the institution'' by one with a 
legal or beneficial ownership interest in the entity. A person may 
already have acquired an ownership interest and then acquire such new 
authority, or may in a single transaction acquire both an ownership 
interest and control. In either case, the transaction changes the 
control group for that institution to a degree that warrants the 
scrutiny mandated in section 498(i) of the HEA. Actions by which a 
person who has no legal or beneficial ownership interest gains or loses 
``control'' are not changes of ownership and control within the meaning 
of the regulation unless the person acquires an ownership interest in 
that action.
    Therefore, the 50-percent test is simply meant to identify those 
situations in which a person becomes owner or controller of the 
majority of the voting stock of a closely-held corporation. Conversely, 
the power to direct the management and decisions of the corporation can 
reasonably be presumed to change, and therefore to warrant scrutiny of 
the continued capability of the institution, when a person who held 
control of the majority of the stock loses that control, even if no 
other single person thereby gains that control. The test is met 
therefore when a person with an ownership interest in any amount 
acquires control of 50 percent of the outstanding voting stock of the 
corporation, or when a person who has an ownership interest and control 
of 50 percent of the voting stock relinquishes that degree of control. 
Very small changes in ownership and/or control can be enough to change 
control. To control a closely-held corporation, a person who already 
holds an ownership interest need not acquire an additional 50 percent 
share in order to control the corporation; a shareholder with ownership 
or control of 49 percent of the voting stock need only acquire either 
ownership or control of another percent of that stock to achieve at 
very least equal power with any other person, and by acquiring an added 
two percent, would hold greater power than any other person to direct 
the management and policies of the corporation. Relinquishing those 
minor shares of control results in the person having less than control 
of a majority of the voting stock of the corporation, and causes a 
change of ownership and control of the corporation.
    Changes: The regulation is modified to state that a change of 
ownership and control of a closely-held corporation occurs when a 
person who holds or acquires a legal or beneficial ownership interest 
in that corporation acquires or relinquishes control of 50 percent or 
more of the total outstanding voting stock of the corporation.
    Comments: Commenters generally agreed that for those corporations 
whose stock is registered with the SEC, using the events that would 
constitute a change of control of the corporation so as to trigger an 
obligation to file an SEC Form 8-K would be a suitable bright line for 
identifying changes of ownership and control within the meaning of 
section 498(i) of the HEA for institutions owned by those corporations. 
Commenters differed in their reactions to the proposal to adopt a 25 
percent ownership interest with actual control as the test for 
corporations that are neither closely held nor registrants with the 
SEC. Still others thought that the 25 percent test should be used even 
for SEC registered corporations. Other commenters believed that the 50 
percent test applied to closely-held corporations should be used for 
all others as well.
    Discussion: As noted earlier and as apparent from a number of the 
comments, SEC registrants already have an obligation, with which they 
are presumably comfortable and familiar, to notify the SEC when 
management identifies a change of control, which presumably is 
invariably accompanied by, or presupposes, the acquisition of an 
ownership interest. Because of this obvious familiarity of the affected 
parties, the relative similarities of the objectives of the two rules, 
and the difficulty in creating any new bright line that would be 
meaningful in this area, adopting the SEC test makes good sense for 
publicly-traded corporations.
    For corporations that are neither closely held nor publicly traded, 
creating a bright line is difficult, and it is desirable therefore to 
use, to the extent practical, regulatory standards that have already 
applied to this category of institutions. As the Secretary noted in 
proposing the rule, Department regulations have recognized that a 
person who holds or acquires the power to vote a 25 percent ownership 
interest may reasonably be presumed to have the ability to ``affect 
substantially the actions of the institution.'' (See 34 CFR part 
668.13(c)(5)(i), [or, in the words of the proposed Sec. 668.15(c)(1), 
(f)(2), to ``exercise substantial control over an institution.'' 
February 28, 1994, 59 FR 9568-69].) ``Substantial'' control may differ 
from control, and the presumptions in that section are warranted for 
persons with records of misfeasance with title IV, HEA program funds, 
but may not warrant the disruption of mandated scrutiny for transfers 
of ownership and control involving other persons. Because of the wide 
variety of circumstances and institutions that may be neither closely 
held nor publicly traded, the use of this same bright line where it is 
also accompanied by real control--judged by the facts of the particular 
case--seems a fair test that should be consistent with, and build on, 
current standards. Acquisition of a 25 percent ownership interest, or 
the right to vote such an interest, with actual control, constitutes a 
change within the meaning of section 498(i) of the HEA for these 
corporations. Holding or acquiring such an ownership share would not 
constitute a change of control if another person nevertheless had the 
power to control the corporation.
    Changes: The regulation treats the change of control of a 
registrant with the SEC as a change of ownership and control within the 
meaning of section 498(i) of the HEA. For other corporations not 
closely held, the regulation treats as a change of ownership and 
control any action by which a person who has or thereby acquires a 
legal or beneficial ownership interest in that corporation obtains both 
ownership of 25 percent of the voting stock of the corporation, or the 
right under a proxy, power of attorney, or similar agreement to vote 
that share, and actual control. Conversely, relinquishing that control 
would also constitute a change within the meaning of this section.
    Comment: Some commenters believe that a change from a for-profit to 
a nonprofit status should not be considered a change of ownership and 
control within the meaning of section 498(i) of the HEA at all; others 
thought that so long as management remained the same, or the facility, 
staff, and management remained the same, that the regulations should 
not treat changes in tax-filing status as significant under section 
498(i) of the HEA. Other commenters felt strongly that a change from 
for-profit to nonprofit status should be considered a change of 
ownership and control within the scope of this section, and noted the 
various changes already made in the Higher Education Amendments of 
1992, and in particular those proposed in regulations, that were 
designed to prevent program weaknesses and abuse among for-profit 
institutions. The commenter stated that these measures would readily be 
frustrated by unscrutinized conversion to nonprofit status, and would 
be contrary to the objectives of increasing protection for students and 
the public. The commenter believed that there was little reason to 
expect that the institution would improve its financial strength by 
such a conversion, and that it may in fact have increased its 
liabilities in the process, yet under the proposed financial 
responsibility standards, the school upon conversion would claim the 
benefit of a more lenient financial responsibility test than that which 
it would have faced had it remained a for-profit entity.
    Discussion: The Secretary recognizes that institutions that change 
from for-profit to nonprofit status may well retain the very same 
faculty, management, programs and facilities. The very fact that the 
institution retains these characteristics through the conversion, 
however, points out the logic of ensuring that section 498(i) of the 
HEA be applied to these conversions in a way that is consistent with 
congressional intent to impose a range of precautions and restrictions 
on for-profit vocational schools.
    Based on the strong congressional intent evidenced in these 
statutory changes to restrict title IV, HEA program participation by 
proprietary trade schools, the Secretary considers it reasonable to 
treat changes in business form by such institutions to a status to 
which those restrictions do not necessarily apply as significant 
changes warranting the same scrutiny section 498(i) of the HEA dictates 
for other, perhaps far less consequential changes in governance by 
schools. Moreover, a change from taxable to nonprofit, tax-exempt 
status contains sufficient elements of a change in ownership and 
control to fall within the scope of section 498(i) of the HEA. Although 
changes in the form of incorporation from for-profit to nonprofit are 
governed by a variety of State laws, only those nonprofit organizations 
that meet the further restrictions of section 501(c)(3) of the Internal 
Revenue Code qualify to participate in the title IV, HEA programs as 
nonprofit institutions. (See 34 CFR 600.2 and 600.6(a).) To so qualify, 
a corporation must not merely ensure that its net earnings do not 
benefit private individuals, but that, unlike a general corporation 
that may engage in any lawful business, this nonprofit institution must 
be organized and operated exclusively for educational or other 
qualifying purposes. Furthermore, unlike other corporations, including 
those nonprofit institutions that are not tax-exempt, the incorporators 
or shareholders must forego any residual claim to a distribution of 
corporate assets upon dissolution of the corporation. Acceptance of 
these restrictions include relinquishment both of ownership rights and 
the independence in choice of business objectives and method of 
operation formerly enjoyed.
    Therefore, although a corporation may affect the change in form 
from taxable to tax-exempt, nonprofit status with little formality, and 
may not be required, under local law, to reconstitute itself as a new 
or different corporation, these consequences of the change make it a 
change cognizable under section 498(i) of the HEA.
    The Secretary is charged by section 498(h)(1)(B)(ii) of the HEA 
with provisionally certifying institutions that undergo a change of 
ownership and control. Provisional certification means, as the 
Department has spelled out in proposed Sec. 668.13(c)(4)(ii), 59 FR 
9564, certification subject to conditions, and the change from for-
profit to nonprofit status warrants adopting as those conditions of the 
required provisional certification those restrictions that would have 
applied to the institution had it remained a for-profit entity. The 
Secretary therefore expects to include such provisions for a limited 
period in certifications given to converting schools.
    Changes: The regulation clarifies that a change from a taxable to a 
tax-exempt entity that qualifies under 501(c)(3) of the Internal 
Revenue Code, or vice versa, constitutes a change of ownership and 
control under this section of the regulations.

Section 600.32  Eligibility of Additional Locations

    Comments: Nine commenters expressed concern that the provisions 
governing the acquisition of an institution that owes a liability on 
improperly expended or unspent title IV, HEA program funds would 
discourage the practice of ``teaching out.'' A commenter suggested that 
the Secretary should not apply the ``two-year rule'' to the acquisition 
of an institution owing a liability on title-IV, HEA program funds, 
even if the liability is not being paid properly. Another commenter 
suggested that the Secretary make clear that the eligibility of 
additional locations under this section is also subject to the 
provisions of Secs. 600.8 (concerning the treatment of branch campuses) 
and 600.10 (which contains provisions governing the date, extent, 
duration, and consequences of the eligibility of an institution with 
respect to the institution's locations).
    Discussion: The Secretary does not agree with the first two 
commenters for the same reasons that were given by the Secretary when 
this provision was originally published as a final regulation in the 
Federal Register of July 31, 1991. (See 56 FR 36685.) In the three 
years since the implementation of those regulations, the Secretary has 
seen no evidence that the provisions discourage ``teach-outs'' to 
students, or that the application of the ``two-year rule'' has not 
served its purpose. The Secretary agrees with the last commenter that 
clarification is necessary with regard to the relationship of this 
section to Secs. 600.8 and 600.10.
    Changes: This section has been revised to make clear that the 
provisions of Secs. 600.8 and 600.10 also apply to the eligibility of 
additional locations.

Section 600.40  Loss of Eligibility

    Comments: A number of commenters suggested that to avoid an 
institution's sudden closure and the consequent interruption of the 
education of currently enrolled students, there should be some 
provision for those students to receive aid to complete their 
educational program even after the institution has lost its 
eligibility.
    Discussion: Under Sec. 668.25 of the current Student Assistance 
General Provisions regulations, and proposed 34 CFR 668.26 (see 59 FR 
pages 9580-9581) that will go into effect on July 1, 1994, provisions 
have been made to pay title IV, HEA program funds to students enrolled 
in institutions that are terminated. Under those sections, if 
termination became effective during a payment period and a student had 
received a commitment to receive title-IV, HEA Program funds for that 
payment period before the effective date of termination, the student 
would receive those funds for that payment period as long as the 
institution continued to provide instruction to the student during that 
payment period.
    Changes: None.
    Comments: Several commenters suggested that the end of the 
applicable award or fiscal year should not be used as the effective 
date for loss of eligibility as a result of a violation of the 
requirement to derive more than 85 percent of an institution's revenues 
from title IV, HEA program funds. They pointed out that the loss of 
eligibility has the effect of causing an institution to be liable for 
any title IV, HEA program funds disbursed or delivered after that date 
but before a compliance audit substantiating the institution's 
calculations is performed. These commenters suggested that institutions 
not be held liable for any such disbursements or deliveries of those 
funds made before the date on which calculations are audited.
    Discussion: These comments have been addressed in connection with 
Sec. 600.5.
    Changes: None.

Section 600.41  Termination and Emergency Action Proceedings

    Comments: Three commenters supported the Secretary's proposed 
position in this section to use a show-cause proceeding for 
terminations of institutional eligibility only in instances where 
neither the facts nor the law would be in dispute during the 
proceeding. Two commenters objected to the use of a show-cause 
proceeding (in place of a proceeding under 34 CFR part 668, subpart G) 
for terminations of institutional eligibility for a violation under 
Secs. 600.5(a)(8) or 600.7(a), claiming that violations of these 
provisions could involve questions of fact that are in dispute. A 
commenter also objected to the use of a show-cause proceeding (in place 
of a proceeding under 34 CFR part 668, subpart G) for terminations for 
loss of accreditation, preaccreditation, or State legal authorization. 
One commenter suggested that the Secretary always use a proceeding 
under 34 CFR part 668, subpart G, for violations of provisions in part 
600. One commenter suggested that the Secretary always use a show-cause 
proceeding, rather than a proceeding under 34 CFR part 668, subpart G, 
for terminations of institutional eligibility.
    Discussion: The Secretary reiterates that because an institution 
itself reports that it is not in compliance with the applicable 
eligibility requirements of Secs. 600.5 or 600.7, there is no question 
of fact in dispute in a termination action taken on those grounds. The 
Secretary continues to believe that a termination proceeding under 34 
CFR part 668, subpart G, is neither necessary nor cost effective when 
facts are not in dispute. The Secretary agrees, however, that it is 
appropriate to use the provisions of 34 CFR part 668, subpart G, when 
the Secretary undertakes to terminate an institution's eligibility when 
the facts giving rise to that termination are in dispute. However, even 
with regard to these institutions, the Secretary may take an emergency 
action against such an institution if that action is considered 
warranted, and if the institution challenges the emergency action, that 
dispute is heard in a show-cause proceeding.
    Changes: None.

Regulatory Flexibility Act Certification

    Comment: In the NPRM, the Secretary certified that the proposed 
regulations would not have a significant economic impact on a 
substantial number of small entities. Several commenters suggested that 
this statement was erroneous and that these rules will definitely have 
a significant impact on institutions, especially the smaller ones that 
are not computerized.
    Discussion: The Secretary recognizes that the regulations will have 
an impact on small institutions. However, based on Department estimates 
of the impact, the Secretary does not believe that the impact will be 
disproportionately or economically significant. The Secretary therefore 
reaffirms his certification that the regulations would not have a 
significant economic impact or a substantial significant economic 
impact on a substantial number of small entities. To the extent that 
commenters are able to provide additional information on the economic 
impact of the regulations, the Secretary invites the commenters to 
submit this information so that it may be considered in reviewing the 
regulations to reduce regulatory burden.
    Changes: None.

Paperwork Reduction Act of 1980

    Comment: In the NPRM, the Secretary provided an estimate for the 
total number of burden hours associated with these regulations. Several 
commenters suggested that this estimate was understated.
    Discussion: In estimating the total number of burden hours 
associated with these regulations, the Secretary considers the best 
information that is available to the Department and computes the 
estimate based on that information. The commenters have complained 
about the burden but have not provided sufficient additional 
information to support a revised computation of burden hours. The 
Secretary appreciates the comments and recognizes that the requirements 
of the statute and regulations impose a burden. As a result of the 
comments and revisions to the regulations, the Department is modifying 
the burden estimates. The total annual reporting and recordkeeping 
burden that would result from the collection of the information is 
20,375 burden hours for this package.
    Changes: None.

Executive Order 12866

    These final regulations have been reviewed in accordance with 
Executive Order 12866. Under the terms of the order the Secretary has 
assessed the potential costs and benefits of this regulatory action.
    The potential costs associated with the final regulations are those 
resulting from statutory requirements and those determined by the 
Secretary to be necessary for administering this program effectively 
and efficiently. Burdens specifically associated with information 
collection requirements were identified and explained in the NPRM.
    In assessing the potential costs and benefits--both quantitative 
and qualitative--of these regulations, the Secretary has determined 
that the benefits of the regulations justify the costs.
    The Secretary has also determined that this regulatory action does 
not unduly interfere with State, local, and tribal government in the 
exercise of their governmental functions.

Paperwork Reduction Act of 1980

    Sections 600.5, 600.7, 600.10, 600.20, 600.30, and 600.31, 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)).
    These regulations contain records that will affect postsecondary 
institutions that wish to participate in the title IV, HEA programs. An 
estimate of the total annual reporting and recordkeeping burden that 
will result from the collection of the information is 1.96 hours per 
response for 10,720 respondents for a total burden of 21,035 burden 
hours for this package.
    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, DC 20503; Attention: Daniel J. Chenok. 
Comments on this burden estimate should be submitted by May 31, 1994.

Assessment of Educational Impact

    In the NPRM, the Secretary requested comments on whether the 
proposed regulations would require transmission of information that is 
being gathered by or is available from any other agency or authority of 
the United States.
    Based on the response to the proposed rules and on its own review, 
the Department has determined that the regulations in this document do 
not require transmission of information that is being gathered by or is 
available from any other agency or authority of the United States.

List of Subjects in 34 CFR Part 600

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

(Catalog of Federal Domestic Assistance Number does not apply)

    Dated: April 20, 1994.
Richard W. Riley,
Secretary of Education.

    The Secretary amends part 600 of title 34 of the Code of Federal 
Regulations as follows:

PART 600--INSTITUTIONAL ELIGIBILITY UNDER THE HIGHER EDUCATION ACT 
OF 1965, AS AMENDED

    1. The authority citation for part 600 is revised to read as 
follows:

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

    2. Subparts A through D of part 600 are revised to read as follows:

Subpart A--General

Sec.
600.1  Scope.
600.2  Definitions.
600.3  [Reserved].
600.4  Institution of higher education.
600.5  Proprietary institution of higher education.
600.6  Postsecondary vocational institution.
600.7  Conditions of institutional ineligibility.
600.8  Treatment of a branch campus.
600.9  Written agreement between an eligible institution and another 
institution or organization.
600.10  Date, extent, duration, and consequence of eligibility.
600.11  Special rules regarding institutional accreditation or 
preaccreditation.

Subpart B--Procedures for Establishing Eligibility

600.20  Application procedures.
600.21  Eligibility notification.

Subpart C--Maintaining Eligibility

600.30  Institutional notification requirements.
600.31  Change in ownership resulting in a change of control.
600.32  Eligibility of additional locations.

Subpart D--Loss of Eligibility

600.40  Loss of eligibility.
600.41  Termination and emergency action proceedings.

Subpart A--General


Sec. 600.1  Scope.

    This part establishes the rules and procedures that the Secretary 
uses to determine whether an educational institution qualifies in whole 
or in part as an eligible institution of higher education under the 
Higher Education Act of 1965, as amended (HEA). An eligible institution 
of higher education may apply to participate in programs authorized by 
the HEA (HEA programs).

(Authority: 20 U.S.C. 1088, 1094, 1099b, 1099c, and 1141)


Sec. 600.2  Definitions.

    The following definitions apply to terms used in this part:
    Accredited: The status of public recognition that a nationally 
recognized accrediting agency grants to an institution or educational 
program that meets the agency's established requirements.
    Award year: The period of time from July 1 of one year through June 
30 of the following year.
    Branch Campus: A location of an institution that is geographically 
apart and independent of the main campus of the institution. The 
Secretary considers a location of an institution to be independent of 
the main campus if the location--
    (1) Is permanent in nature;
    (2) Offers courses in educational programs leading to a degree, 
certificate, or other recognized educational credential;
    (3) Has its own faculty and administrative or supervisory 
organization; and
    (4) Has its own budgetary and hiring authority.
    Clock hour: A period of time consisting of--
    (1) A 50- to 60-minute class, lecture, or recitation in a 60-minute 
period;
    (2) A 50- to 60-minute faculty-supervised laboratory, shop 
training, or internship in a 60-minute period; or
    (3) Sixty minutes of preparation in a correspondence course.
    Correspondence course: (1) A ``home study'' course provided by an 
institution under which the institution provides instructional 
materials, including examinations on the materials, to students who are 
not physically attending classes at the institution. When students 
complete a portion of the instructional materials, the students take 
the examinations that relate to that portion of the materials, and 
return the examinations to the institution for grading.
    (2) A home study course that provides instruction in whole or in 
part through the use of video cassettes or video discs in an award year 
is a correspondence course unless the institution also delivers the 
instruction on the cassette or disc to students physically attending 
classes at the institution during the same award year.
    (3) A course at an institution that may otherwise satisfy the 
definition of a ``telecommunications course'' is a correspondence 
course if the sum of telecommunications and other correspondence 
courses offered by that institution equals or exceeds 50 percent of the 
total courses offered at that institution.
    (4) If a course is part correspondence and part residential 
training, the Secretary considers the course to be a correspondence 
course.
    Educational program: A legally authorized postsecondary program of 
organized instruction or study that leads to an academic, professional, 
or vocational degree, or certificate, or other recognized educational 
credential. However, the Secretary does not consider that an 
institution provides an educational program if the institution does not 
provide instruction itself (including a course of independent study), 
but merely gives credit for one or more of the following: instruction 
provided by other institutions or schools; examinations provided by 
agencies or organizations; or other accomplishments such as ``life 
experience.''
    Eligible institution: An institution that--
    (1) Qualifies as--
    (i) An institution of higher education, as defined in Sec. 600.4;
    (ii) A proprietary institution of higher education, as defined in 
Sec. 600.5; or
    (iii) A postsecondary vocational institution, as defined in 
Sec. 600.6; and
    (2) Meets all the other applicable provisions of this part.
    Federal Family Education Loan (FFEL) programs: The loan programs 
(formerly called the Guaranteed Student Loan (GSL) programs) authorized 
by title IV-B of the HEA, including the Federal Stafford Loan, Federal 
PLUS, Federal Supplemental Loans for Students (Federal SLS), and 
Federal Consolidation Loan programs, in which lenders use their own 
funds to make loans to enable students or their parents to pay the 
costs of the students' attendance at eligible institutions. The Federal 
Stafford Loan, Federal PLUS, Federal SLS, and Federal Consolidation 
Loan programs are defined in 34 CFR part 668.
    Incarcerated student: A student who is serving a criminal sentence 
in a Federal, State, or local penitentiary, prison, jail, reformatory, 
work farm, or other similar correctional institution. A student is not 
considered incarcerated if that student is in a half-way house or home 
detention or is sentenced to serve only weekends.
    Legally authorized: The legal status granted to an institution 
through a charter, license, or other written document issued by the 
appropriate agency or official of the State in which the institution is 
physically located.
    Nationally recognized accrediting agency: An agency or association 
that the Secretary recognizes as a reliable authority to determine the 
quality of education or training offered by an institution or a program 
offered by an institution. The Secretary recognizes these agencies and 
associations under the provisions of 34 CFR part 602 and publishes a 
list of the recognized agencies in the Federal Register.
    Nonprofit institution: An institution that--
    (1) Is owned and operated by one or more nonprofit corporations or 
associations, no part of the net earnings of which benefits any private 
shareholder or individual;
    (2) Is legally authorized to operate as a nonprofit organization by 
each State in which it is physically located; and
    (3) Is determined by the U.S. Internal Revenue Service to be an 
organization to which contributions are tax-deductible in accordance 
with section 501(c)(3) of the Internal Revenue Code (26 U.S.C. 
501(c)(3)).
    One-academic-year training program: An educational program that is 
at least one academic year as defined under 34 CFR 668.2.
    Preaccredited: A status that a nationally recognized accrediting 
agency, recognized by the Secretary to grant that status, has accorded 
an unaccredited public or private nonprofit institution that is 
progressing toward accreditation within a reasonable period of time.
    Recognized equivalent of a high school diploma: The following are 
the equivalent of a high school diploma--
    (1) A General Education Development Certificate (GED);
    (2) A State certificate received by a student after the student has 
passed a State-authorized examination that the State recognizes as the 
equivalent of a high school diploma;
    (3) An academic transcript of a student who has successfully 
completed at least a two-year program that is acceptable for full 
credit toward a bachelor's degree; or
    (4) For a person who is seeking enrollment in an educational 
program that leads to at least an associate degree or its equivalent 
and who has not completed high school but who excelled academically in 
high school, documentation that the student excelled academically in 
high school and has met the formalized, written policies of the 
institution for admitting such students.
    Recognized occupation: An occupation that is--
    (1) Listed in an ``occupational division'' of the latest edition of 
the Dictionary of Occupational Titles, published by the U.S. Department 
of Labor; or
    (2) Determined by the Secretary in consultation with the Secretary 
of Labor to be a recognized occupation.
    Regular student: A person who is enrolled or accepted for 
enrollment at an institution for the purpose of obtaining a degree, 
certificate, or other recognized educational credential offered by that 
institution.
    Secretary: The Secretary of the Department of Education or an 
official or employee of the Department of Education acting for the 
Secretary under a delegation of authority.
    State: A State of the Union, American Samoa, the Commonwealth of 
Puerto Rico, the District of Columbia, Guam, the Trust Territory of the 
Pacific Islands, the Virgin Islands, and the Commonwealth of the 
Northern Mariana Islands.
    Telecommunications course: A course offered in an award year 
principally through the use of television, audio, or computer 
transmission, including open broadcast, closed circuit, cable, 
microwave, or satellite, audio conferencing, computer conferencing, or 
video cassettes or discs. The term does not include a course that is 
delivered using video cassettes or disc recordings unless that course 
is delivered to students physically attending classes at an institution 
providing the course during the same award year. If the course does not 
qualify as a telecommunications course it is considered to be a 
correspondence course, as provided for in paragraph (c) of the 
definition of correspondence course in this section.
    Title IV, HEA program: Any of the student financial assistance 
programs listed in 34 CFR 668.1(c).

(Authority: 20 U.S.C. 1071 et seq., 1078-2, 1088, 1099b, 1099c, and 
1141 and 26 U.S.C. 501(c).)


Sec. 600.3  [Reserved]


Sec. 600.4  Institution of higher education.

    (a) An institution of higher education is a public or private 
nonprofit educational institution that--
    (1) Is in a State, or for purposes of the Federal Pell Grant, 
Federal Supplemental Educational Opportunity Grant, Federal Work-Study, 
and Federal TRIO programs may also be located in the Federated States 
of Micronesia or the Marshall Islands;
    (2) Admits as regular students only persons who--
    (i) Have a high school diploma;
    (ii) Have the recognized equivalent of a high school diploma; or
    (iii) Are beyond the age of compulsory school attendance in the 
State in which the institution is physically located;
    (3) Is legally authorized to provide an educational program beyond 
secondary education in the State in which the institution is physically 
located;
    (4) Provides an educational program--
    (i) For which it awards an associate, baccalaureate, graduate, or 
professional degree;
    (ii) That is at least a two-academic-year program acceptable for 
full credit toward a baccalaureate degree; or
    (iii) That is at least a one-academic-year training program that 
leads to a certificate, degree, or other recognized educational 
credential and prepares students for gainful employment in a recognized 
occupation; and
    (5) Is--
    (i) Accredited or preaccredited; or
    (ii) Approved by a State agency listed in the Federal Register in 
accordance with 34 CFR part 603, if the institution is a public 
postsecondary vocational educational institution that seeks to 
participate only in Federal student assistance programs.
    (b) An institution is physically located in a State if it has a 
campus or other instructional site in that State.
    (c) The Secretary does not recognize the accreditation or 
preaccreditation of an institution unless the institution agrees to 
submit any dispute involving the final denial, withdrawal, or 
termination of accreditation to binding arbitration before initiating 
any other legal action.

(Authority: 20 U.S.C. 1094, 1099b, and 1141(a))


Sec. 600.5  Proprietary institution of higher education.

    (a) A proprietary institution of higher education is an educational 
institution that--
    (1) Is not a public or private nonprofit educational institution;
    (2) Is in a State;
    (3) Admits as regular students only persons who--
    (i) Have a high school diploma;
    (ii) Have the recognized equivalent of a high school diploma; or
    (iii) Are beyond the age of compulsory school attendance in the 
State in which the institution is physically located;
    (4) Is legally authorized to provide an educational program beyond 
secondary education in the State in which the institution is physically 
located;
    (5) Provides an eligible program of training, as defined in 34 CFR 
668.8, to prepare students for gainful employment in a recognized 
occupation;
    (6) Is accredited;
    (7) Has been in existence for at least two years; and
    (8) Has no more than 85 percent of its revenues derived from title 
IV, HEA program funds, as determined under paragraph (d) of this 
section.
    (b)(1) The Secretary considers an institution to have been in 
existence for two years only if--
    (i) The institution has been legally authorized to provide, and has 
provided, a continuous educational program to prepare students for 
gainful employment in a recognized occupation during the 24 months 
preceding the date of its eligibility application; and
    (ii) The educational program that the institution provides on the 
date of its eligibility application is substantially the same in length 
and subject matter as the program that the institution provided during 
the 24 months preceding the date of its eligibility application.
    (2)(i) The Secretary considers an institution to have provided a 
continuous educational program during the 24 months preceding the date 
of its eligibility application even if the institution did not provide 
that program during normal vacation periods, or periods when the 
institution temporarily closed due to a natural disaster that directly 
affected the institution or the institution's students.
    (ii) The Secretary considers an institution to have satisfied the 
provisions of paragraph (b)(1)(ii) of this section if the institution 
substantially changed the subject matter of the educational program it 
provided during that 24-month period because of new technology or the 
requirements of other Federal agencies.
    (3) In determining whether an applicant institution satisfies the 
requirement contained in paragraph (b)(1) of this section, the 
Secretary--
    (i) Counts any period during which the applicant institution 
qualified as a branch campus; and
    (ii) Except as provided in paragraph (b)(3)(i) of this section, 
does not count any period during which the applicant institution was a 
part of another eligible proprietary institution of higher education, 
postsecondary vocational institution, or vocational school.
    (c) An institution is physically located in a State if it has a 
campus or other instructional site in that State.
    (d)(1) An institution satisfies the requirement contained in 
paragraph (a)(8) of this section by examining its revenues under the 
following formula: 

  Title IV, HEA program funds the institution used to satisfy tuition,  
           fees, and other institutional charges to students.           
                                                                        
------------------------------------------------------------------------
                                                                        
The sum of revenues generated by the institution from: Tuition, fees,   
 and other institutional charges for students enrolled in eligible      
 programs as defined in 34 CFR 668.8; and activities conducted by the   
 institution, to the extent not included in tuition, fees, and other    
 institutional charges, that are necessary for the education or training
 of its students who are enrolled in those eligible programs.           
                                                                        


    (2) Under the fraction contained in paragraph (d)(1) of this 
section--
    (i) Except as provided in paragraph (h) of this section, the title 
IV, HEA program funds included in the numerator and the revenue 
included in the denominator are the amount of title IV, HEA program 
funds and revenues received by the institution during the institution's 
last complete fiscal year;
    (ii) The title IV, HEA program funds included in the numerator do 
not include State Student Incentive Grant (SSIG) or Federal Work-Study 
(FWS) program funds. (The SSIG and FWS programs are defined in 34 CFR 
668.2);
    (iii) The title IV, HEA program funds included the numerator and 
revenue included the denominator do not include any refunds paid to or 
on behalf of students under the institution's refund policy;
    (iv) The amount charged for books, supplies, and equipment is not 
included in the numerator or the denominator unless the amount is 
included in tuition, fees, or other institutional charges;
    (v) With regard to the numerator, any title IV, HEA program funds 
disbursed or delivered to or on behalf of a student shall be presumed 
to be used to pay the student's tuition, fees, or other institutional 
charges, regardless of whether the institution credits those funds to 
the student's account or pays those funds directly to the student, 
except for tuition, fees, and other institutional charges that were 
satisfied by--
    (A) Grant funds provided by non-Federal public agencies, or private 
sources independent of the institution; or
    (B) Funds provided under a contractual arrangement described in 
Sec. 600.7(d); and
    (vi) With regard to the denominator, revenue generated by the 
institution from other activities conducted by the institution that are 
necessary for its students' education or training includes only revenue 
for those activities that--
    (A) Are conducted on campus or at a facility under the control of 
the institution;
    (B) Are performed under the supervision of a member of the 
institution's faculty; and
    (C) Are required to be performed by all students in a specific 
educational program at the institution.
    (e)(1) An institution shall substantiate the calculation required 
in paragraph (a)(8) of this section by having the certified public 
accountant who prepares its audited financial statement under 34 CFR 
668.15 or its title IV, HEA program compliance audit under 34 CFR 
668.23 report on the accuracy of the institution's calculation based on 
performing an agreed-upon procedures attestation engagement in 
accordance with the American Institute of Certified Public Accountants 
(AICPA's) Statement on Standards for Attestation Engagements, and 
include that report as part of the audit report.
    (2) If the certified public accountant cannot attest to the 
accuracy of the institution's calculations, the Secretary presumes that 
the institution does not satisfy the 85 percent rule and therefore does 
not satisfy the requirement contained in paragraph (a)(8) of this 
section.
    (3) The institution may rebut this presumption if, no later than 30 
days after the date on which the audit report that includes the 
attestation engagement report was submitted, the institution submits a 
calculation to the Secretary indicating that it satisfies the 
provisions of paragraph (a)(8) of this section, and the certified 
public accountant who could not attest to the accuracy of its previous 
calculation, attests to the accuracy of those calculations.
    (f) Except as provided in paragraph (h) of this section, an 
institution shall notify the Secretary if it fails to satisfy the 
requirement contained in paragraph (a)(8) of this section within 90 
days following the end of the fiscal year used in paragraph (d)(1) of 
this section.
    (g) If an institution loses its eligibility because it failed to 
satisfy the requirement contained in paragraph (a)(8) of this section, 
to regain its eligibility it must demonstrate compliance with all 
eligibility requirements for at least the fiscal year following the 
fiscal year used in paragraph (d)(1) of this section.
    (h) Special provisions for the 1994-95 award year. As of July 1, 
1994:
    (1) If an institution's latest complete fiscal year ended during 
the period of October 1, 1993 through June 30, 1994, an institution 
shall use that fiscal year in paragraph (d)(1) of this section to 
determine whether the institution satisfies the requirement contained 
in paragraph (a)(8) of this section.
    (2) If an institution's latest complete fiscal year ended before 
October 1, 1993, the institution shall use as its latest fiscal year in 
paragraph (d)(1) of this section the fiscal year that ends between July 
1, 1994 and September 30, 1994 to determine whether the institution 
satisfies the requirement contained in paragraph (a)(8) of this 
section.
    (3) If an institution uses the fiscal year described in paragraph 
(h)(1) of this section as its latest fiscal year under paragraph (d)(1) 
of this section, the institution shall notify the Secretary by 
September 30, 1994 if it fails to satisfy the requirement contained in 
paragraph (a)(8) of this section.
    (4) If an institution uses the fiscal year described in paragraph 
(h)(2) of this section as its latest fiscal year under paragraph (d)(1) 
of this section, the institution shall notify the Secretary if it fails 
to satisfy the requirement contained in paragraph (a)(8) of this 
section within 90 days following the end of that fiscal year.
    (i) The Secretary does not recognize the accreditation of an 
institution unless the institution agrees to submit any dispute 
involving the final denial, withdrawal, or termination of accreditation 
to binding arbitration before initiating any other legal action.

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


Sec. 600.6  Postsecondary vocational institution.

    (a) A postsecondary vocational institution is a public or private 
nonprofit educational institution that--
    (1) Is in a State;
    (2) Admits as regular students only persons who--
    (i) Have a high school diploma;
    (ii) Have the recognized equivalent of a high school diploma; or
    (iii) Are beyond the age of compulsory school attendance in the 
State in which the institution is physically located;
    (3) Is legally authorized to provide an educational program beyond 
secondary education in the State in which the institution is physically 
located;
    (4) Provides an eligible program of training, as defined in 34 CFR 
668.8, to prepare students for gainful employment in a recognized 
occupation;
    (5) Is--
    (i) Accredited or preaccredited; or
    (ii) Approved by a State agency listed in the Federal Register in 
accordance with 34 CFR part 603, if the institution is a public 
postsecondary vocational educational institution that seeks to 
participate only in Federal assistance programs; and
    (6) Has been in existence for at least two years.
    (b)(1) The Secretary considers an institution to have been in 
existence for two years only if--
    (i) The institution has been legally authorized to provide, and has 
provided, a continuous education or training program to prepare 
students for gainful employment in a recognized occupation during the 
24 months preceding the date of its eligibility application; and
    (ii) The education or training program it provides on the date of 
its eligibility application is substantially the same in length and 
subject matter as the program it provided during the 24 months 
preceding the date of its eligibility application.
    (2)(i) The Secretary considers an institution to have provided a 
continuous education or training program during the 24 months preceding 
the date of its eligibility application even if the institution did not 
provide that program during normal vacation periods, or periods when 
the institution temporarily closed due to a natural disaster that 
affected the institution or the institution's students.
    (ii) The Secretary considers an institution to have satisfied the 
provisions of paragraph (b)(1)(ii) of this section if the institution 
substantially changed the subject matter of the educational program it 
provided during that 24-month period because of new technology or the 
requirements of other Federal agencies.
    (3) In determining whether an applicant institution satisfies the 
requirement contained in paragraph (b)(1) of this section, the 
Secretary--
    (i) Counts any period during which the applicant institution 
qualified as an eligible institution of higher education;
    (ii) Counts any period during which the applicant institution was 
part of another eligible institution of higher education, provided that 
the applicant institution continues to be part of an eligible 
institution of higher education;
    (iii) Counts any period during which the applicant institution 
qualified as a branch campus; and
    (iv) Except as provided in paragraph (b)(3)(iii) of this section, 
does not count any period during which the applicant institution was a 
part of another eligible proprietary institution of higher education or 
postsecondary vocational institution.
    (c) An institution is physically located in a State or other 
instructional site if it has a campus or instructional site in that 
State.
    (d) The Secretary does not recognize the accreditation or 
preaccreditation of an institution unless the institution agrees to 
submit any dispute involving the final denial, withdrawal, or 
termination of accreditation to binding arbitration before initiating 
any other legal action.

(Authority: 20 U.S.C. 1088 and 1094(c)(3))


Sec. 600.7  Conditions of institutional ineligibility.

    (a) General rule. For purposes of title IV of the HEA, an 
educational institution that otherwise satisfies the requirements 
contained in Secs. 600.4, 600.5, or 600.6 nevertheless does not qualify 
as an eligible institution under this part--
    (1) If for its latest complete award year--
    (i) More than 50 percent of the institution's courses were 
correspondence courses as calculated under paragraph (b) of this 
section;
    (ii) Fifty percent or more of the institution's regular enrolled 
students were enrolled in correspondence courses;
    (iii) Twenty-five percent or more of the institution's regular 
enrolled students were incarcerated;
    (iv) Fifty percent or more of its regular enrolled students had 
neither a high school diploma nor the recognized equivalent of a high 
school diploma, and the institution does provide a four-year or two-
year educational program for which it awards a bachelor's degree or 
associate degree, respectively;
    (2) The institution, or an affiliate of the institution that has 
the power, by contract or ownership interest, to direct or cause the 
direction of the management or policies of the institution, files for 
bankruptcy; or
    (3) The institution, its owner, or its chief executive officer--
    (i) Has pled guilty to, has pled nolo contendere to, or is found 
guilty of, a crime involving the acquisition, use, or expenditure of 
title IV, HEA program funds; or
    (ii) Has been judicially determined to have committed fraud 
involving title IV, HEA program funds.
    (b) Special provisions regarding correspondence courses and 
students--(1) Treatment of telecommunications courses. For purposes of 
paragraphs (a)(1) (i) and (ii) of this section, the Secretary considers 
a telecommunications course to be a correspondence course if the sum of 
telecommunications courses and other correspondence courses the 
institution provided during that award year equaled or exceeded 50 
percent of the total number of courses it provided during that year.
    (2) Calculating the number of courses. For purposes of paragraphs 
(a)(1) (i) and (ii) of this section--
    (i) A correspondence course may be a complete educational program 
offered by correspondence, or one course provided by correspondence in 
an on-campus (residential) educational program;
    (ii) A course must be considered as being offered once during an 
award year regardless of the number of times it is offered during that 
year; and
    (iii) A course that is offered both on campus and by correspondence 
must be considered two courses for the purpose of determining the total 
number of courses the institution provided during an award year.
    (3) Exceptions. (i) The provisions contained in paragraphs (a)(1) 
(i) and (ii) of this section do not apply to an institution that 
qualifies as a ``technical institute or vocational school used 
exclusively or principally for the provision of vocational education to 
individuals who have completed or left high school and who are 
available for study in preparation for entering the labor market'' 
under section 521(4)(C) of the Carl D. Perkins Vocational and Applied 
Technology Education Act.
    (ii) The Secretary waives the limitation contained in paragraph 
(a)(1)(ii) of this section for an institution that offers a 2-year 
associate-degree or a 4-year bachelor's-degree program if the students 
enrolled in the institution's correspondence courses receive no more 
than 5 percent of the title IV, HEA program funds received by students 
at that institution.
    (c) Special provisions regarding incarcerated students--(1) 
Exception. The Secretary may waive the prohibition contained in 
paragraph (a)(1)(iii) of this section, upon the application of an 
institution, if the institution is a nonprofit institution that 
provides four-year or two-year educational programs for which it awards 
bachelor's or associate degrees, respectively.
    (2) If the nonprofit institution that applies for a waiver consists 
solely of four-year or two-year educational programs for which it 
offers bachelor's or associate degrees, respectively, or both types of 
programs, the Secretary waives the prohibition contained in paragraph 
(a)(1)(iii) of this section for the entire institution.
    (3) If the nonprofit institution that applies for a waiver does not 
consist solely of four-year or two-year educational programs for which 
it offers bachelor's or associate degrees, respectively, or both types 
of programs, the Secretary waives the prohibition contained in 
paragraph (a)(1)(iii) of this section--
    (i) For the four-year and two-year programs that lead, 
respectively, to bachelor's and associate degrees; and
    (ii) For the other programs the institution offers, if the 
incarcerated regular students enrolled in those other programs have a 
completion rate of 50 percent or greater.
    (d) Special provision for a nonprofit institution if more than 50 
percent of its enrollment consists of students who do not have a high 
school diploma or its equivalent. (1) Subject to the provisions 
contained in paragraphs (d)(2) and (d)(3) of this section, the 
Secretary waives the limitation contained in paragraph (a)(1)(iv) of 
this section for a nonprofit institution if that institution 
demonstrates to the Secretary's satisfaction that it exceeds that 
limitation because it serves, through contracts with Federal, State, or 
local government agencies, significant numbers of students who do not 
have a high school diploma or its recognized equivalent.
    (2) Number of critical students. The Secretary grants a waiver 
under paragraph (d)(1) of this section only if no more than 40 percent 
of the institution's enrollment of regular students consists of 
students who--
    (i) Do not have a high school diploma or its equivalent; and
    (ii) Are not served through contracts described in paragraph (d)(3) 
of this section.
    (3) Contracts with Federal, State, or local government agencies. 
For purposes of granting a waiver under paragraph (d)(1) of this 
section, the contracts referred to must be with Federal, State, or 
local government agencies for the purpose of providing job training to 
low-income individuals who are in need of that training. An example of 
such a contract is a job training contract under the Job Training 
Partnership Act (JPTA).
    (e) Special provisions. (1) For purposes of paragraph (a)(1)of this 
section, when counting regular students, the institution shall--
    (i) Count each regular student without regard to the full-time or 
part-time nature of the student's attendance (i.e., ``head count'' 
rather than ``full-time equivalent'');
    (ii) Count a regular student once regardless of the number of times 
the student enrolls during an award year; and
    (iii) Determine the number of regular students who enrolled in the 
institution during the relevant award year by--
    (A) Calculating the number of regular students who enrolled during 
that award year; and
    (B) Excluding from the number of students in paragraph 
(e)(1)(iii)(A) of this section, the number of regular students who 
enrolled but subsequently withdrew or were expelled from the 
institution and were entitled to receive a 100 percent refund of their 
tuition and fees less any administrative fee that the institution is 
permitted to keep under its fair and equitable refund policy.
    (2) For the purpose of calculating a completion rate under 
paragraph (e)(3)(ii) of this section, the institution shall--
    (i) Determine the number of regular incarcerated students who 
enrolled in the other programs during the last completed award year;
    (ii) Exclude from the number of regular incarcerated students 
determined in paragraph (e)(2)(i) of this section, the number of those 
students who enrolled but subsequently withdrew or were expelled from 
the institution and were entitled to receive a 100 percent refund of 
their tuition and fees, less any administrative fee the institution is 
permitted to keep under the institution's fair and equitable refund 
policy;
    (iii) Exclude from the total obtained in paragraph (e)(2)(ii) of 
this section, the number of those regular incarcerated students who 
remained enrolled in the programs at the end of the applicable award 
year;
    (iv) From the total obtained in paragraph (e)(2)(iii) of this 
section, determine the number of regular incarcerated students who 
received a degree, certificate, or other recognized educational 
credential awarded for successfully completing the program during the 
applicable award year; and
    (v) Divide the total obtained in paragraph (e)(2)(iv) of this 
section by the total obtained in paragraph (e)(2)(iii) of this section 
and multiply by 100.
    (f)(1) If the Secretary grants a waiver to an institution under 
this section, the waiver extends indefinitely provided that the 
institution satisfies the waiver requirements in each award year.
    (2) If an institution fails to satisfy the waiver requirements for 
an award year, the institution becomes ineligible on June 30 of that 
award year.
    (g)(1) For purposes of paragraph (a)(1) of this section, and any 
applicable waiver or exception under this section, the institution 
shall substantiate the required calculations by having the certified 
public accountant who prepares its audited financial statement under 34 
CFR 668.15 or its title IV, HEA program compliance audit under 34 CFR 
668.23 report on the accuracy of the institution's calculation based on 
performing an agreed-upon procedures attestation engagement in 
accordance with the AICPA's Statement on Standards for Attestation 
Engagements, and include that report as part of the audit report.
    (2) If the certified public accountant cannot attest to the 
accuracy of the institution's calculations for purposes of paragraph 
(a)(1) of this section or any applicable waiver or exception under this 
section, the Secretary presumes that the institution lost its 
eligibility as a result of those provisions.
    (3) The institution may rebut this presumption if, no later than 30 
days after the date on which the audit report that includes the 
attestation engagement report was submitted, the institution submits a 
calculation to the Secretary indicating that it satisfies the 
provisions of paragraph (a)(8) of this section, and the certified 
public accountant who could not attest to the accuracy of its previous 
calculation, attests to the accuracy of those calculations.
    (h) Notice to the Secretary. An institution shall notify the 
Secretary--
    (1) By July 31 following the end of an award year if it falls 
within one of the prohibitions contained in paragraph (a)(1)of this 
section, or fails to continue to satisfy a waiver or exception granted 
under this section; or
    (2) Within 10 days if it falls within one of the prohibitions 
contained in paragraphs (a)(2) or (a)(3) of this section.
    (i) Regaining eligibility. (1) If an institution loses its 
eligibility because of one of the prohibitions contained in paragraph 
(a)(1) of this section, to regain its eligibility, it must 
demonstrate--
    (i) Compliance with all eligibility requirements;
    (ii) That it did not fall within any of the prohibitions contained 
in paragraph (a)(1) of this section for at least one award year; and
    (iii) That it changed its administrative policies and practices to 
ensure that it will not fall within any of the prohibitions contained 
in paragraph (a)(1) of this section.
    (2) If an institution loses its eligibility because of one of the 
prohibitions contained in paragraphs (a)(2) and (a)(3) of this section, 
this loss is permanent. The institution's eligibility cannot be 
reinstated.

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


Sec. 600.8   Treatment of a branch campus.

    A branch campus of an eligible institution must be in existence for 
at least two years as a branch campus before seeking to be designated 
as a main campus or a free-standing institution.

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


Sec. 600.9   Written agreement between an eligible institution and 
another institution or organization.

    (a) Without losing its eligibility under this part, an eligible 
institution may enter into a written agreement with another eligible 
institution under which the latter institution provides all or a part 
of the educational program of students enrolled in the former 
institution if the former institution gives credit to students enrolled 
in that contracted program on the same basis as if it provided that 
program itself.
    (b) Without losing its eligibility under this part, an eligible 
institution may enter into a written agreement with an institution or 
organization that is not an eligible institution under which the latter 
institution or organization provides a part of the educational program 
of students enrolled in the eligible institution if--
    (1) The eligible institution gives credit to students enrolled in 
that contracted program on the same basis as if it provided that 
program itself;
    (2) The ineligible institution or organization--
    (i) Has not been terminated from participation in the title-IV, HEA 
programs; or
    (ii) Has not withdrawn from participation in the title IV, HEA 
programs under a termination, show-cause, suspension, or similar type 
proceeding initiated by the institution's State licensing agency, 
accrediting agency, guarantor, or SPRE, or by the Secretary; and
    (3) The ineligible institution or organization provides--
    (i) Not more than 25 percent of the educational program of a 
student enrolled in the eligible institution; or
    (ii) More than 25 percent but not more than 50 percent of the 
educational program of a student enrolled in the eligible institution 
so long as--
    (A) The eligible institution and the ineligible institution or 
organization are not owned or controlled by the same individual, 
partnership, or corporation; and
    (B) The eligible institution's accrediting agency or, if the 
eligible institution is a public postsecondary vocational educational 
institution, the relevant State agency listed in the Federal Register 
in accordance with 34 CFR part 603, specifically determines that the 
institution's agreement meets the agency's standards for the 
contracting out of educational services.

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


Sec. 600.10   Date, extent, duration, and consequence of eligibility.

    (a) Date of eligibility. (1) If the Secretary determines that an 
applicant institution satisfies all the statutory and regulatory 
eligibility requirements, the Secretary considers the institution to be 
an eligible institution as of the date--
    (i) The Secretary signs the institution's program participation 
agreement described in 34 CFR part 668, subpart B, for purposes of 
participating in any title IV, HEA program; and
    (ii) The Secretary receives all the information necessary to make 
that determination for purposes other than participating in any title 
IV, HEA program.
    (2) For purposes of participating in a title IV, HEA program, if an 
eligible institution seeks eligibility for a location or educational 
program not previously designated eligible, and the Secretary 
determines that the location or educational program satisfies all the 
statutory and regulatory eligibility requirements, the Secretary 
considers the location or program to be eligible to participate in that 
title IV, HEA program as of the date the Secretary certifies that 
location or program to so participate.
    (b) Extent of eligibility. (1) If the Secretary determines that the 
entire applicant institution, including all its locations and all its 
educational programs, satisfies the applicable requirements of this 
part, the Secretary extends eligibility to all educational programs and 
locations identified on the institution's application for eligibility.
    (2) If the Secretary determines that only certain educational 
programs or certain locations of an applicant institution satisfy the 
applicable requirements of this part, the Secretary extends eligibility 
only to those educational programs and locations that meet those 
requirements and identifies the eligible educational programs and 
locations in the eligibility notice sent to the institution under 
Sec. 600.21.
    (3) Eligibility does not extend to any location that an institution 
establishes after it receives its eligibility designation if the 
institution provides at least 50 percent of an educational program at 
that location, unless--
    (i) The institution has notified the Secretary of that location in 
accordance with Sec. 600.30(a)(3); and
    (ii) The Secretary does not require the institution to submit an 
eligibility application for that location under Sec. 600.21(c).
    (c) Subsequent additions of educational programs. (1) Except as 
provided in paragraph (c)(2) of this section, if an eligible 
institution adds an educational program after it has been designated as 
an eligible institution by the Secretary, the institution must apply to 
the Secretary to have that additional program designated as an eligible 
program of that institution.
    (2) An eligible institution that adds an educational program after 
it has been designated as an eligible institution by the Secretary does 
not have to apply to the Secretary to have that additional program 
designated as an eligible program of that institution if the additional 
program--
    (i) Leads to an associate, baccalaureate, professional, or graduate 
degree; or
    (ii)(A) Prepares students for gainful employment in the same or 
related recognized occupation as an educational program that has 
previously been designated as an eligible program at that institution 
by the Secretary; and
    (B) Is at least 8 semester hours, 12 quarter hours, or 600 clock 
hours.
    (3) If an institution incorrectly determines under paragraph (c)(2) 
of this section that an educational program satisfies the applicable 
statutory and regulatory eligibility provisions without applying to the 
Secretary for approval, the institution is liable to repay to the 
Secretary all HEA program funds received by the institution for that 
educational program, and all the title IV, HEA program funds received 
by or on behalf of students who were enrolled in that educational 
program.
    (d) Duration of eligibility. (1) If an institution participates in 
the title IV, HEA programs, the Secretary's designation of the 
institution as an eligible institution under the title IV, HEA programs 
expires when the institution's program participation agreement, as 
described in 34 CFR part 668, subpart B, expires.
    (2) If an institution participates in an HEA program other than a 
title IV, HEA program, the Secretary's designation of the institution 
as an eligible institution, for purposes of that non-title IV, HEA 
program, does not expire as long as the institution continues to 
satisfy the statutory and regulatory requirements governing its 
eligibility.
    (e) Consequence of eligibility. (1) If, as a part of its 
institutional eligibility application, an institution indicates that it 
wishes to participate in a title IV, HEA program and the Secretary 
determines that the institution satisfies the applicable statutory and 
regulatory requirements governing institutional eligibility, the 
Secretary will determine whether the institution satisfies the 
standards of administrative capability and financial responsibility 
contained in 34 CFR part 668, subpart B.
    (2) If, as part of its institutional eligibility application, an 
institution indicates that it does not wish to participate in any title 
IV, HEA program and the Secretary determines that the institution 
satisfies the applicable statutory and regulatory requirements 
governing institutional eligibility, the institution is eligible to 
apply to participate in any HEA program listed by the Secretary in the 
eligibility notice it receives under Sec. 600.21. However, the 
institution is not eligible to participate in those programs, or 
receive funds under those programs, merely by virtue of its designation 
as an eligible institution under this part.

(Authority: 20 U.S.C. 1088 and 1141)


Sec. 600.11  Special rules regarding institutional accreditation or 
preaccreditation.

    (a) Change of accrediting agencies. For purposes of 
Secs. 600.4(a)(5)(i), 600.5(a)(6), and 600.6(a)(5)(i), the Secretary 
does not recognize the accreditation or preaccreditation of an 
otherwise eligible institution if that institution is in the process of 
changing its accrediting agency, unless the institution provides to the 
Secretary--
    (1) All materials related to its prior accreditation or 
preaccreditation; and
    (2) Materials demonstrating reasonable cause for changing its 
accrediting agency.
    (b) Multiple accreditation. The Secretary does not recognize the 
accreditation or preaccreditation of an otherwise eligible institution 
if that institution is accredited or preaccredited as an institution by 
more than one accrediting agency, unless the institution--
    (1) Provides to each such accrediting agency and the Secretary the 
reasons for that multiple accreditation or preaccreditation;
    (2) Demonstrates to the Secretary reasonable cause for that 
multiple accreditation or preaccreditation; and
    (3) Designates to the Secretary which agency's accreditation or 
preaccreditation the institution uses to establish its eligibility 
under this part.
    (c) Loss of accreditation or preaccreditation. (1) An institution 
may not be considered eligible for 24 months after it has had its 
accreditation or preaccreditation withdrawn, revoked, or otherwise 
terminated for cause, unless the accrediting agency that took that 
action rescinds that action.
    (2) An institution may not be considered eligible for 24 months 
after it has withdrawn voluntarily from its accreditation or 
preaccreditation status under a show-cause or suspension order issued 
by an accrediting agency, unless that agency rescinds its order.
    (d) Religious exception. (1) If an otherwise eligible institution 
loses its accreditation or preaccreditation, the Secretary considers 
the institution to be accredited or preaccredited for purposes of 
complying with the provisions of Secs. 600.4, 600.5, and 600.6 if the 
Secretary determines that its loss of accreditation or 
preaccreditation--
    (i) Is related to the religious mission or affiliation of the 
institution; and
    (ii) Is not related to its failure to satisfy the accrediting 
agency's standards.
    (2) If the Secretary considers an unaccredited institution to be 
accredited or preaccredited under the provisions of paragraph (d)(1) of 
this section, the Secretary will consider that unaccredited institution 
to be accredited or preaccredited for a period sufficient to allow the 
institution to obtain alternative accreditation or preaccreditation, 
except that period may not exceed 18 months.

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

Subpart B--Procedures for Establishing Eligibility


Sec. 600.20  Application procedures.

    (a) An institution that wishes to establish its eligibility to 
apply to participate in any program authorized by the HEA must first 
apply to the Secretary for a determination that it qualifies as an 
eligible institution.
    (b) A previously designated eligible institution must apply to the 
Secretary if--
    (1) The Secretary requests the institution to file an application 
so as to determine whether it continues to meet the requirements of 
this part; or
    (2) The institution satisfies one of the conditions contained in 
paragraph (c) of this section.
    (c) An institution must apply if it wishes to--
    (1) Continue to be eligible beyond the scheduled expiration of its 
current eligibility designation;
    (2) Include in its eligibility designation a branch campus that is 
not currently included in that designation;
    (3) Include in its eligibility designation a location that is not 
currently included in that designation, if--
    (i) The institution offers 100 percent of an educational program at 
that location; or
    (ii) The institution offers at least 50 percent of an educational 
program at that location, and the Secretary requires the institution to 
apply for eligibility under Sec. 600.21(c)(2);
    (4) Continue to be eligible following a change in its name, 
location, or address;
    (5) Continue to include in its eligibility designation a branch 
campus that has changed its name, location, or address;
    (6) Continue to include in its eligibility designation another 
location that has changed its name, location, or address, if--
    (i) That location offers 100 percent of an educational program; or
    (ii) The Secretary requires the institution to apply for 
eligibility under Sec. 600.21(c)(2); or
    (7) Reestablish eligibility following a change in ownership that 
results in a change in control according to the provisions of 
Sec. 600.31.
    (d) An institution applying for designation as an eligible 
institution shall--
    (1) Apply on the form prescribed by the Secretary; and
    (2) Provide all the information and documentation requested by the 
Secretary to make a determination of its eligibility.

(Authority: 20 U.S.C. 1088 and 1141)


Sec. 600.21  Eligibility notification.

    (a) The Secretary notifies an institution in writing--
    (1) Whether the applicant institution qualifies in whole or in part 
as an eligible institution under the appropriate provisions in 
Secs. 600.4, 600.5, 600.6 and 600.7;
    (2) Whether the institution is certified to participate in the 
title IV, HEA programs if the institution applied to participate in 
those programs; and
    (3) Of the title IV, HEA programs in which it is eligible to 
participate, and the title IV, HEA programs for which it is eligible to 
apply to participate.
    (b) If only a portion of the applicant institution qualifies as an 
eligible institution, the Secretary specifies in the notice the 
locations or educational programs that qualify as the eligible 
institution.
    (c) If the Secretary receives a notice from an institution as a 
result of Sec. 600.30(a)(3), the Secretary--
    (1) Notifies the institution that the location is an eligible 
location of that institution, identifies the HEA programs in which the 
institution may participate without further action, and indicates that 
the extension of eligibility and participation is effective on the date 
that the Secretary received the institution's notice; or
    (2) Notifies the institution that the institution must apply for 
eligibility of that location under Sec. 600.20.
    (d) The Secretary makes the determination in paragraph (c) of this 
section by evaluating the institution's ability to provide adequately 
education or training at the location. In making that evaluation, the 
Secretary uses such factors as--
    (1) The percentage of an educational program offered at the 
location; and
    (2) The financial and administrative capability of the institution.

(Authority: 20 U.S.C. 1088, 1099c, and 1141)

Subpart C--Maintaining Eligibility


Sec. 600.30  Institutional notification requirements.

    (a) Except as provided in paragraph (b) of this section, an 
eligible institution shall notify the Secretary in writing, at an 
address specified by the Secretary in a notice published in the Federal 
Register, no later than 10 days after the change occurs, of any change 
in the following information provided in the institution's eligibility 
application:
    (1) Its name.
    (2) Its address.
    (3) The name, number, and address of locations other than the main 
campus at which it offers at least 50 percent of an educational program 
and the percentages of the educational programs that it provides at 
each location.
    (4) The way it measures program length, e.g. clock hours or credit 
hours.
    (5) Its ownership, if that ownership change results in a change in 
control of the institution.
    (6) Its status as a proprietary, nonprofit, or public institution.
    (7) The exercise of a person's substantial control over the 
institution, if the person did not previously exercise that control. 
The Secretary generally considers that a person exercises substantial 
control over an institution if the person--
    (i) Directly or indirectly holds at least a 25 percent ownership 
interest in the institution;
    (ii) Holds, together with another member or members of his or her 
family, at least a 25 percent ownership interest in the institution;
    (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
    (iv) Is a member of the board of directors, a general partner, the 
chief executive officer, or other executive officer of--
    (A) The institution; or
    (B) An entity that holds at least a 25 percent ownership interest 
in the institution.
    (b) An eligible institution that is owned by a publicly-traded 
corporation shall notify the Secretary in writing, at an address 
specified by the Secretary in a notice published in the Federal 
Register, of any change in the information that is described in 
paragraphs (a) (5) through (7) of this section at the same time that 
the institution notifies the institution's accrediting agency, but no 
later than 10 days after the corporation learns of the change.
    (c) The Secretary notifies the institution in writing if any 
reported change affects the institution's eligibility, and the 
effective date of that change.
    (d) The institution's failure to inform the Secretary of the 
information described in paragraph (a) of this section within the time 
period stated in that paragraph may result in adverse action against 
it, including its loss of eligibility.
    (e)(1) For the purposes of this section, 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 or 
institution's parent corporation.
    (2) The term ownership interest includes, but is not limited to--
    (i) An interest as tenant in common, joint tenant, or tenant by the 
entireties;
    (ii) A partnership; and
    (iii) An interest in a trust.
    (3) 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--
    (i) A mutual fund that is regularly and publicly traded;
    (ii) An institutional investor; or
    (iii) A profit-sharing plan, provided that all employees are 
covered by the plan.
    (f) For the purposes of this section, the Secretary considers a 
member of a person's family to be a parent, sibling, spouse or child; 
spouse's parent or sibling; or sibling's or child's spouse.

(Authority: 20 U.S.C. 1088 and 1141)


Sec. 600.31  Change in ownership resulting in a change of control.

    (a) General. (1) An institution that undergoes a change of 
ownership that results in a change of control ceases to qualify as an 
eligible institution upon the change of ownership and control. A change 
of ownership that results in a change in control includes any change by 
which a person who has or thereby acquires an ownership interest in the 
entity that owns the institution or the parent corporation of that 
entity, acquires or loses the ability to control the institution.
    (2) In order to reestablish eligibility and to resume participation 
in the title IV, HEA programs, the institution must demonstrate to the 
Secretary that after the change of ownership and control--
    (i) The institution satisfies all the applicable requirements 
contained in Secs. 600.4, 600.5, and 600.6, except that if the 
institution is a proprietary institution of higher education or 
postsecondary vocational institution, it need not have been in 
existence for two years before seeking eligibility; and
    (ii) The institution qualifies to be certified to participate under 
34 CFR part 668, subpart B.
    (b) Definitions. The following definitions apply to terms used in 
this section:
    Closely-held corporation. Closely-held corporation (including the 
term close corporation) means--
    (1) A corporation that qualifies under the law of the State of its 
incorporation as a closely-held corporation; or
    (2) If the State of incorporation has no definition of closely-held 
corporation, a corporation the stock of which --
    (i) Is held by no more than 30 persons; and
    (ii) Has not been and is not planned to be publicly offered.
    Control. Control (including the terms controlling, controlled by 
and under common control with) means the possession, direct or 
indirect, of the power to direct or cause the direction of the 
management and policies of a person, whether through the ownership of 
voting securities, by contract, or otherwise.
    Ownership. Ownership or ownership interest means a legal or 
beneficial interest in an entity, or a right to share in the profits 
derived from the operation of an entity. The term does not include the 
interests of a mutual fund that is regularly and publicly traded, of an 
institutional investor, or of a profit-sharing plan in which all 
employees of an entity may participate.
    Parent. The parent or parent corporation of a specified corporation 
is the corporation or partnership that controls the specified 
corporation directly or indirectly through one or more intermediaries.
    Person. Person includes a legal person (corporation or partnership) 
or an individual.
    Wholly-owned subsidiary. A wholly-owned subsidiary is one 
substantially all of whose outstanding voting securities are owned by 
its parent together with the parent's other wholly-owned subsidiaries.
    (c) Standards for identifying changes of ownership and control--(1) 
Closely-held corporation. A change of ownership and control occurs 
when--
    (i) A person acquires 50 percent or more of the total outstanding 
voting stock of the corporation;
    (ii) A person who holds an ownership interest in the corporation 
acquires control of 50 parent or more of the total outstanding voting 
stock of the corporation; or
    (iii) A person who holds or controls 50 percent or more of the 
total outstanding stock of the corporation ceases to hold or control 
that proportion of the stock of the corporation.
    (2) Publicly-traded corporation required to be registered with the 
Securities and Exchange Commission (SEC). A change of ownership and 
control occurs when a change of control of the corporation takes place 
that gives rise to the obligation to file a Form 8K with the SEC 
notifying that agency of the change in control.
    (3) Other corporations. A change of ownership and control of a 
corporation that is neither closely held nor required to be registered 
with the SEC occurs when--
    (i) A person who has or acquires an ownership interest acquires 
both control of at least 25 percent of the total outstanding voting 
stock of the corporation and control of the corporation;
    (ii) A person who holds both ownership or control of at least 25 
percent of the total outstanding voting stock of the corporation and 
control of the corporation, ceases to own or control that proportion of 
the stock of the corporation, or to control the corporation; or
    (iii) For a membership corporation, a person who is or becomes a 
member acquires or loses control of 25 percent of the voting interests 
of the corporation and control of the corporation.
    (4) Partnership or sole proprietorship. A change of ownership and 
control occurs when a person who has or acquires an ownership interest 
acquires or loses control of the institution.
    (5) Parent corporation. An institution that is a wholly-owned 
subsidiary changes ownership and control when the parent corporation 
changes ownership and control as described in this section.
    (6) Nonprofit corporation or association. An institution that is 
owned by a nonprofit corporation or association changes ownership and 
control when a change specifically described in this paragraph (c) 
takes place.
    (7) Public institution. Notwithstanding paragraph (d) of this 
section, an institution owned and operated by a governmental entity 
changes ownership and control only when the ownership of the 
institution is transferred to a different governmental entity or to 
another person.
    (d) Covered transactions. For the purposes of this section, a 
change in ownership of an institution that results in a change of 
control may include, but is not limited to--
    (1) The sale of the institution;
    (2) The transfer of the controlling interest of stock of the 
institution or its parent corporation;
    (3) The merger of two or more eligible institutions;
    (4) The division of one institution into two or more institutions;
    (5) The transfer of the liabilities of an institution to its parent 
corporation;
    (6) A transfer of assets that comprise a substantial portion of the 
educational business of the institution, except where the transfer 
consists exclusively in the granting of a security interest in those 
assets; or
    (7) A conversion of the institution from a for-profit to a 
nonprofit institution.
    (e) Excluded transactions. A change of ownership and control 
otherwise subject to this section does not include a transfer of 
ownership and control upon the retirement or death of the owner, to--
    (1) A member of the owner's family, as described in Sec. 600.30(f);
    (2) A person with an ownership interest in the institution who has 
been involved in management of the institution for at least two years 
preceding the transfer.
    (f) Transfers subject to contingency. An institution may submit and 
have considered an application for a designation of eligibility and for 
certification under 34 CFR part 668, subpart B, only when the transfer 
has been completed. A transfer is complete for purposes of this section 
when the transfer is otherwise final but is subject to the condition 
subsequent that the institution obtain approval from the Secretary, the 
accrediting agency, or State licensing authority after the transfer. A 
transfer otherwise complete is not considered incomplete or contingent 
where the transferor retains a interest in the stock or assets of the 
institution or its owner solely for purposes of security.

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


Sec. 600.32  Eligibility of additional locations.

    (a) Except as provided in paragraphs (b) and (c) of this section, 
to qualify as an eligible location, an additional location of an 
eligible institution must satisfy the applicable requirements of this 
section and Secs. 600.4, 600.5, 600.6, 600.8, and 600.10.
    (b) To qualify as an eligible location, an additional location is 
not required to satisfy the two-year requirement of Secs. 600.5(a)(7) 
or 600.6(a)(6), unless--
    (1) The location was a facility of another institution that has 
closed or ceased to provide 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 applicant institution acquired, either directly from the 
institution that closed or ceased to provide educational programs, or 
through an intermediary, the assets at the location; and
    (3) The institution from which the applicant institution acquired 
the assets of the location--
    (i) Owes a liability for a violation of an HEA program requirement; 
and
    (ii) Is not making payments in accordance with an agreement to 
repay that liability.
    (c) Notwithstanding paragraph (b) of this section, an additional 
location is not required to satisfy the two-year requirement of 
Sec. 600.5(a)(7) or Sec. 600.6(a)(6) if the applicant institution 
agrees--
    (1) To be liable for all improperly expended or unspent title IV, 
HEA program funds received by the institution that has closed or ceased 
to provide educational programs;
    (2) To be liable for all unpaid refunds owed to students who 
received title IV, HEA program funds; and
    (3) To abide by the policy of the institution that has closed or 
ceased to provide educational programs regarding refunds of 
institutional charges to students in effect before the date of the 
acquisition of the assets of the additional location for the students 
who were enrolled before that date.
    (d) For purposes of this section, an ``additional location'' is a 
location of an institution that was not designated as an eligible 
location in the eligibility notification provided to an institution 
under Sec. 600.21.

(Authority: 20 U.S.C. 1088 and 1141)

Subpart D--Loss of Eligibility


Sec. 600.40  Loss of eligibility.

    (a)(1) Except as provided in paragraphs (a) (2) and (3) of this 
section, an institution, or a location or educational program of an 
institution, loses its eligibility on the date that--
    (i) The institution, location, or educational program fails to meet 
any of the eligibility requirements of this part;
    (ii) The institution or location permanently closes;
    (iii) The institution or location ceases to provide educational 
programs for a reason other than a normal vacation period or a natural 
disaster that directly affects the institution, particular location, or 
the students of the institution or location; or
    (iv) For purposes of the title IV, HEA programs--
    (A) The institution's period of participation as specified under 34 
CFR 668.13 expires;
    (B) The institution's provisional certification is revoked under 34 
CFR 668.13; or
    (C) The Secretary receives a notice under 34 CFR part 667 from a 
SPRE of the SPRE's determination that the institution shall not be 
eligible to participate in a title IV, HEA program.
    (2) If an institution loses its eligibility because it violated the 
requirements of Sec. 600.5(a)(8), as evidenced by the determination 
under provisions contained in Sec. 600.5(d), it loses its eligibility 
on the last day of the fiscal year used in Sec. 600.5(d), except that 
if an institution's latest fiscal year was described in 
Sec. 600.7(h)(1), it loses its eligibility as of June 30, 1994.
    (3) If an institution loses its eligibility under the provisions of 
Sec. 600.7(a)(1), it loses its eligibility on the last day of the award 
year being evaluated under that provision.
    (b) If the Secretary undertakes to terminate the eligibility of an 
institution because it violated the provisions of Sec. 600.5(a)(8) or 
Sec. 600.7(a), and the institution requests a hearing, the presiding 
official must terminate the institution's eligibility if it violated 
those provisions, notwithstanding its status at the time of the 
hearing.
    (c)(1) If the Secretary designates an institution or any of its 
educational programs or locations as eligible on the basis of 
inaccurate information or documentation, the Secretary's designation is 
void from the date the Secretary made the designation, and the 
institution or program or location, as applicable, never qualified as 
eligible.
    (2) If an institution closes its main campus or stops providing any 
educational programs on its main campus, it loses its eligibility as an 
institution, and that loss of eligibility includes all its locations 
and all its programs. Its loss of eligibility is effective on the date 
it closes that campus or stops providing any educational program at 
that campus.
    (d) Except as otherwise provided in this part, if an institution 
ceases to satisfy any of the requirements for eligibility under this 
part--
    (1) It must notify the Secretary within 30 days of the date that it 
ceases to satisfy that requirement; and
    (2) It becomes ineligible to continue to participate in any HEA 
program as of the date it ceases to satisfy any of the requirements.

(Authority: 20 U.S.C. 1088, 1099a-3, and 1141)


Sec. 600.41  Termination and emergency action proceedings.

    (a) If the Secretary believes that a previously designated eligible 
institution as a whole, or at one or more of its locations, does not 
satisfy the statutory or regulatory requirements that define that 
institution as an eligible institution, the Secretary may--
    (1) Terminate the institution's eligibility designation in whole or 
as to a particular location--
    (i) Under the procedural provisions applicable to terminations 
contained in 34 CFR 668.81, 668.83, 668.86, 668.87, 668.88, 668.89, 
668.90 (a)(1), (a)(4), and (c) through (f), and 668.91; or
    (ii) Under a show-cause hearing, if the institution's loss of 
eligibility results from--
    (A) Its previously qualifying as an eligible vocational school;
    (B) Its previously qualifying as an eligible institution, 
notwithstanding its unaccredited status, under the transfer-of-credit 
alternative to accreditation (as that alternative existed in 20 U.S.C. 
1085, 1088, and 1141(a)(5)(B) and Sec. 600.8 until July 23, 1992);
    (C) Its loss of accreditation or preaccreditation;
    (D) Its loss of legal authority to provide postsecondary education 
in the State in which it is physically located;
    (E) Its violations of the provisions contained in Sec. 600.5(a)(8) 
or Sec. 600.7(a);
    (F) Its permanently closing;
    (G) Its ceasing to provide educational programs for a reason other 
than a normal vacation period or a natural disaster that directly 
affects the institution, a particular location, or the students of the 
institution or location; or
    (H) The Secretary's receipt of a notice under 34 CFR part 667 from 
a SPRE of the SPRE's determination that the institution shall not be 
eligible to participate in the title IV, HEA programs;
    (2) Limit, under the provisions of 34 CFR 668.86, the authority of 
the institution to disburse, deliver, or cause the disbursement or 
delivery of funds under one or more title IV, HEA programs as otherwise 
provided under 34 CFR 668.26 for the benefit of students enrolled at 
the ineligible institution or location prior to the loss of eligibility 
of that institution or location; and
    (3) Initiate an emergency action under the provisions contained in 
34 CFR 668.83 with regard to the institution's participation in one or 
more title IV, HEA programs.
    (b) If the Secretary believes that an educational program offered 
by an institution that was previously designated by the Secretary as an 
eligible institution under the HEA does not satisfy relevant statutory 
or regulatory requirements that define that educational program as part 
of an eligible institution, the Secretary may in accordance with the 
procedural provisions described in paragraph (a) of this section--
    (1) Undertake to terminate that educational program's eligibility 
under one or more of the title IV, HEA programs under the procedural 
provisions applicable to terminations described in paragraph (a) of 
this section;
    (2) Limit the institution's authority to deliver, disburse, or 
cause the delivery or disbursement of funds provided under that title 
IV, HEA program to students enrolled in that educational program, as 
otherwise provided in 34 CFR 668.26; and
    (3) Initiate an emergency action under the provisions contained in 
34 CFR 668.83 with regard to the institution's participation in one or 
more title IV, HEA programs with respect to students enrolled in that 
educational program.
    (c)(1) An action to terminate and limit the eligibility of an 
institution as a whole or as to any of its locations or educational 
programs is initiated in accordance with 34 CFR 668.86(b) and becomes 
final 20 days after the Secretary notifies the institution of the 
proposed action, unless the designated department official receives by 
that date a request for a hearing or written material that demonstrates 
that the termination and limitation should not take place.
    (2) Once a termination under this section becomes final, the 
termination is effective with respect to any commitment, delivery, or 
disbursement of funds provided under an applicable title IV, HEA 
program by the institution--
    (i) Made to students enrolled in the ineligible institution, 
location, or educational program; and
    (ii) Made on or after the date of the act or omission that caused 
the loss of eligibility as to the institution, location, or educational 
program.
    (3) Once a limitation under this section becomes final, the 
limitation is effective with regard to any commitment, delivery, or 
disbursement of funds under the applicable title IV, HEA program by the 
institution--
    (i) Made after the date on which the limitation became final; and
    (ii) Made to students enrolled in the ineligible institution, 
location, or educational program.
    (d) After a termination under this section of the eligibility of an 
institution as a whole or as to a location or educational program 
becomes final, the institution may not certify applications for, make 
awards of or commitments for, deliver, or disburse funds under the 
applicable title IV, HEA program, except--
    (1) In accordance with the requirements of 34 CFR 668.26(c) with 
respect to students enrolled in the ineligible institution, location, 
or educational program; and
    (2) After satisfaction of any additional requirements, imposed 
pursuant to a limitation under paragraph (a)(2) of this section, which 
may include the following:
    (i) Completion of the actions required by 34 CFR 668.26(a) and (b).
    (ii) Demonstration that the institution has made satisfactory 
arrangements for the completion of actions required by 34 CFR 668.26(a) 
and (b).
    (iii) Securing the confirmation of a third party selected by the 
Secretary that the proposed disbursements or delivery of title IV, HEA 
program funds meet the requirements of the applicable program.
    (iv) Using institutional funds to make disbursements permitted 
under this paragraph and seeking reimbursement from the Secretary for 
those disbursements.
    (e) If the Secretary undertakes to terminate the eligibility of an 
institution, location, or program under paragraphs (a) and (b) of this 
section:
    (1) If the basis for the loss of eligibility is the loss of 
accreditation or preaccreditation, the sole issue is whether the 
institution, location, or program has the requisite accreditation or 
preaccreditation. The presiding official has no authority to consider 
challenges to the action of the accrediting agency.
    (2) If the basis for the loss of eligibility is the loss of legal 
authorization, the sole issue is whether the institution, location, or 
program has the requisite legal authorization. The presiding official 
has no authority to consider challenges to the action of a State agency 
in removing the legal authorization.
    (3) If the basis for the loss of eligibility for title IV, HEA 
program purposes is a notice under 34 CFR part 667 from a SPRE to the 
Secretary of the SPRE's determination that the institution shall not be 
eligible to participate in the title IV, HEA programs, the sole issue 
is whether the SPRE notified the Secretary of that determination. The 
presiding official has no authority to consider any challenge to the 
SPRE's determination.

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

[FR Doc. 94-10139 Filed 4-28-94; 8:45 am]
BILLING CODE 4000-01-P