[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: 94-10140]


[[Page Unknown]]

[Federal Register: April 29, 1994]


_______________________________________________________________________

Part VIII





Department of Education





_______________________________________________________________________



34 CFR Parts 668, 682, and 690




Student Assistance General Provisions; Federal Family Education Loan 
Programs; Federal Pell Grant Program; Interim Final Rule
DEPARTMENT OF EDUCATION

34 CFR Parts 668, 682, and 690

RIN 1840-AB85 and 1840-AB80

 
Student Assistance General Provisions; Federal Family Education 
Loan Programs; Federal Pell Grant Program

AGENCY: Department of Education.

ACTION: Interim final regulations with invitation for comment.

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SUMMARY: The Secretary amends the Student Assistance General Provisions 
regulations, the Federal Family Education Loan (FFEL) Program 
regulations, and the Federal Pell Grant Program regulations to 
implement changes in the Higher Education Act of 1965, as amended 
(HEA), and to improve the monitoring and accountability of institutions 
and third-party servicers participating in the student financial 
assistance programs authorized by Title IV of the HEA (Title IV, HEA 
programs). These changes also establish standards of administrative and 
financial responsibility for third-party servicers that administer any 
aspect of a guaranty agency's or lender's participation in the FFEL 
programs.
    These regulations seek to improve the efficiency of Federal student 
aid programs and, by so doing, to improve their capacity to enhance 
opportunities for postsecondary education. The Secretary invites 
comment on these regulations.

DATES: Effective Date: These regulations take effect July 1, 1994 with 
the exception of Secs. 668.3, 668.8, 668.12, 668.13, 668.14, 668.15, 
668.16, 668.17, 668.22, 668.23, 668.25, 668.26, 668.90, 668.96, 
668.113, appendix A to 34 CFR part 668, 682.414, 682.416, 682.711, and 
690.83. Sections 668.3, 668.8, 668.12, 668.13, 668.14, 668.15, 668.16, 
668.17, 668.22, 668.23, 668.25, 668.26, 668.90, 668.96, 668.113, 
appendix A to 34 CFR part 668, 682.414, 682.416, 682.711, and 690.83 
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 regulations, call or write the Department of Education contact 
persons. A document announcing the effective date will be published in 
the Federal Register.
    Comment Date: Comments on these interim final regulations must be 
received on or before June 20, 1994.

ADDRESSES: All comments concerning these regulations should be 
addressed to Greg Allen and Wendy Macias, U.S. Department of Education, 
400 Maryland Avenue, SW. (Regional Office Building 3, room 4318), 
Washington, DC 20202-5343.

FOR FURTHER INFORMATION CONTACT: Greg Allen or Wendy Macias, U.S. 
Department of Education, 400 Maryland Avenue, SW. (Regional Office 
Building 3, room 4318), Washington, DC 20202-5343. Telephone (202) 708-
7888. Individuals who use a telecommunications device for the deaf 
(TDD) may call the Federal Information Relay Service (FIRS) at 1-800-
877-8339 between 8 a.m. and 6 p.m., Eastern time, Monday through 
Friday.

SUPPLEMENTARY INFORMATION: The Higher Education Amendments of 1992, 
Pub. L. 102-325, (the Amendments of 1992) and the Higher Education 
Technical Amendments of 1993, Pub. L. 103-208 (the Technical Amendments 
of 1993) amended the HEA in several areas relating to the participation 
of institutions in the Title IV, HEA programs. Further, the Amendments 
of 1992 amended the HEA to expand the Secretary's authority to regulate 
the activities of those individuals and organizations now called third-
party servicers. The Student Assistance General Provisions regulations 
contain requirements that are common to educational institutions that 
participate in the Title IV, HEA programs.
    On February 28, 1994, the Secretary published a Notice of Proposed 
Rulemaking (NPRM) for parts 668 and 690 in the Federal Register (59 FR 
9526). The NPRM included a discussion of the major issues surrounding 
the proposed changes which will not be repeated here. The following 
list summarizes those issues and identifies the pages of the preamble 
to the NPRM on which a discussion of those issues can be found:
    The Secretary proposed to clarify the terms used in the statutory 
definition of academic year (pages 9529-9530);
    The Secretary proposed a definition of an eligible program to 
implement statutory requirements, including requirements for ``short-
term'' programs (at least 300 but less than 600 clock hours) that would 
be eligible for the FFEL programs only. The Secretary proposed 
methodologies for the measurement of completion and placement rates for 
short-term programs, as required by the statute. Also in accordance 
with the statute, the Secretary proposed further provisions to evaluate 
the quality of short-term programs (pages 9530-9531);
    The Secretary proposed to add two new sections to codify procedures 
with regard to applications to participate initially or to continue to 
participate in a Title IV, HEA program and procedures by which the 
Secretary certifies that an institution meets the standards in subpart 
B of these regulations and accordingly may participate in a Title IV, 
HEA program. The Secretary proposed procedures to codify new statutory 
provisions governing provisional certification procedures for 
participation in a Title IV, HEA program (pages 9533-9536);
    The Secretary proposed to amend the regulations governing program 
participation agreements to include numerous new provisions added by 
the Amendments of 1992 and provisions previously prescribed by the HEA 
but not specifically spelled out in the regulations. The Secretary also 
proposed provisions to amend the regulations governing program 
participation agreements (pages 9536-9539);
    The Secretary proposed significant changes to the section governing 
the evaluation of an institution's financial responsibility. The 
Secretary proposed to strengthen the factors used to evaluate an 
institution's financial responsibility and to reflect statutory changes 
(pages 9539-9544);
    The Secretary proposed to strengthen and expand the standards of 
administrative capability for participating institutions, addressing 
areas previously not regulated or for which there were only guidelines 
(pages 9544-9549);
    The Secretary proposed to amend the provisions governing default 
reduction measures to reflect statutory changes made by the Amendments 
of 1992 and current departmental practices. The provisions in the 
Technical Amendments of 1993 that address institutional appeals of 
cohort default rates were not included in the NPRM (pages 9549-9551);
    The Secretary proposed to clarify the terms used in the statutory 
definition of a fair and equitable refund policy (pages 9551-9556);
    The Secretary proposed to implement the statutory requirement that 
institutions have annual compliance audits. The Secretary proposed to 
extend the audit requirements to foreign institutions (pages 9556-
9557); and
    The Secretary proposed to amend the Federal Pell Grant Program 
regulations to implement section 487(c)(7) of the HEA that provides 
that an institution may offset the amount of Title IV, HEA program 
disbursements against liabilities or may receive reimbursement from the 
Department for those amounts if, in the course of any audit conducted 
after December 31, 1988, the Department discovers or is informed of any 
Title IV, HEA program assistance (specifically, Federal Pell Grant 
Program funds) that an institution has provided to its students in 
accordance with program requirements, but the institution has not 
previously received credit or reimbursement for these disbursements 
(page 9558).
    On February 17, 1994, the Secretary published an NPRM proposing 
amendments to parts 668 and 682 in the Federal Register (59 FR 8044). 
The NPRM included a discussion of the major issues involved in the 
proposed changes. The following list summarizes those issues and 
identifies the pages of the preamble to the NPRM on which a discussion 
of those issues can be found:
    The Secretary proposed a definition of third-party servicer as 
applicable to those individuals or organizations that contract with an 
institution to administer any aspect of the institution's participation 
in the Title IV, HEA programs (page 8045);
    The Secretary proposed to expand the factors of financial 
responsibility of an institution to take into consideration substantial 
control over both institutions and third-party servicers (pages 8046-
8047);
    The Secretary proposed annual audit requirements for third-party 
servicers as necessary to implement statutory provisions under the 
Amendments of 1992 (pages 8047-8048);
    The Secretary proposed notification requirements for third-party 
servicers against which the Secretary has assessed a liability for a 
violation of a Title IV, HEA program violation (pages 8048-8049);
    The Secretary proposed to create a new section to codify contract 
requirements between institutions and third-party servicers. As one of 
the conditions in the contract, a third-party servicer would be 
required to assume joint and several liability with an institution that 
the servicer contracts with for any violation by the servicer of any 
Title IV, HEA program requirement (pages 8049-8050);
    The Secretary proposed to apply against a third-party servicer the 
sanctions under subpart G of the Student Assistance General Provisions 
that currently solely apply to institutions for any violation of a 
Title IV, HEA program requirement (pages 8050-8051);
    The Secretary proposed to apply the fiduciary standards that 
currently only apply to institutions to third-party servicers so that 
third-party servicers would be required to act at all times with the 
competency necessary to qualify them as a fiduciary (page 8051);
    The Secretary proposed a definition of third-party servicer 
applicable to those individuals or organizations that contract with a 
lender or guarantee agency to administer any aspect of the lender's or 
guarantee agency's participation in the FFEL programs (page 8055);
    The Secretary proposed to require a third-party servicer that 
contracts with a lender or guaranty agency to assume joint and several 
liability for any violation of any FFEL program requirement or 
applicable statutory requirement. Collection of liabilities from the 
violation would be collected first from the lender or guaranty agency 
(page 8055-8056); and
    The Secretary proposed a new section to codify Federal requirements 
for third-party servicers that contract with lenders or guaranty 
agencies. A third-party servicer would be required to meet certain 
standards of financial responsibility and administrative capability to 
be considered eligible to contract with a lender or guaranty agency. In 
addition, this section would require a third-party servicer to have 
performed an annual audit of the servicer's administration of a 
lender's or guaranty agency's participation in the FFEL programs (page 
8056);

Program Integrity Triad

    In order to approve a postsecondary education institution to 
participate in the student financial assistance programs authorized 
under Title IV of the HEA (referred to as ``Title IV, HEA programs'') 
and many other Federal programs, the Secretary must determine, in part, 
that the institution satisfies the statutory definition of an 
``institution of higher education.'' Under the HEA and many other 
Federal statutes, one element of that definition requires an eligible 
institution of higher education to be accredited or preaccredited by an 
accrediting agency recognized by the Secretary as a reliable authority 
as to the quality of the education or training provided by the 
institution. Another element requires an eligible institution to be 
legally authorized to provide an education program beyond the secondary 
level in the State in which it is located. In addition, to participate 
in the Title IV, HEA programs, the institution must be certified by the 
Secretary as administratively capable and financially responsible. 
Thus, the HEA provides the framework for a shared responsibility among 
accrediting agencies, States, and the Federal government to ensure that 
the ``gate'' to Title IV, HEA programs is opened only to those 
institutions that provide students with quality education or training 
worth the time, energy, and money they invest in it. The three 
``gatekeepers'' sharing this responsibility have traditionally been 
referred to as ``the triad.''
    While the concept of a triad of entities responsible for 
gatekeeping has had a long history, originating in 1952, the Higher 
Education Amendments of 1992, Pub. L. 102-325, significantly increased 
the gatekeeping responsibilities of each member of the triad. 
Specifically, Congress amended the HEA to provide for a new part H of 
Title IV entitled ``Program Integrity Triad.'' Under the new part H, 
the requirements that accrediting bodies must meet if they are to be 
recognized by the Secretary as ``gatekeepers'' for Title IV or other 
Federal purposes are specified in detail. Part H also provides a new 
oversight responsibility for States: the State Postsecondary Review 
Program. Altogether, part H establishes a set of responsibilities for 
accrediting agencies, States, and the Secretary that creates a stronger 
and more coordinated evaluation of institutions that participate, or 
wish to participate, in the Title IV, HEA programs.
    The Secretary recognizes that the approach to significantly 
increased gatekeeping activity outlined in the statute for the three 
members of the triad is a new one. This approach will require 
leadership in both implementation and evaluation if it is to achieve 
the effectiveness that Congress intended. The Secretary will take steps 
to assure that the various responsibilities of the triad members are 
carried out in a manner that, in fact, results in the identification of 
institutions that should not participate in the Title IV, HEA programs, 
on the basis of either the quality of education they offer or their 
inability to handle program funds. At the same time, the Secretary is 
committed to carrying out the responsibility for coordinating the 
activities of the triad members that are inherent in the statute in a 
manner that causes the least burden to institutions participating in 
the Title IV, HEA programs.
    To these ends, the Secretary is committed to effective management 
of the gatekeeping function. The Secretary will review carefully the 
applications of accrediting bodies and the standards and operating 
plans proposed by State Postsecondary Review Entities (SPREs) under the 
State Postsecondary Review Program to insure that they meet the 
requirements of the statute and these regulations and will enable these 
triad agencies to fulfill their statutory purposes. The Secretary will 
also place a priority on the completion of the ``Postsecondary 
Education Participation System,'' the Department's new integrated data 
base, which will contain the information that the Secretary generates 
in the course of the Secretary's oversight of institutions 
participating in Title IV, HEA programs. The Secretary will use the 
data base to inform accrediting bodies and SPREs of actions taken by 
the Secretary so that they may in turn carry out their 
responsibilities. This expanded data base is also critical to the 
Secretary's effective selection of institutions for program review.
    Monitoring the results of the gatekeeping process is a very 
important key to effective management. The Secretary will evaluate the 
activities of accrediting agencies, SPREs, and the Department to 
determine their effectiveness in improving the integrity of 
institutions participating in Title IV programs and will take such 
steps as may be indicated to improve the results. Finally, as provided 
in the statute, the Secretary will seek the advice and counsel of the 
National Advisory Committee on Institutional Quality and Integrity in 
evaluating the effectiveness of the triad.
    The Secretary believes that the approach best suited to achieving 
the objectives of the statute is a complementary one, with each member 
of the triad focusing its evaluation on its obligations within the 
context of the HEA. Thus, the focus for accrediting agencies is the 
quality of education or training provided by the institutions or 
programs they accredit. States, in addition to providing the legal 
authority to operate within the state required for participation in the 
Title IV, HEA programs, will review institutions that meet certain 
statutory review criteria related to institutional performance in the 
Title IV, HEA programs. The focus of the Secretary's evaluation of 
institutions is on the administrative and financial capacity of those 
institutions to participate in the Title IV, HEA programs.
    While the functions and responsibilities of each of the triad 
members are generally different, the statute does require, in some 
instances, that all members of the triad evaluate similar areas. For 
the most part, the principle of complementary functions will lead to 
the members evaluating those same areas from different perspectives for 
different purposes. For example, all three of the triad members are 
required to examine the finances of an institution. If each looks at 
financial strength from a perspective complementary to that of the 
others, accrediting agencies would focus principally on the capacity of 
the institution to continue to offer programs at a level of quality 
sufficient to meet accrediting agency standards and to fulfill the 
institution's mission over a 5-10 year period of accreditation. The 
emphasis of a review by a SPRE would be on whether or not the 
institution possesses the full range of resources needed to serve 
students currently attending the institution. The Secretary's 
responsibilities focus on the institution's finances in light of its 
ability to provide the services described in its official publications 
and statements, to provide the administrative resources necessary to 
comply with its Title IV, HEA program responsibilities, and to meet all 
of its financial obligations, including, but not limited to, refunds of 
institutional charges and repayments to the Secretary for liabilities 
and debts incurred in programs administered by the Secretary.
    Despite the Secretary's efforts to encourage complementary 
functions for each of the triad members, it is theoretically possible 
that, in some instances, an institution could be subject to three 
different standards regulating the same area of operation. For this 
reason, where a Title IV standard has been promulgated at the Federal 
level, the Secretary expects accrediting agencies and States to take 
this into account in establishing their own standards to insure that 
varying standards do not pose an unnecessary burden on institutions. It 
is also important that accrediting agencies and States do not impose 
any standard that is weaker than comparable Title IV, HEA program 
standards. The Secretary believes coordination of this is a federal 
responsibility.
    In view of the complementary approach to the functions of the triad 
members, the Secretary believes, for example, that institutions should 
not have to develop different methodologies to provide data that the 
three members of the triad may require. The Secretary also believes 
that, to the extent feasible, any other requests for data about the 
institution, its students, or its graduates should rely on information 
already in the institution's possession. To that end, the Secretary 
expects accrediting agencies and States either to accept student data 
based on the methodology that will be specified in the regulations 
governing ``Student Right to Know,'' also mandated by the Higher 
Education Amendments of 1992, or, where the institution may have other 
methodologies for calculating data, such as a system designed to 
provide data to a State higher education commission or other State 
agency, to accept data in the format already being used by the 
institution. Similarly, the Secretary expects accrediting agencies and 
SPREs to use the audited financial statements institutions are now 
required to provide to the Secretary on an annual basis to the extent 
those statements are compatible with the nature of the reviews 
conducted under their respective standards.
    The Secretary also recognizes that other Federal agencies, such as 
the Department of Labor and the Veterans Administration, also regulate 
institutions in some areas that are similar to those included in part 
H. The suggestion has been made that the Secretary should promulgate 
Federal standards in the areas of overlap so that institutions would 
not be subject to varying standards developed by other Federal agencies 
and the triad members. However, the Secretary interprets part H as 
permitting States and accrediting agencies to establish their own 
standards, as opposed to using a Federal standard, and also believes 
that this is the most effective approach. In addition, it is not clear 
how the requirements of the different agencies are compatible with the 
requirements of part H. The purposes of these programs administered by 
other agencies may be very different. As a result, the Secretary has 
not pursued this alternative. The Secretary does believe that it would 
be useful to explore how the varying requirements of other Federal 
agencies that are similar to those of part H might be coordinated to 
reduce any burden on institutions and will initiate such exploration.
    The Secretary believes that, where possible, data developed at the 
national level should be made available to institutions, as well as to 
States and accrediting agencies to assist them in carrying out their 
responsibilities under part H. In particular, data concerning labor 
markets and compensation for specific fields and information concerning 
graduation and withdrawal rates at various types of institutions may be 
helpful to both triad members and institutions. The Secretary will 
facilitate the development of this type of information and, where 
possible under the auspices of the Department, will coordinate the 
development of data that will be helpful to institutions and the triad.
    Finally, as part of the commitment to providing leadership to the 
triad, the Secretary will convene representatives of the triad members 
and institutions to exchange information about the gatekeeping process 
and to discuss how the triad is functioning, both in identifying 
institutions whose performance is questionable and in reporting 
requirements that have proven to be unreasonably burdensome. The 
Secretary invites comments concerning the functioning of the triad, as 
it is implemented through these and other regulations governed by part 
H. The Secretary will seek improvement, where possible, within existing 
regulations and will propose modifications to regulations and to the 
statute itself if experience indicates those changes are both necessary 
to achieve effective gatekeeping, with minimal burden, and compatible 
with the need to maintain, and assure the public of, the integrity of 
the Title IV, HEA programs.

Substantive Changes to the NPRMs

Part 668--Student Assistance General Provisions

Subpart A--General

Section 668.2  General Definitions

    Academic Year. In the February 28, 1994 NPRM, the Secretary 
requested comment on how to implement the technical amendment that 
provided that the Secretary may reduce, for good cause on a case-by-
case basis, the required minimum of 30 weeks of instructional time to 
not less than 26 weeks of instructional time in the case of an 
institution of higher education that provides a 2-year or 4-year 
program of instruction for which it awards an associate or 
baccalaureate degree. The Secretary did not propose specific criteria 
to implement this technical amendment in the February 28, 1994 NPRM, 
but instead requested comments on a definition of ``good cause'' and 
requested comments on ways of implementing this provision that 
addressed the Secretary's concern that reductions in the award year 
would encourage many institutions to seek that treatment routinely. 
After reviewing public comments on defining good cause, and developing 
safeguards to discourage routine requests for reductions in the 
academic year, the Secretary has implemented this technical amendment 
in new Sec. 668.3.
    Under this section, for the purpose of awarding Title IV, HEA 
funds, the Secretary may reduce the length of an academic year for an 
institution that submits a written request to the Secretary. Section 
668.3 provides for a two-year ``phase-in'' period for institutions that 
are currently participating, have an academic year of 26-29 weeks, and 
meet the other applicable standards of the section. The Secretary will 
consider all other requests for a reduction in the minimum number of 
weeks of instructional time to not less than 26 weeks on a case-by-case 
basis in accordance with the requirements of Sec. 668.3. Section 668.3 
is discussed in greater detail in the section of the Analysis of 
Comments and Changes that addressed the definition of an academic year 
(Sec. 668.2).
    In the February 28, 1994 NPRM, the Secretary requested comment on 
how to address an abuse of the definition of an academic year whereby 
an institution that has programs that are measured in credit hours 
without terms could claim that it meets the requirements for the 
minimum amount of work to be performed by a full-time student over an 
academic year by giving a full-time student a minimal amount of 
instruction over a 30-week (or more) period, which the institution 
claims to be equivalent to 24 semester or 36 quarter hours. The 
Secretary requested comment on whether a minimum full-time workload for 
students enrolled in these educational programs should be established 
to address this abuse. Several commenters agreed that this abuse should 
be addressed. However, rather than changing the proposed definition of 
full-time student to require measurement of student workloads, a 
modification has been made to require that, for educational programs 
using credit hours, but not using a semester, trimester, or quarter 
system, a week of instructional time is any week in which at least five 
days of regularly scheduled instruction, examinations, or preparation 
for examinations occurs, as opposed to one day of regularly scheduled 
instruction, examinations, or preparation for examinations for all 
other programs. The Secretary believes it is important to ensure that 
full-time students are performing comparable workloads regardless of 
the type of institution they are attending, and that such work should 
be ratably allocated throughout the period of instruction. The 
Secretary notes that this is an area of abuse that is not fully 
addressed by the implementation of the ``clock hour/credit hour'' 
regulations. A corresponding change has been made to the definition of 
an eligible program.
    One-third of an academic year and two-thirds of an academic year. 
In response to public comment, the Secretary has defined one-third of 
an academic year and two-thirds of an academic year in order to clarify 
the procedure for prorating awards under the FFEL and NDSL programs.
    Undergraduate student. Because the Secretary recognizes that, at 
this time, there are legitimate reasons supported by statute for 
separate definitions of an undergraduate student under the various 
Title IV, HEA program regulations the definition of undergraduate 
student has been deleted in these final regulations.

Section 668.8  Eligible Program

    Qualitative factors. Section 668.8(e)(1)(iii) requires that, for a 
short-term program, the length of the program may not exceed by more 
than 50 percent the minimum number of clock hours required for training 
in the recognized occupation for which the program prepares students, 
as established by the State in which the program is offered, if the 
State has established such a requirement. In response to public 
comment, this provision has been amended to also prohibit a short-term 
eligible program from exceeding by 50 percent any applicable minimum 
number of clock hours required by a Federal agency for training in the 
recognized occupation for which the program prepares students.
    In response to public comment, Sec. 668.8(e)(2) has been revised to 
clarify that, since a certified public accountant cannot certify the 
accuracy of an institution's completion or placement-rate calculations, 
the institution shall substantiate these calculations by having the 
certified public accountant follow the procedures of an attestation 
engagement.
    Calculation of completion rate. Section 668.8(f)(4) has been 
amended to require that a student must complete the educational program 
in which he or she is enrolled within 150 percent of the published 
length of the educational program in order to be counted as a completer 
for purposes of this calculation. This change was made to conform with 
the calculation of a completion rate under the Student Right-to-Know 
provisions. The Secretary notes that the Department will continue to 
evaluate the feasibility of replacing this methodology with the 
methodology developed relative to the Student Right-to-Know Act once 
that methodology has been published in final regulations.
    Calculation of Placement Rate. In response to public comment, the 
requirement in proposed Sec. 668.8(g)(1)(ii) that an institution 
exclude from the calculation of a placement rate students who are hired 
by the institution has been deleted from these regulations.
    In response to public comment, a change has been made to the 
placement rate calculation to clarify that every student must be 
employed for at least 13 weeks in a recognized occupation for which 
they were trained or in a related comparable occupation before that 
student can be counted as placed.
    The Secretary has amended Sec. 668.8 by revising paragraph (k) to 
remove the provision that an institution offering an undergraduate 
educational program measured in credit hours and at least two academic 
years in length is exempt from applying the formula contained in 
paragraph (l) to that program if the program provides an equivalent 
degree as determined by the Secretary, or if each course within the 
program is fully acceptable for credit toward that institution's 
equivalent degree.
    Paragraphs (k) and (l) were originally published in final 
regulations on July 23, 1993 (58 FR 39618). In those final regulations, 
the Secretary exempted from the requirements of the regulations, 
undergraduate educational programs that were at least two years in 
length and lead to an associate, bachelor's, professional, or an 
equivalent degree as determined by the Secretary or if each course 
within that program was fully acceptable for credit toward one of those 
degree programs at that institution. The Secretary believed that it was 
prudent to exempt programs that lead to an equivalent degree because 
there might be a type of degree being offered (not an associate, 
bachelor's, or professional degree) that the Secretary had not yet 
encountered. The Secretary wanted to be able to examine the degree to 
determine if that degree was in fact equivalent to an associate, 
bachelor's, or professional degree. If the Secretary determined that 
the degree was equivalent to an associate, bachelor's, or professional 
degree, and was at least two academic years in length, the Secretary 
would exempt from the regulations undergraduate educational programs 
that lead to the equivalent degree or if each course within the program 
was fully acceptable for credit toward that institution's equivalent 
degree.
    However, since publication of the final regulations on July 23, 
1993, the Secretary has yet to encounter a degree that the Secretary 
would consider to be an equivalent of an associate, bachelor's, or 
professional degree. Conversely, dozens of institutions have submitted 
to the Secretary arguments that their diploma programs are the 
equivalent of an associate degree program. The regulations were never 
meant to permit a determination that a nondegree program be classified 
as the equivalent of a degree program. The regulations only applied to 
a determination of whether a degree resulting from an educational 
program is equivalent to an associate, bachelor's, or professional 
degree. Because the diploma programs are not in themselves degree 
programs, the Secretary does not consider those programs to lead to an 
equivalent degree.
    Because of this misconception by many institutions that 
``equivalent degree'' means an educational program equivalent to a 
degree granting program, and because the Secretary has not yet found a 
true instance of an equivalent degree that is not an associate, 
bachelor's, or professional degree, the Secretary is removing the 
phrase ``equivalent degree as determined by the Secretary'' from 
paragraph (k).
Subpart B--Standards for Participation in the Title IV, HEA Programs

Section 668.13  Certification Procedures

    Period of participation. In response to concerns of many commenters 
about the consequences (particularly the potential for provisional 
certification) to a participating institution in the event that the 
Secretary does not complete a review of the institution's application 
prior to the expiration of the institution's program participation 
agreement, even if the institution had filed its renewal application in 
a timely manner, Sec. 668.13(b) is amended to provide that full 
certification will be extended on a month to month basis following the 
expiration of a program participation agreement where the institution's 
application for recertification was materially complete, and submitted 
at least 90 days prior to the expiration date.
    Provisional certification. In response to public comment, proposed 
Sec. 668.13(c)(1)(ii) that provided that the Secretary may 
provisionally certify an institution if the financial responsibility 
and administrative capability of the institution was being determined 
for the first time has been deleted from these regulations. Although 
this provision is statutory, the Secretary has decided that the other 
standards requiring the use of provisional certification are adequate 
to identify institutions that would be captured by this provision where 
greater monitoring and procedural restrictions are appropriate.
    Section 668.13(c)(2)(i) has been amended to clarify the maximum 
permissible length of periods of provisional certification. Upon 
further consideration, the Secretary has decided to repeat the language 
of the statute that provides that periods of participation under 
provisional certification should be for ``complete award years.'' So, 
for example, the regulations will permit the Secretary to provisionally 
certify an initial applicant for one complete award year, rather than 
for a period of 12 months as proposed in the February 28, 1994 NPRM. 
This will provide the Secretary with a complete award year of data on 
which to base determinations of further participation for the 
institution.
    In response to public comment, Sec. 668.13(d)(1) that lists the 
requirements for provisional certification to participate on a limited 
basis for institutions that are not financially responsible has been 
amended to make clear that the criteria of this section are not 
required for an institution that meets the exceptions to the general 
standards of financial responsibility under Sec. 668.15(d).
    In response to public comment Sec. 668.13(d)(1)(ii) has been 
amended to clarify that any required submission of a letter of credit 
must be in an amount and in a form acceptable to the Secretary.
    Proposed Sec. 668.13(d)(1)(iii)(B) has been revised, consistent 
with similar changes in Sec. 668.15(b) (3) and (4), to make clear how 
an institution demonstrates that it has met all of its financial 
obligations and is current in its debt payments. This provision is 
explained in greater detail in the section of the Analysis of Comments 
and Changes that addresses the factors of financial responsibility 
(Sec. 668.15).
    In response to public comment, Sec. 668.13(d)(2) has been clarified 
to explain that financial guarantees are only required if the 
institution comes within the requirements of Sec. 668.15(c)(2), or 
where the institution fails to demonstrate financial responsibility 
under its current audit and has failed to do so at least one other time 
under the standards in effect during the preceding five years.
    In response to public comment, a new paragraph (e) is added to 
Sec. 668.13 which provides for denial of certification to initial 
applicants for participation in a Title IV, HEA program and to 
participants that have undergone a change of ownership resulting in a 
change of control, if the State in which those applicants or 
participants are located does not participate in the State 
Postsecondary Review Program. This addition conforms these regulations 
to the requirements of the State Postsecondary Review Program in 34 CFR 
part 667, and provides some further explanation of the consequences to 
an institution if the State in which the institution is located does 
not participate in the State Postsecondary Review Program. Under 
paragraph (e), the Secretary may provisionally certify a participating 
institution or branch campus in that State. Section 668.13(c)(2)(ii) 
has also been revised to provide that the provisional certification of 
an institution under these circumstances expires at the end of the 
third complete award year following the date of the provisional 
certification.
    In response to public comment, a change has been made to provide 
for notices of revocation of provisional certification to be sent by 
certified mail, instead of registered mail.
    In response to public comment, Sec. 668.13(f)(4)(i) has been 
modified to provide that the official reviewing a request for 
reconsideration of provisional certification must be different from, 
and not subject to supervision by, the official that issued the notice 
of revocation.

Section 668.14  Program Participation Agreement

    In response to public comment, Sec. 668.14(b)(1) has been amended 
to clarify that an institution must comply with all special 
arrangements, agreements, or limitations entered into under the 
authority of statutes applicable to Title IV of the HEA. Corresponding 
changes have been made throughout the sections of 34 CFR part 668 and 
34 CFR part 682 contained in this regulatory package.
    In response to public comment, Sec. 668.14(b)(4) has been amended 
to provide that an institution must provide information relating the 
administrative capability and financial responsibility of the 
information to a SPRE only if the institution was referred by the 
Secretary under 34 CFR 667.5.
    The proposed regulations prohibited any type of incentive payments, 
particularly those based on ``retention.'' In response to public 
comment, the Secretary has amended Sec. 668.14(b)(22) to allow that 
token gifts may be given to students or alumni for referring other 
students for admission to the institution, as long as:
    (1) The gift is not money, check or money order;
    (2) No more than one such gift is given to any student or alumnus; 
and
    (3) The value of the gift is no more than twenty-five dollars.
    In response to public comment, proposed Sec. 668.16(k) that 
requires that an institution: (1) Demonstrate a reasonable relationship 
between the length of the program and occupational entry level 
requirements and (2) establish the need for the training has been moved 
to Sec. 668.14(b)(26). Further, the requirements of this provision have 
been amended to require an institution to demonstrate a reasonable 
relationship between the length of the program and occupational entry 
level requirements established by any Federal agency.

Section 668.15  Factors of Financial Responsibility

    Sections 668.15(b) (1), (2), and (3) have been amended to clarify 
that, in order to be financially responsible, an institution must be 
providing the services described in its official publications and 
statements; providing the administrative resources necessary to comply 
with the requirements of subpart B; and meeting all if its financial 
obligations. This is a change from the proposed regulations that would 
have required an institution to demonstrate that it was able to provide 
and meet these requirements. The Secretary believes these changes more 
accurately reflect the intent of the regulations.
    In response to public comment, Sec. 668.15(b)(4) further defines 
the requirement that an institution be current in its debt payments. 
The Secretary considers an institution to be current in its long-term 
debt obligations if it is not in violation of existing loan agreements 
at the end of the institution's fiscal year. The Secretary considers an 
institution to not be current in all of its debt obligations whenever 
the institution is more than 120 days delinquent in making payments, 
and a legal claim has been initiated against the institution or a lien 
has been filed on its assets due to the non-payment of the obligation. 
The Secretary believes that an institution's non-payment of obligations 
is a serious concern because the possibility exists that legal actions 
brought by creditors may result in forfeiture of some or all of an 
institution's assets. Consistent with the determination that payment 
delinquencies place the institution at risk, the Secretary notes that 
such actions are also often precede an action by creditors to force a 
company into bankruptcy.
    In response to public comment, Sec. 668.15(b)(5) has been amended 
to require that the amount of an institution's required cash reserve 
shall be one-quarter of the amount the institution paid in refunds 
during its previous year, as shown in its audited financial statement. 
By using historical information specific to the individual institution, 
the Secretary provides for adequate reserves for all institutions, 
rather than establishing an across the board measure which would be 
inadequate for some and inappropriate for others. Also, in response to 
the comments, the regulations have been changed to require the cash 
reserve to be maintained as a cash deposit in a federally insured bank 
account or an investment in U.S. Treasury securities, with an original 
maturity of three months or less.
    Proposed Sec. 668.15(b)(6)(ii) that would have provided that an 
institution is financially responsible if the institution does not have 
a finding of unauthorized use of donor restricted net assets to meet 
current operating expenses, has been removed from these regulations. 
This change was made based upon general considerations that were 
presented in the public comments concerning the need to implement 
consistent standards for determining financial responsibility for for-
profit and nonprofit institutions, and to simplify the administrative 
resources necessary to determine whether institutions were in 
compliance with the regulations.
    In response to numerous public comments, Sec. 668.15(b)(7)(i)(A) 
and (b)(8)(i)(B) have been amended to require that both for-profit 
institutions and nonprofit institutions must meet an acid test ratio of 
1:1 to replace the proposed ratio requirements that differed for for-
profit and nonprofit institutions. The acid test ratio is defined as 
the sum of cash and current accounts receivable, divided by current 
liabilities. The Secretary has kept the regulatory exclusions of 
unsecured or uncollateralized related party receivables because they 
represent capital outflows from an institution that do not contain 
provisions for repayment. The Secretary has allowed the inclusion of 
the institution's cash reserve requirement in the calculation of the 
acid test ratio.
    In response to public comment concerning the proper development of 
standards for nonprofit and for-profit institutions, 
Sec. 668.15(b)(7)(i)(B) has been amended to require that a for-profit 
institution may not have operating losses in one or both years 
exceeding ten percent of equity capital. The Secretary's intent is to 
determine whether a trend of continuing losses exists, or if a loss 
occurs in any one year that it's magnitude is such that it does not 
materially impact the equity of the institution. The Secretary has 
changed the reference year used in the calculation to be that of the 
beginning of the first year in the two year period rather than the most 
recently completed fiscal year.
    In response to public comment, Sec. 668.15(b)(7)(ii), (b)(8)(ii), 
and (b)(9)(v) have been added to provide that a for- profit 
institution, a nonprofit institution, or a public institution may 
demonstrate that it is financially responsible if it submits evidence 
of a superior bond rating as an alternative to having to meet the tests 
for financial responsibility. The Secretary considers an institution to 
be financially responsible if the institution has currently issued an 
outstanding debt obligations that are, without insurance, guarantee, or 
credit enhancement rated at or above the second highest level of rating 
given by a nationally recognized statistical rating organization.
    Section 668.15(b)(8)(i)(C)(1) has been changed from the NPRM to 
incorporate the existing requirement that a nonprofit institution must 
have a positive unrestricted current fund balance or positive 
unrestricted net assets. This requirement is unchanged from the former 
requirement in effect for more than fourteen years that a nonprofit 
have a positive unrestricted current fund balance.
    Section 668.15(b)(8)(i)(C)(2) has been amended to require that a 
nonprofit institution may not have excess current fund expenditures in 
either or both of two years that results in a decrease in the current 
unrestricted fund or a decrease in unrestricted net assets of greater 
than ten percent of the institution's unrestricted current fund balance 
or unrestricted net assets in the beginning of the first year of the 
two year period. The proposed regulation would have required that a 
nonprofit institution not have a decrease in total net assets of such 
significance that if continued would result in a current ratio of less 
than 1:1. As in the requirement for for-profit institutions, the 
Secretary's intent is to determine whether a trend of continuing excess 
expenditures exists, or if a significant excess expenditure in any one 
year is so great in magnitude that it materially affects the 
unrestricted current fund balance or the unrestricted net assets of the 
institution.
    In the NPRM the Secretary proposed that a public institution is 
financially responsible only if it has its liabilities backed by the 
full faith and credit of a state. In response to public comment, 
Sec. 668.15(b)(9) has been revised to add three alternatives that a 
public institution may employ to demonstrate that it is financially 
responsible: for institutions reporting under the Single Audit Act, a 
positive unrestricted current fund balance; a positive unrestricted 
current fund balance in a state's Higher Education Fund, as presented 
in the general purpose financial statements of the state; or the 
submission of a statement by the State Auditor General that the 
institution has sufficient resources to meet all of its financial 
obligations.
    In response to public comment, Sec. 668.15(d)(ii) has been amended 
to identify the circumstances where an institution that does not 
otherwise demonstrate financial responsibility can continue to 
participate fully by showing that it meets certain conditions to 
demonstrate that it has sufficient resources to ensure against its 
precipitous closure.
    In response to public comment, Sec. 668.15(e)(3) has been added to 
clarify that the submission of an audit performed in accordance with 
the Single Audit Act satisfies the requirement for a submission of an 
audited financial statement under Sec. 668.15(e)(1).

Section 668.16  Standards of Administrative Capability

    In response to public comment, the Secretary has modified the 
proposed administrative standards significantly. The Secretary made 
some changes and clarified implementation of standards where commenters 
pointed out that the Secretary could achieve the same goal by requiring 
less detail or action by those institutions that have demonstrated a 
history of compliance with regulations governing the Title IV, HEA 
programs and by imposing more requirements or restrictions on 
institutions that either have no track record or have a record of 
problems administering the Title IV, HEA programs. The Secretary 
removed other sections of the proposed standards because there was 
overlap with the responsibilities of accrediting agencies or SPREs or 
duplication of other sections of the regulations.
    In response to public comment, Sec. 668.16(a) clarifies that an 
institution must administer the Title IV, HEA programs in accordance 
with all the statutory and regulatory provisions, and with any 
applicable special arrangement, agreement or limitation entered into 
under the authority of statutes applicable to Title IV of the HEA.
    In response to public comment, Sec. 668.16(b)(1) is amended by 
adding documented success in administering Title IV, HEA programs to 
the list of factors the Secretary may consider in determining whether 
an individual is capable. The Secretary intends to use the list of 
factors in Sec. 668.16(b)(2) primarily to assess the adequacy of staff 
levels at institutions that apply for initial participation, change of 
ownership, or the addition of a location or branch campus; institutions 
that make other changes that have an impact on the administrative 
capability of the institution, such as ceasing to use a financial aid 
servicer; and institutions with documented compliance violations.
    In the preamble to the February 28, 1994 NPRM, the Secretary 
solicited comment on the regulation of appropriate staffing levels at 
institutions. In response to public comment, the Secretary does not 
plan to specifically regulate in this area at this time. However, 
Sec. 668.16 has been amended to clarify that the Secretary will look at 
the number and distribution of financial aid staff when determining if 
an institution uses an adequate number of qualified persons to 
administer the Title IV, HEA programs. The Secretary believes this 
addition is inherent to this provision and should be clearly stated. 
However, the Secretary does not plan to closely scrutinize the number 
or distribution of financial aid staff at an institution unless the 
Secretary finds other indications that the institution may not be 
administratively capable due to understaffing or a poor distribution of 
staff at the institution.
    In response to public comment, use of third-party servicers is 
added to the list of factors in Sec. 668.16(b)(2).
    After consideration of public comment, the Secretary agrees that 
the burden to an institution of having to prepare written procedures 
for or written information indicating the nature and frequency of 
communication of pertinent information among all the offices that have 
an impact on the administration of the Title IV, HEA programs outweighs 
the benefit that this provision would provide to the Secretary. 
Therefore, proposed Sec. 668.16(b)(4)(i) has been removed from these 
final regulations. The Secretary also agrees that, unless compliance 
problems relevant to the listed responsibilities are identified, 
institutions may satisfy the requirement in Sec. 668.16(b)(4) that an 
institution have written procedures for or written information 
indicating the responsibilities of the various offices with respect to 
the approval, disbursement, and delivery of Title IV, HEA program 
assistance and the preparation and submission of reports to the 
Secretary by a general written description of the responsibilities of 
the various offices.
    In response to public comment, Sec. 668.16(e)(3)(B) is amended to 
clarify that a maximum time frame in which a student must complete his 
or her educational program must be no longer than 150 percent of the 
published length of the educational program for full-time students.
    This section is also amended to clarify that the time frame must be 
divided into increments of equal size. The Secretary is making this 
change, as well as the change from previous regulations that requires 
increments to be the lesser of an academic year or one-half of the 
length of the program, to make clear that no increment can coincide 
with the length of the maximum time frame.
    Some institutions have used the previous provision as a means of 
avoiding determining satisfactory academic progress for a student until 
the student completes his or her program. Increments of the maximum 
time frame are expected to coincide with an institution's payment 
period, however. For example, in a program of one academic year that is 
structured on a quarter basis, the increments would be expected to be 
the quarters.
    In response to public comment, Sec. 668.16(f)(3) has been modified 
to include documentation of a student's social security number in the 
information normally available to an institution and for which the 
institution must have a system to identify and resolve discrepancies.
    In response to public comment, Sec. 668.16(g) has been amended to 
clarify that an institution must only refer to the Office of the 
Inspector General of the Department of Education credible information 
indicating fraud and abuse.
    In response to public comment, the following sections have been 
removed from these regulations: proposed Sec. 668.16(i) that provided 
that an institution that serves significant numbers of students with 
special needs must have and implement plans for providing students with 
information about how to meet their needs; proposed Sec. 668.16(j) that 
would require institutions to have procedures for receiving, 
investigating, and resolving student complaints; proposed 
Sec. 668.16(l), requiring that certain information be made available to 
students; proposed Sec. 668.16(m) that required that an institution 
have advertising, promotion, and student recruitment practices that 
accurately reflect the content and objective of the educational 
programs offered at the institution; proposed Sec. 668.16(o) which 
addressed the issue of outstanding liabilities; and proposed 
Sec. 668.16(r), which proposed consideration of completion, placement 
and pass rate standards. The specific reasons for the removal of these 
provisions are discussed in the section of the Analysis of Comments and 
Changes that addresses administrative capability (Sec. 668.16).
    In response to public comment, proposed Sec. 668.16(k) that 
requires that an institution: (1) demonstrate a reasonable relationship 
between the length of the program and occupational entry level 
requirements and (2) establish the need for the training has been moved 
to the program participation agreement section (Sec. 668.14).
    In response to public comment, Sec. 668.16(j) has been amended to 
specify that the significant problems identified in reviews of the 
institution that the Secretary will take into account in determining 
administrative capability, relate to the administration of Title IV, 
HEA programs.
    Proposed Sec. 668.16(s), which would have made an annual cohort 
default rate of 20% in the FFEL programs and a 15% default rate in the 
Federal Perkins Loan Program immutable standards of administrative 
capability, has been modified in these final regulations in 
Sec. 668.16(m) as follows. The Secretary accepted commenters' arguments 
that it would be more logical to use a 25% cohort default rate for the 
FFEL programs over a three-year period. Further, the Secretary has 
specified in this section of the regulations that if an institution 
cannot be determined administratively capable solely because the 
institution fails to comply with this section, the Secretary will 
provisionally certify the institution in accordance with 
Sec. 668.13(c). An institution will have the right to appeal 
noncompliance with this provision by submitting an appeal in accordance 
with Sec. 668.17(d). The Secretary has amended Sec. 668.17(c)(6) to 
specify that this standard will not apply to tribally controlled 
colleges, HBCUs, and Navajo community colleges.
    In response to public comment, the Secretary has amended 
Sec. 668.16(l) to provide for the use of net enrollment figures, after 
deduction of students who were entitled to a 100 percent refund, in the 
calculation of withdrawal rate. In addition, the Secretary has now 
restricted the calculation of withdrawal rates to withdrawals of 
undergraduate students. The Secretary believes that the undergraduate 
enrollment pattern is an adequate measurement of an institution's 
ability to administer the Title IV, HEA programs.

Section 668.17  Default Reduction Measures

    In accordance with statute, Sec. 668.17(c)(6) has been amended to 
extend the exemption of historically black colleges or universities 
(HBCUs), tribally controlled community colleges, and Navajo community 
colleges from the provisions of Sec. 668.17(c)(1) to July 1, 1998. 
Section 668.17(c)(1) addresses the loss of participation in the FFEL 
programs for institution's with cohort default rates above the 
specified thresholds.
    Section 668.17(f) which addresses Federal SLS Program participation 
has been deleted since the Federal SLS Program is no longer in 
existence.

Section 668.22  Institutional Refunds and Repayments

    Section 668.22(a)(1)(ii), (e)(1)(i), (g)((2)(iv), (i)(1)(i)(B), and 
(i)(2)(iii) have been revised to reflect that a student who has taken 
an approved leave of absence is considered to have withdrawn for 
purposes of Title IV, HEA program refunds and repayments. This change 
has been made to ensure the treatment of leaves of absence is 
consistent for all Title IV, HEA programs. The Federal Pell Grant 
Program regulations consider a student on a leave of absence to have 
withdrawn for purposes of receiving Federal Pell Grant Program funds. 
This was inconsistent with the FFEL programs regulations, which allowed 
an institution to consider a student on a leave of absence to still be 
enrolled. The FFEL programs treatment of leaves of absence remains in 
effect, but only for in-school deferment purposes, not for purposes of 
Title IV, HEA refunds and repayments. All Title IV, HEA programs will 
now treat a leave of absence as a withdrawal for refund and repayment 
purposes. Corresponding changes have been made by removing the language 
addressing leaves of absence in proposed Sec. 668.22(i)(1)(ii), (i)(2), 
and (i)(3)(iii).
    Section 668.22(a)(2) has been amended to clarify that the 
institution must provide refund examples to students only upon request, 
and must inform students of the availability of these examples in the 
written statement of its refund policy. The language proposed in the 
February 28, 1994 NPRM was unclear and implied that the required 
written refund statement must include the refund examples themselves.
    In response to public comment, Sec. 668.22(c)(2) and (f)(2)(ii) has 
been amended to include allowable late disbursements of unsubsidized 
Federal Stafford loans and loans made under the FDSL Program when 
calculating a student's unpaid charges. This language has also been 
changed to allow for the inclusion of late disbursements of State 
student financial assistance, provided the State in question has a 
standard written late disbursement policy which the institution follows 
in calculating unpaid charges and provided the student is eligible to 
receive the late disbursement in spite of having withdrawn. If an 
institution chooses to count a late disbursement of State student aid 
in this manner, the institution will be liable for any amount not 
disbursed within 60 days after the student's withdrawal. If the late 
disbursement of State aid does not come in, the institution must 
recalculate the Title IV, HEA program refund and return any additional 
amounts required to the appropriate Title IV, HEA program accounts or 
to the lender within the applicable regulatory deadlines.
    The February 28, 1994 NPRM proposed that certain fees could be 
subtracted from the refund due under a pro rata refund calculation. 
This treatment was consistent with previous pro rata guidance given 
under the FFEL programs. The February 28, 1994 NPRM pointed out that, 
as proposed, the calculation included the fees in the institutional 
costs, allowed the institution to retain a prorated portion of those 
institutional costs, and then allowed the full amount of those fees to 
be subtracted from the resulting refund. The resulting ``double-
counting'' allowed the institution to retain more than the actual fees 
that were charged. In response to commenters that supported the 
elimination of such double-counting, Sec. 668.22(c)(4) has been revised 
to allow an institution to exclude certain fees from the pro rata 
refund calculation so that the most an institution would be allowed to 
retain is 100 percent of an institutional charge.
    Further, in response to comment, the reference to an application 
fee as an excludable fee has been deleted as it is not necessary to 
specifically allow for such an exclusion. The Secretary agrees with the 
commenters that asserted that an application fee should not be a factor 
in the calculation of an institutional refund for Title IV, HEA program 
purposes, because it is not an educational cost.
    The provision allowing for the exclusion of expended board credits 
in excess of the attributable prorated portion (proposed 
Sec. 668.22(c)(1)(iv)), based on the period attended by the student 
prior to withdrawal, has been removed. After further examination, the 
Secretary has found this provision to be excessively complicated and 
not entirely effective in the purpose intended. No support for this 
provision was received from commenters and the Secretary plans to 
revisit this issue in the future, after seeking further input from the 
financial aid community. Except for treatment under the provision in 
Sec. 668.22(c)(6)(i), all room and board charges must be included in 
the pro rata refund calculation and refunded at the applicable 
percentage, as required by the Amendments of 1992.
    The language of Sec. 668.22(c)(5) (and corresponding language in 
Appendix A) has been changed to clarify the specific requirements 
related to ``other charges assessed the student by the institution'' 
under the pro rata refund calculation. ``Other charges'' includes, but 
is not limited to, charges for any equipment, books, or supplies issued 
by an institution to the student, provided that the enrollment 
agreement signed by the student specifies a separate charge for such 
equipment or provided that the institution refers the student to an 
affiliated vendor for purchase of the equipment. An institution may 
exclude the documented cost of such equipment from the pro rata refund 
calculation in the following instances: For unreturnable equipment, if 
the student actually receives and keeps the equipment; or for 
returnable equipment, the student does not return the equipment in good 
condition allowing for reasonable wear and tear, within 20 days after 
withdrawal. For example, an item is not considered to be in good 
condition and, hence, is unreturnable, if it cannot be reused because 
of clearly recognized health and sanitary reasons. Institutions must 
clearly disclose in the enrollment agreement any restrictions on the 
return of equipment, including identifying equipment that is 
unreturnable. The regulatory language has been changed to reflect that 
an institution must notify the student in writing, prior to enrollment, 
that return of such equipment will be required within 20 days of 
withdrawal. It is the responsibility of the institution to determine 
whether specific equipment is returnable or not, in accordance with 
State and accrediting agency guidelines. This change conforms with a 
similar provision from the FFEL programs regulations. The Secretary 
believes that it would be unreasonable to expect a student to return 
equipment within a certain time period without ensuring that the 
student has been informed of the conditions of acceptable return of 
equipment.
    The February 28, 1994 NPRM proposed that institutions be exempted 
from making refunds of $25 or less, because the burden and cost of 
making such a refund would exceed the amount refunded. However, that 
proposed change will not be made. Section 668.22(f)(3)(iii) has been 
amended to remove the proposed minimum dollar amount below which a 
refund would not have to be made. After further consideration, the 
Secretary believes that this proposed provision is inconsistent with 
the amendment made to section 490 of the HEA that established criminal 
penalties for failure to pay refunds, specifically including refunds of 
less than two hundred dollars. Further, the Secretary believes that by 
the time the institution has determined the amount of the refund, most 
of the administrative effort and cost has been expended. The Secretary 
believes that neither the institution nor the student would benefit 
from the proposal to allow institutions to forego making refunds of $25 
or less. Also, the Secretary believes that part of the institution's 
administrative costs are recouped through the administrative fee that 
is allowed to be excluded from the pro rata refund calculation.
    In response to public comment, language has been added to 
Sec. 668.22(i)(1)(ii) to limit an institution's determination of a 
student's unofficial withdrawal to no later than 30 days after the 
expiration of the enrollment period, the academic year, or the program, 
whichever is earlier.
    Section 668.22(i)(2) has been amended to clarify that the refund 
deadline in that paragraph is applicable only to refunds made to 
students, and does not alter or affect the FFEL regulatory deadlines 
for returning a refund to a lender or the regulatory deadline for 
returning a refund to a Title IV, HEA program account.
    In response to public comment, the Secretary has provided the 
following examples to aid in the implementation of the refund 
requirements:

Example #1

Fair and Equitable Refund: Term Institution

    Institutional Profile. Term Community College (TCC) offers two- 
and four-year programs, measured in credit hours, and its academic 
year is divided into two semesters, each 15 weeks long. TCC 
participates in the Federal Pell Grant program, the Federal Family 
Education Loan (FFEL) programs, and the Federal campus-based 
programs. TCC charges by the semester: $1800 for tuition, $2500 for 
on-campus housing and meals, $25 for application, and $75 for 
administrative costs. Noninstitutional charges include: books and 
supply costs (because these items are purchased separately by the 
student, from the campus bookstore or an unaffiliated vendor), 
living expenses and meals (if the student lives in off-campus 
housing), transportation, and personal miscellaneous expenses. 
(Noninstitutional costs vary by student budget, depending in part 
upon the educational program in which the student enrolls.)
    Applicable Refund Policies. The State in which TCC is located 
has a modified pro rata refund policy: students who withdraw on or 
before the 25 percent point of the enrollment period receive a 75 
percent refund; students who withdraw after the 25 percent point but 
on or before the 50 percent point of the enrollment period receive a 
50 percent refund; and students who withdraw after the 50 percent 
point but on or before the 75 percent point of the enrollment period 
receive a 25 percent refund. (Students withdrawing after the 75 
percent point of the enrollment period receive no refund under State 
guidelines.)
    TCC's accrediting agency refund guidelines offer a 50 percent 
refund to students who withdraw in the first four weeks of the 
enrollment period, and a 25 percent refund to those who withdraw 
after four weeks but before the beginning of the ninth week. 
(Students withdrawing after that point receive no refund under the 
accrediting agency policy.)
    Student Profile. Sam the Student enrolled in a two-year program 
at TCC, moved into on-campus housing, and began attending classes. 
Sam made a cash payment of $500 toward institutional charges.
    Financial Aid Package and Disbursements. Sam's financial aid 
package for the academic year consisted of a $2200 Federal Pell 
Grant, a $2400 Federal Stafford Loan, a $1600 FSEOG, and $1000 in 
Federal Work-Study funds. Sam's first disbursement of Federal Pell 
Grant funds ($1100), his first disbursement of Federal Stafford Loan 
funds ($1116--loan and origination fees have been subtracted), and 
his first disbursement of FSEOG funds ($800), were credited to his 
institutional account. Sam received $400 of his Federal Work-Study 
award, paid directly to him for living expenses, before he 
officially withdrew at the end of the fifth week.
    Step One: Figuring the Educational Costs. Only institutional 
costs are included in the refund calculation. TCC must use the 
institutional costs as charged, by the term, for a total of $4375--
$1800 tuition, $2500 on-campus housing and meals (because Sam lives 
on-campus), and $75 for administrative costs. (The $25 application 
fee is not a cost of education, so it is not included.) 
Noninstitutional costs are treated in the repayment calculation. 
(See Example #3.)
    Step Two: Figuring the Totals Paid to Institutional Costs. TCC's 
records show that Sam paid $500 in cash toward his institutional 
costs, and that a total of $3016 in student aid was paid toward 
institutional charges [$1100 Federal Pell+$1116 Federal Stafford+800 
FSEOG=$3016]. (The Federal Work-Study funds are not reflected in 
this total, because funds earned through work-study cannot be 
required to be refunded or returned, and are therefore not included 
in the calculation of a refund.)
    The total paid to institutional costs (student payments and 
financial aid) is $3516 [$500+$3016=$3516]. Only funds paid to 
institutional charges are included in the refund calculation; aid 
disbursed to the student for noninstitutional expenses is treated in 
the repayment calculation. (See Example #3.)
    Step Three: Checking for Pro Rata Eligibility Under the Law. To 
determine whether Sam is eligible for a statutory pro rata refund 
calculation, TCC must determine if he's a first-time student and if 
he withdrew on or before the 60 percent point in time of the 
enrollment period for which he was charged. Sam is a first-time 
student, because he's never attended classes at TCC prior to this 
term. He withdrew at the end of the fifth week in the term; the term 
is 15 weeks long, and the 60 percent point is figured in calendar 
time for term institutions [15 weeks x .60=9, so any withdrawal 
prior to the end of the ninth week falls within the 60 percent 
requirement of statutory pro rata]. Sam withdrew at the end of the 
fifth week, so he is entitled to a statutory pro rata refund 
calculation.
    Step Four: Calculating the Unpaid Charges. Because a student's 
unpaid charges impact the refund calculation, TCC must first 
calculate Sam's unpaid charges (as defined in Sec. 668.22(c) and 
(f)) using the following formula:

Total Institutional Costs
-Total Aid Paid to Institutional Costs
----------------------------------------------------------------------
=Student's Scheduled Cash Payment (SCP)
-Student's Cash Paid to Institutional Costs
----------------------------------------------------------------------
=Unpaid Charges

To calculate Sam's unpaid charges, TCC subtracts the $3016 in total 
aid paid to institutional costs (from Step Two, above) from the 
Total institutional costs of $4375 (from Step One, above). The 
resulting scheduled cash payment is $1359 [$4375-$3016=$1359]. From 
that total, TCC subtracts Sam's cash payment of $500 (from Step Two, 
above) and Sam's unpaid charges equal $859 [$1359-$500=$859]. This 
amount ($859) will be used in all three refund calculations.
    Step Five: Calculating a Fair and Equitable Refund. Under the 
Amendments of 1992, TCC must calculate Sam's refund under State and 
accrediting agency guidelines, and under statutory pro rata 
requirements. TCC must then use whichever calculation provides the 
largest refund.
    In accordance with the June 8, 1993 Student Assistance General 
Provisions regulations, for all refunds other than statutory pro 
rata refunds, the student's unpaid charges must be subtracted from 
the amount the institution may otherwise retain. Therefore, in 
calculating Sam's refund under State and accrediting agency 
guidelines, $859 (from Step Four, above) must be subtracted from the 
amount TCC could otherwise retain.
    The State refund guidelines allow Sam a 50 percent refund (he 
withdrew after the 25 percent point but before the 50 percent 
point), which means TCC is allowed to retain 50 percent of the 
institutional charges. Total institutional costs (from Step One, 
above) are $4375. Assessed at 50 percent, this allows TCC to retain 
$2188 [$4375 x .50=$2187.5]. (Figures are rounded to the nearest 
dollar.) However, in accordance with the June 8, 1993 regulations, 
TCC must subtract Sam's unpaid charges of $859 (from Step Four, 
above) from this amount. Therefore, TCC is actually allowed to 
retain $1329 [$2188-$859=$1329]. Sam's refund under the State policy 
is $2187, figured by subtracting the amount TCC can retain from the 
total paid to institutional costs (from Step Two, above) 
[$3516-$1329=$2187].
    The accrediting agency refund guidelines allow Sam a 25 percent 
refund (he withdrew after four weeks but before the beginning of the 
ninth week), which means TCC is allowed to retain 75 percent of the 
institutional charges. Total institutional costs (from Step One, 
above) are $4375. Assessed at 75 percent, this allows TCC to retain 
$3281 [$4375 x .75=$3281.25]. (Figures are rounded to the nearest 
dollar.) However, in accordance with the June 8, 1993 regulations, 
TCC must subtract Sam's unpaid charges of $859 (from Step Four, 
above) from this amount. Therefore, TCC is actually allowed to 
retain $2422 [$3281-$859=$2422]. Sam's refund under the accrediting 
agency policy is $1094, figured by subtracting the amount TCC can 
retain from the total paid to institutional costs (from Step Two, 
above) [$3516-$2422=$1094].
    To figure Sam's refund under the statutory pro rata refund 
calculation, TCC must first calculate the portion of the enrollment 
period that remains (in accordance with Sec. 668.22(c)) by using the 
following formula for credit-hour programs:

Weeks Remaining in Period
Total Weeks in Period
----------------------------------------------------------------------
=Portion of Enrollment Period That Remains

Sam withdrew at the end of the fifth week of a fifteen-week 
semester, so 10 weeks remain in the term. TCC calculates that for 
Sam, 60 percent of the enrollment period remains [10+15=.666, 
rounded down to the nearest tenth]. The statutory pro rata 
calculation allows Sam a refund proportionate to the portion of the 
enrollment period that remains: 60 percent. Total institutional 
costs (from Step One, above) are $4375. However, under the statutory 
pro rata refund calculation, TCC is allowed to exclude from this 
amount an administrative charge, not to exceed the lesser of $100 or 
5 percent of the institutional charges (provided that the fee is a 
real and documented charge). Therefore, the $75 administrative fee 
charged to all TCC students can be excluded, making the total 
institutional costs for statutory pro rata purposes equal $4300 
[$4375-$75=$4300]. (Had the administrative fee exceeded $100 or 5 
percent of TCC's total institutional charges, TCC could only have 
excluded the allowable portion of the fee.) Total institutional 
costs are assessed at 60 percent, making Sam's initial refund equal 
$2580 [$4300 x .60=$2580]. However, in accordance with the law, TCC 
must subtract Sam's unpaid charges of $859 (from Step Four, above) 
from his initial refund amount. Therefore, Sam's actual refund under 
the statutory pro rata refund calculation is $1721 
[$2580-$859=$1721].
    After calculating all of Sam's possible refunds, TCC must use 
the calculation which provides for the largest refund. In this case, 
the largest refund is provided by the State refund calculation: 
$2187. This refund amount must be returned, in Sam's behalf, first 
to the Title IV, HEA programs and then to Sam, in accordance with 
the allocation priorities in Sec. 668.22(g); no portion of the 
refund due can be used to pay Sam's unpaid charges to TCC.

Example #2

Fair and Equitable Refund: Nonterm Institution.

    Institutional Profile. Nonterm Technical Institute (NTI) offers 
900-hour and 1200-hour programs, measured in clock hours, and its 
academic year is 30 weeks long. NTI participates in the Federal Pell 
Grant program and the Federal Family Education Loan (FFEL) programs. 
NTI charges by the program and requires payment up-front. The 
institutional costs of the 900-hour program are: $3000 for tuition; 
$520 for equipment, books, and supplies; and a $100 administrative 
fee. Institutional costs for the 1200-hour program are: $4000 for 
tuition; $740 for equipment, books, and supplies; and a $150 
administrative fee. Noninstitutional charges include: living 
expenses and meals (NTI has no on-campus housing or food service), 
transportation, and personal miscellaneous expenses. 
(Noninstitutional costs vary by student budget, depending in part 
upon the educational program in which the student enrolls.)
    Applicable Refund Policies. The State in which NTI is located 
provides a 90 percent refund to students who withdraw before 
completing 10 percent of the program; students who withdraw after 
the 10 percent point but before completing 25 percent of the program 
receive a 70 percent refund; students who withdraw after the 25 
percent point but before completing 50 percent of the program 
receive a 45 percent refund; and students who withdraw after the 50 
percent point but before completing 75 percent of the program 
receive a 20 percent refund. (Students withdrawing after completing 
75 percent of the program receive no refund under State guidelines.)
    NTI's accrediting agency gives an 80 percent refund to students 
who withdraw before completing 15 percent of the program; students 
who withdraw after the 15 percent point but before completing 45 
percent of the program receive a 50 percent refund; and students who 
withdraw after the 45 percent point but before completing 60 percent 
of the program receive a 25 percent refund. (Students withdrawing 
after completing 60 percent of the program receive no refund under 
the accrediting agency policy.)
    Student Profile. Susan the Student, who lives in an off-campus 
apartment, enrolled in a 900-hour program at NTI and began attending 
classes. Susan made a cash payment of $800 toward institutional 
charges.
    Financial Aid Package and Disbursements. Susan's financial aid 
package for the program consisted of a $2000 Federal Pell Grant and 
a $2325 Federal Stafford Loan. Susan's first Federal Pell Grant 
disbursement ($1000) and the first disbursement of her Federal 
Stafford Loan ($1081--loan and origination fees have been 
subtracted) were credited to her institutional account. At the end 
of the academic year, NTI determined that Susan had unofficially 
withdrawn. The last record of Susan's attendance was a midterm exam 
she'd taken after completing 450 hours of the program.
    Step One: Figuring the Educational Costs. Only institutional 
costs are included in the refund calculation. NTI must use the 
institutional costs as charged, by the term, for a total of $3620--
$3000 tuition, $520 for equipment, books, and supplies, and $100 for 
administrative costs. Noninstitutional costs are treated in the 
repayment calculation. (See Example #3.)
    Step Two: Figuring the Totals Paid to Institutional Costs. NTI's 
records show that Susan paid $800 in cash toward her institutional 
costs, and that a total of $2081 in student aid was paid toward 
institutional charges [$1000 Federal Pell+$1081 Federal 
Stafford=$2081].
    The total paid to institutional costs (student payments and 
financial aid) is $2881 [$800+$2081=$2881]. Only funds paid to 
institutional charges are included in the refund calculation; aid 
disbursed to the student for noninstitutional expenses are treated 
in the repayment calculation. (See Example #3.)
    Step Three: Checking for Pro Rata Eligibility Under the Law. To 
determine whether Susan is eligible for a statutory pro rata refund 
calculation, NTI must determine if she's a first-time student and if 
she withdrew on or before the point in time when she had completed 
60 percent of the clock hours scheduled for the period of enrollment 
for which she was charged. Susan enrolled last year in the same 
program at NTI, but she never began attending classes and so was 
entitled to a 100 percent refund. Therefore, in accordance with the 
regulatory definition in Sec. 668.22(c), Susan is a first-time 
student. Susan's last recorded date of attendance was at the point 
of having completed 450 clock hours; 900 clock hours are scheduled 
for the program, and 60 percent of the scheduled hours would be 540 
clock hours [900 hours x .60=540]. Because Susan is a first-time 
student and she withdrew before completing 60 percent of the hours 
scheduled, she is entitled to a statutory pro rata refund 
calculation.
    Step Four: Calculating the Unpaid Charges. Because a student's 
unpaid charges impact the refund calculation, NTI must first 
calculate Susan's unpaid charges (as defined in Sec. 668.22(c) and 
(f)) using the following formula:

Total Institutional Costs
-Total Aid Paid to Institutional Costs
----------------------------------------------------------------------
=Student's Scheduled Cash Payment (SCP)
-Student's Cash Paid to Institutional Costs
----------------------------------------------------------------------
=Unpaid Charges

To calculate Susan's unpaid charges, NTI subtracts the $2081 in 
total aid paid to institutional costs (from Step Two, above) from 
the total institutional costs of $3620 (from Step One, above). The 
resulting scheduled cash payment is $1539 [$3620-$2081=$1539]. From 
that total, NTI subtracts Susan's cash payment of $800 (from Step 
Two, above) and Susan's unpaid charges equal $739 [$1539-$800=$739]. 
This amount ($739) will be used in all three refund calculations.
    Step Five: Calculating a Fair and Equitable Refund. Under the 
Amendments of 1992, NTI must calculate Susan's refund under State 
and accrediting agency guidelines, and under statutory pro rata 
requirements. NTI must then use whichever calculation provides the 
largest refund.
    In accordance with the June 8, 1993 Student Assistance General 
Provisions regulations, for all refunds other than statutory pro 
rata refunds, the student's unpaid charges must be subtracted from 
the amount the institution may otherwise retain. Therefore, in 
calculating Susan's refund under State and accrediting agency 
guidelines, $739 (from Step Four, above) must be subtracted from the 
amount NTI could otherwise retain.
    The State refund guidelines allow Susan a 20 percent refund (she 
withdrew after the 50 percent point but before completing 75 percent 
of the program), which means NTI is allowed to retain 80 percent of 
the institutional charges. Total institutional costs (from Step One, 
above) are $3620. Assessed at 80 percent, this allows NTI to retain 
$2896 [$3620 x .80=$2896]. However, in accordance with the June 8, 
1993 regulations, NTI must subtract Susan's unpaid charges of $739 
(from Step Four, above) from this amount. Therefore, NTI is actually 
allowed to retain $2157 [$2896-$739=$2157]. Susan's refund under the 
State policy is $724, figured by subtracting the amount NTI can 
retain from the total paid to institutional costs (from Step Two, 
above) [$2881-$2157=$724].
    The accrediting agency refund guidelines allow Susan a 25 percent 
refund (she withdrew after the 45 percent point but before completing 
60 percent of the program), which means NTI is allowed to retain 75 
percent of the institutional charges. Total institutional costs (from 
Step One, above) are $3620. Assessed at 75 percent, this allows NTI to 
retain $2715 [$3620 x .75=$2715]. However, in accordance with the June 
8, 1993 regulations, NTI must subtract Susan's unpaid charges of $739 
(from Step Four, above) from this amount. Therefore, NTI is actually 
allowed to retain $1976 [$2715-$739=$1976]. Susan's refund under the 
accrediting agency policy is $905, figured by subtracting the amount 
NTI can retain from the total paid to institutional costs (from Step 
Two, above) [$2881-$1976=$905].
    To figure Susan's refund under the statutory pro rata refund 
calculation, NTI must first calculate the portion of the enrollment 
period that remains (in accordance with Sec. 668.22(c)) by using the 
following formula for clock-hour programs:

Hours Remaining in Period
Total Hours in Period
=Portion of Enrollment Period That Remains

Susan's last recorded date of attendance was at the point of having 
completed 450 clock hours, so 450 hours remain in the program. NTI 
calculates that for Susan, 50 percent of the enrollment period 
remains [450900=.50]. The statutory pro rata calculation 
allows Susan a refund proportionate to the portion of the enrollment 
period that remains: 50 percent. Total institutional costs (from 
Step One, above) are $3620. However, under the statutory pro rata 
refund calculation, NTI is allowed to exclude from this amount an 
administrative charge, not to exceed the lesser of $100 or 5 percent 
of the institutional charges (provided that the fee is a real and 
documented charge). Therefore, the $100 administrative fee charged 
to all NTI students can be excluded, making the total institutional 
costs for statutory pro rata purposes equal $3520 
[$3620-$100=$3520]. (Had the administrative fee exceeded $100 or 5 
percent of NTI's total institutional charges, NTI could only have 
excluded the allowable portion of the fee.) NTI could also exclude 
(from the total institutional costs) the documented cost of any 
returnable equipment that Susan failed to return in accordance with 
Sec. 668.22(c), and the documented cost of any unreturnable 
equipment that was actually issued to Susan (and kept by Susan) in 
accordance with 668.22(c). Total institutional costs are assessed at 
50 percent, making Susan's initial refund equal $1760 
[$3520 x .50=$1760]. However, in accordance with the law, NTI must 
subtract Susan's unpaid charges of $739 (from Step Four, above) from 
her initial refund amount. Therefore, Susan's actual refund under 
the statutory  pro rata refund calculation is $1021 
[$1760-$739=$1021].
    After calculating all of Susan's possible refunds, NTI must use 
the calculation which provides for the largest refund. In this case, 
the largest refund is provided by the statutory pro rata refund 
calculation: $1021. This refund amount must be returned, in Susan's 
behalf, first to the Title IV, HEA programs and then to Susan, in 
accordance with the allocation priorities in Sec. 668.22(g); NTI 
cannot bill Susan for any unpaid charges, because under the 
statutory pro rata refund calculation, those charges have been paid 
by Title IV, HEA program funds.

Example #3

Repayment Calculation

    Institutional Profile. United States Academy (USA) offers one- 
and two-year programs on a semester system; its academic year is 30 
weeks long and divided into two equal semesters, each 15 weeks in 
length. USA participates in the Federal Pell Grant program and the 
Federal Family Education Loan (FFEL) programs. USA charges $800 
tuition per semester. Noninstitutional costs are assessed by the 
semester at the following average rates: $3000 for living expenses 
and meals (USA has no on-campus housing or food service), $250 for 
books and supplies (not purchased through the institution), $600 for 
transportation, and $300 for personal miscellaneous expenses. 
(Noninstitutional cost assessments are amended as necessary based on 
individual student needs and circumstances.)
    Institutional Repayment Policy. In keeping with the local 
bookstore's refund policy, 50 percent of the books and supplies 
allowance is incurred at the time of purchase. All other 
noninstitutional (living) expenses are prorated based on the 
percentage of the semester completed.
    Student Profile. Sarah the Student, who lives in an off-campus 
apartment, enrolled for the winter semester at USA and began 
attending classes. She made a $400 cash payment toward her tuition 
costs. Her noninstitutional costs are adequately reflected in the 
institution's average student budget.
    Financial Aid Package and Disbursements. Sarah's financial aid 
package for the program consisted of a $1800 Federal Pell Grant and 
a $2000 Federal Stafford Loan. Sarah's first Federal Pell Grant 
disbursement ($900) was applied first to her tuition balance ($400) 
and the remaining $500 was then disbursed to her in cash. The first 
disbursement of her Federal Stafford Loan ($930--loan and 
origination fees have been subtracted) was also disbursed directly 
to her. Sarah officially withdrew after attending 4 weeks.
    Step One: Figuring Expenses Actually Incurred. Only 
noninstitutional costs are included in a repayment calculation. 
Institutional costs are treated in the refund calculation. (See 
Examples #1 and #2.) According to USA's repayment policy, 50 percent 
of Sarah's $250 books and supplies allowance was incurred at the 
time of purchase [$250 x .50=$125]. The rest of her semester 
expenses, for living expenses and meals, transportation, and 
personal miscellaneous expenses, are prorated based on the 
percentage of the term completed. Total noninstitutional costs equal 
$3900 [$3000+$600+$300=$3900]. Because Sarah completed 4 of 15 
weeks, these costs should be prorated at 27 percent 
[415=.266, rounded to the nearest tenth]. Therefore, Sarah's 
noninstitutional costs incurred equal $1053 [$3900 x .27=$1053].
    Step Two: Figuring the Total Federal Student Financial Aid (SFA) 
Disbursed as Cash. Sarah received $500 of her Federal Pell Grant in 
cash, and all of her first Stafford Loan disbursements, $930, in 
cash. However, in accordance with Sec. 668.22(e), the repayment 
calculation does not include any Title IV, HEA program loan amounts 
disbursed as cash, because those loan funds will have to be repaid 
by the student anyway. Therefore, a total of $500 cash disbursed is 
considered for repayment purposes. (As with the refund calculation, 
the repayment calculation does not include any Federal Work-Study 
funds disbursed as cash, because repayment of work earnings cannot 
be required. Notice that students Sam and Susan, from Examples #1 
and #2 respectively, would not have owed repayments because they 
received no cash disbursements other than FFELP loan funds or 
Federal Work-Study funds.)
    Step Three: Calculating the Repayment Owed. To calculate Sarah's 
owed repayment, USA must subtract the total costs incurred ($1053, 
from Step One above) from the total cash disbursed ($500, from Step 
Two above). In Sarah's case, this calculation results in a negative 
number [$500-$1053=0], which means she owes no repayment. If her 
cash disbursement had exceeded her costs incurred, however, she 
would have been required to repay the balance back to the Title IV, 
HEA program funds (the Federal Pell Grant program, in this case), in 
accordance with the allocation priorities in Sec. 668.22(g); if 
Sarah had owed unpaid charges to USA, no portion of the repayment 
owed could be used to pay those charges.

Section 668.23  Audits, Records, and Examinations

    The Secretary has amended Sec. 668.23 by requiring an institution 
or a third-party servicer with which the institution contracts to 
cooperate with the institution's nationally recognized accrediting 
agency in the conduct of audits, investigations, or program reviews 
authorized by law, in addition to the other authorized entities that 
were stipulated in the NPRMs.
    In addition, the Secretary has amended this section to require an 
institution to have performed, without exception, on an annual basis, a 
compliance audit of an institution's administration of its Title IV, 
HEA programs or a third-party servicer to have performed, without 
exception, on an annual basis, a compliance audit of a third-party's 
administration of an aspect of an institution's participation in a 
Title IV, HEA program.
    The Secretary is removing the audit exceptions proposed in the 
NPRMs that would have exempted certain institutions and third-party 
servicers from some or all of the audit requirements of this section 
because upon further review, the Secretary has determined that the 
proposed exemptions were inconsistent with the requirement in section 
487(c) of the HEA that annual compliance audits be provided for in 
these regulations. However, changes are planned for the Student 
Financial Assistance Programs Audit Guide to reduce administrative 
costs by allowing institutions meeting certain performance-based or 
funding criteria to submit compliance audits under a reviewed or 
compiled basis rather than a full compliance audit.
    Paragraph (c)(3) is revised to specify that an institution's or 
third-party servicer's audit report must be submitted to the Department 
of Education's Office of Inspector General within 120 days after the 
end of the institution's or servicer's fiscal year. An institution or 
third-party servicer that submits an audit conducted in accordance with 
the Single Audit Act (Chapter 75 of Title 31, United States Code) is 
required to submit that audit report in accordance with the deadlines 
established in that act.
    Finally, paragraph (c)(4) is revised to include the Secretary of 
Veterans Affairs in the list of entities that the Secretary may require 
an institution or a third-party servicer to provide, upon request, the 
results of any audit conducted under this section.
Subpart G--Fine, Limitation, Suspension and Termination Proceedings

Section 668.82  Standard of Conduct

    The Secretary has revised paragraph (d)(1)(D) to clarify that a 
third-party servicer violates its fiduciary duty and that of any 
institution with which the servicer contracts if the servicer uses or 
contracts in a capacity that involves any aspect of the administration 
of the Title IV, HEA programs any person, agency, or organization that 
has been or whose officers or employees are guilty of a crime or 
judicially or administratively determined to have committed fraud or 
other material violation of law with respect to government funds.

Section 668.92  Fines

    The Secretary has revised this section to take into account 
additional criteria when determining the amount of a fine against a 
third-party servicer. Paragraph (a)(5) is revised so that a repeated 
mechanical systemic unintentional error is not counted as a single 
violation if the third-party servicer, against whom the fine is 
assessed, had already been cited for a similar violation and had not 
taken the appropriate steps to correct the problem. The Secretary will 
also take into consideration in determining the amount of the fine, the 
amount of Title IV, HEA program funds that were wasted as a result of 
the repeated mechanical systemic unintentional error. The Secretary 
also makes a conforming change in Sec. 682.413 to parallel the changes 
described in this section.

Part 682--Federal Family Education Loan Programs

Subpart D--Guaranty Agency Programs

Section 682.413  Remedial Actions

    The Secretary has revised the provisions of this section governing 
the means of collecting a liability that results from a third-party 
servicer's violation of applicable Title IV, HEA program requirements 
in administering a lender's or guaranty agency's FFEL programs. A 
third-party servicer is required to repay any outstanding liabilities 
because of its violation only if the lender or guaranty agency has not 
paid the full amount of the liability or has not made satisfactory 
arrangements to pay the amount of the liability within 30 days from the 
date that the lender or guaranty agency receives the notice from the 
Secretary of the liability. If the 30-day period elapses and the lender 
or guaranty agency has not paid the full amount of the liability within 
that time frame or has not set up a payment plan acceptable to the 
Secretary to repay that liability, the Secretary will attempt to 
collect any remaining amount owed by offsetting the lender's or 
guaranty agency's first bill to the Secretary for interest benefits or 
special allowance. After that, if the liability has not been completely 
paid, the Secretary will seek payment for the remainder of the 
liability from the third-party servicer.

Section 682.416  Requirements for Third-Party Servicers and Lenders 
Contracting With Third-Party Servicers

    The Secretary has revised paragraph (b) to specify that the 
Secretary will apply the provisions of 34 CFR 668.15(b) (1)-(4) and 
(6)-(9) to determine that a third-party servicer is financially 
responsible under this part. Any references to an institution under 
those provisions shall be understood to mean the third-party servicer, 
for this purpose.

Analysis of Comments and Changes

    In response to the Secretary's invitation in the NPRMs, 84 parties 
submitted comments on the NPRM published on February 17, 1994 and 421 
parties submitted comments on the NPRM published on February 28, 1994. 
An analysis of the comments and of the changes in the regulations since 
publication of the NPRMs 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 the applicable statutory authority are not addressed.
    General comments that refer to broad issues rather than a specific 
section or sections of the proposed regulations are discussed first, 
followed by a discussion of other issues in the order in which they 
appeared in the NPRMs.
    It should be noted that not all comments are addressed in these 
final regulations. There are several reasons for this. First, many of 
the concerns expressed by commenters were directed to the statute, not 
the proposed regulations. In some instances, those comments are 
mentioned in the discussion that follows because of the importance of 
the issues that were raised. In most instances, however, they are not 
mentioned because the Secretary is not legally authorized to make the 
changes suggested by commenters. Second, many commenters made excellent 
suggestions for editorial and technical changes, as well as other minor 
changes, that, in the Secretary's opinion, strengthened the 
regulations; the Secretary has merely incorporated these suggestions 
without comment. Third, some comments appeared to be based on 
misunderstandings of what was actually in the NPRMs. For example, a few 
commenters expressed concern about the absence of a particular 
provision that was, in fact, included in the NPRMs. In general, these 
types of comments are not discussed.

General Comments

    The Secretary received numerous comments about the overall impact 
of the proposed regulations. In general, commenters opposed to the 
proposed regulations believed that the February 28, 1994 NPRM did not 
achieve the coordinated balance of responsibilities among the triad 
members that it sought to achieve, and that it provided for extensive 
and duplicative data collection and reporting requirements that created 
a costly and unnecessary burden on the higher education community. 
Further, they believed that the regulations did not regulate ``narrowly 
to the law,'' as they purported to do. In general, these commenters 
suggested that the Secretary should review each requirement in the 
proposed regulations to determine if it was required by the statute and 
should further ensure that all requirements that meet this test and are 
included in the final regulations are implemented in the most 
reasonable and cost effective manner. This, they believed, would ensure 
the Department's compliance with Executive Order 12866.
    The more specific concerns of commenters opposed to the proposed 
regulations may be summarized as follows:
    (1) The proposed regulations are overly prescriptive and excessive 
in detail and either exceed the statutory authority of the Secretary or 
significantly expand the statute beyond Congressional intent.
    (2) The proposed regulations will force institutions and third-
party servicers to engage in excessive and duplicative information 
gathering and reporting, at considerable cost, with no net increase in 
the quantity or quality of information available to the public, and 
will result in the diversion of institutions' and third-party 
servicers' already scarce resources away from their primary mission of 
providing a quality education.
    (3) The proposed regulations threaten the diversity of American 
higher education and fail to focus oversight properly on vocational 
institutions.
    In addition to receiving comments in opposition to the proposed 
regulations, the Secretary received comments supportive of the NPRM. 
For example, these commenters favored the increased protections for 
students in the changes to the refund provisions, and approved of the 
strengthening of the administrative capability and financial 
responsibility standards.
    Finally, the Secretary received suggestions from several commenters 
that the Department should strongly encourage all triad members to work 
together and adopt the same or similar language for the various 
standards, should collect the necessary data through a common source 
such as readily available public information or IPEDS, and should use 
common methodologies for various calculations such as completion or 
withdrawal rates.
    Discussion: As suggested by several commenters, the Secretary has 
carefully reviewed each requirement in the proposed regulations in 
light of statutory intent. The Secretary has also carefully considered 
both the burden of the proposed regulations on institutions and third-
party servicers, in terms of cost, duplication of effort, and the added 
recordkeeping and reporting requirements. Similarly, the Secretary has 
considered the benefits of the proposed regulations, not just to 
institutions and third-party servicers but to students and the general 
public as well. A particular concern of the Secretary has been how to 
ensure that the regulations hold the three members of the triad 
accountable for the manner in which they fulfill their responsibilities 
under the HEA yet still provide each member of the triad the 
flexibility to determine the appropriate means to carry out those 
responsibilities.
    In general, the Secretary has responded to the concerns of 
commenters by eliminating much of what was perceived as excessive 
detail in the February 28, 1994 NPRM, thus providing institutions more 
flexibility to meet a particular requirement in the manner that best 
suits their needs. The final regulations make it quite clear that the 
Secretary continues to bear the primary responsibility for enforcing 
standards and requirements to ensure that institutions and third-party 
servicers administer Title IV, HEA program funds properly.
    The Secretary does not believe that the Department's role 
overshadows those of the accrediting agencies or the States. These 
regulations not only speak to the responsibilities of each member of 
the triad, but also establish the Federal requirements for institutions 
and third-party servicers under the HEA. Therefore, the Federal role in 
these regulations may appear larger than that envisioned for the States 
and accrediting bodies, but this appearance is due to the inclusion of 
the implementing regulations for these responsibilities. Without 
question, the States and accrediting bodies will exercise their 
responsibilities by promulgating and implementing standards for HEA 
program participants, and the Secretary anticipates that any overview 
of all such requirements by the triad would show that the Federal role 
has been appropriately established. The Secretary notes that some of 
the commenters specific concerns are addressed in the Analysis of 
Comments and Changes section of these regulations.
    Finally, with regard to the issue of whether the regulations 
properly focus on vocational institutions, the Secretary wishes to note 
that Congress found abuses in all sectors of higher education, not just 
the vocational sector. For this reason, the regulations apply to all 
institutions.
    Changes: The specific changes to the regulations are discussed 
below.

Part 668--Student Assistance General Provisions

Subpart A--General

Section 668.2  General Definitions.

    Academic Year. Comments: Many commenters argued that the proposed 
definition of a week in determining the length of an academic year 
should not be based on the number of days of instructional time for 
institutions that use clock hours to measure program length. These 
commenters suggested that a week of instructional time should be based 
on the number of clock hours completed by a student. Some of these 
commenters suggested that a week of instructional time should be 
defined as 24 clock hours; another commenter suggested 30 clock hours. 
A number of these commenters suggested that this approach was more 
consistent with the regulatory requirements for calculating pro-rata 
refunds, which relies on the number of clock hours completed by 
students.
    Discussion: Section 481(d)(1) of the HEA requires that an academic 
year must be a minimum of 30 weeks of instructional time in which a 
full-time student is expected to complete at least 900 clock hours at 
an institution that measures program length in clock hours. Thus, the 
statute requires a minimum of 30 weeks and a minimum of 900 clock 
hours; both standards must be met.
    Changes: None.
    Comments: Many commenters recommended that the Secretary implement 
the provision in the Technical Amendments of 1993 that provides that 
the Secretary may reduce, for good cause, the 30-week minimum to not 
less than 26 weeks of instructional time.
    Many of these commenters suggested that ``good cause'' should be 
based on educational outcomes, such as placement rates or completion 
rates. Some commenters suggested the same standard that was proposed 
for short-term programs in Sec. 668.8--a 70 percent completion rate and 
a 70 percent placement rate. Other commenters suggested that approval 
by an institution's nationally recognized accrediting agency or State 
postsecondary review entity (SPRE) would demonstrate good cause. Some 
commenters suggested that good cause should be based on whether an 
educational program has historically provided instruction for less than 
30 weeks in previous academic years. Other factors suggested for 
defining good cause included fiscal stability of an institution, 
scheduling adjustments due to natural disasters, ethnic composition of 
an institution's student population, an accelerated or concentrated 
educational program, and educational programs that offer advanced 
placement.
    Some commenters recommended that no reductions in the 30-week 
minimum should be permitted or that reductions should be approved on an 
extremely limited basis in order to avoid inequitable treatment of 
institutions and students.
    Discussion: The Secretary did not propose specific criteria to 
implement this technical amendment in the February 28, 1994 NPRM, but 
instead requested comments on a definition of ``good cause'' and 
requested comments on ways of implementing this provision that 
addressed the Secretary's concern that reductions in the award year 
would encourage many institutions to seek that treatment routinely. 
After reviewing public comments on defining good cause, and developing 
safeguards to discourage routine requests for reductions in the 
academic year, the Secretary has implemented this technical amendment 
through regulation.
    In an effort to discourage routine requests, the Secretary will 
grant a reduction for institutions that can demonstrate a commitment to 
changing to a 30-week academic year, but will not permit the period of 
reduction to exceed two years. For institutions that do not demonstrate 
a commitment to changing to a 30-week academic year, the Secretary may 
grant a reduction for a limited period, on a case-by-case basis.
    The Secretary agrees with the commenters that suggested approval by 
an institution's nationally recognized accrediting agency or State body 
that authorizes the institution to provide postsecondary programs 
should be considered as factors in determining good cause on a case-by-
case basis, but such approval may not be a sufficient reason for 
granting an institution's request. Other factors that should be taken 
into account include the number of hours of attendance and other 
coursework that a full-time student is required to complete in the 
academic year, and any unique circumstances that justify granting the 
institution's request.
    The Secretary does not believe that placement rates, completion 
rates or other educational outcomes that may measure the quality of an 
educational program are relevant in determining whether the instruction 
offered in less than thirty weeks is sufficient to justify a reduction 
in the minimum standard. Other factors suggested by commenters may 
qualify as unique circumstances that justify granting the institution's 
request, depending upon the context in which these factors are 
presented in a particular case.
    Every institution that requests a reduction must also demonstrate 
that it has provided Title IV, HEA program funds to its students based 
on the academic-year requirements in section 481(d) of the HEA since 
July 23, 1992, as the requirements became applicable to the various 
Title IV, HEA programs. The Secretary believes institutions must have 
made a good faith effort to comply with the requirements of the 
statute. Institutions that did not comply with the law should not now 
expect to receive a temporary waiver.
    Changes: A new Sec. 668.3 is established, under which, for the 
purpose of awarding Title IV, HEA funds, the Secretary may reduce the 
length of an academic year for an institution that submits a written 
request to the Secretary. The request must identify each educational 
program for which a reduced academic year is requested and specify the 
requested length, which may not be less than 26 weeks of instructional 
time. The Secretary considers requests for reducing an academic year 
only for educational programs at institutions that provide 2-year and 
4-year programs leading to associate degrees or baccalaureate degrees, 
respectively. In addition, an institution must demonstrate that it has 
provided Title IV, HEA program funds to its students based on the 
academic-year requirements in section 481(d) of the HEA since July 23, 
1992.
    In addition, for an institution that currently has an academic year 
of less than 30 weeks and demonstrates that it is in the process of 
changing to a 30-week academic year, the Secretary will grant a 
reduction for a period not to exceed two years.
    For an institution that meets all of the above requirements other 
than demonstrating a commitment to changing to a 30-week academic year, 
the Secretary may grant a reduction for a limited period, on a case-by-
case basis, The Secretary considers such factors as approval of the 
academic year for each educational program by the institution's 
accrediting agency or State body that legally authorizes the 
institution to provide postsecondary education, the number of hours of 
attendance and other coursework that a full-time student is required to 
complete in the academic year, and any unique circumstances that 
justify granting the institution's request.
    Comments: Some commenters supported the proposed definition of a 
week as a seven-day period of instructional time in which one day of 
regularly scheduled instruction, examination, or preparation for 
examination occurs. Some commenters argued that the standard of one day 
a week was too lax and susceptible to abuse. One commenter suggested 
that the minimum standard for one week of instructional time should be 
revised to require one instructional hour per week. Another commenter 
suggested that the definition of an academic year should be based on 
the total number of days of scheduled instruction.
    Discussion: The Secretary agrees with those commenters who were 
concerned that the proposed definition of a week of instructional time 
was susceptible to abuse. Based on these comments and on information 
the Secretary has received regarding abuses in this area, the Secretary 
believes that the standard of one regularly scheduled instructional day 
per week needs to be increased to five days of regularly scheduled time 
per week for educational programs using credit hours and not using a 
semester, trimester, or quarter system. Under the proposed definition 
published in the February 28, 1994 NPRM, institutions could structure 
programs that do not use clock hours or standard academic terms to 
provide one class a week and permit those classes to be ``made up'' 
later in the program, in order to maximize the amount of Title IV, HEA 
program funds received by the institution.
    Changes: A change has been made. For an educational program using 
credit hours but not using a semester, trimester, or quarter system, 
the Secretary considers a week of instructional time to be any week in 
which at least five days of regularly scheduled instruction, 
examinations, or preparation for examinations occurs. A corresponding 
change has been made to the definition of an eligible program.
    Comments: A number of commenters suggested that instructional time 
should include internships. Some commenters suggested including other 
activities, such as periods of orientation, cooperative education, 
independent study, special studies, and research.
    Discussion: The Secretary agrees that internships, cooperative 
education programs, independent study, and other forms of regularly 
scheduled instruction can be considered as part of an institution's 
academic year. In most cases, research is not considered to be 
regularly scheduled instruction. Orientation programs do not provide 
educational instruction related to class preparation or examination and 
must not be included in determining the length of an academic year.
    Changes: None.
    Comments: Several commenters argued that the proposed academic year 
definition would make it difficult for institutions to develop creative 
programs that allow students to accelerate their educational programs. 
One commenter believed that, if the Secretary does not account for 
these types of programs, a student will no longer have an incentive to 
accelerate his or her educational program, and the Department will 
expend more Title IV, HEA program funds on longer periods of study.
    Discussion: Because the cost of a student's education includes 
living expenses in addition to the cost of tuition and fees, the 
Secretary believes that students who have an incentive to reduce their 
costs by accelerating their educational programs will still have a 
strong incentive to pursue a more concentrated or intensive course 
load. In addition, the Secretary will consider unique circumstance in 
determining whether to reduce the academic year for programs that are 
eligible for such consideration.
    Changes: None.
    Comments: A commenter suggested that the Secretary define two-
thirds of an academic year as a minimum of 15 weeks of instructional 
time and one-third of an academic year as 10 weeks of instructional 
time in order to clarify the procedure for prorating the awards for 
students attending programs that are less than an academic year.
    Discussion: The Secretary agrees that the procedure for prorating 
the awards for students attending programs that are less than an 
academic year needs to be clarified. However, the Secretary does not 
believe that 15 weeks of instructional time is an adequate minimum 
standard for two-thirds of an academic year. If the minimum standard 
for a full academic year is 30 weeks, the minimum standard for two-
thirds of an academic year should be two-thirds of 30 weeks (20 weeks).
    Changes: A change has been made. In Sec. 668.2, the Secretary 
defines two-thirds of an academic year as a period that is at least 
two-thirds of an academic year as determined by an institution. At a 
minimum, two-thirds of an academic year must be a period that begins on 
the first day of classes and ends on the last day of classes or 
examinations and is a minimum of 20 weeks of instructional time during 
which, for an undergraduate course of study, a full-time student is 
expected to complete at least 16 semester or trimester hours or 24 
quarter hours in an educational program whose length is measured in 
credit hours or 600 clock hours in an educational program whose length 
is measured in clock hours. For an institution whose academic year has 
been reduced under Sec. 668.3, one-third of an academic year is the 
pro-rated equivalent, as measured in weeks and credit or clock hours, 
of at least two-thirds of the institution's academic year.
    In Sec. 668.2, the Secretary also defines one-third of an academic 
year as a period that is at least one-third of an academic year as 
determined by an institution. At a minimum, one-third of an academic 
year must be a period that begins on the first day of classes and ends 
on the last day of classes or examinations and is a minimum of 10 weeks 
of instructional time during which, for an undergraduate course of 
study, a full-time student is expected to complete at least 8 semester 
or trimester hours or 12 quarter hours in an educational program whose 
length is measured in credit hours or 300 clock hours in an educational 
program whose length is measured in clock hours. For an institution 
whose academic year has been reduced under Sec. 668.3, one-third of an 
academic year is the pro-rated equivalent, as measured in weeks and 
credit or clock hours, of at least one- third of the institution's 
academic year.
    Comments: Several commenters suggested that the definition of an 
academic year in Sec. 668.2 should be amended to reflect the provision 
in the Technical Amendments of 1993 specifying that the definition of 
academic year in section 481 of the HEA applies only to an 
undergraduate course of study.
    Discussion: The Secretary agrees that a limitation in the 
definition of academic year needs to be included in Sec. 668.2. 
However, the Secretary notes that the requirement that an academic year 
require a minimum of 30 weeks of instructional time applies to both 
undergraduate and graduate courses of study.
    Changes: A change has been made to clarify that the amount of 
instruction that a full-time student is required to complete during an 
academic year applies only to an undergraduate course of study.
    Full-time student. Comments: Several commenters believed that the 
Secretary should address the potential for abuse under the definition 
of academic year for educational programs that are measured in credit 
hours. One commenter suggested that the Secretary establish a weekly 
minimum full-time workload for full-time students in these programs by 
tying quarter hours to actual quarters to prevent an institution from 
claiming to offer a full academic year's worth of work over a thirty-
week period by giving a full-time student a small amount of 
instruction, which the institution claims to be equivalent to 24 
semester or 36 quarter hours. The commenter also suggested that the 
Secretary eliminate the use of quarter or semester hours for 
institutions that do not have quarters or semesters and instead require 
those institutions to measure their programs in clock hours.
    Two commenters urged the Secretary to reject any mechanism where 
the institution would be responsible for self-measuring the quantity of 
work required because it would be too easy for unscrupulous 
institutions to evade. Instead, the commenters recommended that only 
bona fide courses, related work, research, or special studies would 
count toward whether a student would be full-time, and that each 
institution's quantification would have to be approved during the 
certification process set forth in Sec. 668.13. One commenter also 
suggested that the Secretary change the procedures and not permit 
institutions to measure workloads for term or semester based schools in 
clock hours, because the clock hour schedules permitted institutions to 
compress the course offerings into too short a time period.
    A few commenters advised that the clock hour/credit hour regulation 
would provide the protection necessary for the weekly schedules of 
students enrolled at institutions offering credit hours without terms, 
and recommended that no further action be taken in changing the 
proposed definition of full-time student. Several other commenters 
stated that they believed the proposed definition was sufficient to 
prevent abuse without further additions to establish a minimum full-
time course workload. One commenter suggested that no stricter 
definition be adopted for full-time students enrolled at institutions 
offering credit hours without terms because this area is currently 
addressed by accrediting agencies, which are in a better position to 
evaluate the variety of delivery systems used by postsecondary 
institutions. One commenter also questioned whether it was fair to 
adopt a more stringent criterion for credit hour programs without 
academic terms rather than adopting uniform criteria and standards for 
full-time students for all sectors of postsecondary education.
    One commenter suggested that the proposed definition was unfair 
because it requires the same number of credit hours for a student 
regardless of whether the courses are measured in semester hours or 
quarter hours, resulting in students having to perform a greater 
quantity of work during a quarter calendar if they were taking semester 
hours. Several other commenters suggested that the proposed definition 
was unfair because it would prohibit students from taking cooperative 
employment for periods that were less than eighteen weeks. These 
commenters suggested that shorter periods of cooperative education 
should be accepted in conjunction with a smaller number of credits so 
long as the workload was pro-rated to match the academic workload of a 
full-time student. For example, a student taking cooperative education 
for one-fourth of the credits necessary to be a full-time student would 
have to complete the cooperative training in one-fourth of the time 
allotted to a full-time student in an eighteen week program. Two other 
commenters stated that the proposed definition would establish 
workloads that could not readily be satisfied by part-time students or 
students that were taking evening or weekend classes. These commenters 
believed that students in these circumstances were often making many 
more sacrifices to pursue their education than full-time day students, 
and that it was unfair to reduce or eliminate aid that these students 
currently receive because they do not carry enough credits to qualify 
for comparable aid under the proposed regulations.
    One commenter suggested that the in-class attendance should be the 
only component of the student workload considered for this provision, 
and that under that standard the definition for full-time student would 
require at least 12 hours of attendance per week to correspond to the 
12 credit hour workload.
    A few other commenters suggested that the proposed definition be 
clarified to show that only students taking classes ``entirely'' by 
correspondence would not be required to meet the workload requirements 
set out in the proposed definition. Others suggested that the language 
for credit hour workloads be amended to show that trimester hours would 
require the equivalent workload for semester hours for academic terms 
and academic years.
    Discussion: As stated in the February 28, 1994 NPRM, this 
definition of full-time student is based primarily on the longstanding 
definition found in the Federal Pell Grant and the campus-based program 
regulations. The Secretary believes this definition of full-time 
student has proved to be appropriate and effective and does not believe 
any substantive changes are necessary. The Secretary notes that this 
definition is now applicable for purposes of all Title IV, HEA 
programs. The individual Title IV, HEA program regulations will be 
amended at a later date to remove the definition of full-time student.
    The Secretary believes that additional changes are appropriate in 
the regulations to prevent institutions from establishing elongated 
instructional schedules that do not require an appropriate workload 
throughout that period for a full-time student. Institutions offering 
credit hour programs without terms have more flexibility in shifting 
the workload requirements for their programs over an indefinite period, 
and the Secretary believes that it is appropriate to establish some 
minimum instructional periods that must be used for full-time students 
attending these institutions. No corresponding changes need to be made 
where students are already required to receive a minimum amount of 
clock hours of training per week to be full- time students, or where 
the institution has fixed terms.
    The Secretary also believes it is important to ensure through 
regulations that full-time students are performing comparable workloads 
regardless of the type of institution they are attending, and that such 
work should be ratably allocated throughout the period of instruction. 
The Secretary notes that this is an area of abuse that is not fully 
addressed by the implementation of the ``clock hour/credit hour'' 
regulations.
    Rather than changing the proposed definition of full-time student 
to require measurement of student workloads, a modification is being 
made to require a minimum number of days of instruction per week for 
institutions that offer credit hour programs without terms. A 
discussion of the specific change is included in the section of the 
Analysis of Comments and Changes that addresses the definition academic 
year (Sec. 668.2).
    Changes: None.
    Undergraduate student. Comments: Several commenters objected to 
defining an undergraduate student as a student who has not earned a 
baccalaureate or first professional degree. The commenters noted that 
this would prevent students who were pursuing further undergraduate 
studies from receiving any Title IV, HEA program assistance. The 
commenters noted that this was a departure from current departmental 
practice that permits such a student to receive assistance under the 
Title IV, HEA loan programs.
    Discussion: The Secretary recognizes that there are legitimate 
reasons supported by statute for separate definitions of an 
undergraduate student based upon the different statutory requirements 
for the various Title IV, HEA program regulations. The Secretary 
believes it is not appropriate at this time to include a general 
definition of an undergraduate student in the Student Assistance 
General Provisions regulations.
    Changes: The definition of undergraduate student has been removed 
from these final regulations.
    Third-party servicer. Comments: Many commenters asked the Secretary 
not to include computer services or software in the examples of 
activities that constitute administration of a Title IV, HEA program, 
on the grounds that this type of service encompasses activities in a 
broad spectrum, from computer software distributors of popular 
commercial spreadsheet programs to computer on-line Federal news 
services. Several commenters stated that computer services are simply 
technological means utilized in administering the programs; computer 
servicers who actually perform administrative functions would be 
covered, therefore there is no need to separately include such 
providers in the definition. Other commenters argued for the inclusion 
of computer services or software in the examples of a Title IV-related 
activity. These commenters argued that it was necessary to include 
providers of computer services and software in the definition of third-
party servicer because many distributors of software certify that their 
computer programs--represented to satisfy Title IV, HEA program 
requirements--comply with all applicable Title IV, HEA program 
requirements. As a result, institutions contracting with a provider for 
the software take for granted that the software is in compliance with 
all Title IV, HEA program requirements. If a violation of a Title IV, 
HEA program requirement occurs because of the software, the provider of 
that software should be held responsible. Several commenters argued 
that those software providers could be subject to potential liabilities 
for Title IV, HEA program violations, even though the computer programs 
of the provider could be modified by the user.
    Discussion: The Secretary agrees with those commenters who either 
objected to the inclusion of computer services or software providers in 
the examples of Title IV-related activities, or who saw no need to 
separately include such providers. In adopting the definition of third-
party servicer, the Secretary is not including providers of those 
services or software because the Secretary believes that this type of 
service is simply a technological means to assist in carrying out 
certain administrative functions that are already included in the 
proposed definition of a third-party servicer.
    Changes: None.
    Comments: Two commenters were concerned that a third-party servicer 
could avoid the requirements of these regulations by simply not 
entering into a written contract with an eligible institution to 
administer any aspect of that institution's participation in the Title 
IV, HEA programs. The commenters recommended that the regulations 
stipulate that the acceptance of fees by the servicer from the 
institution for administration of any aspect of the institution's 
participation in a Title IV, HEA program would constitute a contract 
with the institution for purposes of the definition of third-party 
servicer under these regulations.
    Discussion: The Secretary disagrees with the commenters that a 
third-party servicer that contracts with an eligible institution could 
be exempt from these regulations simply by not executing a written 
contract with that institution. A third-party servicer is defined as 
anyone who contracts with an institution, and is not limited to only 
those entering a written contractual agreement. Oral contracts, payment 
of fees for services rendered and other arrangements also constitute 
enforceable contracts. The Secretary recognizes these types of 
contracts and will consider an individual or organization employing 
such a method to contract with an institution to administer any aspect 
of the institution's participation in the Title IV, HEA programs to be 
a third-party servicer and therefore subject to these regulations. The 
Secretary cautions institutions and third-party servicers that verbal 
contracts or other non-written contracts do not exempt institutions 
from documenting in writing the contractual obligations of both 
parties, including the requirements in Sec. 668.25, and submitting a 
copy to the Secretary, if so instructed by the Secretary.
    Changes: None.
    Comments: One commenter felt that the activities of Multiple Data 
Entry (MDE) Processors and the Central Processor should be included in 
the examples of what constitutes administration of participation in a 
Title IV, HEA program because the data generated by MDEs or the Central 
Processor is the foundation for determining a student's eligibility for 
Title IV, HEA program assistance.
    Discussion: The Secretary disagrees with the commenter. The 
Secretary has previously explained in the NPRM published on February 
17, 1994, that MDEs serve under contract with the Department and are 
already bound by that contract and other Department of Education 
requirements. Therefore, the Secretary does not believe it necessary to 
separately regulate MDE activities as part of these regulations.
    Changes: None.
    Comments: One commenter was of the opinion that the activities of 
administering or scoring ability-to-benefit tests should be included in 
the examples of what the Secretary considers to be a third-party 
servicer activity because these activities constitute the determination 
of student eligibility.
    Discussion: The Secretary agrees with the commenter that these 
activities could be considered to be an aspect of the administration of 
Title IV, HEA programs and therefore should be regulated. However, the 
Secretary believes that any abuses in these types of activities will be 
protected against in the regulations governing the administration of 
ability-to-benefit tests. The Secretary plans to issue an NPRM on this 
subject shortly. Therefore, the Secretary does not believe it necessary 
to regulate administering or scoring ability-to-benefit test activities 
as part of these regulations.
    Changes: None.
    Comments: A few commenters requested that attorneys litigating on 
behalf of institutions to collect loan funds or interpreting statutory 
or regulatory requirements be excluded from the definition of third-
party servicer.
    Discussion: The Secretary generally considers attorneys not to be 
covered by the definition of a third-party servicer under these 
regulations. The Secretary, in promulgating the definition of third-
party servicer, applied the definition to a set of activities relating 
to the administration of the Title IV, HEA programs, and thus is not 
regulating distinct entities by their identity but rather the 
activities that individuals or organizations perform in contracting 
with institutions. Provision of legal advice is not one of these 
activities. However, it is conceivable that an attorney would be 
considered a third-party servicer under these regulations if the 
activity of the attorney, performed on behalf of an institution, 
constitutes administration of the Title IV, HEA programs. It would not 
be appropriate to state that attorneys are never considered third-party 
servicers as that would permit services to escape oversight simply by 
being provided under attorney signature or by non-attorneys working for 
attorneys or their law firms.
    Changes: None.

Section 668.8  Eligible Program

    Definitions. Comments: Some commenters believed that the definition 
of ``equivalent of an associate degree'' would be difficult to 
administer because colleges do not have consistent standards for 
accepting two-year programs for full credit toward a bachelor's degree 
and for qualifying a student for admission into the third year of a 
bachelor's degree program. Some of these commenters suggested that any 
person who completes the equivalent number of credit hours necessary to 
receive an associate degree should be included in this definition as 
long as the person earned those credits from an institution that was 
accredited by a nationally recognized accrediting agency. Other 
commenters suggested that any program that leads to an occupational 
objective that requires licensing or certification and equals at least 
the length of a typical associate degree program, should be added to 
the proposed definition. Another commenter expressed support for the 
provision as written in the February 28, 1994 NPRM.
    Discussion: As stated in the February 28, 1994 NPRM, this 
definition is modeled after section 1201(a)(3) of the HEA, and is 
designed to measure the educational backgrounds of students admitted to 
programs offered by a proprietary institution of higher education and 
postsecondary vocational institutions. The Secretary believes that a 
student does not have the equivalent of an associate degree unless he 
or she has completed an educational program that includes two critical 
characteristics: the student successfully completed at least a two-year 
program that is acceptable for full credit toward a bachelor's degree 
and the student qualifies for admission into the third year of a 
bachelor's degree program. The alternatives suggested by commenters 
lack these characteristics.
    In response to comments about the absence of consistent standards, 
the Secretary notes that inconsistent standards apply to students with 
associate degrees as well. The two-year programs completed by students 
with an associate degree may be fully transferable to some institutions 
offering bachelor's degree, but not to other institutions. Institutions 
that have programs leading to a bachelor's degree also have different 
standards for determining a transfer student's standing.
    Changes: None.
    Qualitative Factors. Comments: Some commenters argued that short-
term programs (programs of less than 600 clock hours) should not be 
required to be in existence for a year before establishing eligibility 
because the rate of technological change in the workplace dictates 
rapid responses by institutions in offering educational programs to 
meet those changes. Some of these commenters also believed that factors 
related to quality should be determined by accrediting agencies. 
Another commenter suggested that initial eligibility for these programs 
should be based on an institution's track record of success rather than 
the existence of the program for one year.
    Discussion: The Secretary believes that a good track record of 
success is whether an institution can maintain a new program for one 
year. The Secretary agrees that the quality of these programs should 
continue to be monitored by accrediting agencies, but the history of 
abuse in these programs necessitates Federal regulatory standards as 
well. Institutions are not prevented from responding rapidly to the 
demands of the economy by offering new short-term programs, but 
institutions must be able to demonstrate that these new programs can 
meet the minimum placement and completion rate standards before Title 
IV, HEA funds are provided to students enrolled in these programs. 
Obviously, this data cannot be provided unless the program has been in 
existence for a period of time.
    Changes: None.
    Comments: A number of commenters objected to limiting the length of 
a program to no more than 150 percent of the minimum number of clock 
hours required for training in the recognized occupation for which the 
program prepares students, as established by the State in which the 
program is offered, if the State has established such a requirement. 
Some of these commenters observed that the requirement would create 
inconsistent standards because States have different requirements and 
that maximum program lengths should be determined by accrediting 
agencies. Another commenter argued that differing State standards would 
make it difficult to train students from neighboring States if those 
States have higher standards.
    Some commenters believed that ``course stretching'' was a frequent 
source of abuse. They cited examples of institutions' combining short 
programs into one accredited course that does not specifically lead to 
licensure, purely for the purpose of exceeding the statutory 600 clock 
hour minimum. These commenters recommended that the standard in the 
February 28, 1994 NPRM was too lenient and that the program length 
should not exceed the minimum State standard. Some commenters suggested 
that the minimum licensing standards of the Federal government should 
also be taken into account in limiting the length of a program. Another 
commenter suggested that exceptions should be made to the general 
standard if the education provided by a particular program was better 
than average.
    Discussion: The Secretary believes that 150 percent of the State 
minimum allows enough latitude for institutions to provide quality 
programs and furnishes a sufficient safeguard against the abuses of 
course stretching. Because States have different licensing standards, 
the Secretary does not believe that a single standard for a maximum 
program length is appropriate. The argument made by one commenter about 
training students from neighboring States with higher standards only 
serves to illustrate the importance of recognizing each State's 
requirements. Training students who will not be able to meet the 
licensing requirements of the States in which they intend to work is a 
terrible disservice to those students. The Secretary agrees that these 
regulations ought to recognize any minimum standards established by 
various Federal agencies for applicable short-term programs.
    Changes: This provision is revised to prohibit a short-term 
eligible program from exceeding by 50 percent any applicable minimum 
number of clock hours required by a Federal agency for training in the 
recognized occupation for which the program prepares students.
    Comments:  Some commenters argued that programs with a small number 
of graduates would not provide a statistically valid measure for 
completion or placement rates.
    Discussion:  The Secretary believes these rates are statistically 
valid unless fewer than thirty students complete a program in an award 
year. The percentage of educational programs this size participating in 
the Title IV, HEA programs is so small, that the issue of statistical 
validity does not need to be addressed in the regulations.
    Changes:  None.
    Award Year. Comments:  Many commenters suggested that the period of 
time for calculating the placement rate should be based on the most 
recent calendar year or on the award year ending twelve months earlier 
(i.e., for 1995-96, the placement rate would apply to students who 
graduated in 1993-94) instead of the immediately preceding award year, 
to account fully for the 180-day period permitted to demonstrate that a 
graduate has been placed and the 13-week period required to count an 
employed student as placed. The ability to count individuals as 
placements under these circumstances becomes increasingly difficult as 
graduation dates approach the end of an award year. Some of these 
commenters believed that this approach would be consistent with the 
reporting procedures of many States and accrediting agencies.
    Other commenters suggested that the burden on institutions would be 
reduced significantly if the formula for calculating placement and 
completion rates were the same as the Department's Student-Right-to-
Know provisions, and if the same formulas were used by accrediting 
agencies and State licensing agencies.
    Discussion:  As noted in the earlier discussion, one reason that 
the Secretary has adopted the requirement for a short-term program to 
be in existence for at least one year is to allow for a track record of 
completion and placement rates. If the calculation of these rates were 
to be based on an earlier award or calendar year than the one specified 
in these regulations, the Secretary would need to require that newly 
established short-term programs remain ineligible for an even longer 
period so that track record could be established. The Secretary does 
not wish to discourage the creation of legitimate, high quality short-
term programs by requiring too great a period of ineligibility for 
those programs. The Secretary notes, of course, that once these 
regulations have been in effect for at least a year, data for currently 
eligible programs, based on earlier years, will be available for 
review.
    The Secretary agrees that a standard rate is desirable, to the 
extent that a standard rate will provide the information the Department 
and other entities seek to obtain. Some rates may have to differ in 
order to achieve the purpose for which they are mandated. For example, 
a rate that is designed purely for consumer information purposes may 
require different data or time periods, than a rate that must coincide 
with student aid program calendars or a rate that is used for long-term 
academic studies. The Secretary cannot control the design of placement 
rates required by State agencies or accrediting agencies, but a 
standard rate or rates that can be calculated from the same data 
sources would help to reduce the burden on institutions. The Secretary 
encourages States and accrediting agencies to foster the development of 
uniform standards the Secretary could adopt, or adopt the standards in 
these regulations.
    The Student-Right-to-Know regulations are currently being drafted 
with the intention of developing a completion rate that will be useful 
for all Title IV, HEA programs when the statute so permits; but the 
Student-Right-to-Know regulations will not require a placement rate 
calculation.
    Changes:  None.
    Calculation of Completion Rate. Comments:  Some commenters 
suggested that the definition of ``enrolled'' for purposes of 
calculating completion rates should be amended to reflect only students 
who begin attending classes.
    Another commenter noted that some institutions do not charge new 
students for any institutional costs during the first month that the 
students attended classes, because administrators at these institutions 
believe that if these students withdrew before tuition and fees were 
assessed, the students could be excluded from the calculation of a 
completion rate.
    Discussion:  As stated in the February 28, 1994 NPRM, when 
calculating the completion rate, an institution would subtract from the 
number of regular students who were enrolled in the program those 
students who withdrew, dropped out of, or were expelled from the 
program and were entitled to and actually received in a timely manner 
in accordance with the refund requirements of these regulations, a 
refund of 100 percent of their tuition and fees (less any permitted 
administrative fee) under the institution's refund policy. The 
Secretary believes that this provision addresses the commenters 
concerns.
    Changes:  None.
    Comments:  Some commenters suggested that students who transfer to 
another program or who withdraw because they have found a new job, 
should be excluded from the completion-rate formula.
    Discussion:  The Secretary believes that transfer students and 
students who withdraw for the purpose of starting new jobs or withdraw 
for other reasons are accounted for by allowing up to 30 percent of the 
enrolled students to withdraw from the program.
    Changes:  None.
    Calculation of Placement Rate. Comments:  Many commenters objected 
to the requirement that a student must be employed for at least 13 
weeks following graduation from an institution to be included in that 
institution's placement-rate calculation. These commenters believed 
that this requirement is overly burdensome because the institution 
would have to track those students for long periods. They believed that 
an institution should not be held accountable for factors that are 
beyond the institution's control, such as layoffs, plant closings, 
illnesses, forced relocations, or the motivation of students. Some 
commenters suggested that instead of tracking students (who tend to be 
very mobile) for 13 weeks, evidence of the initial hiring by an 
employer should suffice. A commenter suggested that the period of 
employment should be reduced to 30 days.
    Discussion:  As discussed in the February 28, 1994 NPRM, the 
Secretary believes that an employment requirement of 13 weeks will help 
stem abuses by institutions that may arrange to have students hired for 
short-term jobs in order to boost placement rates. In addition, a 
period of time beyond the initial hiring by an employer should be used 
to determine that the student received adequate training from the 
institution. The Secretary believes that extraneous factors affecting a 
student's employment are accounted for by using a placement rate that 
excludes up to 30 percent of the institution's graduates. The 13-week 
period is consistent with the period of time a student must be employed 
to be counted in the institution's placement rate under the procedures 
delineated in Sec. 668.17(d) for the appeal of an institution's loss of 
participation due to an unacceptable cohort default rate
    Changes:  None.
    Comments:  A commenter suggested that students who are placed in 
jobs that are not related to their training should be counted, or at 
least excluded from the placement-rate formula. Another commenter 
suggested that placements should be limited to graduates who obtained a 
job in the recognized occupation for which they were trained in order 
to prevent program abuse.
    Discussion:  Students who are placed in jobs not related to their 
training should be treated in the formula in the same manner as 
students who are not employed. The placement rate is designed to 
measure the effectiveness of the training provided by the institution, 
and employment in an unrelated job does not demonstrate that the 
training was effective. The Secretary believes that graduates who are 
employed in occupations that are comparable and related to the 
occupation for which they have been trained should be included in the 
numerator of the placement rate formula. In these circumstances, the 
training provided by the school is likely to have been a contributing 
factor in obtaining employment. However, the Department may revise this 
provision in the future if there are numerous incidents of abuse in 
this area.
    Changes: None.
    Comments: A number of commenters contended that it would be too 
burdensome for institutions to document the placement rates of students 
because students and employers would have little incentive to provide 
written verification of employment. Some commenters believed the 
substantiation requirement would discourage employers from hiring 
students from institutions that solicited documentation. Some 
commenters recommended that the institution should be required to 
record information, such as the name, address, and telephone number of 
the employer, the job title, and the starting date of employment, 
instead of obtaining the documentation proposed in the February 28, 
1994 NPRM. A State agency, or the Department's reviewers, or an auditor 
could then use this information to verify the placement. Other 
commenters suggested that a written statement from the student that his 
or her employment was a result of the institution's training would be 
sufficient verification; or that an institution should merely be 
required to document its attempt to obtain written verification from 
employers or graduates.
    Many commenters also were concerned about the cost of the 
Secretary's proposed requirement that an institution's auditor should 
review the documentation of placement rates for each student in the 
placement-rate calculation. Some of these commenters suggested that the 
auditor be permitted to verify the placement rates by selecting a 
random sample. Some commenters suggested that the Department should 
administer and pay for its own placement substantiation procedures.
    Discussion: As stated in the preamble to the February 28, 1994 
NPRM, the Secretary believes that requiring institutions to document 
this data and requiring an auditor to review this data will help curb 
abuse by institutions that may overstate their placement rates to 
achieve and maintain eligibility for short-term programs. In order to 
address this concern, the Secretary believes that documentation of 
employment must be made by a reliable source and that written 
statements by the student or the institution are not sufficient. The 
failure of an employer or student to respond to requests for 
documentation is accounted for by using a placement rate that excludes 
up to 30 percent of the institution's graduates.
    The Secretary disagrees with comments that the requirement of 
auditing each placement rate is unnecessary or prohibitively expensive. 
The audit will be conducted as part of the institution's annual 
compliance review and specific guidance provided in the Department of 
Education's audit guide should be drafted in a manner sufficient to 
detect abuse and avoid unnecessary costs.
    Changes: None.
    Comments: Some commenters suggested that based on auditing 
literature, certified public accountants cannot certify the accuracy of 
an institution's placement-rate calculations, but must instead follow 
the procedures of an attestation engagement.
    Discussion: The Secretary agrees with the commenters that a 
clarification is necessary.
    Changes: This section has been amended to require that an 
institution shall substantiate the calculation of its completion and 
placement rates by having the certified public accountant who prepares 
its audit report required under Sec. 668.23 report on the institution's 
calculations based on performing an attestation engagement in 
accordance with the Standards for Attestation Engagements of the 
American Institute of Independent Certified Public Accountants (AICPA). 
Section 668.24 has also been amended to reflect the same type of change 
discussed here.
    Comments: Some commenters argued that students who are hired by an 
institution either before or after they receive a degree or certificate 
from that institution, should not be excluded from the placement rate 
calculation. The commenters suggested that institutions would be 
penalized for hiring the most qualified candidate and that any abuse in 
this area could be easily detected. Other commenters suggested that 
graduates who are employed by separate businesses that are operated by, 
or financially linked to, an institution's owner(s) should be excluded 
from the placement-rate calculation. Some commenters suggested that 
graduates who were student employees should not be subtracted from the 
number of students who have degrees or certificates if they find a 
position with another employer.
    Discussion: Upon further consideration, the Secretary agrees that 
including students who are hired by an institution would have a 
negligible effect on the institution's placement rate, particularly if 
the hiring is based on a legitimate employment selection process.
    The Secretary does not agree with the suggestion to exclude 
graduates from an institution's placement-rate formula if they are 
hired by separate businesses that have some financial connection to the 
institution. In many of these cases, the potential for abuse is not as 
great because the economic interests of the parties that control the 
separate businesses do not necessarily coincide with the financial 
interests of the institutions.
    The Secretary agrees that student employees who are no longer 
employed by the institution upon graduation and who are hired by 
another employer after graduation, should not be excluded from the 
placement rate calculation.
    Changes: The requirement that an institution exclude from the 
calculation of a placement rate students who are hired by the 
institution has been deleted from these regulations.
    Comments: Some commenters believed that the placement rate 
calculation may be misinterpreted by some institutions because the 
proposed placement rate calculation requires the school to include 
students in the numerator who, ``on the date of this calculation are 
employed, or have been employed for at least 13 weeks following receipt 
of the credential by the institution.'' These commenters suggested that 
the phrase ``are employed'' will be interpreted to mean that any 
student employed at the time the calculation is made, regardless of 
whether they have met the 13-week standard, can be included in the 
numerator.
    Discussion: Every student must be employed for at least 13 weeks in 
a recognized occupation for which they were trained or in a related 
comparable occupation before that student can be counted as placed. The 
Secretary agrees to clarify this provision.
    Changes: A change has been made to clarify that every student must 
be employed for at least 13 weeks in a recognized occupation for which 
they were trained or in a related comparable occupation before that 
student can be counted as placed by inserting a comma after the words 
``have been employed.''
    English as a Second Language. Comments: Some commenters argued that 
the purpose of the testing requirement for students who completed a 
program in English as a Second Language (ESL) was unclear, and that 
testing the proficiency of these students was an intrusion on an 
institution's internal academic affairs and a violation of the 
Department of Education Organization Act. Another commenter recommended 
testing students before they enrolled in an ESL program to determine 
whether they needed to improve their proficiency skills, as well as 
testing students who completed the program. A commenter suggested that 
the ESL testing provisions should also apply to vocational programs 
that include ESL education within the curriculum. Another commenter 
expressed support for the provision as written in the February 28, 1994 
NPRM.
    Discussion: As discussed in the February 28, 1994 NPRM, the purpose 
of this requirement, which is based on a California law, is to curb 
abuses by institutions. Some institutions have received significant 
amounts of Federal Pell Grant funds for students who have not attained 
an adequate proficiency in written and spoken English to use already 
existing knowledge, training and skills. Because this testing 
requirement is limited to ESL programs that are ancillary to an 
institution's academic programs, the Secretary does not believe it is 
an intrusion on an institution's internal academic affairs.
    The suggestions to add a pre-test requirement or to extend the 
testing requirement to vocational programs that include ESL courses 
were not adopted at this time. However, the Secretary intends to 
monitor reports of abuse in these areas to see if regulation is 
necessary. Institutions are encouraged to test all students before and 
after they enroll in ESL courses to determine whether the students need 
to improve their proficiency skills and to determine whether the 
students have attained the desired proficiency skills after completing 
the courses.
    Changes: None.
Subpart B--Standards for Participation in the Title IV, HEA Programs

Section 668.11  Scope

    Comments: A few commenters opposed subjecting a third-party 
servicer to proceedings under subpart G of this part, which governs 
emergency actions, fines, and limitation, suspension, or termination of 
participation in the Title IV, HEA programs. The commenters felt that 
since the Secretary has noted that institutions are ultimately 
responsible for any liabilities incurred that the institutions should 
be responsible for monitoring the activities of the organization with 
which they contract.
    Discussion: The Secretary disagrees with the commenters who argued 
that third-party servicers should not be subject to proceedings under 
subpart G of this part. The statute specifically requires the Secretary 
to apply subpart G proceedings to third-party servicers. The Secretary 
agrees with commenters that institutions have a duty to monitor the 
actions of their third-party servicers, and that an institution is 
always ultimately liable for any violations caused by those servicers, 
but, the Secretary believes that Congress clearly intended for the 
Secretary to directly hold third-party servicers accountable for any 
program violations through the use of all sanctions that the Secretary 
is able to impose. The sanctions under subpart G of this part are an 
appropriate recourse to use to correct program violations because a 
third-party servicer, as an agent of an institution, contracts with 
institutions to provide services that parallel an institution's 
responsibilities under the institution's program participation 
agreement.
    Changes: None.

Section 668.12  Application Procedures

    Applications for continued participation. Comments: This section of 
the regulations generated many comments. Some commenters were concerned 
about the circumstances under which their institutions might be 
required to file an application in order to continue to participate in 
a Title IV, HEA program. The majority of the comments concerned the 
need for institutions to be notified enough in advance of the 
expiration of their program participation agreements so they could file 
an application for reapproval and the corresponding need for the 
Secretary to act on an institution's renewal application prior to the 
expiration of the institution's program participation agreement.
    A number of commenters were concerned that the provision requiring 
institutions to apply for recertification upon the request of the 
Secretary allowed the Secretary too much discretionary authority and 
would mean that the Secretary would act in an arbitrary and capricious 
manner. Many of these commenters believed that the regulations should 
identify the specific circumstances or significant events that would 
trigger a request from the Secretary and should require the Secretary 
to explain the reasons for the request. Two commenters recommended 
further that the regulations make clear that the Secretary will 
initiate action only if there is reliable evidence affecting an 
institution's financial responsibility or administrative capability. 
This commenter also said that it should be made clear that such an 
application would not be considered an initial application and that if 
the Secretary were to determine, on the basis of the application, that 
the institution should no longer participate in a Title IV, HEA 
program, the institution would have recourse to the appeal procedures 
specified in subpart G of this part.
    Over seventy commenters were very concerned about the 
recertification process. Their understanding of the process was that 
even were an institution to file an application for reapproval in a 
timely manner, if the Secretary did not approve the institution prior 
to the expiration date of its program participation agreement, the 
institution either would lose approval altogether or would be 
provisionally certified. Because provisional certification connotes 
lesser status to these commenters and confers fewer appeal rights than 
full certification, the commenters viewed provisional certification 
under these circumstances to be unfair and unacceptable.
    Many commenters provided concrete, constructive recommendations for 
addressing their concerns. The majority of these commenters asked that 
the Secretary notify institutions in advance of the scheduled 
expiration dates of the program participation agreements and supply the 
necessary application forms. One group of commenters suggested that the 
Secretary establish time frames for the submission and the processing 
of applications. The time frames proposed by the commenters varied 
greatly, with one commenter urging that the Secretary be required to 
send applications to institutions 18 months in advance of the 
expiration dates of the program participation agreements and another 
stating that six months would be sufficient. Other commenters would 
have the regulations require that the Secretary act on an application 
within 45 or 60 days of receipt. The approach taken by another group of 
commenters was to recommend that if an institution submitted an 
application for renewal within a specific time frame, such as a certain 
number of days prior to the expiration date of the program 
participation agreement, the Secretary should extend the certification 
of the institution, as necessary, until the Secretary's review is 
complete.
    Discussion: The Secretary finds it necessary to reserve the right 
to require a participating institution to submit an application for 
certification if the Secretary has reason to believe the financial 
responsibility or administrative capability of the institution is in 
question. The Secretary refers those concerned to a discussion of the 
Secretary's position on page 9533 of the preamble to the NPRM published 
on February 28, 1994. The Secretary reiterates that the Secretary 
expects to exercise this authority rarely and to advise the affected 
institution of the reason for the request. An application submitted 
under these provisions is not considered an initial application, 
because the institution is a participating institution. The institution 
continues to be governed by the program participation agreement in 
effect at the time the institution submits its application until that 
program participation expires, the institution signs a new program 
participation agreement, or the Secretary limits or terminates the 
institution's program participation agreement under the procedures in 
subpart G of this part.
    The Secretary understands the concerns expressed regarding the 
processing of renewal applications and agrees that an institution 
should not be penalized if it files an application in a timely manner 
but the Secretary is unable to complete a review of the institution 
prior to the expiration date of the institution's program participation 
agreement. For a full discussion of this issue, see the section of the 
Analysis of Comments and Changes that addresses certification 
procedures (Sec. 668.13).
    Changes: None.
    Notification and application requirements for additional locations. 
Comments: There were a number of comments on this section, and they 
conveyed a wide range of concerns. Many of the commenters were 
concerned that institutions would be required to notify the Secretary 
of each new location, regardless of the percentage of the educational 
program offered at the location. Many of these commenters asserted that 
the provision would prohibit community colleges from responding to 
community needs, because community colleges are constantly offering 
training and education at new locations.
    Other commenters could discern no reason why the addition of a 
branch campus or other location at which 100 percent of an eligible 
program is offered should trigger a certification review of an entire 
institution. These commenters suggested that because accrediting 
agencies and State licensing bodies review additional locations, there 
is no need for the Secretary also to conduct a review. One commenter 
went so far as to recommend that Sec. 668.12(b)(2) be removed, to 
guarantee that if the Secretary were to decide to certify a branch 
campus or other location, the decision could not trigger a 
recertification review of the entire institution.
    Commenters were concerned about the effect of these regulations on 
the ability of institutions to continue to offer internships on sites 
apart from their main campuses. Commenters complained about the effect 
of these provisions on an institution that contracts with a company to 
provide training for the company's employees on the site of the 
company's facilities.
    A few commenters supported the Secretary's need to monitor the 
financial responsibility and administrative capability of institutions 
that establish locations that offer at least 50 percent of an 
educational program. Two commenters recommended that the regulations be 
expanded to require that a location that offers less than 50 percent of 
an educational program be reported to the Secretary if the volume of 
activity at the location exceeded a certain threshold.
    Discussion: The comments reflect a good deal of confusion about the 
current requirements for reporting the addition of locations, current 
application procedures, and the proposed regulations.
    The current Institutional Eligibility regulations, published on 
April 5, 1988, specify in Sec. 600.30(a)(3) that institutions are to 
notify the Secretary of any changes in the name or number of locations 
since the institution's last eligibility application. As a practical 
matter, the Secretary has required institutions to report only changes 
to those locations at which the institution offered a complete 
educational program. This policy has been reflected for several years 
in the application and instructions. Thus, the notification requirement 
in these regulations, and the corresponding requirement in the new 
Institutional Eligibility regulations at Sec. 600.30, are actually less 
onerous than the requirements in earlier regulations. Under these final 
regulations, community colleges and other institutions that frequently 
establish outreach locations at which they offer one or two courses 
need not report these locations. And, unless the internship portion of 
a student's program constitutes at least 50 percent of that program, 
there would be no need to report the location at which an internship is 
performed. Similarly, there is no need to report locations that offer 
only continuing education classes and do not have students who are 
eligible to receive Title IV, HEA program funds.
    The Secretary has determined through experience that the addition 
of a branch campus or other location that offers a complete educational 
program can have a major impact on the financial status of the whole 
institution and the ability of the whole institution to administer the 
Title IV, HEA programs. For many years, the Secretary has required 
institutions that seek to add a location at which a complete 
educational program is offered to undergo a certification review so 
that the Secretary could ascertain whether the institution has the 
financial resources and sufficient administrative capability to support 
another location. In addition, section 498(b) of the HEA requires the 
Secretary to have a form on which the institution describes the 
relationship between a main campus of an institution and all of its 
branch campuses. It follows then that the Secretary cannot scrutinize a 
branch campus in a vacuum. Thus, this provision is a codification of 
the Secretary's longstanding policy and application procedures and new 
statutory requirements.
    Commenters that discussed employer-sponsored training programs 
seemed not to understand that if institutions contract with employers 
to provide training programs at the work-site or some other off-campus 
location that employer is paying for the cost of training and no Title 
IV, HEA program funds are involved, there is no need for the 
institution to notify the Secretary.
    The Secretary has established a requirement that an institution 
must notify the Secretary of a location that offers at least 50 percent 
of an educational program if the institution wishes to have the 
location included in the institution's participation in a Title IV, HEA 
program. The Secretary puts institutions on notice that they may be 
required to file a complete recertification application in such 
situations, but the Secretary expects to make requests for complete 
recertification applications only rarely.
    Changes: None.
    Notification and application requirements for changes in name, 
location, or address. Comments: Two commenters stated that the 
Secretary should not require an institution to undergo a 
recertification review if the institution changed only its name, 
address, or location.
    Discussion: This section requires only that institutions notify the 
Secretary of such changes.
    Changes: None.
    Required forms and information. Comments: A few commenters asserted 
that the proposed requirement of Sec. 668.12(e)(2) for an institution 
to provide to the Secretary upon request all information that the 
Secretary needs to certify an institution was too broad. Their 
perception was that the requirement would give the Secretary unlimited 
access to institutional information under the guise of a certification 
review. They recommended that the provision be revised to state that 
the Secretary would request only the information and documentation 
specified on the application form.
    Discussion: This provision refers only to information and 
documentation needed to certify that the institution meets the 
standards in this subpart, particularly the factors of financial 
responsibility and standards of administrative capability. The 
application form clearly specifies the information and documents that 
institutions must submit with their application. However, the Secretary 
must retain the flexibility to request additional information or 
documentation to clarify or support an institution's response on the 
application, should that be necessary. The Secretary notes that this 
provision would not require an institution to provide information such 
as tenure information contained in faculty records.
    Changes: None.

Section 668.13  Certification Procedures

    Requirements for certification. Comments: A few commenters objected 
to the proposal that an institution could be refused full certification 
that the institution meets the standards of subpart B and may 
participate in the Title IV, HEA programs because of a problem 
identified at one of its branch campuses. These commenters suggested 
that it was not fair to restrict the certification for an institution 
based upon a problem that was identified at its branch location.
    Discussion: The commenters misunderstood the purpose of this 
provision. Section 498(j) of the HEA requires a branch campus, as 
defined by the Secretary, to be certified under the requirements of 
this subpart to be included in an institution's participation in a 
Title IV, HEA program. Thus, a branch campus must separately 
demonstrate to the Secretary's satisfaction that it meets, for example, 
the factors of financial responsibility and standards of administrative 
capability. The commenters should note that the Secretary has defined 
branch campus narrowly, in part for this reason, in the Institutional 
Eligibility regulations. A more complete discussion of the implications 
of meeting that definition is found in those regulations.
    Changes: None.
    Comments: Several comments were received recommending that an 
institution's financial aid officer be included in the list of 
personnel that are required to have precertification training.
    Discussion: Pursuant to the administrative capability standards set 
out in Sec. 668.16, every institution is required to designate a 
capable individual that is responsible for administering the Title IV, 
HEA programs at the institution. This designated individual, who is 
usually a financial aid administrator, is required to have 
precertification training.
    Changes: None.
    Period of participation. Comments: A few commenters suggested that 
the Secretary provide greater detail in the regulations concerning when 
an institution would receive full certification for a period of less 
than four years.
    Discussion: As noted in the discussion for the proposed 
regulations, the full four year certification period will generally be 
used for institutions. There may be a limited number of times when an 
institution would receive a shorter period of full certification, based 
upon the specific circumstances presented. One instance where a shorter 
period of full certification would be used is where an institution has 
submitted a materially complete application for renewal in a timely 
manner, but no decision is issued before the institution's 
certification expires. In that instance, as explained in the discussion 
concerning provisional certification below, the institution's full 
certification would be extended on a month to month basis until a 
decision on its application was issued. Other situations will arise 
where a certification of less than four years will be appropriate, but 
it is not feasible to try and identify such infrequent actions by 
referencing them specifically in the regulations.
    Changes: None.
    Provisional certification. Comments: Several commenters were 
concerned that the proposed implementation of provisional certification 
in the regulations was very broad, and would impose hardships on a 
number of institutions. The commenters suggested that the Secretary 
treat the administrative capability and financial responsibility 
requirements as indicators of instances where provisional certification 
could be used, but would not necessarily be required if the institution 
could demonstrate that it should be permitted to participate under full 
certification. Numerous commenters suggested that it was inappropriate 
to use provisional certification for institutions whose cohort default 
rates exceeded the thresholds set out in the proposed regulations at 
Sec. 668.16. Other commenters recommended that the regulations be 
amended to clarify that provisional certification could be renewed.
    Some commenters suggested that the regulations be amended to 
provide for the provisional certification of all institutions in a 
State where no SPRE has been established. These commenters believed 
that this use of provisional certification was consistent with the 
intent of the HEA for the Secretary to monitor institutions more 
closely in this situation.
    Discussion: The Secretary believes it is appropriate to use the 
administrative capability and financial responsibility thresholds as 
events that will require provisional certification, rather than as 
indicators that might or might not result in provisional certification 
being required. Provisional certification will be used to permit these 
institutions to continue participating in the Title IV, HEA programs 
while correcting over time the items that were identified that caused 
the institution to be placed under provisional certification. The 
categories and thresholds set out in the regulations provide sufficient 
notice to institutions of the standards to which they will be held 
accountable. The proposed mechanism for provisional certification also 
provides administrative efficiency in reviewing applications for 
certification, and encourages institutional improvements over time to 
meet and maintain these standards.
    The Secretary has responded to concerns about the cohort default 
rate measures by adjusting the administrative capability thresholds in 
Sec. 668.16 that would trigger a requirement that an institution would 
receive provisional certification based upon its reported cohort 
default rates. See the section of the Analysis of Comments and Changes 
that addresses administrative capability (Sec. 668.16). The Secretary 
intends that institutions that have participated successfully under 
provisional certification, but who still do not satisfy certain 
requirements for full certification, will be permitted to renew their 
provisional certification. No specific changes are needed to reflect 
this procedure in the regulations, because such decisions will be made 
in response to the applications for certification that institutions 
will submit in response to the expirations of their current 
certifications.
    The Secretary agrees that technical changes are needed to make 
these regulations conform to the requirements of the State 
Postsecondary Review Program in 34 CFR part 667, and has decided to 
provide some further explanation here of the consequences to an 
institution if the State in which the institution is located does not 
participate in the State Postsecondary Review Program.
    Section 494(a) of the HEA prohibits the Secretary from designating 
as eligible to participate in a Title IV, HEA program any institution 
seeking initial participation in that Title IV, HEA program, or any 
participating institution that has undergone a change of ownership 
resulting in a change of control, as determined under 34 CFR 600.31, if 
the institution is in a State that does not participate in the State 
Postsecondary Review Program. The Secretary also is prohibited from 
designating for initial inclusion in any institution's eligibility for 
participation a Title IV, HEA programs branch campus located in a State 
that does not participate in the State Postsecondary Review Program, 
even if the institution itself is in a State that participates in the 
State Postsecondary Review Program.
    Further, the Secretary may grant no more than provisional 
certification for participation in a Title IV, HEA program to any 
participating institution or branch campus in a State that does not 
participate in the State Postsecondary Review Program.
    Currently, all States participate in the State Postsecondary Review 
Program. The Secretary does not anticipate that any State will fail to 
comply with the requirements of the State Postsecondary Review Program 
to the extent that the State will cease to participate in the program. 
Nevertheless, the regulations need to incorporate these statutory 
provisions so that institutions may be aware of the potential 
consequences of a State's failure to participate in the program.
    Changes: A new paragraph (e) is added to provide for denial of 
certification to initial applicants for participation in a Title IV, 
HEA program and to participants that have undergone a change of 
ownership resulting in a change of control, if the State in which those 
applicants or participants are located does not participate in the 
State Postsecondary Review Program. Under paragraph (e), the Secretary 
may provisionally certify a participating institution or branch campus 
in that State. Section 668.13(c)(2)(ii) has also been revised to 
provide that the provisional certification of an institution under 
these circumstances expires at the end of the third complete award year 
following the date of the provisional certification.
    Comments: Several commenters voiced concern over the proposed 
language in the regulations that would subject institutions to 
provisional certification where the financial responsibility and 
administrative capability was being determined for the first time. 
Suggestions were made that schools be exempted from this provision if 
they had been in operation for a number of years without problems being 
identified concerning their financial condition or administrative 
capability.
    Discussion: The Secretary believes that the other standards 
requiring the use of provisional certification are adequate to identify 
institutions where greater monitoring and procedural restrictions are 
appropriate. The Secretary agrees that longstanding institutions with 
no previous problems identified in their administrative capability or 
financial condition will not require the use of provisional 
certification where the current audits and application submitted by the 
institution satisfies the financial and administrative requirements 
under the regulations. Furthermore, since provisional certification is 
required for initial applicants and for existing institutions whose 
financial condition or administrative capability cannot be shown to 
meet the required standards, there does not appear to be a 
corresponding need to require provisional certification if a 
participating institution satisfies the proposed standards when the 
Department reviews its application for the first time.
    Changes: The provision that provided that the Secretary may 
provisionally certify an institutions if the financial responsibility 
and administrative capability of the institution was being determined 
for the first time has been deleted from these regulations.
    Comments: A number of commenters objected to the proposal that 
provisional certification be used for all occasions where the 
institution undergoes a change in ownership that results in a change of 
control. Instead, the commenters suggested that there were numerous 
instances where a transfer of an institution to a new owner should be 
viewed as a positive step that should be encouraged by using full 
certification, especially where the transfer was to an owner that had 
already established a good track record with the Department. Some 
comments also recommended that transfers to family members or to 
employees that had experience operating the institution should not 
require provisional certification.
    Discussion: The Secretary agrees that some transfers to family 
members or to personnel that own stock in an institution who have also 
worked for the institution should be treated differently from other 
changes of ownership that result in a change of control. These 
transfers to family members or to certain other owners have been 
exempted from treatment as a change of ownership resulting in a change 
of control in the regulations codified at 34 CFR part 600. In all other 
situations where there is a change of ownership resulting in a change 
of control, the Secretary believes it is appropriate to use provisional 
certification in order to provide more protection to the Federal 
interests while the new owner demonstrates the ability to operate that 
institution successfully. Such concern is especially warranted where a 
financially troubled institution has been acquired for little or no 
capital investment by the new owner, because the risk of loss is 
minimized if the institution fails as a business investment. Even 
though it may be a positive step for an institution to be bought by a 
new owner who can provide greater resources and experience in its 
operations, it is also reasonable to provide for the greater oversight 
and protection to Title IV, HEA program funds that are available under 
provisional certification. Also, the period of provisional 
certification may be established for a shorter period where the 
particular facts so warrant.
    Changes: None.
    Comments: A number of commenters were concerned that an institution 
that had applied for recertification in a timely manner would be placed 
on provisional certification if the Department had not processed the 
application before the institution's participation agreement expired. 
These commenters objected to changing an institution from full 
certification to provisional certification where the delays were 
attributable to the Department's review process rather than to a tardy 
application for renewal from the institution. Some remarks were also 
submitted by these commenters suggesting that formal notice be required 
from the Secretary of the expiration date for an institution's period 
of participation before any such ending date could become effective.
    Discussion: The Secretary agrees that delays in processing 
applications by the Department should not be the cause for transferring 
an institution from full certification to provisional certification. In 
such a circumstance where a complete application for renewal was timely 
submitted, it is appropriate to provide for a mechanism that will 
continue the institution's full certification on an interim basis. The 
Secretary has decided to establish a target date for institutions to 
submit certification renewal applications at least 90 days before the 
ending date for the institution's current program participation 
agreement. Provided that the application is materially complete when 
submitted, the institution's full certification will continue beyond 
its expiration date on a month-to-month basis until the Department 
issues its decision on the application. If the institution's 
application is not approved for full certification, the program 
participation agreement will expire on the last business day of the 
month in which the decision is sent to the institution. If the 
application for full certification is not made at least 90 days before 
the ending date for the institution's program participation agreement, 
the institution will only be permitted to participate under provisional 
certification while an application for recertification is pending. When 
an institution is notified that its application for recertification was 
not materially complete when submitted, the Department will exercise 
reasonable discretion in determining whether to deny the application as 
submitted or to request additional information, and to determine 
whether the institution may continue to participate under provisional 
certification while the application is reviewed.
    The Secretary continues to believe that it is appropriate for the 
institution to monitor the expiration date for its participation rather 
than relying upon the Secretary to tell it when it must reapply. 
Although the Secretary may provide routine notices to institutions 
concerning upcoming expiration dates, the institution will be held 
responsible for submitting an application for recertification in a 
timely manner in accordance with the expiration date on its program 
participation agreement, regardless of whether the institution receives 
a notice of expiration from the Secretary.
    Changes: Section 668.13(b) is amended to provide that full 
certification will be extended on a month to month basis following the 
expiration of a program participation agreement where the institution's 
application for recertification was materially complete, and submitted 
at least 90 days prior to the expiration date.
    Requirements for provisional certification to participate on a 
limited basis for institutions that are not financially responsible. 
Comments: A number of commenters stated that an institution should not 
be placed under provisional certification if the institution satisfied 
the criteria for provisional certification to participate on a limited 
basis for institutions that are not financially responsible. These 
commenters believed sufficient protection of Title IV, HEA program 
funds was obtained from the required posting of a reduced surety in 
conjunction with using a funding arrangement other than the advance 
payment system without the additional requirement of only granting 
provisional certification to the institution. Several of the commenters 
also argued that any institution meeting these criteria should be 
considered to be financially responsible, and therefore not placed 
under the provisional certification that would trigger heightened 
monitoring by the Department and by the other members of the triad. The 
commenters also observed that institutions that were in financial 
difficulties would probably experience further hardship by being 
required to post a surety and receive Title IV, HEA program funding 
through an alternate mechanism.
    A few commenters noted that this provision appeared to require 
provisional certification if an institution did not demonstrate 
financial responsibility under the general standards of financial 
responsibility set out in Sec. 668.15(b), and that such a construction 
of the regulation would mean that institutions demonstrating financial 
responsibility under the exceptions to the general standards of 
financial responsibility set out in Sec. 668.15(d) could still be 
required to use provisional certification.
    Some commenters also suggested that the reference to a letter of 
credit be modified to explain that it would be an irrevocable letter of 
credit rather than some other type that the institution could revoke 
without notice to the Department. These commenters also suggested that 
institutions could withhold information about the amount of Title IV, 
HEA program funds disbursed through the institution that would 
otherwise increase the amount of the letter of credit that would be set 
based upon the information available to the Department for the 
institution's prior award years.
    Some commenters suggested that the requirement that an institution 
show that it has met all of its financial obligations during the 
preceding two award years be expanded to acknowledge that normal 
business practices would permit institutions to refinance debts to 
change payment terms or obtain lower interest rates.
    Several commenters also stated that the proposed regulation was 
unfair because it would require provisional certification for any 
institution that had not demonstrated financial responsibility during 
the preceding five years, regardless of whether the institution 
currently demonstrated financial responsibility under its most recent 
audit. These commenters believed that such a procedure would be unfair 
because it could penalize an institution that met current financial 
responsibility standards based upon its prior financial condition. 
Other commenters suggested that the Secretary should exercise 
discretion in determining when financial guarantees would be required 
rather than making them mandatory whenever an institution triggered 
these provisions.
    Discussion: The Secretary disagrees that the standards for 
provisional certification to participate on a limited basis for 
institutions that are not financially responsible should be deemed to 
constitute a sufficient demonstration of financial responsibility that 
would warrant granting full certification to such institutions. 
Institutions that are not able to meet the general standards of 
financial responsibility in Sec. 668.15(b) or the exceptions to the 
general standards of financial responsibility in Sec. 668.15(d) are in 
a financial situation that is demonstrably different from their 
counterparts that do satisfy the requirements under these sections. 
Institutions that only meet the standards for provisional certification 
to participate on a limited basis for institutions that are not 
financially responsible warrant the additional monitoring and 
protection to Title IV, HEA program funds that provisional 
certification provides. Even though such funding restrictions and 
surety postings may be difficult for some institutions that are already 
experiencing financial restraints, such protections and the heightened 
ability to act quickly to protect Title IV, HEA program funds are 
essential for improving the Department's oversight and gatekeeping 
responsibilities. Provisional certification will permit some 
institutions to improve their financial operations over time without 
compromising their administration of the Title IV, HEA programs.
    The Secretary would like to clarify that any letter of credit that 
an institution is required to submit to the Secretary must be in a form 
and amount acceptable to the Secretary.
    The Secretary agrees with the commenters on the provision requiring 
an institution to have met all its financial obligations during the 
preceding two award years. The Secretary has decided to clarify this 
provision in the manner in which a similar provision has been clarified 
in Sec. 668.15 (see the discussion in Sec. 668.15 on this issue).
    The Secretary would also like to clarify when third party financial 
guarantees or assumptions of liabilities by owners are required. 
Institutions that demonstrate financial responsibility under the 
requirements of Sec. 668.15(b) and Sec. 668.15(d) and are in compliance 
with all other requirements of this subpart generally are entitled to 
full certification. An institution that, despite meeting the 
requirements of Sec. 668.15(b) and (d), falls within one of the 
categories in Sec. 668.15(c)(2) is not considered financially 
responsible and therefore cannot be fully certified. These categories 
include a limitation, suspension, or termination by the Secretary or a 
guaranty agency of the institution's participation at any time within 
the previous five years or a settlement to resolve such an action. Also 
included are audit or program review findings during the two most 
recent audits or program reviews amounting to more than five percent of 
the institution's Title IV, HEA program funds for a given award year, a 
citation for failure to submit acceptable audit reports in a timely 
fashion during any of the previous five years, and a failure to address 
satisfactorily any compliance problems still identified in program 
reviews or audits after the institution has exhausted its appeals of 
those findings. The Secretary considers any of these characteristics 
sufficiently detrimental to the integrity of the Title IV, HEA programs 
to provide that an institution meeting them is not financially 
responsible.
    Further, to emphasize the seriousness with which the Secretary 
views these institutional failings, to protect Federal funds, and to 
deter institutions from acting in a manner that could cause them to 
fall within one of these categories, the Secretary will refuse even to 
provisionally certify such an institution, unless the appropriate 
additional financial guarantees and assumptions of liability are 
furnished. In the February 28, 1994 NPRM, the Secretary had also 
proposed to apply this treatment regarding provisional certification to 
any institution failing the financial responsibility standards of 
Sec. 668.15 during the previous five years. The Secretary believes that 
a modification of this last provision is in order. The Secretary 
therefore wishes to clarify that any institution that fails to 
demonstrate financial responsibility under its current audit, and that 
has failed to do so at least once under the standards in effect during 
the preceding five years (other than for a reason described in 
Sec. 668.15(c)(2)) is also required to post financial guarantees and 
furnish assumptions of liability in accordance with Sec. 668.13(d)(2). 
This additional safeguard is warranted where an institution does not 
meet the current standard for demonstrating financial responsibility 
and has failed to do so at least once during the preceding five years.
    The Secretary believes that it is appropriate to put in place a 
procedure where such financial guarantees and assumptions of liability 
will be required from institutions that come within the provisions in 
Sec. 668.13(d)(2). Rather than exercising discretion in whether to 
require such guarantees at all, the Department will examine the 
specific circumstances presented by each such institution and set the 
required amount and terms of the financial guarantees and assumptions 
of liability in accordance with the regulation.
    Changes: The requirements for provisional certification to 
participate on a limited basis for institutions that are not 
financially responsible have been amended to make clear that the 
criteria of this section are not required for an institution that meets 
the exceptions to the general standards of financial responsibility 
under Sec. 668.15(d). The regulations have been amended to clarify that 
any required submission of a letter of credit must be in an amount and 
in a form acceptable to the Secretary. Section 668.13(d)(2) has been 
clarified to explain that financial guarantees are only required if the 
institution comes within the requirements of Sec. 668.15(c)(2), or 
where the institution fails to demonstrate financial responsibility 
under its current audit and has failed to do so at least one other time 
under the standards in effect during the preceding five years.
    Revocation of provisional certification. Comments: A number of 
commenters complained that the lack of a formal appeal process for 
revocation of provisional certification was unfair to the institution 
because it provided much less due process than is available to other 
institutions under the appeal procedures in subpart G of the 
regulations. Some of these commenters also indicated that they believed 
it would be more appropriate to offer provisionally certified 
institutions the full appeal rights under subpart G of the regulations, 
and several commenters believed that more extensive appeal procedures 
were required to revoke provisional certification than were described 
in the regulations.
    Some commenters also suggested that a revocation notice should not 
be made effective upon the date of the mailing, but either upon receipt 
by the institution or until a specified number of days after the 
mailing. A few commenters also recommended that first class mail be 
used because it is an accepted means of filing legal documents in the 
court system, or that certified mail be used as an alternative to 
registered mail.
    Many commenters also requested that the provision that provides 
that an institution may request reconsideration of a revocation of 
provisional certification be modified to provide that any request for 
reconsideration of a revocation of provisional certification be decided 
by someone other than the person issuing the revocation. These comments 
stated that it was important that such requests for reconsideration be 
made to a different official because it would be more meaningful than 
having the request be presented to the person that had already made a 
decision adverse to the institution.
    Discussion: The Secretary disagrees with the commenters that 
revocations of provisional certification should receive the same appeal 
procedures given to fully certified institutions under subpart G of the 
regulations. Institutions receiving provisional certification are being 
given the opportunity to participate under limiting conditions because 
a heightened risk to Title IV, HEA program funds has been identified, 
either by the institution's current financial condition or through 
prior problems in the administration of the Title IV, HEA programs by 
the institution or its owners. Furthermore, section 498(h) of the HEA 
provides that provisionally certified institutions may be terminated if 
the Secretary determines that an institution is unable to meet its 
responsibilities under its program participation agreement. This 
language is significantly different from the requirement in section 
487(c)(1)(F) of the HEA that provides that an adverse action against a 
fully participating institution be determined after reasonable notice 
and opportunity for hearing. The regulations require that the notice 
revoking the provisional certification contain the basis for the 
action, explain to the institution the consequences of such revocation, 
and detail the procedures required to request reconsideration of the 
action. The notice and opportunity to request reconsideration of the 
decision to revoke the institution's provisional certification provide 
adequate protection to the institution that it will have the 
opportunity to respond directly to the stated basis for the action, and 
establish a reasonable mechanism to resolve the dispute in a fair 
manner. The Secretary believes that such procedure provides an 
institution with a fair opportunity to be heard, and the final agency 
decision will be subject to Federal court review to ensure that the 
action was not arbitrary and capricious.
    The Secretary does not agree that a notice of revocation of an 
institution's provisional certification should be effective on a date 
other than the date that the letter is sent to the institution. An 
institution that participates under provisional certification does so 
with the understanding that it is subject to greater scrutiny with 
fewer procedural rights when problems are identified. A notice advising 
the institution that its provisional certification is revoked will 
identify the reasons for such action and give the institution an 
opportunity to request reconsideration of that decision. The effective 
date of the revocation is the date that the notice is mailed; this 
provides greater protection of Title IV, HEA program funds while still 
giving the institution an opportunity to have that decision 
subsequently set aside.
    The Secretary agrees that it would be more appropriate to provide 
that notices of revocation decisions will be sent by certified mail, 
return receipt requested, rather than by registered mail. The Secretary 
notes that certified mail is already used to initiate adverse actions 
against fully participating institutions under subpart G of the 
regulations, and therefore believes that it is appropriate to 
standardize this notice requirement for revocations of provisional 
certification. The regulation also provides that, where practical, more 
expeditious notice may be provided through facsimile or overnight mail.
    The Secretary agrees that the designated department official making 
the decision concerning an institution's request for reconsideration of 
a revocation should be different from, and not subject to supervision 
by, the official who initiated the revocation of the institution's 
provisional certification. This separation of function will ensure that 
the official making the final decision for the Department is 
independent from the supervision of the official issuing the initial 
decision, and this procedural protection strengthens the integrity of 
the review procedures for revocation of provisional certification.
    Changes: A change has been made to provide for notices of 
revocation of provisional certification to be sent by certified mail. 
The regulations have been modified to require that the official 
reviewing a request for reconsideration of provisional certification 
must be different from, and not subject to supervision by, the official 
that issued the notice of revocation.

Section 668.14  Program participation agreement.

    Comments: Five commenters suggested that an institution's program 
participation agreement should only cover those branches or locations 
which are specifically listed in the institution's notice of 
eligibility. One commenter indicated that this provision makes clear 
that the program participation agreement applies to each branch campus 
or location of the institution.
    Discussion: The provision emphasizes that the program participation 
agreement applies only to those branch campuses and locations that meet 
the applicable requirements of this part; therefore, additional 
clarification is unnecessary.
    Changes: None.
    Comments: Four commenters asserted that the regulations should 
specify that the terminology ``special arrangement, agreement, or 
limitation'' applies only to the Title IV, HEA programs, and not any 
other programs in which the institution participates. Two commenters 
suggested that the proposed regulations marked a radical departure from 
existing regulations, and that a ``phase- in'' period was in order.
    Discussion: The Secretary would like to clarify that any ``special 
arrangements, agreements, or limitations'' included in an institution's 
program participation agreement by the Secretary should apply only to 
those special arrangements, agreements, or limitations entered into 
under the authority of statutes applicable to Title IV of the HEA. 
Considering that the language for this section of the regulations is 
for the most part statutory, institutions have had access to this 
information since July 1992 when the Amendments of 1992 were enacted. 
The Secretary believes that institutions have had adequate time to set 
in place any policies or procedures to comply with this section. A 
``phase-in'' period is unnecessary.
    Changes: Section 668.14(b)(1) has been amended to clarify that an 
institution must comply with all special arrangements, agreements, or 
limitations entered into under the authority of statutes applicable to 
Title IV of the HEA. Corresponding changes have been made throughout 
the sections of 34 CFR 668 and 34 CFR 682 contained in this regulatory 
package.
    Comments: One commenter agreed that a mechanism was needed to 
ensure that an institution's fund requests meet only its immediate 
Title IV, HEA program needs, but suggested that such a mechanism should 
accommodate institutions where funds must first pass through a State 
agency, adding to the time frame for expenditure. Four commenters 
indicated that the proposed regulations may necessitate changes in 
institutions' methods of accounting, programming, banking, fund 
monitoring, etc. and recommended that institutions should be allowed a 
reasonable ``phase-in'' period for the requirements, during which the 
Secretary should provide significant guidance regarding implementation.
    Discussion: The Department's requirements regarding immediate cash 
needs have not changed with these proposed regulations. They have 
simply been restated as a criterion of the program participation 
agreement. These long established rules are explained in many 
Department publications, and are included in annual Department training 
sessions. A ``phase-in'' period for these requirements is unnecessary. 
As for institutions that must wait for funds to pass through a State 
agency, these institutions should have already addressed this issue in 
an effort to comply with existing Title IV, HEA program guidance.
    Changes: None.
    Comments: A large group of commenters was concerned that the 
information provided to the Secretary, SPRE, guaranty agency, 
accrediting agency or State licensing agency relative to an 
institution's administrative capability and financial responsibility 
may be disclosed to the public, and recommended that the Secretary 
provide a guarantee that such information must be kept confidential by 
the above-listed parties. Three commenters suggested that the Secretary 
develop a specific format for the reporting of data and that the data 
be sent directly to the Secretary for dissemination to any of the above 
organizations that might need it.
    Discussion: The Secretary does not have the authority to create or 
supersede laws that may relate to disclosure of potentially sensitive 
information. Such laws vary from State to State and from agency to 
agency; it would be inappropriate for the Secretary to address such an 
issue. As for data provided directly to the Secretary, if that data 
were discloseable under a freedom of information request, the Secretary 
would have no choice but to release the information if it were 
requested.
    It is important to note that the provision only requires 
institutions that have been selected for review under the State 
Postsecondary Review Program process to provide the above-referenced 
information to SPREs. By the nature of the selection procedures and 
because of the limited number of institutions which the Secretary 
anticipates will meet review-triggering criteria, the Secretary 
believes most institutions will not be requested to provide this 
information and therefore will not need to worry about potential public 
disclosure.
    The Secretary believes a specific format for reporting and a 
centralized location for collection of data are unnecessary at this 
time. As the information must only be provided upon request, each 
organization can specify exactly what information is needed from an 
institution and in what time frame. A format specified by the Secretary 
might cause some institutions to be burdened with providing information 
that is not needed.
    Changes: Section 668.14(b)(4) has been amended to provide that an 
institution must provide information relating the administrative 
capability and financial responsibility of the information to a SPRE if 
the institution was referred by the Secretary under 34 CFR 667.5.
    Comments: Four commenters recommended that SPREs and guaranty 
agencies be added as parties to whom institutions must submit reports 
of information required by the Secretary. Four commenters also 
suggested including Federal consolidation loans in the list of loan 
programs described in this section.
    Discussion: Other provisions in the regulations require reports to 
be provided to SPREs and guaranty agencies. To restate those 
requirements here would be redundant.
    Federal consolidation loans are not a Title IV, HEA program in 
which an institution must be certified for participation and 
consequently should not be included in this section.
    Changes: None.
    Comments: Three commenters indicated that the proposed regulations 
placed responsibility on institutions for knowing how much money 
students may have borrowed while attending other institutions.
    Discussion: The commenters are correct. Institutions do have a 
responsibility to determine the amounts of Title IV, HEA program funds 
students have received attending other institutions by obtaining 
financial aid transcripts from those schools. Past abuses with this 
system, caused chiefly by institutions which did not recognize the 
importance of financial aid transcripts, have created the need to tie 
this requirement to an institution's continuing participation in the 
Title IV, HEA programs. While the Secretary does not anticipate that an 
institution would be penalized for information of which it was not 
aware, it must be stressed that an institution must do everything in 
its power to ensure that no loan is certified for an amount in excess 
of a student's allowable limits.
    Changes: None.
    Comments: Two commenters recommended that applicable institutions 
not only be required to make graduation and placement statistics 
available to prospective students, but also to publish the information 
in their catalogs. One commenter suggested that an institution only be 
required to provide to prospective students the job licensing 
requirements for its programs relative to the State in which the school 
is located.
    Discussion: The Secretary believes the regulations go far enough in 
requiring the institutions to make graduation and placement rates 
available to prospective students. While some institutions may elect to 
publish this information in their catalogs for convenience, such a 
measure is not required. Concerning the comment on State licensing 
requirements for jobs, neither the statute nor the proposed regulations 
indicate that an institution must provide the criteria for any State 
other than that in which the school is located.
    Changes: None.
    Comments: Three commenters are concerned that early deadlines for 
applications for State grants may affect an institution's ability to 
inform eligible student loan borrowers about the availability and 
eligibility of those borrowers for State grant assistance in the State 
in which the institution is located. Two commenters are concerned that 
in having to inform students from other locations of State grant 
information pursuant to their States, institutions will be required to 
be aware of State grant information for a large number of States.
    Discussion: If an institution is aware that a student has enrolled 
or applied for financial assistance after the application date has 
passed to receive State grant assistance that year in that State, it 
must simply inform the student that he or she is not eligible for those 
funds, and may apply the following year prior to the deadline. 
Accordingly, the institution will then process the student's aid 
package with no consideration of State grant funds for that award year. 
The Secretary does not understand how this requirement could have any 
adverse affect on an institution. In fact, it is the Secretary's 
understanding that many institutions already publish State grant 
application information in their catalogs or disseminate the 
information through their financial aid offices. Regarding students 
from other States, institutions are indeed required to inform them of 
State grant assistance available to them from their own State; however, 
the institutions are not expected to be experts on this information, 
but rather to be sources of general information from which students may 
learn who to contact in their State to apply for assistance. The 
Secretary does not believe this requirement is unduly burdensome on 
institutions.
    Changes: None.
    Comments: A large group of commenters was concerned that requiring 
newly participating institutions or institutions that have changed 
ownership to implement a default management plan equal to Appendix D, 
for two years, was overly restrictive. Most suggested that institutions 
be allowed to submit an alternate plan to the Secretary for approval. 
Many of the commenters recommended that in the case of ownership 
changes, institutions with default rates under a certain percentage 
(10% or 20%) should be exempt from the requirement.
    Discussion: The Secretary's proposal that newly participating 
institutions and institutions that have changed ownership use Appendix 
D as a default management plan was made only after careful review by 
the Department showed that Appendix D is effective in helping reduce 
student defaults. Moreover, Appendix D is simply a basic default 
management plan. There is nothing in the statute or regulations that 
would preclude an institution from adding elements. In fact, the 
Secretary applauds such creative efforts and believes they may help to 
further reduce student defaults. The Secretary believes institutions 
with low default rates should not be exempted because there is no 
reason to believe under different ownership the rates would remain as 
low.
    Changes: None.
    Comments: Four commenters want to expand the regulations to include 
Social Security Administration, Immigration and Naturalization Service, 
Law Enforcement Agencies and Direct Lending Contractors as parties that 
are authorized to share information pertaining to an institution's 
Title IV, HEA eligibility or participation, or pertaining to fraud and 
abuse.
    Discussion: The Secretary does not have authority to include these 
organizations in the regulations as they do not appear in the statute.
    Changes: None.
    Comments: Many commenters argued that the provisions in this 
section governing an institution's ability to employ or contract with 
individuals or organizations to administer any aspect of the Title IV, 
HEA programs or the receipt of funds under those programs go far beyond 
the scope of section 487(a)(16) of the HEA. These commenters pointed 
out that the statute referred only to individuals or organizations that 
have been convicted, have pled nolo contendere or guilty to a crime, or 
that have been judicially determined to have committed fraud involving 
Title IV, HEA program funds and not to administrative determinations, 
other material violations of law, or misuse of State, local, or Federal 
government funds (other than Title IV, HEA program funds) with respect 
to an institution's ability to employ an individual or organization. 
One commenter supported the Secretary's proposed restrictions. Five 
commenters were concerned that an institution may be penalized for 
hiring or contracting with a party convicted of fraud involving 
government funds or a party that has been terminated from participation 
under the HEA for an infraction involving government funds, even if 
they were unaware of the conviction or termination. One commenter was 
concerned that the institution may be penalized if it hired or 
contracted with such a party, even if that person's job was to cut 
grass or collect garbage.
    Discussion: The Secretary disagrees with those commenters who 
argued that the provisions in this section restricting an institution's 
ability to employ or contract with certain individuals or organizations 
go beyond the authority of the HEA. Section 487(a)(4) expressly 
requires an institution to agree in its program participation agreement 
to comply with financial and fiscal responsibility requirements 
established by the Secretary. These requirements are part of the 
financial responsibility provisions found in Sec. 668.15(c). In 
proposing the additional restrictions in the NPRM, the Secretary 
provided justification that these additional safeguards were necessary 
to protect the Title IV, HEA programs and institutions participating in 
those programs. The Secretary still believes those justifications to be 
valid. The regulations state in regard to a participating institution's 
responsibility, it will not ``knowingly'' employ or contract with an 
individual, agency, organization, etc. which has violated any laws 
involving any government funds. The Secretary believes the regulations 
are clear that an institution will not be penalized for information of 
which it is not aware. Furthermore, in safeguarding Federal funds, the 
Secretary is concerned with any parties that may have previously 
violated a law involving government funds, even if these parties now 
perform janitorial or maintenance duties. By the provision, an 
employment or contract relationship with such a party is not 
appropriate, and by ``knowingly'' entering into such a relationship an 
institution may well jeopardize its continued participation in the 
Title IV, HEA programs. The Secretary believes the regulations make 
this clear as well.
    Changes: None.
    Comments: Three commenters recommended that the regulations be 
amended to prohibit contracts with institutions or third-party 
servicers that have been terminated for any reason, not just for a 
reason involving government funds.
    Discussion: The purpose of this provision is to safeguard Federal 
funds, not to punish institutions or servicers that may have been 
terminated. For that reason, the Secretary believes the provision is 
adequate in its present form to satisfy the intent of the statute.
    Changes: None.
    Comments: Five commenters advised that requiring institutions to 
complete surveys conducted as part of the Integrated Postsecondary 
Education System (IPEDS) in a timely manner and to the satisfaction of 
the Secretary could be burdensome to institutions, especially if the 
school did not have a large staff or computer systems capable of 
collecting information. Three of the five commenters recommended that 
the Secretary design forms or specify formats to make data collection 
easier. One of the five commenters suggested that the Secretary 
accommodate institutions not yet computerized with more time to 
complete the surveys.
    Discussion: The language for this provision is statutory and may 
not be changed by the Secretary. In addition, the Secretary believes 
that any survey conducted as part of IPEDS is necessary and will 
provide valuable information to the Department. Those offices that 
collect IPEDS information work diligently to create consistent, easy-
to-use forms and formats, not just because this makes data collection 
easier for the institutions, but also because it makes tabulating and 
sorting of the information easier. The Secretary does not believe this 
requirement is unduly burdensome to institutions.
    Changes: None.
    Comments: One commenter suggested that by not allowing institutions 
to impose penalties on students unable to meet their financial 
obligations due to disbursement delays for loan proceeds, this 
provision would force institutions to ``carry'' unpaid students 
indefinitely, creating a financial burden. One commenter suggested it 
was not the intent of the statute for an institution to allow an unpaid 
student to remain enrolled if the delay in disbursement of loan 
proceeds was caused by the student's failure to comply with a program 
requirement. One commenter recommended that the regulations stipulate 
that institutions would not be prohibited from withholding academic 
transcripts and other graduate services from students as the result of 
delayed disbursement of Title IV, HEA program funds.
    Discussion: The language of this requirement is for the most part 
statutory, and very clear in its intent. The Secretary does not believe 
this requirement will cause a financial burden to institutions as this 
situation should not frequently occur if an institution is complying 
with all applicable regulations.
    It is not probable that a student would deliberately cause the 
delay of his or her loan disbursement by not complying with the 
instructions of the institution or lender; nevertheless, if such a 
situation occurred, the institution would not be prohibited from 
imposing penalties on the student.
    The withholding of a student's academic transcript or other 
graduate services is considered a penalty by the Secretary.
    Changes: None.
    Comments: A very large number of commenters suggested that the 
proposed regulations went beyond the scope of the statute by 
prohibiting any type of incentive payments, particularly those based on 
``retention.'' Most of those same commenters, plus another large group, 
felt that token gifts to students and alumni should be excluded from 
this requirement.
    Discussion: The Secretary believes that even in incentive payment 
structures based on retention there is room for abuse and, in fact, has 
seen evidence of such abuse. Since July of 1992 when the Amendments of 
1992 were enacted, many institutions have opted to change to retention-
based pay for admissions personnel. In that time, the Secretary has 
seen evidence of lowered satisfactory progress standards and in extreme 
cases, falsified attendance and leave of absence requests, all in an 
effort to keep students enrolled. In many cases, these practices were 
designed by admissions personnel who were duly paid after the student 
passed a retention mark. After that mark, the students were dropped. 
Furthermore, the Secretary has evidence that some of these students 
were admitted using falsified ability-to-benefit tests, which further 
ties the issue of retention to enrollment. The Secretary believes that 
reputable and conscientious institutions can develop other creative 
ways to reward their employees that will have no direct or indirect 
relationship to success in securing enrollments. Regarding token gifts 
for students and alumni who refer other students, the Secretary, after 
reviewing the comments, has decided that such practices are widespread 
and will cause no harm if the tokens are not monetary, and limits are 
placed both on their value and frequency of distribution.
    Changes: The Secretary has amended Sec. 668.14(b)(22) to allow that 
token gifts may be given to students or alumni for referring other 
students for admission to the institution, as long as:
    (1) the gift is not money, check or money order;
    (2) no more than one such gift is given to any student or alumnus; 
and
    (3) the value of the gift is no more than twenty-five dollars.
    Comments: Seven commenters asserted that most institutions that 
offer athletically related student aid are currently audited by the 
National Collegiate Athletic Association (NCAA) and the Office of 
Management and Budget (OMB), and that the regulations should be amended 
to state that compilations and audits which together satisfy NCAA and 
OMB also satisfy the requirements of paragraphs (d) and (e) of the 
regulation. One commenter indicated that the proposed regulations 
paralleled NCAA audit requirements and compliance should not pose a 
problem for member institutions. One commenter pointed out that a 
``compilation'' is a term defined under Statements on Standards for 
Accounting and Review Services No.1 and only provides a representation 
without any assurances on the statements. The commenter suggested that 
the Secretary require preparation of a schedule, and have that schedule 
audited.
    Discussion: The Secretary believes that the requirements of the 
statute and regulations stand on their own. It is up to each 
institution to determine if a particular audit or compilation prepared 
for a different organization satisfies the conditions specified in 
paragraphs (d) and (e) of the regulation. The Secretary believes it is 
unwise to give blanket approval to audits and compilations which, 
although at present may satisfy the regulation, may not at a later 
date. Furthermore, the language of this provision, as written, covers 
all institutions, even those which are not NCAA members.
    Changes: None.
    Comments: Seven commenters indicated that by making the effective 
date for participation in the Title IV, HEA programs the date that the 
Secretary signs an institution's program participation agreement, there 
may well be a lapse of time from the expiration of the prior program 
participation agreement during which the institution may be ineligible. 
The commenters felt this may create financial problems for both 
institutions and students, and some recommended that program 
participation be made retroactive to the date of application. Some 
other commenters felt program participation should be made retroactive 
to the date of the certification review.
    Discussion: The language for this provision is statutory. The 
Secretary has no reason to believe that Congress had any other intent 
when the law was drafted. However, the Secretary understands the 
concern of commenters that an institution's program participation 
agreement might expire after an institution has submitted a renewal 
application but before the Secretary signs a new program participation 
agreement. The Secretary has modified Sec. 668.13 to address that 
concern. See the section of the Analysis of Comments and Changes that 
addresses certification procedures (Sec. 668.13).
    Changes: None.

Section 668.15  Factors of Financial Responsibility

    General. Comments: A few commenters supported all of the 
Secretary's proposed regulations in Sec. 668.15. One of the commenters 
recommended the inclusion of a debt to net worth ratio in considering 
an institution's financial responsibility. One commenter, who disagreed 
with the Secretary's rationale for increasing the current ratio 
requirement from 1:1 to 1.25:1, suggested that the Secretary consider 
other types of financial analysis such as a ``Z Score'' in evaluating 
an institution's financial resources. Another commenter, who also 
disagreed with the Secretary, believed that tangible net worth was not 
an appropriate indicator of financial responsibility and recommended 
that the Secretary consider cash flow statements in his evaluation.
    Discussion: The Secretary considered a number of alternative ratio 
tests that could be used to evaluate an institution's financial 
condition. While the Secretary does consider minimum capitalization an 
important factor in determining an institution's financial 
responsibility, he has elected not to put such a standard into 
regulation at this time. Based upon the limited information presented 
by in the commenters, the Secretary is not convinced that a ``Z Score'' 
would be an appropriate measure of financial responsibility for an 
institution. However, the Secretary will monitor the financial 
information gathered in accordance with these regulations to determine 
whether it would be appropriate to require either additional, or 
alternative cash flow statement criteria as a factor in determining 
financial responsibility.
    Changes: None.
    Comments: Many commenters responded to the Secretary's request for 
comments regarding the acceptability of a ``bond rating'' as sufficient 
indicia of a nonprofit institution's financial responsibility. The 
majority of the commenters expressed support of the use of a bond 
rating as a means of evaluating financial responsibility. One commenter 
suggested that the Secretary consider an institution to be financially 
responsible if it is able to demonstrate that it has a debt financing 
arrangement that is acceptable to the College Construction Loan 
Authority (Connie Lee). Another commenter believed that the Secretary 
should broaden the definition of acceptable bonds to include other than 
general obligation bonds because certain types of revenue bonds issued 
by pubic nonprofit institutions also have ratings by nationally 
recognized rating agencies. One commenter believed that the Secretary 
should expand the provision to exempt for-profit institutions with an 
acceptable bond rating.
    Discussion: The Secretary believes that a superior bond rating may 
serve as an effective proxy for demonstrating an institution's 
financial responsibility. An institution that has the capacity to issue 
a top rated debt security is, in general, considered to have the 
financial resources necessary to meet all of its financial obligations. 
The Secretary believes that the debt paying ability of an institution, 
as determined by a comprehensive credit review conducted by a 
nationally recognized statistical rating organization, is 
representative of the institution's financial health. For an 
institution's bond rating to serve as an acceptable proxy, the 
institution must have the financial resources required to obtain a 
rating at or above the second highest level used by the rating 
organization. Furthermore, the Secretary requires that an institution 
provide evidence that the issue has been rated without consideration of 
any insurance, guarantee, or credit enhancement that may have been used 
to lower the institution's cost of capital. The Secretary requires that 
an institution provide an actual rating from a nationally recognized 
statistical rating organization. Since Connie Lee is not a rating 
organization, financing arrangements that are acceptable to Connie Lee 
are only eligible for consideration to the extent that they are 
separately rated by a nationally recognized rating organization that is 
acceptable to the Secretary. The Secretary agrees with commenters that 
the substitution of a bond rating for an institution's having to 
demonstrate financial responsibility should be expanded to include 
other forms of rated debt such as revenue bonds. The Secretary also 
agrees that this provision should be applied to both nonprofit and for-
profit institutions.
    Changes: Sections 668.15(b)(7)(ii), (b)(8)(ii) and (b)(9)(v) have 
been added to provide that the Secretary shall consider an institution 
to be financially responsible if the institution is able to demonstrate 
to the satisfaction of the Secretary that it has an outstanding debt 
obligation which has been rated by a nationally recognized statistical 
rating organization at or above the second highest level rated by that 
organization. To be acceptable to the Secretary, an institution's debt 
must have been rated without consideration of any insurance, guarantee, 
or credit enhancement employed by the institution to lower its cost of 
capital.
    General standards of financial responsibility. Comments: A few 
commenters expressed concern that the Secretary's requirement that an 
institution submit an audited financial statement without qualification 
or disclaimer was particularly burdensome because the commenters 
believed an institution is likely to be faced with a ``qualified'' 
statement as a result of adopting new accounting standards mandated 
under FAS 117.
    Discussion: The Secretary believes that the reliability of any 
financial statement is dependent upon the ability of the institution's 
independent auditor to determine and report that the information 
contained within the financial statements is a fair representation of 
the institution's financial resources. The auditor will issue a 
qualified statement if the auditor is unable to determine that the 
information is a fair representation because of any uncertainty. It is 
the institution's responsibility to identify the cause of the 
uncertainty and make every reasonable effort to correct it.
    Changes:  None.
    Comments: Many commenters believed that the requirement for an 
institution to be current on any debt service should be clarified to 
take into consideration legitimate disputes that may arise in the 
normal course of business. Several commenters believed that a single 
instance or even a few instances of late payments would not necessarily 
be indicative of financial problems. Many commenters believed that an 
institution should be considered current, despite not having made 
scheduled payments, if the institution is currently involved in 
negotiations with creditors to restructure or reschedule outstanding 
debt. A number of commenters suggested that a pattern of late payments 
on the part of an institution would be a more reliable indicator of 
financial difficulty than would a single instance of failure to pay. 
Many of the commenters suggested that the Secretary rely on the 
judgement of the institution's independent auditor in determining 
whether or not such a pattern of late payment exists.
    Discussion: In general, the Secretary believes that an 
institution's ability to meet its financial obligations when due is 
indicative of financial health. However, the Secretary recognizes that 
over the normal course of a business cycle an institution may 
occasionally delay payment to certain trade creditors as a result of 
contractual disputes. Alternatively, the Secretary recognizes that an 
institution that is experiencing cash flow problems will typically 
delay payment to creditors in an effort to conserve cash. Clearly, if 
the cause of an institution's delay in making payment is contractual in 
nature, than the Secretary expects that this would occur infrequently. 
If the cause is related to insufficient cash flow, then the Secretary 
would expect to observe a recurring pattern of late payments to 
creditors. The Secretary believes that payments related to long term 
liabilities such as term loans from financial institutions, bonds, 
debentures, or notes payable which become due beyond one year are of 
significant importance because the institution's assets are typically 
pledged, encumbered, or assigned to collateralize such obligations. The 
Secretary agrees with the commenters that an institution is current, 
despite having failed to make scheduled payments, if the institution 
has reached an acceptable agreement with creditors to substantially 
reschedule or restructure the outstanding debt. However, the Secretary 
believes that a failure, on the part of the institution, to reach an 
agreement with creditors after a reasonable period of time exposes the 
institution to potential financial and legal problems that may 
adversely affect the quality of the institution's educational program. 
Information about the institution's outstanding debt is already 
provided by the institution in its audited financial statement. 
Furthermore, the institution's independent auditor has a responsibility 
to disclose any failure, on the part of the institution, to be in 
compliance with loan agreements in existence on the date the 
institution's balance sheet was prepared.
    Changes:  Section 668.15(b)(4) is amended to provide that an 
institution is not considered to be financially responsible if the 
institution is not in compliance with all loan agreements in existence 
on the date the institution's financial statements are prepared. 
However, the Secretary considers an institution to be current in its 
debt service if the institution can provide evidence that it has 
reached a mutually acceptable agreement to restructure or reschedule 
its obligations. If an institution is unable to reach a mutually 
acceptable agreement with creditors after 120 days and the 
institution's failure to pay its obligations has resulted in a creditor 
taking legal action to attach the institution's assets or obtain a 
judgment, then the institution shall not be considered to be 
financially responsible.
    Comments: Many commenters felt the requirement that an institution 
maintain a cash reserve was excessive. A few commenters supported the 
requirement of the cash reserve and provided suggestions for 
alternative methods of calculating the amount of the reserve 
requirement. A majority of the commenters who expressed a concern 
believed that the establishment of a separate reserve account would 
significantly reduce available working capital funds that might be 
better applied to meet other operating expenditures. Many commenters 
believed that nonprofit institutions should be allowed to include 
amounts held in the cash reserve in the calculation of the ratio of 
current assets to current liabilities. Some commenters supported the 
Secretary's position that the cash reserve account should be excluded 
from the calculation of the ratio for nonprofit institutions. A number 
of the commenters thought that a more appropriate requirement would be 
a cash reserve that is based on the institution's actual refund 
experience. A few commenters suggested that the cash reserve 
requirement be based on the residual of total unearned tuition 
liability less accounts receivable, with an adjustment for refunds made 
under the pro rata refund policy. Many commenters suggested that the 
calculation of the reserve requirement on the basis of deferred tuition 
revenue seemed arbitrary and indicated that it would vary greatly among 
institutions depending on the timing of enrollments and the preparation 
of year end financial statements. Other commenters recommended that the 
Secretary consider an annual financial statement along with cash flow 
projections for the next three enrollment periods as an alternative to 
the cash reserve. A few commenters believed that the definition of 
acceptable forms of the cash reserve should be expanded to include 
money market instruments, that are highly liquid and trade in an active 
secondary market. Overall, the majority of the commenters believed that 
the provision should be removed.
    Discussion: Section 498(c)(5) of the HEA requires the Secretary to 
establish requirements for an institution to maintain sufficient cash 
reserves to ensure repayment of any required refunds. The Secretary 
proposed that a cash reserve based on the institution's deferred 
tuition revenue would be appropriate because the balance of the 
deferred tuition account generally reflects amounts collected by, or 
contractually obligated to be received by, the institution in advance 
of providing educational services. The Secretary believed an 
institution could reasonably expect that some students would withdraw 
prior to the completion of their educational program and be entitled to 
a refund of amounts paid for services not yet rendered.
    The Secretary believes that the commenters are correct in observing 
that the balance of deferred tuition revenue would vary among 
institutions depending on factors that have little to do with actual 
refund payments by the institution, such as enrollment periods and 
fiscal year ends. The Secretary believes that it would be more 
consistent with the intent of the HEA for this provision to match the 
reserve requirement more closely with an institution's historical 
refund experience. The Secretary believes that a cash reserve balance 
equal to one quarter of the institution's previous year's total refund 
expenditure would be sufficient to satisfy the institutions cash 
reserve requirement because that amount represents approximately three 
months potential refund expenditure.
    In order to establish the appropriate amount for the cash reserve, 
the institution will have to disclose, in a note to its audited 
financial statements, the dollar amount of total refunds paid in both 
the current fiscal year and prior year. The Secretary does not consider 
internally generated cash flow projections as reliable indicators of an 
institution's ability to meet the cash reserve requirement. The 
Secretary does not consider liquid investments, such as money market 
funds, to be equivalent to cash because such investments do not 
generally have a maturity date and are therefore more characteristic of 
equity investments.
    While the Secretary acknowledges the criticism from the commenters 
that the establishment of a cash reserve reduces available working 
capital, the Secretary points out that the establishment of a reserve 
account requires the accumulation of cash on a one-time basis. 
Contributions to the reserve account would be required only to the 
extent that enrollment levels and refund experiences vary. On a 
continuing basis, the resulting net outflow of working capital would be 
the same despite the establishment of a cash reserve.
    The Secretary agrees with the commenters that nonprofit 
institutions should be treated consistently with for-profit 
institutions, and allowed to include the cash reserve in the 
calculation of the liquidity ratios. The reserve account is intended to 
provide an immediately available source of cash that must be available 
to make refunds at any time. It is reasonable to expect that if an 
institution were to close at other than the end of an academic period 
that the cash reserve funds would be used to pay the institution's 
refund liability. Since unpaid refunds are generally recognized as a 
current liability it is appropriate to recognize, in the institution's 
ratio calculation, those assets which would actually be used to offset 
the liability in the event of liquidation.
    The regulation will restrict the type of account in which the cash 
reserve must be kept because it must be maintained at a certain minimum 
level at all times. Accordingly, an institution may not hold reserve 
funds in any type of investment that is subject to significant price 
variation. The Secretary believes only cash held in the form of a 
demand deposit in a federally insured bank account, or short term 
investments secured by the full faith and credit of the United States 
meet this criteria.
    Changes: The Secretary amends the cash reserve requirement in 
Sec. 668.15(b)(5) to require an institution to maintain at all times, a 
cash reserve equal to one-quarter of the total dollar amount of refunds 
paid by the institution in the previous fiscal year. Such reserves 
shall be maintained in a cash deposit in a federally insured bank 
account or, in U.S. Treasury securities, backed by the full faith and 
credit of the United States having an original maturity of three months 
or less.
    Comments: Many commenters believed that the requirement that for-
profit institutions maintain a ratio of current assets to current 
liabilities of 1.25:1 was burdensome and exceeded the scope of the 
statute. One commenter supported the ratio requirement and suggested 
that a current ratio of 1.6:1 up to 2:1 might be a more appropriate 
standard of financial responsibility. The majority of commenters who 
expressed concern regarding the ratio requirement indicated that they 
believed the Secretary's justification for applying a higher standard 
to for-profit institutions was unsupported and discriminatory. Many 
commenters believed that the Secretary should not attempt to 
distinguish between for-profit and nonprofit institutions. Among the 
commenters who expressed a concern, most believed that the 
establishment of separate ratio tests for each type of institution was 
not required by the HEA. Some of the commenters believed that the 
exclusion of uncollateralized related party receivables from the 
calculation of current assets was inconsistent with generally accepted 
accounting principles. A number of commenters suggested that a phase-in 
period ranging from twelve months to more than five years should be 
granted to allow institutions time to build up working capital reserves 
in order to comply with this standard.
    Discussion: Many commenters believed that in applying this standard 
the Secretary was effectively mandating that for-profit institutions 
divert available funds away from capital assets such as facilities, 
supplies, and equipment and into lower yielding short term investments. 
While the Secretary recognizes the possibility that a higher current 
ratio requirement could theoretically lead to greater inefficiencies in 
the use of funds, the Secretary believes that higher levels of working 
capital afford greater financial flexibility to institutions and thus 
provide greater protection against the possibility of unexpected 
closure. The Secretary believes that Congress intended to ensure 
through regulation that students are afforded every reasonable 
protection with regard to their attendance at an institution through 
which they are receiving HEA funds. The Secretary also believes that 
the numerous fundamental differences in accounting and funding methods 
for nonprofit and for-profit institutions provide sufficient 
justification for the application of different standards to them.
    However, the Secretary believes that a change in the current ratio 
requirement is appropriate to take into consideration differing 
financial and operating structures while employing similar standards 
for both for-profit and nonprofit institutions. In order to implement a 
uniform standard that may be used for different types of institutions, 
the Secretary believes that it is appropriate to exclude certain assets 
and liabilities from the calculation of the analytical ratios. As 
discussed in more detail below, the Secretary believes institutions 
that are currently in compliance with the existing standards of 
financial responsibility will not require a grace period to meet the 
new standards.
    Changes: In Secs. 668.15(b)(7)(i)(A) and (b)(8)(i)(B), the 
Secretary has replaced the current ratio requirement of 1.25:1 with an 
acid test ratio of 1:1, representing the ratio of the sum of cash and 
cash equivalents, and current accounts receivable divided by current 
liabilities. In applying this standard, the Secretary excludes from the 
ratio calculation all unsecured or uncollateralized related party 
receivables as well as all other assets not specifically identified in 
the above ratio calculation.
    Comments: Several commenters were concerned that the Secretary is 
involved in attempting to set accounting standards by requiring 
classified statements of financial position for nonprofit institutions 
reporting under Financial Accounting Standards Board Statement 117 
(FASB 117), Financial Statements for Not-for-Profit Organizations.
    Discussion: The Secretary is aware that presenting the statement of 
financial position of a nonprofit institution as a classified statement 
of financial position is a matter of management decision. However, 
during the negotiated rule making process, the need for comparable 
financial responsibility and accounting standards became evident. This 
need must be reconciled in some manner, despite the varying accounting 
standards between for-profit and nonprofit entities. The Secretary does 
not permit this information to be presented in a supplementary schedule 
because supplementary schedules are not subject to audit tests, as are 
notes to the financial statements. The information concerning current 
assets and current liabilities does not have to be included as part of 
the audit but may be included in the notes to the financial statements. 
Preparation of a classified statement of financial position is included 
as an option under FASB 117. The Secretary is therefore not setting 
standards but merely requiring that presentation be made in accordance 
with one of those options in particular.
    Changes: None.
    Comments: Many commenters believed that implementation of the 
proposed regulations should be delayed for at least a year, with most 
commenters expressed stating that the increased current ratio 
requirement and cash reserve requirement would require institutions to 
accumulate additional cash or other liquid assets.
    Discussion: The Secretary believes institutions that are in 
compliance with the current standards for financial responsibility will 
not require a significant period of time to implement the proposed 
changes. For many institutions, the acid test ratio proposed by the 
Secretary will measure exactly the same elements as the former current 
ratio did. The establishment of a separate cash reserve should not 
impact the calculation to a great extent because the cash reserve 
balance will be included in the ratio calculation. Because the acid 
test ratio is a more stringent measure of liquidity, the Secretary only 
requires that an institution demonstrate parity between its most liquid 
assets and its current obligations. The accumulation of significant 
liquid assets would generally not be required by an institution. The 
Secretary believes that it is reasonable to expect that an institution 
has at least as much cash on hand and current receivables as it does 
current obligations.
    Changes: None.
    Past performance of an institution or persons affiliated with an 
institution. Comments: Two commenters were concerned about the proposal 
to expand the requirements whereby an institution is not considered to 
be financially responsible if an individual, who exercises substantial 
control over any other existing institutions or defunct institution or 
third-party servicer, owes a liability for a violation of a Title IV 
requirement, and is not making payments according to an agreement 
established with the Secretary to repay the liability. Several 
commenters wanted all references to a member or members of a person's 
family deleted from the regulations citing that people should not be 
held financially or legally responsible for the actions of members of 
their family who have reached their majority. Another commenter was 
concerned about the inclusion of a member of the person's family 
without regard to whether there is any partnership between the 
individuals and felt that this requirement unnecessarily broadens the 
scope of the requirement. Several commenters suggested that the 
percentage of ownership interest used to establish substantial control 
over an institution or third-party servicer be set at 50 percent rather 
than 25 percent stating that a 25 percent ownership interest does not 
mean that the person has control of the business.
    Discussion: Section 498(e)(4)(B) refers to audit findings of more 
than 5 percent of an institution's Title IV, HEA program funds for any 
award year. The Secretary considers this statutory provision to be 
designed to require the consideration of the loss of that amount of 
Title IV, HEA program funds, regardless of whether that loss was 
identified from an audit or as the result of a program review.
    The Secretary considers the criteria in the provisions of 
Sec. 668.15(c)(2) to be indicative of serious problems with financial 
responsibility. An institution in one of these categories has already 
failed to comply properly with the Title IV, HEA program requirements 
and has had the opportunity, during its appeal process or other 
negotiations with the Department's officials, to demonstrate any 
mitigating circumstances that might have justified reducing or 
eliminating the sanction or finding. The Secretary agrees with the 
commenters who suggested that one of the categories of past performance 
problems should be revised to reflect a failure of an institution to 
resolve satisfactorily any significant compliance problem.
    The Secretary is satisfied that citing an institution for a failure 
to submit acceptable required audit reports in a timely fashion is a 
better standard of past performance problems than a final 
determination. A final determination is issued only after an acceptable 
audit report has been submitted and the findings have been formally 
issued to the institution. An institution can be cited for failure to 
submit an audit report in a timely fashion, and an institution can have 
its audit report returned because the report is unacceptable. These 
actions do not imply that the institution has committed any other 
violations of Title IV, HEA program requirements, but it is essential 
for the Secretary to have acceptable audit reports on time so that the 
Secretary can evaluate whether the institution is appropriately 
administering its participation in the Title IV, HEA programs.
    Changes: The criterion in paragraph (c)(2)(iv) of this section has 
been revised to provide that the failure to resolve satisfactorily any 
significant problem identified in a program review or audit report 
causes an institution not to be considered financially responsible.
    Exceptions to the general standards of financial responsibility. 
Comments: Three commenters suggested that performance bonds should be 
accepted to meet the standard for surety amounting to at least 50 
percent of total Title IV HEA program funding under the statute. The 
commenters contended that performance bonds may provide equal, if not 
better, protection to the Secretary than letters of credit because it 
is often possible to collect on performance bonds even after the 
expiration date.
    Discussion: The Secretary has determined that the level of 
protection afforded by performance bonds is not sufficient due to the 
relative difficulty in collecting against such instruments compared to 
recoveries under a letter of credit. In some instances involving school 
closures where a performance bond was in place, the Secretary might be 
required to submit and document claims on a student-by-student basis 
before a third party before collecting the full amount of institutional 
liabilities. Collection under an irrevocable letter of credit has 
proven to be reliable and effective in protecting the federal 
interests.
    Changes: None.
    Comments: A number of commenters responded to the Secretary's 
request in the February 28, 1994 NPRM for specific standards that might 
be employed to measure the acceptability of a State's tuition recovery 
fund. Several commenters recommended that the Department only require 
states to certify that the fund can pay all required refunds on behalf 
of schools that close precipitously. Some of the commenters recommended 
that the Secretary take into consideration the success of various 
teach-out measures which exist in the various states. One commenter 
recommended removal of the exemption because many charges associated 
with attending an institution that are properly included in refunds are 
not considered part of tuition, and would not be recoverable by the 
student in the event an institution closes. The commenter went on to 
recommend that the Secretary require an actuarial analysis and 
certification of full funding before considering a fund acceptable. 
Some of the commenters believed that a State's tuition recovery fund 
should be acceptable if the State has taxing authority to require 
schools to contribute to the fund. One commenter provided the 
Department with a number of suggestions including: assessing the extent 
of refund obligation that the fund would cover, the current funding 
level, maximum fund balance, amounts of annual assessments, amount of 
annual claims, the authority of the fund's administrator and the 
historical experience of the fund. One commenter believed that the 
Department would not effectively be able to evaluate the State's 
tuition recovery fund. Another commenter suggested that the 
acceptability of the state's tuition recovery fund should be determined 
by comparing a State fund's established maximum payout to an individual 
institution's annual loan volume.
    Discussion: In general, the Secretary believes that a State's 
tuition recovery fund will be found to be acceptable where it has the 
backing of the full faith and credit of the State and agrees to 
administer such refund payments in accordance with the requirements of 
the HEA programs. Based upon historical experience, State tuition 
recovery funds have been poorly capitalized and fund administrators 
have little authority to levy assessments. Many of the funds will pay 
refunds only for students currently enrolled, and not to students that 
were owed refunds when the institution closed. Other State tuition 
recovery funds have only provided protection to in-state residents and, 
in general, have capped payments at a predetermined maximum level 
without regard to the refund owed under the HEA programs. Some problems 
have also arisen where refunds were being made directly to students on 
a first-come, first-served basis that exhausted the available funds 
without apportioning them ratably to the funding sources that should 
have received the refunds for the benefit of those students.
    Given these concerns regarding the acceptability of State tuition 
recovery funds, the Secretary does not believe it is appropriate to 
address these criteria through regulation at this time. The Secretary 
will continue to review this issue to determine what standards, if any, 
may be set out through regulation.
    Changes: None.
    Comments: One commenter supported the requirement that an 
institution maintain a minimum cash reserve equal to 10 percent of 
deferred tuition revenue but believed that an institution's 
contributions to a State's tuition recovery fund should be included in 
calculating the reserve requirement. One commenter noted that the North 
Carolina General Statute 115D-90 requires an institution to maintain a 
guaranty bond in an amount equivalent to an institution's deferred 
tuition revenue at peak enrollment. The commenter believed that 
students were already afforded reasonable protection under the bond 
requirement and suggested that the cash reserve be required when no 
other form of protection exists. Another commenter believed that the 
Secretary should fully exempt institutions which retain deferred 
tuition amounts through independently administered escrow arrangements.
    Discussion: Section 498(c)(5) of the HEA requires that all 
institutions maintain a minimum cash reserve. The requirement for an 
institution to maintain a cash reserve does not apply to institutions 
which reside in a State that has a tuition recovery fund if that 
state's tuition recovery fund is acceptable to the Secretary. As 
discussed above, under certain situations an institution may be able to 
demonstrate that the State tuition recovery fund to which it 
contributes will supplant the institution's requirement to maintain a 
separate cash reserve. In such an instance, the institution will not be 
able to treat its contributions to the State tuition recovery fund as a 
portion of its current assets.
    Changes: None
    Comments: One commenter believed that the requirement for an 
institution to demonstrate a positive tangible net worth would 
discourage employee ownership of institutions because amounts invested 
in employee stock ownership plans (ESOP's) are treated as intangibles 
and would be excluded from the calculation of net worth. Furthermore, 
the commenter believed that this particular provision was retroactive 
because intangibles that may have been acquired several years ago would 
still appear on an institution's balance sheet. The same commenter 
believed that the expense item representing amortization of intangibles 
should be excluded from the calculation of operating loss in view of 
the Secretary's exclusion of intangible assets from the calculation of 
tangible net worth. Another commenter requested that the Secretary 
consider the market value of assets purchased years ago and carried at 
depreciated book value on the institution's financial statement. One 
commenter believed that intangibles should be excluded only if the 
Secretary has reason to believe that the value of these assets does not 
reflect an arm's length valuation.
    Discussion: In general, an intangible asset has no physical 
existence and depends on some expected future benefit to derive its 
value. While the Secretary believes that the presence of an intangible 
on an institution's balance sheet can, and often does, imply some 
future economic benefit to the institution, the Secretary does not 
believe that such an asset should be included in the institution's net 
worth calculation to determine whether the institution demonstrates 
financial responsibility for HEA program purposes. The Secretary does 
not believe that it would be necessary to exclude the expense item in 
the calculation of operating losses. Generally accepted accounting 
principles require that an institution show asset values at historical 
cost less accumulated depreciation. In the ordinary course of business, 
it would not be possible for the Secretary to make a determination 
regarding the current market value of any asset unless that asset was 
actually sold in an arm's length transaction or an actuarial valuation 
was obtained in a manner acceptable to the Secretary. Administrative 
efficiency and a preference for certainty as documented through the 
audited financial statements warrant the exclusion of such items.
    Changes: None.
    Documentation of financial responsibility. Comments: Two commenters 
felt that audited financial statements should be submitted only once 
every four years, when most institutions are recertified. The 
commenters believed that the statute allows for this limited reporting. 
A few commenters believed that the submission of an audited financial 
statement should be accepted by the Secretary as sufficient evidence to 
establish an institution's financial responsibility without regard to 
the content of the statements.
    Discussion: The statute is clear in making annual audited financial 
statements a requirement. Further, the Secretary believes that the 
Department has a responsibility to verify on an annual basis that 
institutions have sufficient financial strength to provide the 
educational services for which its students are contracting. The 
Secretary has prescribed an acid test ratio in accordance with 
Sec. 498(c)(2) of the HEA. The calculation of the acid test ratio is 
based on information contained in an institution's audited financial 
statement as prescribed in Sec. 498(4). The Secretary believes that the 
acid test ratio provides reliable information about the financial 
condition of an institution.
    Changes: None.
    Comments: One commenter believed that the requirement that an 
institution submit a financial statement for its two most recently 
complete fiscal years should be clarified by the Secretary to require 
two years of financial information in only the first year following the 
implementation of the regulation because annual financial statements 
would be required thereafter.
    Discussion: The Secretary requires the submission of two years of 
financial data on an annual basis. To be considered financially 
responsible, an institution must demonstrate that it has not 
experienced operating losses in either or both of its two most recently 
completed fiscal years that in sum total more than ten percent of the 
institution's total net worth at the beginning of the first year in the 
two year period. The Secretary shall make this determination on the 
basis of financial information submitted by the institution in the form 
of an audited comparative financial statement representing each of the 
institution's two most recently completed fiscal years or by comparing 
information provided by the institution in the form of two individual 
audited financial statements, each representing one of the 
institution's two most recently completed fiscal years.
    Changes: None.
    Comments: Many commenters believed that the requirement for an 
institution to submit an audited financial statement within four months 
of the institution's fiscal year end was burdensome because 
institutions were also required to perform compliance audits during the 
year at points that did not necessarily coincide with the institution's 
fiscal year end. As a result the institution would be required to incur 
additional audit costs that would be unnecessary if both audits could 
be performed simultaneously. To accomplish this, the commenters 
requested that the Secretary extend the period in which audits are due 
from four months to within six months of the institution's fiscal year 
end. Two commenters believed that the requirement for an institution to 
submit an audited financial statement within four months of the fiscal 
year end contradicted the objectives of the Single Audit Act, and OMB 
circular A-128 and A-133, because timing differences related to the 
availability of information would result in an institution being 
required perform both a financial audit and a compliance audit. Another 
commenter noted that audits prepared in accordance with the Single 
Audit Act were acceptable under 34 CFR 668.23(f), and suggested that an 
audit prepared in accordance with the Single Audit Act ought to be 
acceptable to the Secretary in other sections of the same regulation.
    Discussion: The Secretary believes that a four month period 
provides ample opportunity for an institution to accomplish the 
preparation and audit of fiscal year end financial statements. The 
reliability of any financial statement, as a fair representation of the 
institution's true financial condition, is largely dependent on the 
timeliness of the financial report. The Secretary believes that four 
months is reasonable and notes that many thousands of publicly traded 
corporations make timely submissions under the 3 month time frame set 
by the Securities and Exchange Commission for the submission of annual 
audited financial statements. The Secretary may, however, grant an 
extension on an individual basis where the institution demonstrates a 
sufficient basis for the extension. An institution that is required to 
report in accordance with OMB circular A-128 or A-133 under the Single 
Audit Act will continue to be governed by the reporting requirements 
specified under that act.
    Changes: The Secretary has added Sec. 668.15(e)(3) to show that 
audits submitted in accordance with the Single Audit Act meet the 
reporting requirements under this section.

Section 668.16  Standards of Administrative Capability

    Comments: Proposed changes to this section generated many comments. 
Some commenters asserted that many of the proposed standards go far 
beyond the issue of administrative capability. Some argued that the 
Secretary would exceed the authority of the HEA if the proposed 
revisions were retained in final regulations. Some commenters argued 
that some of the issues addressed in this section were subject to 
review by accrediting agencies or SPREs and inclusion in these 
standards would result in duplication of effort on the part of the 
Triad agencies and institutions. Some commenters believed the proposed 
standards to be needlessly detailed and complex. Some commenters stated 
that the proposed standards were too broad. Some commenters strongly 
opposed the clarification that institutions would be expected to comply 
with all the standards in order to be fully certified. Some commenters 
noted that there was no effort to weigh the relative importance of the 
various proposed elements of administrative capability and recommended 
that the section be revised to prioritize the various standards. Some 
commenters recommend that the elements of administrative capability in 
Sec. 668.16 be considered indicators, not absolutes. Some commenters 
requested that the Secretary provide more specificity in the 
regulations so that institutions would know precisely what was 
requested of them and when.
    Discussion: The Secretary appreciates the many thoughtful comments 
on the various aspects of regulating in the area of administrative 
capability. The Secretary found many of the constructive 
recommendations made by commenters to be useful in modifying some 
standards, crafting more precise language for other standards, and 
understanding why some proposed standards are unnecessary or should not 
be imposed at this time.
    Based on the comments, the Secretary has modified the proposed 
administrative standards significantly. While specific changes are 
discussed in detail in connection with the applicable section, the 
Secretary believes it may be useful to note some of the principles and 
rationale which guided the refinement of the administrative standards. 
The Secretary made many changes in sections where commenters pointed 
out that the same goal could be reached by requiring less detail or 
action by those institutions that demonstrated a history of compliance 
with regulations governing the Title IV, HEA programs and imposing more 
on requirements or restrictions on institutions that have either no 
track record or have a record of problems administering the Title IV, 
HEA programs. The Secretary also made adjustments in those proposed 
standards where there was overlap with the responsibilities of 
accrediting agencies or SPREs.
    The Secretary did not find persuasive the comments of those who 
urged that the elements be considered as indicators of administrative 
capability instead of absolutes, or that the standards be prioritized 
to indicate relative importance. Requiring that institutions meet each 
and every standard is critical to successful enforcement by the 
Secretary. If institutions were not required to do so, institutions 
could argue that they had substantially complied with the 
administrative capability standards and it would be difficult for the 
Department to enforce compliance. The Secretary has determined that 
only way to become a more effective gatekeeper is to select critical 
standards, put institutions on notice that they are responsible for 
adhering to them--by requiring that each standard of administrative 
capability be met--and taking action when they are not.
    Changes: None.
    Comments: The majority of commenters believed the Secretary should 
clarify that an institution must administer the Title IV, HEA programs 
in accordance with all statutory provisions, regulatory provisions, or 
applicable special arrangement, agreement or limitation. Two commenters 
believed the paragraph to be overly broad and unnecessary.
    Discussion: The Secretary appreciates the support of those 
commenters who understand the importance of making it clear that an 
institution is expected to comply with all applicable statutes, 
regulations, and any special agreement or arrangement into which the 
institution has entered with the Secretary. The Secretary agrees to 
clarify that special agreements, limitations, or arrangements are those 
entered into under statutes applicable to Title IV of the HEA.
    Changes: Section 668.16(a) is amended to clarify that an 
institution must administer the Title IV, HEA programs in accordance 
with all statutory provisions, regulatory provisions, or applicable 
special arrangements, agreements or limitations entered into under the 
authority of statutes applicable to Title IV of the HEA. A conforming 
change has been made to Sec. 668.14(b)(1).
    Comments: Many commenters supported the idea that the Department 
recognize quality training provided by State, regional, or national 
financial aid administrators or guaranty agencies as a factor in the 
determination of a designated individual's ability to administer the 
Title IV, HEA programs at an institution. One commenter noted that 
while attendance at training workshops may be beneficial, the workshops 
have no means of assessing whether attendees have achieved a given 
level of knowledge. While a few commenters acknowledged that the 
caliber of training varies and suggested a system that recognizes a 
variety of training options, no one responded to the Secretary's 
request for criteria to consider in approving non-Federal training.
    A majority of the commenters recommended that to be deemed a 
``capable individual'' an aid administrator should be required to 
satisfy a training or certification requirement. Many commenters noted 
that a continuing education requirement might be appropriate, also. 
Some of the commenters who advocated a continuing education requirement 
recommended that such training be required to be reported to the 
Secretary or be attested to by the institution's auditor.
    Of those commenters who advocated a certification requirement, most 
opposed national certification because they felt it would be costly and 
might duplicate State certification efforts. However, two commenters 
did advocate national certification or credentials. A few commenters 
opposed certification and noted that one State had discarded 
certification several years ago; one commenter noted that the Secretary 
has not shown any evidence that State-certified training leads to or 
correlates with improved administration of the Title IV, HEA programs. 
One commenter who recommended that experience, training, or 
certification be required specified that the requirement should apply 
to ``at least'' the individual operationally in charge of the financial 
aid office.
    Several commenters provided additional suggestions for factors to 
use in determining whether an individual is capable: An individual's 
record of timeliness and accuracy in administration of Title IV, HEA 
programs; an individual's years of experience administering Title IV, 
HEA programs; an individual's on-going attendance at workshops and 
seminars during each award year; and an individual's record of 
compliance with Title IV, HEA program regulations.
    Discussion: The Secretary appreciates the comments from those 
individuals and organizations that supported making some kind of 
training, certification, or continuing education a requirement. The 
Secretary continues to believe that State certification, as well as 
participation in and completion of quality workshops and training 
programs, are good indicators of a ``capable individual'' and intends 
to consider these factors in evaluating capability. However, the 
Secretary does not see the need at this time to make training or 
certification a requirement.
    Despite the lack of response to the solicitation of suggestions on 
training elements the Secretary might use to evaluate and approve 
nondepartmental training, the Secretary believes that quality training 
programs exist outside the Department that would be beneficial in 
determining an individual's capability and will continue to solicit 
advice as to how such programs might be identified and approved. To 
encourage suggestions on appropriate approval of training programs and 
to facilitate the use of any training programs approved in the future 
to evaluate capability, the Secretary retains, without change, the 
provision in the final regulations that would accommodate training 
approved by the Secretary.
    The Secretary agrees that previous experience and documented 
success in properly administering Title IV, HEA programs are germane to 
the evaluation of an individual's capability.
    Changes: Previous experience and documented success in properly 
administering Title IV, HEA programs are added to the list of factors 
in Sec. 668.16(b)(1) that the Secretary may consider in determining 
whether an individual is capable.
    Comments: The vast majority of commenters opposed strongly the use 
of any prescriptive staffing standards to evaluate the adequacy of 
staffing levels at institutions. Many commenters were concerned that 
there are too many variables--number and type of professional programs 
offered by an institution, level of staff experience, degree of 
centralized processing, use of third-party servicers, and diversity of 
the student body, in addition to the factors listed in 
Sec. 668.16(b)(2)--to permit an accurate assessment of the adequacy of 
staff levels. A number of commenters expressed the concern that small 
institutions would be penalized if staff levels were stipulated in 
regulations. Many commenters stated that adequate staffing should not 
be an issue unless an institution demonstrates problems administering 
the Title IV, HEA programs, as reflected in audits, program reviews, or 
student complaints. One commenter noted that during the negotiated 
rulemaking sessions, non-Federal negotiators explained and stressed the 
potential negative impact on current aid office staffing levels that 
could result from creating an artificial ratio of aid applicants or 
recipients to financial aid administrators.
    A few commenters provided suggestions on how to evaluate the 
adequacy of staffing levels at institutions or recommended that the 
Secretary analyze workload issues and develop appropriate formulae. 
Other commenters recommended to the Secretary a recent staffing survey 
conducted for the National Association of Student Financial Aid 
Administrators (NASFAA) as an appropriate model to use in developing 
more precise measures of staff adequacy. A few commenters believed that 
currently participating institutions should be judged on the basis of 
their track record, but thought that use of ratios of aid applicants or 
recipients to financial aid administrators might be helpful in the 
assessment of the administrative capability of institutions applying 
for participation in the Title IV, HEA programs for the first time.
    Discussion: The Secretary believes that, in general, a currently 
participating institution's compliance with the other standards of 
administrative capability can serve as a reliable indicator that a 
financial aid office is staffed adequately. However, if an institution 
adds a branch campus or other location, starts using or stops using a 
third-party servicer, or makes other changes that would have an impact 
on the administrative capability of the institution, the Secretary 
believes it may be necessary to look more closely at the institution's 
staffing pattern. Further, an institution that undergoes a change of 
ownership that results in a change of control may experience a change 
in its enrollment level and financial aid office personnel and should 
be subject to review of its staffing level.
    In general, the Secretary intends to use the list of factors in 
this section especially to assess the adequacy of staffing at 
institutions that make these changes, at institutions that are applying 
for initial participation, and at institutions with documented 
compliance violations. However, the Secretary expects all institutions 
to be able to demonstrate that they have an adequate number of 
qualified persons to administer the Title IV, HEA programs properly.
    In addition to those factors identified in the proposed 
regulations, the Secretary agrees with those commenters that the use of 
third-party servicers could have a significant impact on the 
institution's ability to administer the Title IV, HEA programs.
    Given the lack of information available currently about 
establishing meaningful ratios of staff to student applicants or 
recipients, the Secretary is not adding a ratio to the factors used to 
evaluate even new institutions at this time.
    Changes: The Secretary has amended Sec. 668.16(b)(2) by adding the 
use of third-party servicers to the list of factors to be considered in 
assessing adequacy of staff levels.
    Comments: A few commenters argued that requiring communication of 
information from any institutional office that receives information 
that has a bearing on student eligibility for Title IV, HEA program 
assistance to the person designated to be responsible for administering 
Title IV, HEA programs was very labor intensive and should be removed. 
One commenter stated that the specifications for interoffice 
communications bear no relationship to an expected outcome.
    Discussion: The Secretary notes that this requirement has existed 
for some time. The Secretary continues to believe that it is an 
appropriate administrative standard inasmuch as proper communication 
among offices is essential to ensuring that students are eligible for 
the amounts of Title IV, HEA program assistance they receive and that 
the status of borrowers is updated, when appropriate.
    Changes: None.
    Comments: A dozen commenters objected to the proposed requirement 
that institutions have written procedures or information regarding 
several key aspects of the administration of the Title IV, HEA 
programs. Most of these commenters stated that the proposed requirement 
was burdensome and would create a lot of paperwork with no discernible 
benefit. One commenter noted that communications processes and 
structures are dynamic by nature and thus subject to frequent changes. 
Another commenter expressed concern that the Secretary was trying to 
dictate the pattern and frequency of communications among college 
offices. This commenter added that while development of written 
procedures such as those proposed would be good management practice, 
the Secretary should not regulate such practices. Some of the 
commenters recommended that this proposed requirement be removed 
entirely. Other commenters recommended that the requirement be imposed 
only on institutions that did not have a record of administering the 
Title IV, HEA programs successfully or only on larger institutions.
    Several commenters suggested that institutions be able to show 
compliance through their computer systems. One commenter, concerned 
that the time required to provide detailed documentation would take 
valuable time away from the smoothly running delivery of aid, 
recommended that general delineation of responsibilities be considered 
sufficient. Another commenter recommended that institutions be 
permitted to work out the method and frequency of communication. One 
commenter asked that the Secretary clarify how this provision relates 
to multi-campus institutions if the proposal were retained in final 
regulations.
    Discussion: The Secretary is not persuaded that mandating written 
procedures or information covering certain aspects of Title IV, HEA 
administration is an inappropriate or unnecessary administrative 
standard. However, the Secretary appreciates the concern of commenters 
who perceived certain areas of the proposal to be unduly burdensome. 
The Secretary agrees that the burden to an institution of having to 
prepare written procedures for or written information indicating the 
nature and frequency of communication of pertinent information among 
all the offices that have an impact on the administration of the Title 
IV, HEA programs outweighs the benefit that this provision would 
provide to the Secretary. The Secretary also agrees that, unless 
compliance problems relevant to the listed responsibilities are 
identified, institutions may satisfy the requirement that an 
institution have written procedures for or written information 
indicating the responsibilities of the various offices with respect to 
the approval, disbursement, and delivery of Title IV, HEA program 
assistance and the preparation and submission of reports to the 
Secretary by a general written description of the responsibilities of 
the various offices.
    Changes: The requirement that an institution has to prepare written 
procedures for or written information indicating the nature and 
frequency of communication of pertinent information among all the 
offices that have an impact on the administration of the Title IV, HEA 
programs has been removed from these regulations.
    Comments: A number of commenters discussed the issue of appropriate 
separation of awarding and disbursing functions. Many of these 
commenters said the prohibition on having family members perform the 
two functions would be onerous, particularly in a small, family-run 
institution. In a similar vein, some commenters noted that in a small 
institution the owner works and has responsibility over all facets of 
the institution. At small institutions, it is very difficult to provide 
for organizational independence. Many commenters suggested deleting the 
new language that references family members and individuals that have 
control over both functions and relying on the annual audit process to 
test for adequate internal controls.
    Discussion: This standard was strengthened to provide additional 
deterrence to collusion, which is a big problem at institutions that 
engage in fraud and at many institutions that fail to make refunds. The 
strengthened language also gives the Secretary added, needed authority 
to terminate institutions that engage in collusion.
    While the Secretary understands the concern of small family-run 
institutions that arranging for someone outside the family to perform 
one or both tasks will be burdensome, the suggestion that the Secretary 
delete the new language and rely on the required financial and 
compliance audit is not realistic. At very small institutions, the 
auditor would probably conclude that there are no internal controls 
because there are only two or three employees--often the owners.
    Changes: None.
    Comments: The Secretary received in excess of sixty comments on the 
provisions that address satisfactory academic progress. The vast 
majority of commenters were opposed to the proposed addition of 
Sec. 668.16(e)(3)(ii)(B), which stipulates that undergraduate students 
would be expected to complete their educational programs within 150% of 
the published length of the programs as a standard for measuring a 
student's satisfactory academic progress. They recommended that the 
proposed new provision be removed. A few commenters argued that 
implementation of the provision would be an infringement of the 
academic freedom of institutions. Many others asserted that requiring 
this level of detail in an institution's satisfactory academic progress 
standards is unwarranted, because it interferes with institutions' 
academic procedures, and argued that the proposed new requirement bears 
no discernible relationship to administrative capability standards. A 
few commenters opposed the inclusion of any satisfactory academic 
progress requirements in the standards for determining administrative 
capability.
    Many commenters were opposed to the proposed new criterion 
governing the maximum time frame because they believed that it does not 
take into consideration the academic career patterns of nontraditional 
students who work and have varying hours, attend part-time, or need 
remedial academic help, often interspersing developmental courses with 
courses taken for credit. One commenter contended that this provision 
would discriminate against students who change majors or eligible 
programs. Some commenters argued that implementation of the proposed 
provision would result in the cut-off of Title IV, HEA program funds to 
students in these categories even though the students may be serious 
and highly motivated. Thus, students who would otherwise be able to 
complete an eligible program would be denied that opportunity because 
they could continue with their education only if they received Title 
IV, HEA program assistance.
    Two commenters recommended that students be permitted to appeal 
this provision on a case-by-case basis. One commenter concurred with 
the provision as written and stated the standard is part of the current 
policy of the commenter's institution. One commenter stated that the 
required increments of time for the establishment of a maximum time 
frame in which the student must complete his or her educational program 
do not work for a program such as court reporting, where the time it 
takes students to complete a given amount of work may vary from 3 to 12 
months.
    Discussion: Because students are required by Title IV of the HEA to 
maintain satisfactory progress to receive Title IV, HEA program 
assistance, it is only logical that an institution's ability to 
administer Title IV, HEA programs must be judged, in part, on the 
existence and implementation of an adequate satisfactory progress 
policy. The proposed addition is a codification of longstanding policy 
and is consistent with the requirements of the Student-Right-to-Know 
Act.
    As stated in the February 28, 1994 NPRM, the establishment of a 
maximum time frame would take into account a student's enrollment 
status. Institutions are currently required to monitor enrollment 
status of students receiving Title IV, HEA program funds and 150% of 
published program length can and should be viewed only in the context 
of an individual student's enrollment status. Thus, if a nontraditional 
student who is enrolled in a baccalaureate program that a full-time 
student is expected to complete in four years and a half-time student 
is expected to complete in eight years, vacillates between full-time 
and half-time enrollment, that student would have a computed maximum 
enrollment period somewhere between six and 12 years. Further, because 
the requirement is designed to set an upper limit on the period of time 
for which a student may receive Title IV, HEA program assistance, 
periods of nonenrollment, during which the student is not receiving 
Title IV, HEA program funds, would not be counted against the length of 
time the student is pursuing a degree or certificate. Thus, a student 
who enrolls and receives Title IV, HEA program funds sporadically would 
be treated differently from a full-time student who pursues a degree or 
certificate without interruption.
    Paragraph (e)(1)(vii) of this section requires an institution to 
have procedures under which a student may appeal a determination that 
the student is not making satisfactory progress. With regard to 
eligible programs of an academic year or less, these regulations make 
even clearer the longstanding requirement that the maximum time frame 
must be divided into increments. Satisfactory academic progress 
policies are expected to measure whether students are progressing 
satisfactorily toward their educational goals and should serve also as 
a device for counseling students about their need to improve their 
progress, if applicable. If maximum time frames are not divided into 
increments, these policies are not serving their purpose. This 
principle applies to programs shorter than an academic year no less 
than to longer programs.
    Changes: Section 668.16(e)(3)(B) is amended to clarify that a 
maximum time frame in which a student must complete his or her 
educational program must be no longer than 150 percent of the published 
length of the educational program for full-time students.
    Comments: Two commenters recommended expanding the requirement that 
an institution must develop and apply an adequate system to identify 
and resolve discrepancies in the information that the institution 
receives to include documentation of a student's social security 
number. They reasoned that resolution of social security number 
discrepancies is an important part of controlling fraud and abuse in 
the Title IV, HEA programs and the ability of an institution to obtain 
appropriate documentation to resolve such discrepancies should be 
considered in determining administrative capability.
    Discussion: The Secretary concurs with the commenters that 
resolution of social security number discrepancies is essential and 
should be expressly stated in this section.
    Changes: Section 668.16(f)(3) is amended to include documentation 
of a student's social security number in the information normally 
available to an institution and for which the institution must have a 
system to identify and resolve discrepancies.
    Comments: About half the commenters expressed concern, to varying 
degrees, that the proposed reporting requirement is too vague and broad 
and would result in overreporting that would overwhelm the Office of 
Inspector General. Some of these commenters recommended that the word 
``evidence'' replace ``information.'' Other commenters suggested that 
there be some kind of internal review or discussion. Several commenters 
recommended that institutions continue to make referrals to local law 
enforcement officials or at least consult with them. Two commenters 
wanted assurance that the institution would be protected in the event 
that it made a referral.
    Discussion: The Secretary cannot accept the substitution of 
``evidence'' for ``information'' because that the word ``evidence'' has 
legal ramifications. Evidence is normally determined in a court of law 
when the judge determines what permissible evidence is. Institutions 
may contact the Office of Investigations within the Office of Inspector 
General for advice before making a formal referral. The Secretary also 
cannot accept the suggestion that institutions establish an internal 
review mechanism prior to referral as such a mechanism may work to 
block appropriate referrals. However, the Secretary believes that an 
institution should only be required to refer to the Office of the 
Inspector General of the Department of Education credible information 
indicating fraud and abuse.
    The Secretary sees no problem with institutions making concurrent 
referrals to local law enforcement authorities, but cannot support the 
referral to local authorities as an alternative to making referrals to 
the Office of Inspector General. Concurrent referrals can be made with 
the regulation as written; no change is necessary. The Secretary cannot 
guaranty protection to institutions or individuals that make referrals.
    Changes: Section 668.16(g) has been amended to clarify that an 
institution must only refer to the Office of the Inspector General of 
the Department of Education credible information indicating fraud and 
abuse.
    Comments: Almost two-thirds of the commenters supported the concept 
of requiring institutions that serve significant numbers of students 
with special needs to have and implement plans for providing students 
with information about how to meet their needs, but half of these 
commenters recommended that the requirement be imposed only on 
institutions with high withdrawal rates. Two commenters recommended 
that institutions be required actually to provide the necessary support 
services.
    Several commenters suggested that students with language barriers 
be considered to have special needs. One commenter suggested that 
students from low socio-economic background, as determined by using the 
Expected Family Contribution (EFC) figures under the Federal Need 
Analysis formula, be determined to have special needs. Those commenters 
who responded to the Secretary's request for how to define significant 
number suggested either that 66 percent of total enrollment be used, as 
that would be consistent with the mitigating circumstances threshold 
for appealing determinations of excessive cohort default rates, or that 
percentages of enrollment, for example five percent, 10 percent, or 20 
percent, be used as thresholds, depending on the number of students.
    Of the commenters who opposed the proposed requirement, almost half 
argued that there is no connection between the proposed regulation and 
administrative capability and the Secretary therefore should not 
regulate in this area. A half dozen commenters believed that students 
were aware of their own special needs and it was their responsibility 
to ensure that these needs were met. Several other commenters believed 
the proposed requirement was unnecessary because either institutions 
that had students with special needs were already attending to those 
needs, or such students would already be getting help from appropriate 
social service agencies. One commenter who objected strongly to the 
proposal noted, among other concerns, that students need to learn to 
become self reliant and that employers with whom the commenter's 
institution deal say the institution is already coddling its students 
too much.
    Discussion: The Secretary is persuaded that regulation in this area 
is unnecessary at this time.
    Changes: The provision that provides that an institution that 
serves significant numbers of students with special needs must have and 
implement plans for providing students with information about how to 
meet their needs has been removed from these regulations.
    Comments: Two commenters supported the provision that would require 
institutions to have procedures for receiving, investigating, and 
resolving student complaints but requested that the Secretary clarify 
the proposed language. One of these commenters asked that the Secretary 
make it clear that institutions would be expected to handle only those 
complaints related to the educational programs and support services 
offered by the institution. The other commenter thought that 
institutions should be required to publicize their system for handling 
complaints and maintain a log of student complaints.
    Discussion: The Secretary appreciates the commenters' support; it 
is good administrative practice to have a mechanism to resolve student 
complaints. However, the Secretary has decided the proposed requirement 
is not an essential administrative standard as there will be other 
means of addressing student complaints about an institution. Each SPRE 
will be setting up a student complaint system to process student 
complaints about the postsecondary institutions in its State. Further, 
SPREs will be reviewing the handling of student complaints at 
institutions they review. Accrediting agencies will also be required to 
assess student complaints about institutions they consider.
    Changes: Proposed Sec. 668.16(j) has been removed from these final 
regulations.
    Comments: The Secretary received many comments on the proposals 
aimed at institutions with educational programs with the stated 
objective of preparing a student for gainful employment in a recognized 
occupation. Many of the commenters opposed the proposed requirements 
that the institution: (1) demonstrate a reasonable relationship between 
the length of the program and occupational entry level requirements and 
(2) establish the need for the training. The commenters believe the 
responsibility for evaluation of program length and the need for 
training rests with the other members of the Triad, principally the 
accrediting agencies. Some of these commenters argued that if the 
Secretary were to regulate in this area, the Secretary would exceed his 
statutory authority and be intervening inappropriately in academic 
affairs. Other commenters asserted that need for or length of training 
programs has nothing to do with ability of institutions to administer 
Title IV, HEA programs. These commenters recommended the elimination of 
this proposed standard.
    While some commenters were concerned that the standard, as 
proposed, is unreasonably vague, other commenters charged that the 
Secretary would be micromanaging if it were implemented. A number of 
these commenters noted that, for several reasons, it would be difficult 
to determine whether program length really is appropriate. Many 
commenters noted that their students are prepared and hired for 
positions that are above entry level.
    Many commenters saw the proposed standard as harmful or unworkable 
because of the use of minimum State standards as a measure of 
appropriate length. One commenter noted that there is no provision for 
evaluation of the method by which a State determines the minimum hours. 
Another commenter said State-mandated hours are too low. Other 
commenters questioned what would happen if the State sets an 
inappropriate length. One commenter represented an institution that 
trains students from many States, each with different minimum 
requirements, and argued that it would be entirely inappropriate to 
limit the length of that institution's programs based on the minimum 
standard of the State in which the institution is located. Many 
commenters believed that the proposed regulation is unnecessary. One 
commenter suggested that disclosures to prospective students are 
mandated under the Student Right-to-Know Act and that SPRE standards 
will be addressing the abuses of the type described in the preamble to 
the February 28, 1994 NPRM and this provision would thus be 
duplicative.
    Discussion: The Secretary proposed this provision to curb existing 
abuses in these areas. The Secretary questions the motives of any 
institution that claims it is necessary to greatly exceed the minimum 
number of clock hours required by the State in which the institution is 
located for adequate training for a particular occupation. The 
Secretary is also concerned with any institution that provides training 
for occupations for which no training is necessary, or for which on-
the-job training is adequate. Although an institution's SPRE and 
accrediting agency may regulate in these general areas, the Secretary 
believes it is necessary to specifically target areas of past abuse. 
Further, the Secretary believes it is consistent to require an 
institution to demonstrate a reasonable relationship between the length 
of the program and occupational entry level requirements established by 
any Federal agency. See the discussion in the Analysis of Comments and 
Changes section that addresses the definition of an eligible program 
(Sec. 668.8).
    However, the Secretary was persuaded by the commenters who asserted 
that need for or length of training programs is not directly linked to 
the ability of institutions to administer the Title IV, HEA programs. 
The Secretary believes that this provision is more appropriate as a 
requirement for participation in the Title IV, HEA programs under an 
institution's program participation agreement.
    Changes: This provision has been moved to Sec. 668.14(b)(26). 
Further, the requirements of this provision have been amended to 
require an institution to demonstrate a reasonable relationship between 
the length of the program and occupational entry level requirements 
established by any Federal agency.
    Comments: Almost half the commenters supported the proposals for 
requiring that information on job availability and the relevance of 
courses to any specific State licensing standards be made available to 
students. All of these commenters suggested new ideas to clarify and 
expand the proposed requirements. Most of the other commenters asserted 
that the proposed requirements did not pertain to the proper 
administration of the Title IV, HEA programs and noted that accrediting 
agency and SPRE standards will address these areas. These commenters 
recommended that these proposed requirements be removed.
    Discussion: The Secretary continues to believe that providing 
adequate and accurate information to students and prospective students, 
so they can make informed decisions, is a function of proper 
administration of the Title IV, HEA programs. However, this requirement 
is covered in the section on the Program Participation Agreement, 
Sec. 668.14, and therefore is being removed from the administrative 
capability standards section.
    Changes: Proposed paragraph 668.16(l) is removed from these final 
regulations.
    Comments: Some commenters stated that the proposed requirement on 
advertising and recruitment practices was an extremely important one 
and recommended that it be strengthened by adding reference to oral as 
well as written statements. The majority of commenters asserted that 
the proposed requirements did not pertain to the proper administration 
of the Title IV, HEA programs and noted that accrediting agency and 
SPRE standards will address these areas. These commenters recommended 
that these proposed requirements be removed.
    Discussion: While the Secretary continues to believe that 
advertising, promotion and recruitment practices that reflect the 
content and objectives of educational programs accurately is a critical 
aspect of the proper administration of the Title IV, HEA programs, the 
Secretary also recognizes that accrediting agencies and SPREs will 
address these practices and agrees with those commenters that 
recommended that these proposed requirements not be included in the 
final regulations.
    Changes: Proposed paragraph 668.16(m) is removed from these final 
regulations.
    Comments: One commenter suggested that there might be a timing 
problem for an institution that is in the process of responding to an 
audit report in which liabilities have been identified. The commenter 
recommended that the Secretary expand the proposed language that would 
require that an institution have no outstanding liabilities, unless it 
has made satisfactory arrangements to repay them, to allow for 
liabilities the institution is currently in the process of making 
provisions to repay. Another commenter stated that this provision 
duplicates the financial responsibility requirements proposed in 
Sec. 668.15(b) (3) and (4) and recommended that it be removed from the 
administrative capability requirements.
    Discussion: The one commenter apparently believes that liabilities 
are established at the time an audit report is issued. Contrary to the 
commenter's perception, institutions are provided with the opportunity 
to respond to an issued audit report before liabilities are 
established. However, once the audit report and institutional response 
have been reviewed and a final program determination letter 
establishing liabilities has been issued, an institution must either 
repay the liabilities or make satisfactory arrangements to repay. 
Responding to audit reports, making any necessary corrections to 
institutional procedures, and making satisfactory arrangements for the 
repayment of any liabilities established are all fundamental 
responsibilities of participating institutions. However, the Secretary 
agrees that these responsibilities are adequately enumerated in the 
general standards of financial responsibility in Sec. 668.15(b).
    Changes: Proposed Sec. 668.16(o) is removed from these regulations.
    Comments: The majority of commenters asserted that the proposed 
requirement that an institution show no evidence of significant 
problems identified in reviews of the institution was overly broad and 
imprecise, giving the Secretary unlimited authority to deny 
certification because of evidence of problems in a wide variety of 
areas. They recommended that the proposed regulation be rewritten to 
limit the scope. Many of these commenters were concerned that 
institutions would be penalized even if there were a problem unrelated 
to Title IV, HEA programs matters. One example given was that of a 
university hospital that was found in violation of Medicare 
reimbursement rules. Some commenters were concerned that the Secretary 
would deny certification based on an audit finding or other citation 
that had not yet been reviewed and upheld in a final audit 
determination or similar action. They urged that only serious findings 
upheld in final audit or program review determinations or legal 
proceedings be considered.
    Many commenters expressed concern that the Secretary would deny 
certification to an institution on the basis of a SPRE review, even if 
the SPRE itself thought the institution should still receive student 
aid. Two commenters argued that the regulation, as proposed, would 
affect the institutions involved in the Department of Justice 
investigation of the Overlap Group, though they have signed a consent 
decree. One commenter recommended that the provision be removed.
    Discussion: The proposed regulation was intended to allow the 
Secretary to consider evidence of problems in administering Title IV, 
HEA programs, as documented not only in reports and determinations 
issued by the Secretary but by other agencies, identified in proposed 
Sec. 668.16(p)(1), in determining of administrative capability. The 
Secretary understands the commenters' concern that this was not clearly 
stated in the proposed regulation and agrees to clarify that the 
Secretary intends to take into account evidence of significant problems 
that have a bearing on the administration of the Title IV, HEA 
programs.
    As stated in the February 28, 1994 NPRM, the Secretary plans to use 
problems identified in final reports and determinations in evaluating 
an institution's administrative capability. However, the Secretary 
cannot accede to commenters' urging that only findings for which 
institutions have exhausted all appeal procedures be considered. If, 
for example, the Office of Inspector General, a guarantee agency, and 
an institution's accrediting agency all issued final reports 
identifying major Title IV, HEA compliance problems, including failure 
to make appropriate refunds, and a $1 million liability, it would be 
unconscionable for the Secretary to fully certify the institution 
because the institution had not had time to exhaust the appeal 
opportunities of the various oversight agencies.
    Changes: Section 668.16(j) has been amended to specify that the 
significant problems identified must relate to problems that affect, as 
determined by the Secretary, the institution's ability to administer a 
Title IV, HEA program.
    Comments: Some commenters supported the proposed requirement that 
an institution comply with any standards established by the State in 
which the institution is located or, if no such standards exist, 
standards developed by the Secretary regarding completion rates, 
placements rates and pass rates on required State examinations. Many 
other commenters requested that the Secretary either clarify in final 
regulations that institutions would be expected to comply with SPRE 
standards or explain what other State standards should be adhered to. 
Most of these commenters also asked the Secretary to clarify what 
Federal standards institutions would be expected to comply with if 
there were no State standards.
    The majority of commenters were opposed to the proposed regulation 
and recommended that it be removed from the final regulations. Most of 
these commenters argued that assessment of completion, placement, and 
licensure pass rates is within the purview of accrediting agencies and 
States. Some of these commenters stated that review of such rates, as 
proposed, has no bearing on the capability of an institution to 
administer Title IV, HEA programs. Many commenters asserted that if the 
Secretary were to promulgate this regulation, the Secretary would 
violate the Department of Education Organization Act as implementation 
of the regulation would involve the Secretary in assessing the 
effectiveness of an institution's academic programs.
    Discussion: The Secretary notes that in commenting on other 
sections, such as proposed Sec. 668.16(s), which deals with default 
rates, commenters urged the Secretary to pay more attention to results 
indicators, such as completion rates, placement rates, and the pass 
rate on State licensure examinations, and give relatively less credence 
to input indicators. Further, both the HEA and the Student Right-to-
Know Act prescribe the development and use of completion and placement 
rates under certain circumstances. Nevertheless, the Secretary believes 
that at this juncture, it is important for the SPREs to develop 
standards in these areas without reference to the establishment of 
standards by the Secretary.
    Changes: Proposed Sec. 668.16(r) has been removed from these final 
regulations.
    Comments: Many commenters argued that the proposal to use a one-
year Federal Stafford Loan and Federal SLS programs default rate of 20 
percent as a criterion of administrative capability went beyond the 
statute and Congressional intent. Other commenters asserted that use of 
a single year's default rate would be unfair to institutions with small 
numbers of students, and institutions with graduates who default in 
unusually high numbers in any given year, and recommended use of two or 
three consecutive year figures to obtain a more accurate picture of an 
institution's loan program experience. Another group of commenters was 
concerned that use of 20 percent, rather than 25 percent, as a 
criterion was inconsistent not only with the statute, but at variance 
with other provisions for addressing defaults under the Federal 
Stafford Loan and Federal SLS programs. Of those individuals and 
organizations that expressed concern with the use of a one-year, 20 
percent figure, many recommended using 25 percent and three years of 
default rate data instead.
    A large number of commenters stated that an institution's default 
rates are not indicative of an institution's administrative capability. 
A majority of these commenters expressed their belief that default 
rates are more reflective of the characteristics of the student body 
served by the institution than of the institution's administrative 
capability and recommended that, at the least, the final regulations 
provide an exemption for institutions that serve a large number of low-
income students. Other commenters argued that default rates are 
influenced by many factors beyond the control of institutions, 
including: erroneous data, errors in calculating rates, collection 
practices of lenders, inadequate servicing, regional differences, and 
borrowers' failure to accept responsibility. Some commenters 
recommended that the ratio of borrowers to total student enrollment be 
taken into consideration. A few others expressed concern that there are 
delays in resolution of challenges to default rates and wanted to have 
it clear that only final default rates would be used.
    A few commenters acknowledged that default rates may be one 
indication of lack of administrative capability, but argued that many 
other factors can and do affect administrative capability.
    Some suggested that it would be more appropriate for the Secretary 
to rely on information such as an institution's withdrawal, completion 
or placement rates and pass rates on external testing and 
certification, in combination with the default rate, rather than to 
rely on the default rate alone. Another commenter recommended assessing 
an institution's default management activities in conjunction with its 
default rate.
    A number of commenters expressed concern that many poor students 
would be discriminated against if default rates were used as an 
administrative capability criterion. Some commenters noted the default 
rate exceptions for tribally controlled community colleges, 
historically black colleges and universities (HBCUs), and Navajo 
community colleges and questioned why institutions other than these 
that serve just as many poor students should be considered poorly 
operated institutions as a result of a high default rate.
    Discussion: The Secretary would like to point out that the use of 
default rates as a determining factor in the evaluation of an 
institution's administrative capability is not new. Although some 
commenters perceived the proposed use of a 20 percent default rate to 
be at variance with current default practices, it should be noted that 
the Secretary proposed use of a 20 percent rate because that rate is 
currently considered as an indicator of impaired administrative 
capability. Furthermore, institutions with default rates of 20 percent 
or more are currently required to submit default management plans. 
However the Secretary also sees merit in using 25 percent as the 
criterion for addressing defaults under the FFEL programs, as an 
institution that has a 25 percent rate for three consecutive years is 
subject to termination from the FFEL programs and it is therefore 
consistent for the Secretary to thus provisionally certify or otherwise 
limit such an institution's participation in the Title IV, HEA 
programs. Acceptance of a three year time period would also address the 
concern of commenters that a one-year rate may not be an accurate 
indicator of an institution's administrative capability.
    Although the Secretary does not agree with those commenters who 
assert that default rates are not indicative of administrative 
capability, as stated in the February 28, 1994 NPRM, the Secretary does 
agree that approval of an institution to participate, or to continue 
participation in, Title IV, HEA programs should not rest solely on the 
institution's having a default rate below 25 percent. Therefore, if the 
Secretary identifies no other serious administrative capability 
problems that would warrant denying participation approval to an 
institution with a default rate of 25 percent or more, the Secretary 
intends to provisionally certify the institution. As discussed above, 
the limitations on full certification will include, at minimum, the 
prohibition on participation in the FFEL programs.
    The Secretary acknowledges that tribally controlled colleges, 
HBCUs, and Navajo community colleges have been treated differently, but 
notes that exceptions to default provisions for these institutions were 
mandated by Congress. The Secretary notes that the exception for these 
institutions will be extended to apply to this provision.
    Changes: The Secretary accepts commenters views that it is more 
logical to use a 25 percent default rate over a three year period and 
has amended Sec. 668.16(m) of these final regulations accordingly. The 
Secretary has amended Sec. 668.17(c)(6) to specify that this standard 
will not apply to tribally controlled colleges HBCUs, and Navajo 
community colleges.
    Comments: Several commenters contended that the cohort default rate 
used to determine an institution's administrative capability should be 
the same for the Federal Perkins Loan Program as it is for the Federal 
Stafford Loan and Federal SLS programs. Two commenters contended that 
the cohort default rate should be set at 30 percent for the Federal 
Perkins Loan Program to be consistent with implementation of the new 
cohort default rate calculation for the Federal Perkins Loan Program. 
One commenter suggested that there be a ``phase-in'' of this 
requirement to allow institutions the opportunity to meet the lower 
default rate. Two commenters recommended that the Secretary provide for 
an appeal procedure for Federal Perkins Loan default rates.
    Discussion: Different cohort default rates apply to determining 
administrative capability with respect to the Federal Perkins Loan 
Program than apply to the Federal Stafford Loan and Federal SLS 
programs to conform to different standards for participation in those 
programs and different sanctions applied for exceeding the rates in 
those programs.
    Changes: None.
    Comments: In response to the Secretary's request for comment on the 
development of an appropriate default rate for the FDSL Program, one 
commenter contended that the rate should be no lower than the cohort 
default rate for the Federal Stafford Loan and Federal SLS programs. 
The commenter believed that if a student does not meet his or her 
repayment arrangements, the student should be placed in default. A few 
commenters believed that a student who is using income contingent 
repayment should not be considered in default and should not be removed 
from the cohort used to determine an institution's default rate.
    Discussion: The Secretary is exploring the use of an appropriate 
default rate for the FDSL Program through the negotiated rulemaking 
process. A default rate for the FDSL Program will not be used for the 
evaluation of an institution's administrative capability at this time.
    Changes: None.
    Comments: The Secretary received over eighty comments on the use 
and computation of withdrawal rates in the determination of 
administrative capability. The majority of commenters had concerns 
about the calculation of withdrawal rates and the effect of this 
standard on institutions serving high-risk populations.
    The principal concern with the calculation was that a student who 
merely completed registration procedures but never showed up for 
classes would be treated as a withdrawal. The commenters believed that 
this would result in artificially high withdrawal rates. One commenter 
stated that it is not unusual to have 20 percent of the enrolled 
students never start classes. These commenters recommended that only 
students who actually begin classes be counted. Several other 
commenters urged that the calculation of withdrawal rate take into 
consideration the institution's refund policy. One of these commenters 
said that the State of California requires a complete refund of the 
registration fee up to one week after classes begin, allowing for a 
``no obligation'' look. Another commenter stated that, at another 
institution, students are allowed a three week ``look-see'' period 
during which to make sure the students are satisfied with the training 
they are receiving and to allow institution personnel to make sure the 
student is motivated and capable of benefiting from the training.
    Many commenters expressed concern that withdrawal rates may be more 
indicative of the type of students being served rather than of an 
institution's administrative capability. Some of these commenters 
asserted that use of a 33 percent withdrawal rate as an absolute 
standard would result in discrimination against high-risk minority 
students, reducing opportunities available to them. Commenters also 
asserted that this standard would adversely affect community colleges 
that enroll a significantly large number of adult, nontraditional 
students, many of whom exit and return to the institution several times 
during their academic careers, or transfer to other institutions. 
Another commenter noted that institutions located near military bases, 
where transfers of personnel are routine, could experience high 
withdrawals of students. One commenter noted that some institutions 
serve vocational rehabilitation and JTPA students who are impaired to 
some degree, and as a result, often drop out of the programs in which 
they were enrolled. Most of these commenters recommended that there be 
some appeal provision or mitigating circumstances exemption.
    One commenter said that in addition to the student population 
served, withdrawal rates were a function of overall institutional 
performance and the support services that are provided to students. Two 
commenters asked how institutions should determine which students will 
succeed and which will fail.
    Some commenters recommended that a rate other than 33 percent be 
used as an administrative standard. Many commenters noted that the 
proposed 33 percent rate was a stricter standard than that used by JTPA 
or any State, but made no mention of what rates States are using. One 
commenter suggested that if there were any withdrawal rate standard, it 
should be set at 40 percent, not 33 percent, as that rate would be 
consistent with JTPA standards. Other commenters said withdrawal rates 
would be fair only if they were based on national averages, comparing 
similar programs in like-type institutions or a study of some sort. Yet 
another commenter said there should be State-established withdrawal 
rates.
    Some commenters argued that withdrawal rates are an academic matter 
and should not be subject to Federal regulation. Other commenters 
questioned the basis for the standard. Some stated their belief that an 
institution's withdrawal rate has nothing to do with the administration 
of the Title IV, HEA programs. A few commenters said review of 
withdrawal rates fell within the purview of accrediting agencies; 
others asserted it was no longer necessary for the Secretary to review 
withdrawal rates as the SPREs and accrediting agencies will have 
specific criteria relating to completion and placement rates. Others 
simply said they could see no basis for using 33 percent as a standard.
    Quite a few commenters supported the use of withdrawal rates in 
assessing administrative capability, albeit as an indicator rather than 
an absolute. One of the commenters believed the language in current 
regulations was sufficient to allow the Secretary to make 
administrative capability determinations. One commenter supported the 
proposed regulation, as written. Others had no problem with the use of 
a 33 percent rate as an absolute, provided that students who register, 
but never show up, are not included in the calculation. One other 
commenter said the proposed rate was too high.
    Discussion: For many years, the administrative capability 
regulations have provided for the use of withdrawal rates in excess of 
33 percent as an indicator of impaired administrative capability. The 
Secretary notes, therefore, that the use of withdrawal rates as a 
determining factor in the evaluation of an institution's administrative 
capability is not new.
    The Secretary does not accept the argument of some commenters that 
withdrawal rates are not an appropriate measure of administrative 
capability. On the contrary, the Secretary finds that withdrawal rates 
are a clear measure of administrative capability as they are a function 
of overall institutional performance and the information and support 
services that an institution provides to its students and prospective 
students.
    The Secretary expects that an institution that has good admissions 
procedures and administers the ability-to-benefit provisions properly 
will have a lower withdrawal rate than one which admits students who 
cannot benefit from the program either because they lack the academic 
ability or do not receive adequate support services. An institution 
that provides proper disclosures, such as the institutional and 
financial assistance information required to be provided to students 
and prospective students under subpart D of these regulations, and in 
the case of an institution that advertises job placement rates as a 
means of attracting students, data concerning graduation and 
employment, and applicable State licensing requirements, as required in 
the program participation agreement in Sec. 668.14(b)(10), will be 
providing information necessary for prospective students to make 
informed decisions. The Secretary believes that if prospective students 
receive adequate and accurate information, they will not drop out of an 
institution in great numbers. Further, if an institution provides the 
financial aid counseling required in Sec. 668.16(h), the Secretary 
expects that students are not likely to withdraw because of a lack of 
understanding about the financial resources available to them.
    In sum, an institution that provides students with comprehensive, 
accurate information on the institution and its programs, thereby 
enabling prospective students to make informed decisions about applying 
to the institution, screens students adequately from the outset to 
determine that the student can benefit from the program selected, and 
provides adequate counseling to students who apply for Title IV, HEA 
program assistance is expected to have a withdrawal rate below 33 
percent.
    The Secretary notes further that students who withdraw may be 
eligible for a refund, especially now that more stringent refund 
policies have been set forth in these regulations at Sec. 668.22. Were 
an institution to have a high withdrawal rate, it follows that an 
institution might experience difficulty complying with the refund 
requirement. By questioning the administrative capability of an 
institution with a high withdrawal rate, the Secretary can monitor 
compliance with the refund requirement. The Secretary also believes 
withdrawal rates are related to default rates in the FFEL and Federal 
Perkins loan programs in that students who withdraw are more likely to 
default. By dealing with institutions that have high withdrawal rates, 
the Secretary hopes to reduce dollars lost due to default in the 
future.
    The Secretary agrees that the withdrawal rate calculation should 
not include students that complete registration procedures but never 
begin classes. Similarly, the Secretary agrees that a student who 
receives a 100 percent refund (less any allowable administrative fee) 
should not be counted for the purposes of this calculation.
    The Secretary agrees with the commenter who wrote that withdrawal 
rates are a function of overall institutional performance and the 
support services that are provided to students. The Secretary believes 
that transfer students, high- risk students, and students who withdraw 
for other reasons are accounted for by allowing up to 33 percent of the 
students to withdraw from the institution.
    Changes: This provision is amended in Sec. 668.16(l) to provide for 
use of net enrollment figures, after deduction of students who were 
entitled to a 100 percent refund.
    Comments: Several commenters objected to this proposed requirement 
that an institution must not otherwise appear to lack the ability to 
administer the Title IV, HEA programs competently on the grounds that 
it is redundant and too open-ended. They recommended that it be 
removed.
    Discussion: This paragraph contains language that is in current 
regulations. Obviously, should the Secretary find it necessary to 
invoke this paragraph in support of an action, the Secretary would 
provide the affected institution with detailed information that 
supports the determination that the institution lacks the ability to 
administer the Title IV, HEA programs competently.
    Changes: None.

Section 668.17  Default Reduction Measures

    Default rates. Comments: A number of commenters suggested that any 
institution with a cohort default rate above 20 percent should be 
allowed to appeal its cohort default rate because that is the minimum 
standard for punitive action against an institution.
    Discussion: There are varying types of appeals offered to 
institutions depending on their cohort default rates. An institution 
which has default rates above the thresholds for participation in the 
FFEL programs may appeal on the grounds that: (1) The calculation of 
the rate was erroneous; (2) it satisfies the criteria for exceptional 
mitigating circumstances; or (3) the calculation included loans which 
due to improper servicing or collection resulted in an inaccurate or 
incomplete calculation of the cohort default rate. Institutions with 
cohort defaults above 20 percent for the most recent year may challenge 
the calculation of the rate based on allegations of improper loan 
servicing. In addition, an institution which receives provisional 
certification based on a default rate above 25 percent over a three 
year period also can show that it meets the criteria for exceptional 
mitigating circumstances and should receive full certification under 
the appropriate regulatory standards. For further information on this 
provision, see the section of the Analysis of Comments and Changes that 
addresses standards of administrative capability (Sec. 668.16). Thus, 
institutions with rates above 20 percent have a significant opportunity 
to challenge their cohort default rate.
    Changes: None.
    Default management plan. Comments: Some commenters asked the 
Secretary to reconsider the requirement that all institutions with 
cohort default rates greater than 20 percent implement a default 
management plan that includes the default reduction measures listed in 
appendix D to the regulations. The commenters asked the Secretary to 
allow institutions to request approval for alternative plans.
    Discussion: The commenters misread the regulations. Section 
668.17(b)(1) requires institutions with cohort default rates over 20 
percent but less than or equal to 40 percent to submit and implement a 
default management plan that implements the measures described in 
appendix D, but allows the institution to submit an alternative plan 
for the Secretary's consideration. Institutions with cohort default 
rates above 40 percent must implement the measures listed in appendix 
D. The Secretary believes that these latter institutions obviously have 
failed to otherwise reduce their default rates and that their future 
efforts need to meet certain standards.
    Changes: None.
    End of participation. Comments: One commenter asked the Secretary 
to shorten the guaranty agencies time frame for responding to 
institutional requests for confirmation of default rate information.
    Discussion: The Secretary believes that the regulations must allow 
the guaranty agencies' sufficient time to check their records in 
response to questions raised by schools. The Secretary does not agree 
that it would be appropriate to shorten the time frame.
    Changes: None.
    Comments: A number of commenters objected to the Secretary's 
proposal to change the effective date of the institution's loss of 
participation under Sec. 668.17(c)(3) to the date the institution 
receives notice of the Secretary's determination that its default rates 
exceed the statutory levels.
    Discussion: Previous regulations allow an institution with 
excessive cohort default rates to continue to participate until eight 
calendar days after the institution receives the Secretary's 
notification. The Secretary has determined that it is inappropriate to 
allow an institution that has high default rates above the statutory 
limits eight additional days to entice students to enroll and receive 
loans under the FFEL programs. An institution which files a timely 
appeal remains eligible to participate during the appeal process. 
However, there is no reason to allow an institution that does not 
appeal additional time to participate in the program.
    Changes: None.
    Comments: Some commenters asked the Secretary to clarify the status 
of FFEL programs loan proceeds which are disbursed after the 
institution learns that it is no longer eligible to participate in the 
FFEL programs under Sec. 668.17, but before the lenders or guaranty 
agencies learn of the loss of participation. These commenters also 
urged the Secretary to provide simultaneous notice of the loss of 
participation to guaranty agencies, lenders and other agencies.
    Discussion: The rules governing the disbursement of funds after an 
institution's loss of participation are set forth in detail in 
Sec. 668.26 of the regulations. The Secretary already provides notice 
of actions against high default rate institutions to guaranty agencies 
simultaneously with or very soon after notification is sent to the 
institution. The Secretary will also provide appropriate notification 
to other interested parties.
    Changes: None.
    Comments: One commenter suggested that if the Secretary initiates a 
limitation, suspension or termination action based on an institution's 
default rate, the Secretary should notify the appropriate SPRE and the 
institution's accrediting agency.
    Discussion: Section 494C(h)(2) of the HEA requires the Secretary to 
notify a SPRE of any limitation, suspension, termination, emergency 
action, or other action that the Department takes against an 
institution. In the regulations governing the designation of nationally 
recognized accrediting agencies, the Secretary is including a similar 
provision.
    Changes: None.
    Appeal procedures. Comments: Some commenters asked how the 
Secretary planned to implement the amendments to sections 435(a) and 
435(m) of the HEA, which allow certain institutions with high cohort 
default rates to review certain loan servicing records and appeal the 
calculation of that rate based on allegations of improper loan 
servicing.
    Discussion: As noted by the commenters, sections 435(a)(3) and 
435(m)(1)(B) of the HEA were changed by the Technical Amendments of 
1993. Under the amended law, institutions that are subject to the loss 
of eligibility under the FFEL programs under section 435(a)(2)(A) of 
the HEA, subject to loss of eligibility for the Federal SLS Program 
under section 428A(a)(2), or whose cohort default rate for the most 
recent year for which rates have been calculated equals or exceeds 20 
percent may include in their appeal of such rate a defense based on 
allegations of improper loan servicing. The Technical Amendments of 
1993 also provide that these institutions will have an opportunity to 
review certain loan servicing and collection records maintained by the 
guaranty agencies. The Secretary published a Request for Comments in 
the Federal Register on March 22, 1994 (59 FR 13606) and is reviewing 
the comments issued in response to that notice. The Secretary intends 
to issue separate regulations to implement these provisions shortly.
    Changes: None.
    Comments: Some commenters complained that the time deadlines for 
cohort default rate appeals are too restrictive and do not provide 
enough time to prepare an appeal.
    Discussion: The Secretary believes that the regulations provide 
adequate time for an institution to prepare and submit an appeal of the 
calculation of the cohort default rate. The Secretary notes that 
Congress has enacted strict time limits on the institution's appeal of 
its cohort default rates under section 435(a) of the HEA and the 
Secretary's regulations reflect these requirements.
    Changes: None.
    Comments: Many commenters argued that the standards for an appeal 
of the loss of participation in the FFEL programs based on exceptional 
mitigating circumstances in Sec. 668.17(d) are too tough. The 
commenters suggested that the completion and placement rate 
requirements should be reduced or that the standards should consider 
the population or community served by the institution.
    Discussion: The Secretary notes that section 435(a)(2)(ii) of the 
HEA allows an institution to avoid the loss of participation in the 
FFEL programs if it shows that exceptional mitigating circumstances 
exist. The current regulations are tough but are also consistent with 
this statutory requirement. The HEA clearly establishes a presumption 
that an institution with excessive cohort default rates above the 
statutory levels is not serving its students and that its continued 
participation in the FFEL programs is not in the public interest. It is 
appropriate that an institution must meet tough standards to overcome 
this presumption. The Secretary notes that most of the commenters did 
not provide any basis for changing the standard or adopting other 
standards. Therefore, the Secretary will not make any changes to those 
requirements. The Secretary will, however, continue to evaluate the 
exceptional mitigating circumstances standards in the regulations and 
determine whether future changes are appropriate.
    Changes: None.
    Comments: Some commenters asked the Secretary to change the 
proposal that would limit the evidence institutions could use to show 
that they serve students with a disadvantaged economic background. The 
Secretary had proposed to limit institutions to showing that the 
students' qualified for an expected family contribution of zero.
    Discussion: The Secretary has found that an excepted family 
contribution of zero is an appropriate standard for showing that an 
institution serves students with a disadvantaged economic background. 
Therefore, no change will be made.
    Changes: None.
    Comments: One commenter suggested that institutions which ask 
guaranty agencies to verify data should be required to list the 
guaranty date and type of loan as well as the information required by 
Sec. 668.17(d)(7). Another commenter suggested that the institution 
should request the information from the Secretary rather than from the 
guaranty agencies.
    Discussion: The Secretary believes that the guaranty agency will be 
able to identify the loans in question with the name and social 
security of the borrowers involved and that it is unnecessary to 
provide the guaranty date and loan type. The Secretary notes that only 
Federal Stafford and Federal SLS loans are currently included in the 
calculation of the cohort default rate. The Secretary also believes 
that it is appropriate for requests for confirmation of errors to be 
sent to the guaranty agency rather than the Secretary. The guaranty 
agencies have the data which the institution is challenging.
    Changes: None.
    Comments: One commenter argued that the Secretary should have a 
time deadline for issuing decisions on appeals of cohort default rates 
filed by institutions and that the institution should win the appeal if 
the decision is not issued on time. Another commenter suggested that 
the institution should not be subject to a sanction if a new reduced 
cohort default rate is issued for the institution during the appeal 
process.
    Discussion: The Secretary is committed to issuing decisions on 
appeals from institutions within a reasonable time. Many of the changes 
made to these regulations will contribute to this effort. However, the 
Secretary does not believe that it is appropriate to allow an 
institution to avoid responsibility for its default rate because a 
decision is not issued within a specified time. The Secretary also does 
not believe that an institution should automatically be able to escape 
responsibility for its high default rate one year by delaying the 
completion of its appeal until the next year's lower rate is released.
    Changes: None.
    Comments: One commenter asked the Secretary to allow institutions 
to submit cohort default rate appeals by facsimile rather than by mail.
    Discussion: The Secretary has found that cohort default rate 
appeals frequently involve numerous documents involving detailed 
listings of information. Facsimile transmission may well result in 
blurred documents. In these circumstances, the Secretary will continue 
to require appeals to be submitted by mail.
    Changes: None.
    Definitions. Comments: Some commenters noted that the Secretary 
proposed to eliminate the provision of the regulations that required 
that, in calculating the cohort default rates, the Secretary would 
exclude any loans which, due to improper servicing or collection would 
result in an inaccurate calculation of the cohort default rate. The 
commenters objected to this change on the grounds that they believe 
that this change is contrary to Congressional intent in enacting the 
new law.
    Discussion: The Secretary believes that it is clear that Congress 
intended to limit the issue of allegations of improper loan servicing 
in regard to cohort default rates to appeals from the calculation of 
such rates. The Secretary notes that the Technical Amendments of 1993 
changed the language of sections 435(a) and 435(m)(1)(B) of the HEA to 
limit consideration of improper loan servicing allegations to appeals. 
Prior to the amendments, the HEA stated that improper servicing would 
be considered in calculating the cohort default rate. The Technical 
Amendments of 1993 eliminated this language and added a new subsection 
435(a)(3) to specifically allow certain schools with high default rates 
to appeal those rates based on allegations of improper loan servicing. 
There is no support for the commenters claim that Congress intended the 
Secretary to consider allegations of improper loan servicing before 
rates are calculated and during the appeal process.
    Changes: None.
    Comments: Some commenters urged the Secretary to require guaranty 
agencies to allow institutions to review the default rate data prior to 
submittal of the data to the Secretary and to work with the 
institutions to ensure correction of the data before the Secretary 
publishes the list of institutional cohort default rates. Some 
commenters argued that publication of rates without such a process 
violated due process.
    Discussion: The Secretary notes that a recent decision of the 
United States District Court for the District of Columbia, Career 
College Association v. U.S. Department of Education, C.A. No. 92-1345-
LFO (March 22, 1994) rejected the claim that pre-publication review of 
cohort default rate information was required. However, the Technical 
Amendments of 1993 amended the HEA to provide institutions an 
opportunity to review and correct errors in the information provided by 
the guaranty agency to the Secretary for calculating cohort default 
rates. This amendment is not effective until October 1, 1994 and the 
Department intends to issue regulations to provide this opportunity 
shortly.
    Changes: None.
    Comments: Some commenters argued that a whole new structure for 
cohort default rates should be developed. According to these 
commenters, there are significant errors in the cohort default rate 
information and the courts have found that the Secretary's calculation 
of such rates is improper. Some commenters said that the Secretary 
should make every effort to ensure that default rate information is 
accurate.
    Discussion: The Secretary has taken and will continue to take 
appropriate actions to ensure that guaranty agencies provide correct 
information for use in calculating cohort default rates. The Secretary 
has found that, during the appeal process, institutions have not 
generally proven significant errors in the calculation of their cohort 
default rates. Thus, the Secretary rejects the commenters' claim that 
the cohort default rate information is inaccurate. Moreover, the 
Secretary does not agree that the courts have reached this conclusion. 
The commenters are referring to certain preliminary decisions reached 
by courts relying on the allegations raised by individual schools. The 
Secretary strongly objects to the suggestion that the cohort default 
rate information is inaccurate. The Secretary also does not believe 
that the commenters have shown any facts that support creation of a new 
appeal structure. However, the Secretary believes that the changes made 
by the Technical Amendments of 1993 may resolve some of the commenters' 
concerns.
    Changes: None.
    Comments: One commenter asked why a loan is still counted as in 
default for purposes of the cohort default rate if the institution pays 
off the loan.
    Discussion: The Secretary does not believe that an institution 
should be allowed to buy its way out of the sanctions related to high 
defaults by its students. The law holds institutions responsible for 
high default rates and wealthy institutions should not be able to avoid 
their responsibility for these high rates by paying off loans.
    Changes: None.
    Comments: One commenter suggested that Federal PLUS loans should be 
included in the calculation of the cohort default rate.
    Discussion: The definition of ``cohort default rate'' is in section 
435(m) of the HEA and includes only Federal Stafford Loans (both 
subsidized and unsubsidized), Federal SLS loans and Federal 
Consolidation Loans which are used to repay Federal Stafford and SLS 
loans.
    Changes: None.

Section 668.22 Institutional Refunds and Repayments.

    General. Comments: Three commenters believed the specific pro rata 
refund requirements should not be limited solely to first-time students 
who received Title IV, HEA program assistance.
    Discussion: The Secretary does not intend to extend this 
requirement beyond the scope of the statute; however, an institution 
would not be prohibited from extending the pro rata refund requirements 
to other students.
    Changes: None.
    Comments: A few commenters contended that cost substantiation is 
unduly burdensome. The commenters maintained that costs differ greatly 
between programs, that indirect expenses such as storage, maintenance, 
packaging, and shipping would be difficult to justify, and that cost 
per student would be difficult to calculate if supplies were bought in 
bulk. The commenters argued that for large schools with many programs, 
the costs would change too frequently to accurately report and many 
costs are determined by student choice. The commenters stated that only 
estimates of costs are possible. These commenters believed that this 
provision should apply only to institutions with compliance problems. 
Two commenters contended that the free market will determine what costs 
are reasonable and this provision is beyond the Secretary's authority. 
Two commenters believed that this provision should be moved to 
Sec. 668.44 (student consumer information). Two commenters fully 
supported the Secretary's proposal, citing firsthand experience with 
institutions that attempt to circumvent refund policies by inflating 
supply costs. One commenter recommended that the Secretary limit this 
provision to the substantiation of only books and supplies that are 
required and that are institutional charges. One commenter recommended 
that the provision be limited to requiring institutions to substantiate 
only the cost of items that the institution supplies, not of those 
provided by a third-party organization. One commenter asserted that 
accrediting agencies should monitor these costs.
    Discussion: The Secretary believes that cost substantiation is 
appropriate if the institution wishes to exclude such costs from the 
refund calculation. As noted by some commenters, the free market has 
not worked to contain costs charged to students for supplies because 
the students have little, if any, discretion on the supplies that they 
are required to purchase for most programs. Furthermore, based upon the 
Department's experience, some institutions have historically inflated 
charges for supplies that students were required to purchase. This 
predatory pricing for supplies has, in turn, inflated costs borne by 
the Title IV, HEA programs and reduced or eliminated refunds that would 
otherwise have been owed to the Title IV, HEA programs for students who 
withdrew. The treatment of supply charges under these regulations will 
help curb this abuse without significantly changing the supply charges 
that can be excluded from the refund calculation by institutions that 
fairly price supplies to their students.
    As a result of limiting the required cost substantiation to student 
charges for supplies sold by the institution or by an affiliated or 
related entity, the institution is responsible for documenting the 
costs where a business relationship exists between the seller and the 
institution. Furthermore, even if an institution purchases supplies in 
bulk and takes advantage of purchasing discounts that cause the costs 
for such supplies to fluctuate over time, the Secretary does not 
believe that it is unduly burdensome to require the institution to 
document its per-unit cost for the supplies before it may exclude that 
amount from the refund calculation. Furthermore, the Secretary does not 
believe it is appropriate for the institution to increase the 
documented supply costs by allocating any portion of the institution's 
fixed charges to such calculation. Any such cost recovery for 
institutional overhead would make the calculation overly complex, 
difficult to monitor, and more subject to abuse by some institutions. 
The procedures under the regulations permit the institution to recover 
the actual cost of such supplies, but are not intended to recapture any 
additional charges allocable to such items.
    The Secretary also believes that the Department is the primary 
member of the triad that is responsible for monitoring an institution's 
ability to comply with the requirements for prompt and accurate refund 
payments. Although an institution's accrediting body or cognizant SPRE 
will have concerns about certain aspects of an institution's adoption 
and implementation of its refund policy, HEA has given the Department 
the primary responsibility for establishing the requirements for the 
timing, calculation and procedures for paying refunds to the Title IV, 
HEA programs.
    Changes: None.
    Comments: Six commenters supported the requirement for fair and 
equitable refunds, but suggested that to be truly equitable, the 
requirement should be in force for all students, not just those who 
receive Title IV, HEA program assistance. Two commenters supported the 
Secretary's proposal to limit these refund requirements to affect only 
recipients of Title IV, HEA program assistance. Two commenters 
suggested refund requirements should differ among students based on the 
reason for the student's withdrawal. The commenters believed students 
who officially withdraw for ``legitimate'' reasons, such as medical 
leave or a family emergency, deserve the benefit of a liberal refund 
policy. The commenters believed, however, that students who withdraw 
without notification or whose reasons for withdrawal are 
``irresponsible or immature'' should be subject to a more stringent, 
less beneficial refund policy.
    Discussion: As discussed in the preamble of the February 28, 1994 
NPRM, several negotiators asserted that applying the refund 
requirements to all students would be too costly for institutions. The 
Secretary acknowledges that having different refund policies for 
students who received Title IV, HEA program assistance could be 
perceived as inequitable. However, no institution is prohibited from 
adopting these refund requirements for all its students. The Secretary 
believes Congress clearly intended to treat groups of students in a 
like manner with regard to refunds, regardless of an individual 
student's reason for withdrawal. The Secretary believes a refund policy 
requiring the assessment of a student's valid cause for withdrawal 
would be difficult to regulate and implement, and would require 
extensive professional judgment on the part of the institution, thereby 
excessively increasing the institution's burden.
    Changes: None.
    Comments: Six commenters stated that the requirement that an 
institution provide examples of an institution's refund policy to 
prospective students is burdensome and unnecessary. The commenters 
asserted that most students would not understand such examples and that 
the examples would inevitably be misleading because the many variables 
that might apply to a real student's withdrawal situation would not be 
represented. Three commenters shared the Secretary's view that 
prospective and current students should receive a written statement 
containing an institution's refund policy, but one commenter believed 
providing such a statement would be burdensome and costly for 
institutions.
    Discussion: The Secretary believes that current and prospective 
students have the right to be informed in writing of an institution's 
refund policies and practices, and that the costs of providing such 
information are part of the normal costs of doing business. A 
particular student's ability to completely comprehend such information 
does not impact that student's right to receive the information. 
Further, the Secretary would expect that, in accordance with 34 CFR 
668.45(a), an institution would have designated an employee or group of 
employees who must be available on a full-time basis to assist students 
or prospective students with any questions they might have in this 
area. The Secretary wishes to clarify that, as discussed in the 
February 28, 1994 NPRM, the requirement to provide examples would be 
met if the institution informs students in the written refund policy 
that examples are available and the institution makes the examples 
readily available to current and prospective students on request. The 
Secretary does not believe refund examples must include all possible 
variables to be useful to students. An institution is expected to 
provide reasonable examples of common refund situations applicable to 
its average student population.
    Changes: Section 668.22(a)(2) has been amended to clarify that the 
institution must make available to students, upon request, examples of 
the application of the refund policy and inform students of the 
availability of these examples in the written statement.
    Fair and equitable refund policy. Comments: Many commenters 
believed the requirement for a fair and equitable refund, as 
interpreted in the February 28, 1994 NPRM, is needlessly complex, is 
intrusive upon the rights of institutions to determine policy, and 
extends beyond the intent of the law. The commenters believed 
institutions should not be forced to calculate up to three separate 
refund amounts for each withdrawing student, as this would be 
burdensome and confusing both to institution employees and to students, 
resulting in withdrawing students inevitably receiving incorrect 
information. The commenters asserted that an institution should be 
allowed to determine which calculation generally provides the most 
beneficial refund to its average student body population and use that 
calculation consistently for Title IV, HEA program refunds. Four 
commenters believed the Secretary should provide certified refund 
calculation software for institutional use, rather than unfairly 
expecting institutions to create or purchase from a private source 
software that is potentially erroneous. Two commenters requested the 
Secretary commit to providing clear notice of revisions and changes to 
the refund requirements, to avoid the inevitable widespread confusion 
and noncompliance that will otherwise result if the February 28, 1994 
NPRM is published as a final rule. One commenter believed it is 
inappropriate and inefficient to require institutions to implement a 
policy which affects such a small number of individuals, and that 
institutions are capable of developing workable refund policies that 
are fair and reasonable. One commenter supported the Secretary's 
interpretation of the statute and believed withdrawing students deserve 
the benefit of the largest refund possible.
    Discussion: The Amendments of 1992 define a fair and equitable 
refund policy as one that provides for at least the largest of the 
amounts provided under applicable State law, nationally recognized 
accrediting agency requirements approved by the Secretary, or the pro 
rata refund calculation for qualifying students, as described in the 
statute. The Secretary asserts that the individual calculation of all 
possible refunds for each withdrawing student is the only possible 
means by which an institution can determine which refund calculation 
provides the largest amount, as required by the statute. The Secretary 
is exploring the development by the Department of software for 
institutional use. The Secretary believes the equity to the student 
provided by the law and the proposed rule override the commenters' 
concerns of burden and potential confusion, and will continue to 
provide ample direction and guidance on refunds to institutions in the 
form of examples, Dear Colleague Letters, and the Federal Student 
Financial Aid Handbook.
    Changes: None.
    Comments: Four commenters believed the requirements of Appendix A 
are too cumbersome and should be replaced with a more reasonable 
policy. Three commenters believed the Appendix A requirements are 
intrusive and extend beyond the scope of the statute, resulting in 
excessive burden and cost for institutions. The commenters suggested 
Appendix A should be a guideline for problem-free institutions, 
required only of institutions with demonstrated compliance problems. 
Two commenters suggested all institutions should be required to follow 
the guidelines of Appendix A, thereby eliminating all the other 
detailed and stringent refund requirements proposed in the February 28, 
1994 NPRM. Four commenters asserted that institutions have already 
adopted procedures in line with the Appendix A guidance and that 
further intrusion on the part of the Secretary is unnecessary and 
unjustifiable. The commenters believed institutions have the ethical 
means to decide these issues among themselves and should be allowed to 
do so.
    Discussion: The Secretary believes the Amendments of 1992 clearly 
give every student who receives Title IV, HEA program assistance--not 
just those students who attend institutions with compliance problems--
the right to a fair and equitable refund as defined in the statute. The 
Secretary is concerned, as discussed in the February 28, 1994 NPRM, 
with instances wherein an institution's State and accrediting agency do 
not have specific refund policies and a particular student is not 
entitled to a pro rata refund. In such a case, a loophole exists and 
the law offers no alternative standard by which to ensure the student 
receives a fair and equitable refund. Consistent with existing FFEL 
programs regulations, the Secretary intends to provide Appendix A as an 
acceptable refund standard in the absence of all other standards.
    Changes: None.
    Pro rata Refund. Comments: Many commenters believed the 60 percent 
point in time (for the purposes of the pro rata refund requirement), 
when measured in clock hours, should be calculated using the hours 
scheduled instead of the proposed use of hours completed by the 
student. Two commenters specifically referred to the statute's concept 
of elapsed time, stating that the treatment proposed in the February 
28, 1994 NPRM is in conflict with the Secretary's earlier guidance and 
the intent of the law. All of these commenters believed the costs of 
providing education are fixed for each day a class is offered, 
regardless of an individual student's attendance. The commenters 
further suggested the Secretary is openly discriminating against clock-
hour institutions by allowing credit-hour institutions to figure the 60 
percent point in time using weeks, while insisting that clock-hour 
institutions consider individual students' rates of progress. Two 
commenters suggested the Secretary allow clock-hour institutions to 
include excused absences and repeated hours in the total hours 
completed by a student. One commenter noted that the determination of 
the 60 percent point in time conflicts with the determination of the 
portion of the enrollment period that remains for the purposes of 
calculating a refund after an institution has determined that a pro 
rata refund must be calculated. This commenter believed these two 
determinations should be simple and consistent with one another.
    Discussion:  In the case of a program measured in clock hours, the 
Secretary believes it is most reasonable to use the number of hours 
completed by the student in determining what percentage of the 
enrollment period has elapsed. To determine the 60 percent point by 
using scheduled hours could unjustifiably punish a student whose 
progress is slower than the average student, and could cause a first-
time student whose progress is above average to be entitled to a pro 
rata refund past the point of 60 percent completion. The Secretary 
acknowledges that this and other provisions of the Title IV, HEA 
program rules differentiate between institutions based on whether 
programs are measured in clock or credit hours, and based on whether 
the institutions use standard terms. The Secretary believes this 
differentiation is justifiable and necessary, and is due to the 
Department's extensive efforts to take into account the many variables 
and circumstances found in the postsecondary educational community. In 
accordance with past guidance issued by the Department, excused 
absences may be counted when determining hours completed by the student 
if the institution has a written excused absence policy allowing for a 
reasonable number of absences which do not need to be made up to 
complete the program, and if it is documented that the hours were 
actually scheduled and missed by the student prior to the student's 
withdrawal. The Secretary acknowledges that, as discussed in the 
February 28, 1994 NPRM, the determination of the 60 percent point in 
time is intentionally different from the determination of the portion 
of the enrollment period that remains. The Secretary does not believe 
consistency between these two determinations is necessary or 
beneficial.
    Changes:  None.
    Comments:  Four commenters found the proposed definition of unpaid 
charges for pro rata purposes to be in conflict with the statutory 
definition. Two commenters believed the statute adequately defines 
unpaid charges and it is unnecessary for the Secretary to propose a 
different or expanded definition. One commenter supported the 
Secretary's proposal to define unpaid charges for pro rata purposes as 
it was defined for general refund purposes in the June 8, 1993 final 
regulations. One commenter suggested that the treatment of unpaid 
charges should be the same in all refund situations, instead of the 
current proposal which differentiates between statutory pro rata refund 
calculations and all other calculations. This commenter believed this 
discriminates against certain groups of students and thus fails to 
treat all students equitably.
    Discussion:  The Secretary does not believe the proposed definition 
of unpaid charges is in conflict with the more general statutory 
definition. The Secretary believes it is appropriate to make the 
definition consistent with the regulatory definition already in place. 
The treatment of unpaid charges for the purposes of the statutory pro 
rata calculation is prescribed in the Amendments of 1992. The Secretary 
has in the past sufficiently justified the treatment of unpaid charges 
for refund calculations other than statutory pro rata refund 
calculations. The commenter has submitted no evidence of 
discrimination.
    Changes:  None.
    Comments:  Three commenters support the Secretary's proposal to 
avoid double-counting certain charges (i.e., administrative fees) by 
excluding them from the pro rata refund calculation instead of 
subtracting them. Three commenters disagreed with the required 
proration of all educational costs, given that some costs incurred by 
the institution are fixed (i.e., teacher salaries, dormitory charges, 
and physical plant costs) and do not decrease when a student withdraws. 
The commenters asserted that institutions required to issue pro rata 
refunds will lose money, and that the students who remain will 
experience cost increases as a result. Four commenters believed an 
application fee should not be subtracted from a pro rata refund, 
because it is not really an education cost and because a portion of 
administrative costs are already recouped through the pro rata refund 
calculation. Two commenters asserted there is no statutory support for 
the Secretary's proposal that an administrative fee must be a real and 
documented charge. One commenter suggested the Secretary allow all 
administrative fees to be subtracted from the pro rata refund 
calculation. Three commenters believed it is intrusive and 
inappropriate for the Secretary to regulate details such as irregularly 
expended meal credits, passed-through room charges, and group health 
insurance fees. The commenters stated that such details should be 
handled in guidelines, not requirements, and should ultimately be left 
to the discretion of individual institutions. One commenter suggested 
that the costs of services voluntarily provided by an institution as a 
courtesy to its students should be excluded from the pro rata refund 
calculation. Two commenters suggested that the Secretary's proposed 
treatment of group health insurance costs should be extended to include 
other insurance, such as the liability and medical malpractice 
insurance required for medical students or group health insurance that 
is not required by the institution. One commenter stated that the 
exclusion allowed for group health insurance fees should be extended to 
all refund calculations, not just statutory pro rata refund 
calculations.
    Discussion: The Secretary agrees that it is more reasonable to 
completely exclude certain costs from the pro rata refund calculation, 
in effect allowing the institution to fully retain the money paid for 
those charges, rather than include the costs and assess them at a 
prorated percentage, only to then completely subtract them from the 
refund, thereby double-counting them. The Secretary wishes to clarify 
that the proration of educational costs under the pro rata refund 
calculation is required by the Amendments of 1992 and it is not the 
purpose or authority of these regulations to rescind that requirement. 
The Secretary agrees that an application fee is not an educational cost 
for Title IV, HEA program purposes and that it is therefore not 
relevant in the calculation of a refund. The Secretary does not believe 
that Congress intended to allow institutions to retain from a pro rata 
refund amount administrative charges that do not actually exist. The 
pro rata refund calculation determines what portion of institutional 
charges paid can be retained by the institution; the Secretary believes 
it is unreasonable to allow the retention of a fee that was not in fact 
charged or paid. The statutory pro rata calculation provides for the 
maximum amount of administrative costs that may be retained by the 
institution. The Secretary believes certain costs (i.e., passed-through 
room charges, and group health insurance fees) warrant treatment other 
than standard proration and has therefore specifically named such costs 
and proposed they be excluded from the calculation. The Secretary 
believes the specific regulation of the treatment of these costs will 
avoid institutional abuse of these allowances and ensure greater equity 
in the payment of refunds. After further consideration, the Secretary 
has found the provision treating irregularly expended meal credits to 
be unnecessarily complex and not entirely effective in its intended 
purpose. No commenters offered support for this provision or any 
alternative suggestions. This issue will be reexamined in the future 
and further input from the financial aid community will be sought. The 
Secretary recognizes that some institutions may elect to provide 
certain services, such as voluntary group health insurance, as a 
courtesy to students. The Secretary believes it is necessary to exclude 
from the pro rata refund calculation mandatory charges for group health 
insurance to prevent students from an unavoidable loss of insurance 
upon withdrawal. This situation could be avoided if the student had the 
option of purchasing health insurance from a source other than the 
institution. The Secretary does not believe the cost of specialized 
insurance coverage such as medical malpractice coverage warrants the 
same treatment as group health insurance costs, primarily because such 
specialized insurance is no longer needed by the student after 
withdrawal. The statute provides that all refunds other than pro rata 
refunds are to be made in accordance with State or accrediting agency 
standards. To extend the allowable exclusion for group health insurance 
fees to all refund calculations would necessitate an amendment to the 
law.
    Changes: Section 668.22(c)(4) has been amended to reflect that 
certain fees, listed as allowable subtractions in the February 28, 1994 
NPRM, are to be excluded entirely from the pro rata refund calculation. 
This section has also been amended to delete from that list of fees the 
reference to an application fee.
    Comments: Several commenters believed the cost of equipment, books 
and supplies should not be prorated, because possession of an item 
cannot be ``split'' between the institution and the student. The 
commenters believed the proposed treatment of books and supply costs 
will unjustifiably enable students to keep supplies they had not fully 
paid for, and will force institutions to either function as ``pawn 
shops'' for the return of such items or bear the costs of supplies they 
do not own. The commenters believed such a policy will force 
institutions to raise book and supply costs for students who remain or 
to stop providing supplies altogether, to the obvious detriment of 
continuing students. Two commenters believed institutions will be 
forced to instruct students to obtain supplies from independent 
vendors, resulting in great consumer risks for the student. One 
commenter suggested that the refund amount for equipment, book, and 
supply costs should be determined by the manufacturer of the individual 
products and passed on from the institution to the student accordingly. 
Several commenters asserted that equipment, books, and supplies become 
the sole property of the student when issued, and suggested the 
institution be allowed to withhold delivery and billing of such items 
until they are needed. The commenters also suggested the Secretary 
allow institutions to retain the full cost of unreturnable items issued 
and of returnable items issued that are not returned, and require 
institutions to refund in full the cost of any issued items that are 
returned and of any items that were not issued but for which the 
student was charged. Several commenters stated that the return of 
certain supplies, books, or equipment is unrealistic and burdensome, 
regardless of the condition in which it is returned, and that the 
regulations should therefore not require institutions to accept 
returned items. One commenter supported the Secretary's proposed 
treatment of charges for returned equipment.
    Discussion: The Amendments of 1992 require all institutions 
participating in the Title IV, HEA programs to refund unearned tuition, 
fees, room and board, and other charges to a student who received Title 
IV, HEA program assistance and failed to complete the period of 
enrollment for which the student was charged. The Secretary does not 
believe Congress intended to exclude the unearned cost of books, 
supplies, and equipment from the refund amount. However, the Secretary 
agrees that institutions should not be expected to refund to the 
student a portion of the cost of unreturnable items that were actually 
issued to the student and kept by the student. The Secretary wishes to 
clarify that the proposed requirements governing books, supplies, and 
equipment will not force an institution to accept returned merchandise; 
rather, the proposed provision allows an institution to state that an 
item is returnable and to then retain in full the cost of that item if 
it is not returned, provided the institution clearly disclosed in the 
enrollment agreement any restrictions on the return of equipment, 
including equipment that is unreturnable and deadlines for returns.
    Changes: Section 668.22(c)(5) has been amended to allow an 
institution to exclude from the pro rata refund calculation the 
documented cost of any unreturnable equipment, books, and supplies 
issued to the student, if the student was informed in the enrollment 
agreement that the item is unreturnable and may keep the item, or under 
what conditions normally returnable equipment is considered to be 
unreturnable. A corresponding change has been made to appendix A.
    Comments: Several commenters asserted that the definition of a 
first-time student should be limited to a student attending any 
postsecondary institution for the first time. Three commenters 
disagreed with the Secretary's proposal to include in the first-time 
student definition any student who previously enrolled at the 
institution but received a 100 percent refund of tuition and fees. One 
commenter asked the Secretary to amend the first-time student 
definition to include students who previously enrolled only in 
continuing education courses that do not lead to a degree. One 
commenter requested the Secretary to issue one consistent definition of 
a first-time student, instead of expecting institutions to use 
different definitions for different Department requirements, such as 
IPEDS, refund calculations, FFEL programs counseling, and student 
consumerism.
    Discussion: The Secretary believes it is the intent of Congress to 
extend the benefit of a pro rata refund calculation to all students 
attending a particular institution for the first time, not just to 
those students who are attending any postsecondary institution for the 
first time. The Secretary also believes that a student who enrolled at 
an institution but received a full 100 percent refund has not had 
sufficient educational experience at the institution to be considered 
anything other than a first-time student. The Secretary does not 
believe the issue of continuing education coursework poses a serious 
problem with the definition of a first-time student for the purposes of 
the pro rata refund calculation. The Secretary recognizes that the 
definition of first-time student is different for certain purposes in 
the administration of the Title IV, HEA programs, and will explore the 
possibility of creating a single, consistent definition in the future.
    Changes: None.
    Comments: Three commenters believed the proposed definition of 
``the portion of the enrollment period for which the student was 
charged that remains'' is not consistent with the statutory definition 
of an academic year. The commenters asked the Secretary to include in 
the proposed definition an explanation of the term ``week'' and 
describe the appropriate handling of a student who attends only a 
portion of a week.
    Discussion: The Secretary does not believe consistency with the 
statutory definition of an academic year is relevant. The Secretary 
does not believe further explanation is necessary, and intends to 
entrust institutions with the responsibility for fairly and 
consistently handling uncertain situations such as a partial week of 
attendance.
    Changes: None.
    Period of Enrollment for Which the Student Has Been Charged. 
Comments: Several commenters suggested alternatives to the Secretary's 
definition of ``period of enrollment for which the student was 
charged.'' Three commenters suggested using only the length of the 
program, for institutions charging by the program, or the length of the 
term, for institutions charging by the term. One commenter suggested 
the Secretary require all institutions to use the academic year as the 
enrollment period. Another commenter suggested the Secretary require 
all institutions to use the lesser of a payment period, the program 
length, or the academic year. Three commenters believed the proposed 
definition does not address programs longer than an academic year. 
Several commenters believed the Secretary's proposed definition is 
unfair to institutions charging by the program, forcing them to use the 
cost of the entire program in the refund calculation, while only a 
portion of the financial aid awarded for the entire program can be 
counted when calculating the unpaid charges. Such a formula results in 
excessively high unpaid charges, which must be subtracted from the 
amount the institution could otherwise retain. The commenters believed 
this treatment is discriminatory against institutions that charge by 
the program and suggested the Secretary retain the concept of payment 
periods, both for assessing charges and considering aid disbursed, and 
limit those payment periods to one-third an academic year (as in a 
quarterly term system), or one-half an academic year (as in a semester 
term system). Two commenters believed the determination of the 
enrollment period for refund purposes should be left to the discretion 
of the institution. Two commenters asked that clock-hour institutions 
using standard terms be treated the same as credit-hour institutions 
using standard terms.
    Discussion: The Secretary believes the proposed definition of 
``period of enrollment for which the student was charged'' is adequate 
and applicable to the needs and circumstances of the various types of 
institutions participating in the Title IV, HEA programs. The Secretary 
wishes to clarify that the proposed definition establishes a minimum 
period of enrollment (to prohibit institutions from creating 
artificially short periods of enrollment simply for the purposes of 
reducing a student's unpaid charges or eligibility for a pro rata 
refund calculation) and does not impose a maximum limit to the period 
of enrollment. The Secretary recognizes that institutions charging by 
the program may have to pay pro rata refunds to a greater number of 
students than institutions that charge by the term and may consistently 
find their students have high amounts of unpaid charges under the 
proposed refund calculation, resulting in a reduction in the amount the 
institution can retain for non pro rata refund calculations. The 
Secretary would like to point out, however, that such a situation 
exists precisely because the institution charges the student for the 
entire cost of the program up-front. It is true the same student could 
attend an institution which charges by the term and would, under the 
proposed refund calculation, owe a smaller amount of unpaid charges. 
The term institution, however, does not contract with the student for 
any amount in excess of the costs of the term. The adverse affects of 
the Secretary's proposal, therefore, as claimed by some of the 
commenters, are the result of an institution's own decision to contract 
with the student for the costs of the entire program up-front, instead 
of contracting for the costs of a smaller period of study, such as an 
academic term; this is an institutional decision over which the 
Secretary has no control. The Secretary believes the discontinuation of 
the use of payment periods and the practice of attribution will greatly 
simplify the refund requirements, and that this benefit overrides the 
commenters' concerns. The Secretary believes it is necessary to define 
and limit the definition of enrollment period to ensure equitable 
refunds to Title IV, HEA program recipients. The Secretary wishes to 
clarify that, under the proposed definition, all clock hour 
institutions are treated the same, regardless of whether they use 
standard terms or not, because it has been the experience of the 
Secretary that these institutions all charge by the program.
    Changes: None.
    Repayments to Title IV, HEA Programs of Institutional Refunds and 
Repayments. Comments: Three commenters believed the treatment of unpaid 
charges for nonpro rata refunds, as prescribed in the June 8, 1993 
final regulations, should be rescinded in compliance with the statutory 
treatment for pro rata refund purposes. Two commenters believed the 
requirement penalizes institutions by reducing the amount of 
institutional charges they can retain. Three commenters asserted that 
the requirement unfairly leaves students owing large balances to the 
institution which would otherwise have been paid by Title IV, HEA 
program assistance, and this result obviously is not fair and equitable 
under the statute. Three commenters requested the Secretary include 
late disbursements of State, private, and institutional aid as amounts 
that can be used to reduce a student's unpaid charges, if these aid 
sources have published late disbursement policies under which a 
withdrawing student can be paid. Two commenters suggested the Secretary 
include late disbursements of unsubsidized Stafford Loan program funds 
and all Direct Loan program funds as amounts that can be used to reduce 
a student's unpaid charges. Two commenters believed the consideration 
of late disbursements when determining unpaid charges is inappropriate 
and should not be allowed under the refund requirements. One commenter 
suggested that, because the requirement to subtract unpaid charges from 
the amount the institution can retain does not apply to statutory pro 
rata refund calculations, the requirement should also not apply to 
voluntarily pro rata refund calculations that are not required by the 
Amendments of 1992.
    Discussion: The public was previously invited to comment on 
requirement to subtract unpaid charges from the amount the institution 
can retain in response to the December 23, 1991 NPRM. The comments and 
responses on this issue, including the decisions and rationale of the 
Secretary, are included in the June 8, 1993 final regulations which 
included the requirement. The required treatment of unpaid charges for 
the purposes of this section, except for the calculation of a pro rata 
refund under the statute, reaffirms the basic principle of student 
financial aid: the family (or student) makes its contribution first 
before financial aid is expended. Although some students may have to 
pay more toward institutional charges than they originally expected, 
due to the fact that they withdrew and became ineligible for a portion 
of the aid they expected to receive, this is more equitable to those 
students who have responsibly fulfilled their financial obligations to 
the institution. The Secretary does not believe this issue warrants 
reconsideration in the context of the February 28, 1994 NPRM. The 
administration of private and institutional student aid funds is not 
within the control of the Secretary. Therefore, the Secretary cannot 
guarantee the availability or delivery of these funds and cannot allow 
institutions to use late disbursements of these funds to reduce a 
student's unpaid charges. The Secretary agrees, however, that 
institutions should be allowed to use late disbursements of State 
student aid to reduce a student's unpaid charges, provided the State in 
question has a standard written late disbursement policy which the 
institution follows in calculating unpaid charges and provided the 
student is eligible to receive the late disbursement in spite of having 
withdrawn. The Secretary wishes to clarify that an institution which 
chooses to count a late disbursement of State student aid in this 
manner will be liable for that amount if it is not disbursed to the 
student within 60 days after the student's date of withdrawal, as 
defined in Sec. 668.22(i)(1), and will be required to recalculate the 
Title IV, HEA program refund and return any additional amounts required 
to the appropriate Title IV, HEA program accounts or to the lender 
within the deadlines specified in Sec. 688.22(g). The Secretary agrees 
that institutions should be allowed to use allowable late disbursement 
amounts from unsubsidized Federal Stafford loans and Direct Student 
loans to reduce a student's unpaid charges. The Secretary does not 
believe the treatment of unpaid charges for the purpose of statutory 
pro rata refund calculations should be extended to voluntary pro rata 
refund calculations.
    Changes: Section 668.22(f)(2)(ii) has been amended to include 
allowable late disbursements of State student financial assistance, 
unsubsidized Federal Stafford loans and loans made under the Federal 
Direct Student Loan Program. A corresponding change has been made to 
Sec. 668.22(c)(2).
    Comments: Many commenters disagreed with the Secretary's proposal 
to remove the fraction that is currently used to determine what portion 
of the refund must be returned to the Title IV, HEA programs. These 
commenters believed this change is grossly unfair and negates the 
concept of equal partnership between the Federal government, the 
States, and the institution in providing student financial assistance. 
Six commenters believed the proposed treatment will cause all parties 
who contribute to a Title IV, HEA program recipient's educational 
costs--States, institutions, private sources of aid--to lose their 
contributed funds to the Title IV, HEA programs in the event of a 
withdrawal. These commenters believed these other parties will 
therefore be reluctant to pay any of their funds to recipients of Title 
IV, HEA program assistance. These commenters asserted that such a 
policy would unfairly penalize State, institutional, and private 
sources of aid, and Title IV, HEA program recipients. One commenter 
reported that State programs are already deciding to avoid the Title 
IV, HEA program refund calculation by withholding their monies until 
after the refund period has passed; such a practice will be detrimental 
to Title IV, HEA program recipients who withdraw and owe large balances 
that would have been paid by State assistance, had it been disbursed on 
time. This commenter urged the Secretary to prevent the negative 
effects of this policy by amending the definition of ``financial aid'' 
(for the purposes of calculating the student's unpaid charges) to 
include State and private assistance that can reasonably be expected to 
be awarded, even if it has not actually been received at the time of 
withdrawal. One commenter supported the Secretary's rationale for 
removing the fraction in relation to refunds, but did not support 
extending that interpretation to repayments.
    Discussion: The Secretary wishes to further clarify that the 
Amendments of 1992 specify in section 485 that refunds must be returned 
to the Title IV, HEA programs first. Further, the Technical Amendments 
of 1993 changed section 485 of the HEA to specify that refunds may be 
returned to other sources of student assistance only after the refund 
is returned to the Title IV, HEA program funds in the specified order 
of allocation. The Secretary has no authority to alter this 
requirement. The Secretary recognizes that some States, institutions, 
or private sources of aid may deliberately withhold funds from 
otherwise eligible students who have received Title IV, HEA program 
assistance. This is a decision over which the Secretary has no control. 
The Secretary does not believe the definition of ``financial aid'' can 
be amended in the manner suggested by one commenter, as such a change 
would be difficult to regulate. The Secretary feels it is appropriate, 
for consistency with the spirit of the law and to reduce administrative 
burden, to extend the interpretation of the law to repayments as well 
as refunds.
    Changes: None.
    Comments: Two commenters support the Secretary's proposal to set a 
minimum dollar amount below which a refund or repayment does not have 
to be made. One commenter suggested the Secretary set the same minimum 
amount for both refunds and repayments.
    Discussion: After further consideration, the Secretary believes 
that this proposed provision is inconsistent with the amendment made to 
section 490 of the HEA that established criminal penalties for failure 
to pay refunds, specifically including refunds of less than two hundred 
dollars. Further, the Secretary believes that by the time the 
institution has determined the amount of the refund, most of the 
administrative effort and cost has been expended. The Secretary 
believes that neither the institution nor the student would benefit 
from the proposal to allow institutions to forgo making refunds of $25 
or less. Also, the Secretary believes that part of the institution's 
administrative costs are recouped through the administrative fee that 
is allowed to be excluded from the pro rata refund calculation.
    Changes: Section 668.22(f)(3)(iii) has been amended to remove the 
proposed minimum dollar amount below which a refund would not have to 
be made.
    Allocation of Refunds and Overpayments. Comments: Three commenters 
support the Secretary's proposal to mandate the order of return of FFEL 
programs refund amounts. One commenter supported the proposed 
allocation of FFEL programs refunds and believed it will reduce student 
indebtedness. Three commenters believed including PLUS and unsubsidized 
Stafford loans in the refund allocation negates the basic principle of 
financial aid, that the family (or student) makes its contribution 
first before financial aid is expended. One commenter believed PLUS and 
unsubsidized Stafford loans should be excluded from the refund 
allocation, because grant money should not be used to pay back student 
loans, especially loans that are not need-based.
    Discussion: The Secretary wishes to clarify that section 485 of the 
Amendments of 1992 specifies the order of return of refunds to the 
various sources of aid and to the student. The statute does not exclude 
the PLUS or unsubsidized Stafford loan programs from this order of 
return. For consistency and reduced administrative burden, the 
Secretary has proposed the same order of return for repayments as is 
mandated in the law for refunds. The Secretary believes the return 
order to be logical and appropriate.
    Changes: None.
    Comments: Three commenters disagreed with the Secretary's assertion 
in the preamble of the February 28, 1994 NPRM that refunds should not 
be used to eliminate outstanding balances on loans made for prior 
years. These commenters believed it is in the best interest of the 
student to allow a refund to be applied to outstanding loans.
    Discussion: The Title IV, HEA programs award financial assistance 
based on the costs of attendance and the student's need assessment for 
a specific period of enrollment in a specific award year. The Secretary 
believes it is inappropriate to use funds awarded for the current 
enrollment period to cover costs from a prior enrollment period.
    Changes: None.
    Refund Dates. Comments: Four commenters believed the Secretary 
should be more flexible in terms of how an institution determines and 
documents a student's last day of attendance in the case of unofficial 
withdrawal. These commenters asserted that it is unreasonable to expect 
all institutions to maintain attendance records. Two commenters 
suggested institutions be required to determine that a student has 
unofficially withdrawn within a certain time frame, to avoid a 
student's unofficial withdrawal going unnoticed for an unreasonably 
long period of time. One commenter believed the proposed provisions 
should address cases of institution-initiated retroactive withdrawals.
    Discussion: The Secretary wishes to clarify that the concept of 
using the student's last recorded date of attendance for refund 
purposes is not ``new,'' but has been included in Sec. 668.22 of the 
Student Assistance General Provisions regulations since 1988. All 
institutions participating in the Title IV, HEA programs have long been 
expected to have in place a system by which student attendance can be 
documented for the purposes of determining the withdrawal date in cases 
of unofficial withdrawal. The Secretary agrees that unofficial 
withdrawals should be determined within a reasonable time frame, in 
connection with the proposed definition of ``withdrawal date.'' The 
Secretary believes cases of institution-initiated retroactive 
withdrawals are uncommon and as such do not warrant regulatory 
inclusion.
    Changes: Section 668.22(i)(1)(ii) has been amended to limit an 
institution's determination of a student's unofficial withdrawal to no 
later than 30 days after the expiration of the enrollment period, the 
academic year, or the program, whichever is earlier.
    Comments: One commenter believed the Secretary should not impose a 
deadline for refunds and repayments. Several commenters simply stated 
the proposed 30-day deadline would be too difficult to meet, especially 
for refunds made to lenders, and requested it be extended to 45 or 60 
days. Many commenters stated that the proposal to require refunds be 
made within 30 days was unreasonable, in light of the proposed 20-day 
return period for equipment, books, or supplies. These commenters 
believed it is unfair to allow a student a leisurely 20-day period in 
which to return equipment, only to force the institution to rush the 
calculation and processing of a refund. Seven commenters stated that 
the proposed 30-day refund deadline does not take into account the 
unavoidable delay in determining unofficial withdrawals. These 
commenters believed most unofficial withdrawals are not discovered 
until the end of the subsequent enrollment periods add-drop period, and 
that several institutions will therefore consistently be unable to meet 
the 30-day requirement. Three commenters requested that all refund 
deadlines--for refunds to the program accounts, to lenders, and to 
students--be modified to be consistent, suggesting 60 days as a 
reasonable length of time for a refund to be made.
    Discussion: The Secretary wishes to reiterate that, as discussed in 
the preamble of the February 28, 1994 NPRM, the refund deadline given 
in Sec. 668.22(i)(3) applies only to refunds made directly to the 
student. The Secretary believes refund deadlines are appropriate and 
necessary. The Secretary would like to clarify that the deadlines for 
the return of refunds to the Title IV, HEA programs are not ``new.'' 
These deadlines are not included in the current Student Assistance 
General Provisions regulations, but in the FFEL programs regulations. 
The Secretary wishes to clarify that Sec. 668.22(g)(2)(iv) clearly 
states the 30-day refund requirement given in that paragraph applies to 
all Title IV, HEA programs other than the Federal Work-Study and FFEL 
programs. The deadline for refunds to lenders under the FFEL programs 
is set forth not in this section of the student aid regulations, but in 
34 CFR 682.607. The Secretary believes that a 30-day refund deadline, 
in spite of the 20-day return period for equipment, is reasonable and 
sound. The Secretary would like to clarify that Sec. 668.22(g)(2)(iv) 
clearly states the refund deadline is determined according to either 
the date the student officially withdraws or the date the institution 
determines the student has unofficially withdrawn. The Secretary 
believes this treatment sufficiently allows for the time needed to 
determine unofficial withdrawals. The Secretary believes the refund 
deadline for the purposes of the FFEL programs is appropriately longer 
than the refund deadlines discussed in this section of the student aid 
regulations and that this is necessary to account for the added 
procedures of returning funds to the lender.
    Changes: Section 668.22(i)(2) has been amended to clarify that the 
deadline in that paragraph is applicable only to refunds made to 
students.

Appendix A

    Comments: A few commenters requested the Secretary more 
specifically define several different terms used in appendix A.
    Discussion: The Secretary believes the terms used in Appendix A are 
standard terms of the educational community, having been in common use 
for several years, and as such, necessitate no further definition.
    Changes: None.
    Comments: Three commenters believed that appendix A was originally 
intended to address proprietary institutions and fails to recognize or 
treat the specific circumstances of nonproprietary, term-based 
institutions. Specifically, these commenters stated that mandatory 
proration of all institutional costs disregards the fact that some 
institutional costs (such as instructor salary and physical plant 
costs) are fixed and unaffected by the withdrawal of a small number of 
students. These commenters requested the Secretary drop appendix A and 
replace it with requirements that more adequately apply to both 
proprietary and nonproprietary institutions.
    Discussion: The proration of educational costs is required for pro 
rata refund calculations under the Amendments of 1992. The Secretary 
feels it is reasonable to extend this concept to the Appendix A 
requirements, in keeping with Congress' intent to provide a fair and 
equitable refund to Title IV, HEA program recipients. The Secretary 
notes that, in the past, the guidelines of appendix A were applicable 
to any institution, not just proprietary institutions, if neither an 
institution's accrediting agency nor its State had refund standards and 
the institution did not choose to follow refund policies set by another 
association of institutions and approved by the Secretary. Appendix A 
is intended to provide a general and stringent refund standard; the 
Secretary encourages institutions and accrediting agencies to work 
together in developing accrediting agency refund standards which can be 
used instead of appendix A standards and which can be better suited to 
the particular needs and circumstances of individual institutions.
    Changes: None.
    Comments: A few commenters suggested various changes to the percent 
of tuition charges that must be refunded for withdrawals which occur 
during certain portions of the academic period.
    Discussion: The Secretary believes the refund percentages provided 
in appendix A are reasonable and appropriate. The commenters have not 
given evidence or justification as to why these refund levels should be 
altered.
    Changes: None.
    Comments: One commenter suggested that institutions should be 
allowed to deduct a students unpaid charges from a refund due under 
appendix A.
    Discussion: The June 8, 1993 final regulations require that, for 
all refund calculations other than a statutory pro rata refund 
calculation, a students unpaid charges be subtracted from the amount an 
institution could otherwise retain. The Secretary finds no 
justification for exempting refund calculations under appendix A from 
this requirement.
    Changes: None.
    Comments: One commenter believed board charges are adequately 
treated under part VI of appendix A, and should not be discussed 
separately in part VII.
    Discussion: The Secretary believes housing charges are separate and 
distinct costs from board charges, even though some institutions 
voluntarily choose to link these two costs together. A housing contract 
prescribes charges for a dormitory or housing space that presumably 
cannot be refilled past a certain point; therefore, such charges are 
expended at the point the space cannot be refilled. Part VI provides 
for the refund and retention of such charges accordingly. Board 
charges, however, are incrementally expended over the length of the 
period for which the student has been charged; the cost of food the 
student has not yet consumed cannot fairly be retained by the 
institution. The contract concept applied to housing charges, 
therefore, is inappropriate when determining the fair refund of board 
costs. Part VII, therefore, provides separate and distinct guidance for 
the refund of board charges. For the purposes of calculating a refund 
under appendix A, institutions must treat these two charges separately, 
in accordance with the appropriate guidelines.
    Changes: None.
    Comments: One commenter suggested adding specific language to 
Section VIII A to clarify that an administrative fee (of the lesser of 
$100 or 5 percent of tuition) cannot be retained in the case of a 
student whose aid package consisted only of FFEL programs funds, 
because FFEL programs funds must be returned in full to the lender if 
the student withdraws before attending one class.
    Discussion: The commenter is correct regarding the requirement that 
FFEL programs funds be returned in full in the circumstance noted. 
However, the Secretary does not believe this or other such requirements 
should be reiterated in appendix A. The first paragraph of appendix A 
clearly states that these requirements do not affect an institution's 
obligation to comply with other Department of Education regulations.
    Changes: None.
    Comments: Five commenters requested the Secretary clarify the 
treatment of unofficial withdrawals under appendix A. Specifically, two 
of these commenters believed the language of Section X clearly implies 
that a students failure to give withdrawal notice in writing would be 
just cause to deny the student's refund.
    Discussion: The Secretary considers an institution to have met the 
fair and equitable refund requirement if it uses a policy that meets 
the minimum requirements of appendix A. Although appendix A does not 
recognize unofficial withdrawals and recommends against the 
institution's acceptance of oral withdrawal notification, an 
institution is not prohibited from adapting a more liberal 
interpretation of this subject into its implementation of appendix A 
requirements.
    Changes: None.

Section 668.23  Audits, Records, and Examinations

    Comments: Two commenters suggested including the nationally 
recognized accrediting agencies among the list of agencies with which 
institutions participating in the Title IV, HEA programs must cooperate 
in the conduct of audits, investigations, and program reviews 
authorized by law. A few commenters also suggested including the 
nationally recognized accrediting agencies among the list of agencies 
with which a third-party servicer must cooperate in the conduct of 
audits, investigations, and program reviews authorized by law.
    Discussion: The Secretary agrees with the commenters. Accrediting 
agencies assist the Secretary in determining institutional 
participation in the Title IV, HEA programs and should therefore be 
included in the list of entities that an institution must cooperate 
with. A third-party servicer, acting as an agent of the institution, 
should be required to cooperate with any accrediting agency that 
accredits an institution with which the servicer contracts to 
administer any aspect of the institution's participation in the Title 
IV, HEA programs.
    Changes: This section is revised to include nationally recognized 
accrediting agencies in the list of entities that an institution and a 
third-party servicer must cooperate with in the conduct of audits, 
investigations, or program reviews authorized by law.
    Comments: One commenter was concerned that the requirement for a 
third-party servicer to cooperate with a guaranty agency and other 
entities in the conduct of audits, investigations, and program reviews, 
would give the guaranty agency access to proprietary information of 
that servicer. The commenter noted that guaranty agencies directly 
compete for the services provided by other third-party servicers. The 
commenter suggested limiting cooperation to only include information 
that a holder of loans would be required to make available.
    Discussion: The Secretary disagrees with the commenter. These 
regulations only require access to a third-party servicer's records to 
the extent necessary to monitor compliance with applicable statutes, 
regulations, special arrangements, agreements, and limitation.
    Changes: None.
    Comments: Another commenter felt that a third-party servicer should 
not be required to cooperate with these entities to the extent that 
that cooperation includes the copying of computer programs that are the 
sole property of the servicer. The commenter felt that any copying 
would violate copyright laws included in the licensing agreement to the 
software; the commenter recommended deleting this provision.
    Discussion: These regulations require access to a third-party 
servicer's records to the extent necessary to monitor compliance with 
applicable statutes, regulations, special arrangements, agreements, and 
limitations. These regulations do not require, nor does the Secretary 
expect, a third-party servicer to violate any copyright laws governing 
computer programs. Nevertheless, a third-party servicer, like an 
institution, is expected to make available for examination and copying 
all relevant information, including the computer program.
    Changes: None.
    Comments: Several commenters suggested amending the provisions of 
Sec. 668.23(b)(3) governing reasonable access to an institution's 
personnel to allow an institution the basic right to protect its 
interest during a compliance review by having an attorney, a management 
representative, or a tape recorder present when the Department of 
Education conducts an interview with a person employed by the 
institution. A few commenters suggested that these provisions violate 
an employee's constitutional rights to counsel. One commenter stated 
that as a minimum, an institution should have the opportunity to build 
its own record and rebut inaccurate charges by having tape recordings 
of interviews between its employees and the Department of Education's 
representatives. Several commenters were against the provisions in this 
section that require a third-party servicer, in the conduct of audits, 
investigations, or program reviews, to allow its individual employees--
those employees connected with the servicer's administration of the 
Title IV, HEA programs--to be questioned in private, without management 
being present or without the questioning being tape recorded. Many of 
these commenters contended that this requirement violated an 
individual's right to due process. One commenter felt that the 
Secretary was overstepping his statutory authority in this matter.
    Discussion: The Secretary has already responded to similar comments 
in the preamble to final regulations for parts 600 and 668 that was 
published in the Federal Register on July 31, 1991 (56 FR 36682). The 
Secretary continues to disagree with these views and in the three years 
since these regulations have been in effect has received no evidence 
that the claims of the commenters are justified. With respect to third-
party servicers, these provisions simply add requirements for third-
party servicers that parallel current requirements for institutions 
participating in the Title IV, HEA programs.
    Changes: None.
    Comments: Many commenters recommended that an institution should be 
able to use a third-party servicer's annual compliance audit report to 
satisfy the portion of an institution's audit requirement for those 
areas that the servicer has contracted to administer on behalf of the 
institution. These commenters noted that this idea would eliminate 
duplication of effort by independent auditors auditing a third-party 
servicer's activities.
    Discussion: The Secretary generally agrees with commenters that an 
institution may use a third-party servicer's audit report to cover 
those areas of an institution's participation in the Title IV, HEA 
programs that the institution has contracted with the servicer to 
administer. However, if an institution is required to have audited 
additional areas of its administration or is required to use different 
procedures in having the audit performed than the servicer then the 
institution may not be able to use fully the results of the servicer's 
audit. An institution is always responsible for ensuring that a 
compliance audit of the institution's participation in the Title IV, 
HEA programs includes all aspects of the institution's participation.
    Changes: None.
    Comments: Forty-three commenters suggested that an institution 
ought to be permitted to remain under the biennial audit requirement if 
that institution did not have deficiencies in the prior audit report of 
more than five percent of the institution's total Title IV, HEA program 
funds. Many of these commenters pointed out that this modification 
would parallel a similar provision in the proposed Sec. 668.15 
governing financial responsibility. At a minimum, the commenters 
recommended that these provisions be modified to reflect that an 
institution that had no deficiencies that required a monetary 
adjustment be permitted to remain under the biennial audit requirement. 
Several commenters asked the Secretary to clarify what are considered 
to be no deficiencies and material exceptions. One commenter suggested 
specifying certain amounts in the use of those terms. Three commenters 
supported the Secretary's proposal to provide exceptions to the annual 
audit requirement for third-party servicers that administer small 
amounts of Title IV, HEA program funds. One commenter argued that 
third-party servicers administering less than $250,000 in Title IV, HEA 
program funds should not be excluded from having an annual audit 
performed. One commenter recommended that instead of requiring third-
party servicers to have performed a compliance audit at least every two 
years if the servicer administers less than $1,000,000 in Title IV, HEA 
program funds, that that threshold should be increased to $5,000,000. 
Three commenters urged the Secretary to require all third-party 
servicers to have an annual audit performed. One commenter suggested 
defining what is meant by a material exception.
    Discussion: The Secretary has reevaluated his proposal in the 
February 17 and 28, 1994, NPRMs and upon a further examination of 
section 487(c) of the HEA and information surrounding the intent of the 
statute, has determined that the proposals were inconsistent with the 
requirement for an institution to have performed, without exception, on 
an annual basis, a compliance audit of the institution's administration 
of its Title IV, HEA programs or a third-party servicer to have 
performed, without exceptions, on an annual basis, a compliance audit 
of the servicer's administration of any aspect of its administration of 
an institution's participation in a Title IV, HEA program. The 
Secretary appreciates the comments and suggestions provided with 
respect to the basis for exempting institutions and third-party 
servicers from the annual audit requirement. While the Secretary cannot 
adopt these in the regulations, the Secretary is considering them in 
the development of changes to the Department of Education's audit 
guides. These changes are being designed to reduce administrative costs 
by allowing institutions that meet certain performance-based or funding 
criteria to have performed compliance audits under a reviewed or 
compiled basis rather than fully audited.
    Changes: The provisions that provided for exceptions to the annual 
audit requirements for institutions and third-party servicers have been 
deleted in these final regulations. The proposed audit exceptions in 
this section have been removed. This section has been revised to 
require that all institutions have performed an annual compliance audit 
of the institution's administration of its Title IV, HEA programs; and 
to require that all third-party servicers have an annual compliance 
audit performed of every aspect of the servicer's administration of the 
participation in the Title IV, HEA programs of each institution with 
which the servicer has a contract.
    Comments: Many commenters suggested amending Sec. 668.23(c)(8) to 
establish deadlines for the submission of audit reports, rather than 
allowing the Inspector General to specify these deadlines in the audit 
guides. Several commenters questioned whether the Inspector General has 
the authority to establish this requirement without regulations. 
Another commenter suggested that the regulations contain a provision 
that would require institutions to meet the deadlines specified in the 
audit guide, but stipulate that under no circumstances would the 
institution be required to submit its audit report earlier than four 
months following the expiration of the audit period.
    Discussion: Upon review of the commenters' concerns, the Secretary 
agrees that because these regulations require that an audit report must 
be submitted in a timely manner, the regulations should provide 
institutions and third-party servicers with the specific dates for 
submission of audit reports. The Secretary believes that a period of 
120 days from the end of the institution's or servicer's fiscal year 
provides an institution or servicer with a sufficient period of time to 
have an audit performed and to submit the audit report to the 
Department.
    Changes: The regulations have been revised to state that an 
institution or third-party servicer must submit its audit within 120 
days of the end of its fiscal year. An institution or third-party 
servicer that has an audit performed under the Single Audit Act must 
submit the audit report in accordance with the deadlines specified in 
that act.
    Comments: Many commenters were opposed to the provision that the 
Secretary could require a third-party servicer to release the results 
of an audit to cognizant guaranty agencies, eligible lenders under the 
FFEL programs, State agencies, nationally recognized accrediting 
agencies, and State Postsecondary Review Entities on the grounds that 
these entities are not affected by the servicer's actions and release 
of information in the audit report could unnecessarily damage a third-
party servicer's reputation.
    Discussion: The Secretary disagrees with the commenters that the 
referenced entities are not affected by a third-party servicer's 
actions. The Secretary believes that by providing information- sharing 
among the appropriate authorized entities that the Secretary relies on 
to help provide oversight of Title IV, HEA program participants, that 
the Secretary is responding to Congressional intent. A third-party 
servicer acts as an agent of the institution and is responsible for 
administering a portion of an institution's participation. As such, the 
various entities involved in program oversight will have a genuine need 
for access to records of, or information about, the servicer. The 
Secretary therefore considers that the audit results of third-party 
servicers must be included in the information available to the 
appropriate oversight bodies monitoring institutional compliance with 
Title IV, HEA requirements.
    Changes: The Secretary is revising paragraph (c)(4) of this section 
to include the Secretary of Veteran Affairs in the list of entities 
that the Secretary may require an institution or third-party servicer 
to provide the results of an audit to.
    Comments: One commenter felt that an audit guide specifically 
developed for third-party servicers was necessary to comply with the 
requirements of this section. Another commenter was of the opinion that 
the period covered by a third-party servicer's first audit should not 
start until after audit guidance is available from the Department of 
Education.
    Discussion: The Department of Education's Office of Inspector 
General is working on developing audit guides applicable for compliance 
audits performed of institutions and third-party servicers. The 
Secretary expects that these guides will be available before the 
initial audit period covered by an audit performed of a third-party 
servicer begins.
    Changes: None.
    Comments: Regarding the requirement for an institution to maintain 
records on a student's placement if the institution has a placement 
service used by the student, four commenters were concerned that 
application of this requirement to all institutions for all types of 
student employment placement might be overreaching and could result in 
institutions electing to terminate their student employment service 
rather than comply with burdensome recordkeeping requirements. 
Commenters pointed out that at some large institutions, student 
employment centers often act as clearinghouses for posting jobs and 
professional career opportunities, but frequently lacked the resources 
to track actual placement. Most often, employment information is made 
available to students and that information is simply removed from 
posting once the employer indicates the position has been filled. 
Commenters maintained that a formal follow-up process on student 
employment is not generally systematic and obtaining appropriate 
documentation would discourage institutions from continuing to provide 
this service to students. Two commenters recommended removing this 
requirement from the regulations. Three other commenters suggested that 
the Department of Education revise this provision of the regulations so 
that it would apply only to institutions that are otherwise required to 
track student employment as a condition of Title IV, HEA program 
eligibility or pertains only to those students for which the 
institution must otherwise maintain employment records.
    Discussion: The Secretary does not intend for this requirement to 
be burdensome to institutions. This provision merely requires an 
institution with a placement service to document that the institution 
does what it claims to do--namely, place students in jobs.
    Changes: None.
    Comments: Two commenters objected to the requirement that an 
institution establish and maintain records that support the educational 
qualifications of each regular student admitted to the institution 
whether or not that student receives Title IV, HEA program assistance, 
that are relevant to the institution's admission standards. Both 
commenters believed that institutions should only be required to 
establish and maintain summary or aggregate information on the 
educational qualifications of students admitted to the institution. 
This aggregate data would be available to the Secretary only if the 
Secretary could demonstrate a compelling need to review the 
information.
    Discussion: The Secretary believes this provision is necessary to 
establish whether an institution is in compliance with the statutory 
admission requirements of sections 1201(a) and 481(b) and (c) of the 
HEA for purposes of institutional eligibility and participation in the 
Title IV, HEA programs.
    Changes: None.
    Comments: Two commenters urged the Secretary to include a 
requirement that institutions retain records documenting whether and 
when a student completes his or her educational program. This 
information is needed to verify completion rates.
    Discussion: The Secretary has taken these comments under 
consideration, but concluded that other regulatory provisions governing 
the completion rate calculations contain requirements to retain 
documentation to support the computations.
    Changes: None.

Section 668.24  Audit Exceptions and Repayments

    Comments: Two commenters supported the Secretary's proposed 
requirement for a third-party servicer to notify all institutions for 
which the servicer provides the same service, in addition to those 
institutions under whose contract the servicer incurred a liability for 
a Title IV, HEA program violation. Other commenters felt that this 
requirement was excessively broad. Several of these commenters argued 
that this requirement would unnecessarily damage a third-party 
servicer's reputation. Several commenters noted that the Secretary's 
proposed notification requirements were not all that different from 
full notification of all institutions with which the servicer 
contracts. One commenter suggested that third-party servicers should be 
required to notify institutions receiving the same service for which 
the servicer owes a liability only if that liability is material. One 
commenter recommended that a third-party servicer that is assessed a 
liability should have a reasonable amount of time to provide the 
notification to the servicer's clients. Another commenter was of the 
opinion that the Secretary notify all of the institutions with which 
the servicer contracts of the Secretary's determination at the same 
time that the servicer is notified.
    Discussion: The Secretary disagrees with the commenters that 
objected to the notification requirements. If a third-party servicer is 
assessed liability for a violation of a Title IV, HEA program 
requirement, any institution for which the servicer provides the same 
service in which the violation was found is potentially at risk as a 
result of the servicer's actions. Obviously, each institution under 
whose contract the servicer committed a violation should be notified 
because the Secretary holds that institution responsible for the full 
amount of the liability. In addition, each institution that contracts 
with the servicer for the same service in which the violation was found 
should also be informed of the servicer's violation. The Secretary 
believes that an institution that receives the same service should be 
informed of the servicer's violation of any Title IV, HEA program 
requirement because the servicer may commit a similar violation at that 
institution and the institution could be held liable for that 
violation. This notice will also allow an institution to take 
corrective action without waiting for formal action by the Secretary.
    With respect to the commenter who was concerned that third-party 
servicers should have a reasonable amount of time in which to notify 
affected institutions of the Secretary's determination to assess a 
liability against the servicer, the Secretary does not believe that 
that time frame needs to be quantified. Servicers are expected promptly 
to notify affected institutions of the Secretary's determination 
because those institutions are also responsible for violations 
committed by their servicers. Servicers that fail to notify 
institutions may jeopardize an institution's ability to provide 
information to show that questioned expenditures were proper or take 
corrective action to mitigate violations caused by a third-party 
servicer. In reviewing a third-party servicer's appeal of the 
Secretary's determination, the Secretary will take into consideration 
whether or not the servicer notified affected institutions promptly of 
the Secretary's determination.
    The Secretary does not agree that it is necessary for the 
Department of Education to provide notice to all of the institutions 
with which a third-party servicer contracts if that servicer is 
assessed a liability. A third-party servicer, as a responsible agent of 
an institution, has an obligation to keep that institution informed of 
any developments that might possibility jeopardize the institution's 
participation in the Title IV, HEA programs. If the Secretary seeks to 
assess liability against an institution for a third-party servicer's 
conduct, he will provide the appropriate notice to the affected 
institution.
    Changes: None.
    Comments: Four commenters opposed the provision in this section 
that required an institution to be responsible for payment of any 
liability owed by the institution's third-party servicer for a 
violation of the institution's participation until the amount is paid 
in full. One of these commenters argued that the third-party servicer 
should be held entirely accountable for payment of any liabilities 
incurred for the servicer's violation of Title IV, HEA program 
requirements.
    Discussion: In the NPRM published on February 17, 1994, the 
Secretary repeatedly stated that an institution is always responsible 
for the actions of any of its third-party servicers. This 
responsibility includes assuming payment of any liability incurred by 
the servicer as a result of a violation of a Title IV, HEA program 
requirement by the servicer while administering aspects of the 
institution's participation in the Title IV, HEA programs. See 
Sec. 668.25(c)(3). No institution will be required to answer for 
servicer violations without the opportunity to have such determinations 
reviewed under the procedures established in these regulations.
    Changes: None.
    Comments: Two commenters were concerned with the provision in this 
section governing the ability of the Secretary to perform an 
administrative offset to collect funds owed under the procedures of 
this section. One of these commenters suggested that the Secretary only 
use administrative offset to collect funds if a third-party servicer 
has not entered into an agreement with the Secretary to repay those 
funds. The other commenter thought that this provision amounted to the 
equivalent of an emergency action without having to afford an 
institution or third-party servicer a show-cause hearing. Several 
commenters were opposed to the provision in this section governing the 
ability of the Secretary to collect on a surety or third-party 
guarantee before the conclusion of appeal proceedings. These commenters 
contended that this provision assumes that the party is guilty before 
it is proven. Two of the commenters were also opposed to this provision 
on the grounds that audit findings of the Department of Education are 
sometimes insupportable or in error and that to collect on a surety or 
guarantee before those findings can be proven wrong is simply improper.
    Discussion: The provisions in this section governing additional 
steps that the Secretary may take to collect funds owed under the 
procedures of this section are necessary to allow the Secretary to act 
quickly to protect Federal funds and insure that funds are available 
for collection. Institutions have a distinct financial incentive to 
cause delay and prolong any appeal of audit determinations. Some 
institutions use delays to either hide assets or drain assets so that 
none remain for collection; others may attempt to draw increased 
amounts of Title IV, HEA program funds prior to any final 
determination. The commenters are incorrect in stating that 
administrative offset denies procedural protection. Under the 
Department's offset regulations in 34 CFR part 30, the Department 
provides written notice and an opportunity to inspect records and 
receive an oral hearing. The Department may offset prior to completing 
the procedural requirements where failure to offset may substantially 
prejudice its ability to collect. In such cases, the Secretary 
completes the procedural requirements promptly thereafter and returns 
any funds later found not to be owing.
    With respect to comments about the Secretary's ability to collect a 
surety or guarantee before final determinations are concluded or all 
appeal procedures are exhausted, the Secretary does not agree with the 
commenters. Financial surety is provided to the Department as a 
condition of participation to insure that funds are available to 
satisfy liabilities. The Secretary would only attempt recourse in cases 
where there is a need to provide relief to students or borrowers 
affected by the actions of the institution or third-party servicer, or 
where the terms of the surety do not guarantee that funds will be 
available after appeals are completed. For example, in the case of an 
institution that has failed to pay refunds owed to students that 
attended that institution, the Secretary believes that the need to 
collect in advance to pay those refunds outweighs deferring collection 
to final determinations or until the exhaustion of all appeal 
procedures are completed.
    Changes: The reference to 34 CFR 30.28 is revised to refer to 34 
CFR part 30 to clarify that the procedural protections in that part 
related to administrative offset apply.

Section 668.25  Contracts Between an Institution and a Third-Party 
Servicer

    Comments: Many commenters supported fully the Secretary's proposal 
in this section that requires a third-party servicer to assume joint 
and several liability with an institution for any violation by the 
servicer of any statutory or regulatory provision relating to Title IV 
of the HEA. One of these commenters noted that only the assumption of 
full liability by a third-party servicer could ensure the protection of 
public funds.
    In addition, many commenters supported the application of some type 
of liability on a third-party servicer for the servicer's violation of 
a Title IV, HEA program requirement, although most of these commenters 
recommended that the Secretary cap liability at the fees and 
compensation received by the servicer from the institution. A few 
commenters supported the Secretary's compromise to limit the liability 
of a third-party servicer to the fees and compensation received from 
the institution if the servicer was not an affiliate of the institution 
and to assess full joint and several liability against the servicer if 
the servicer was an affiliate of the institution. Other commenters 
believed in the concept of joint and several liability for third-party 
servicers only to the extent that it could be unequivocally proven that 
the servicer is the one at fault, or that the violation of a Title IV, 
HEA program requirement was more serious than simple human error.
    Many commenters opposed requiring a third-party servicer to assume 
joint and several liability with an institution for a violation by the 
servicer of a Title IV, HEA program requirement. These commenters 
argued that to impose joint and several liability on a third-party 
servicer would (1) lead to increased servicing fees to compensate for 
increased risk assumed by the servicer; (2) force out servicers not 
willing to assume a level of risk in excess of the servicer's fees and 
compensation; and (3) interfere in contractual matters that should be 
left to the parties involved. These commenters recommended that instead 
of imposing liability on a third-party servicer, to increase 
accountability of the administration of the Title IV, HEA programs, the 
Secretary should instead focus on an institution's administrative 
capability and financial responsibility to achieve greater 
accountability.
    Several commenters questioned what happens to existing contracts 
with institutions that were negotiated under a different assumption of 
liability. A few of these commenters asked the Secretary not to impose 
retroactive liability for contracts that did not incorporate or price 
for such an event.
    Discussion: The Secretary appreciates the support from the 
commenters who agreed that third-party servicers should be jointly and 
severally liable with an institution with which the servicer contracts 
for any violation by the servicer of a Title IV, HEA program 
requirement. The Secretary agrees with these commenters that third-
party servicer liability is necessary to insure compliance with Title 
IV, HEA program requirements. Servicers who must stand behind their 
work financially are more likely to use the high standard of care 
expected of Title IV, HEA program participants.
    The Secretary has reexamined his position with regard to adopting 
the compromise in the NPRM to limit joint and several liability to the 
fees and compensation that a third-party servicer has received from the 
institution if the servicer was not an affiliate of the institution. 
The Secretary does not believe that anything less than the full 
assumption of liability can fully protect the interest of Federal tax 
dollars in the form of Title IV, HEA program assistance. Otherwise, 
servicers have no financial incentive to insure complete program 
compliance. With respect to the comment that a third-party servicer 
should not be assessed liability unless it can be proven that the 
servicer is at fault, the Secretary does not consider a third-party 
servicer to be jointly and severally liable with an institution unless 
the servicer is the one that has violated a Title IV, HEA program 
requirement. The Secretary believes that if a third-party servicer 
violates a Title IV, HEA program requirement that the servicer should 
be held liable, along with the institution with which the servicer 
contracts, because a violation, even an error, impacts on the integrity 
of the Federal student financial assistance programs, and should be 
redressed.
    The Secretary disagrees with the comments that requiring servicer 
liability will necessarily increase fees so as to deny access to 
servicing. Some of these commenters noted that some servicers may price 
their service at a low-level to reflect the fact that they assume no 
liability. The Secretary does not believe that institutions or federal 
taxpayers are well served by servicers who are unwilling to stand 
behind the quality of their work. As agents of institutions 
participating in the Title IV, HEA programs, servicers are also subject 
to an institution's fiduciary responsibility to use the highest 
standard of care and diligence. By rejecting any responsibility for the 
quality of its work, the Secretary believes any such servicer cannot be 
expected to perform with the required concern for the proper 
expenditure of federal funds. The Secretary notes that he received 
favorable comments from organizations that are third-party servicers, 
or institutions who utilize third-party servicers, who did not raise 
any issue of adverse impact on fees. The Secretary has no doubt that 
these and similar servicers will continue to compete effectively for 
institutional clients at competitive prices. The Secretary notes that 
the higher education servicing industry is highly competitive which 
should restrain any excessive fee increases; in fact, by requiring all 
servicers to assume liability, the Secretary believes that this 
requirement should level the playing field by eliminating underbidding 
by those servicers who assume no responsibility for the quality of 
their work.
    The Secretary notes that servicers are not being asked to serve as 
guarantors for their client-institutions, but merely being required to 
answer for the consequences of their own conduct. In this regard, if 
the services they provide have no adverse financial impact, there is no 
financial exposure for such a third-party servicer, or reason to 
increase fees charged.
    With respect to those commenters who contended that the liability 
provision interfered in contractual matters that should be left up to 
the parties involved, the Secretary disagrees. The Secretary strongly 
believes that it is necessary to include this provision in the 
regulations because a third-party servicer administers aspects of the 
Title IV, HEA programs that are funded with Federal tax dollars. 
Therefore, it is entirely appropriate to establish requirements to 
safeguard such funds. Simply leaving this area to the parties, leaves 
open that possibility that no minimal care will be exercised by the 
servicer. An institution is free, however, under these regulations to 
agree to indemnify a third-party servicer in the event a third-party 
servicer must make any payment to the Secretary. The Secretary notes 
that these regulations will have the salutary effect of requiring 
institutions and servicers to exercise greater care in the selection of 
their contractual partners.
    The Secretary would like to make clear that a third-party servicer 
and an institution are only jointly and severally liable for any 
violations of any statutory or regulatory provision applicable to Title 
IV of the HEA and not for other types of violations. The Secretary is 
imposing requirements in contracts between third-party servicers and 
institutions only to the extent that a third-party servicer or 
institution administers any aspect of the Title IV, HEA programs.
    With respect to the commenters who asked about the impact on 
existing contracts, the Secretary states that third-party servicers 
will have no joint and several liability for periods prior to the 
effective date of these regulations. The Secretary expects that once 
these regulations become effective, all contracts between third-party 
servicers and institutions will have to include the requirements 
provided in Sec. 668.25(c), including the requirement that a third-
party servicer is jointly and severally liable with the institution for 
any violation by the servicer of any statutory provision of or 
applicable to Title IV of the HEA, any regulatory prescribed under that 
statutory authority, and any applicable special arrangements, 
agreements, and limitations entered into under the authority of 
statutes pertaining to Title IV of the HEA. This may require 
modification of existing contracts.
    Changes: None.
    Comments: Some of the commenters questioned the provisions of this 
section governing a third-party servicer's responsibility to report all 
suspected instances of fraud to the Department of Education's Office of 
Inspector General. Two of these commenters recommended that in order to 
meet this requirement that third-party servicers be given an 
unqualified privilege exempting the servicer from any liability in 
connection with the referral of an institution to the Department of 
Education's Office of the Inspector General. In addition, one of the 
commenter questioned the Secretary's requirement to refer suspected 
instances of fraud or other criminal misconduct in connection with the 
Title IV, HEA programs. The commenter was concerned that if the 
servicer was wrong that the servicer's reputation would be irrevocably 
damaged. One commenter suggested that a third-party servicer should 
only be required to report information indicating fraud only where 
there is proof to substantiate the belief that an institution may have 
engaged in fraud.
    Discussion: The Secretary recognizes that third-party servicers 
will not always be privy to sufficient information to identify possible 
fraud or criminal misconduct on the part of an institution. However, if 
there are identifiable circumstances in which a reasonable person would 
believe that an institution has deliberately misreported information, 
recklessly reported information without regard for its accuracy, or 
altered official documents, then a third-party servicer should report 
such information to the Office of Inspector General. The servicer is 
not required to reach a firm conclusion as to the impropriety of the 
institution's actions or provide evidence to substantiate possible 
criminal charges, but is required to simply refer the matter to the 
Department of Education's Office of Inspector General for appropriate 
action. Since this referral requirement is a required part of any 
contract between a third-party servicer and an institution, an 
institution has no basis to object to any referral made pursuant to 
this requirement. The Secretary thus believes that it is unnecessary to 
provide an unqualified privilege as suggested by some commenters; 
moreover, such a privilege would allow referrals even where there is no 
reasonable basis to believe misconduct has occurred. The Secretary 
assures third-party servicers that a third-party servicer will not be 
held responsible for any violations that the servicer has not itself 
perpetrated or aided and abetted. However, the Secretary will regard 
failure to take appropriate action when there is reasonable cause to 
believe that fraud or criminal misconduct has occurred to be a serious 
violation of these regulations and of a participant's fiduciary 
obligations.
    Changes: None.
    Comments: One commenter supported the concept of the provision in 
this section governing the requirement that an institution must notify 
the Secretary within 10 days of the date that a contract between an 
institution or third-party servicer is modified or terminated or within 
10 days of the date that a third-party servicer, under contract with 
that institution, goes out of business, stops providing services, or 
files a petition for bankruptcy. However, the commenter believed that 
the burden of notifying the Secretary of any changes to the contract 
should rest with the servicer. Many commenters opposed this provision 
and argued that this requirement constituted needless paperwork on the 
part of the institution. These commenters contended that any changes to 
a contract between a third-party servicer would be examined in the 
course of having performed an annual audit.
    One commenter recommended that the notification time frame be 
changed from 10 days to 30 days. Another commenter recommended that the 
time frame either be revised to state that the institution must notify 
the Secretary promptly of any changes or, barring that, within 90 days.
    Discussion: Section 498(b)(3) of the HEA requires an institution to 
submit to the Secretary with its application for participation a copy 
of any contract between the institution and a third-party servicer and 
a description of that servicer; section 487(a)(3) requires an 
institution to submit information related to its administrative 
capability and financial responsibility. The Secretary interprets these 
statutory provisions to require institutions to keep the Secretary 
apprised of any contracts between themselves and third-party servicers, 
including, any significant modifications to those contracts, or any 
terminations of those contracts. The Secretary need contract 
information provided by institutions to monitor the responsibilities of 
third-party servicers. For example, if a program review uncovers a 
Title IV, HEA program violation at an institution in an area that a 
third-party servicer has recently contracted to administer, the 
Secretary must have current information to identify other institutions 
where the same servicer may have committed the same violation. The 
Secretary believes that 10 days constitutes a reasonable time period in 
which an institution must inform the Secretary of any changes or 
terminations of a contract while at the same time providing the 
Secretary with current information on those contracts. This time frame 
is consistent with the other reporting requirements concerning 
institutional eligibility under 34 CFR 600.30, thereby facilitating 
reporting as an institution will not have to track different reporting 
deadlines.
    Changes: None.
    Comments: One commenter objected to the requirement that a third-
party servicer return all applicable records to the institution if the 
contract between the servicer and institution is terminated, or if the 
servicer stops providing services, or if the servicer files a petition 
for bankruptcy. The commenter believed that these records were the 
servicer's sole guarantee that the institution would pay the servicer 
any fees or compensation still owed to the servicer by the institution. 
The servicer also argued that the absence of these records would 
adversely affect the ability of an independent auditor in the event the 
servicer had a compliance audit performed of its administration of the 
institution's participation in the Title IV, HEA programs.
    Discussion: If a third-party servicer must return records to an 
institution, these regulations do not prohibit a third-party servicer 
from retaining copies of the original records in order to facilitate a 
compliance audit. The Secretary notes that the expense of copying 
should be unnecessary as an institution must provide a third-party 
servicer's independent auditor with access to records pursuant to 34 
CFR 668.23(b).
    With respect to the comment specifying that record retention was a 
third-party servicer's sole guarantee that an institution owing that 
servicer unpaid fees or compensation would pay, the Secretary strongly 
objects to any use of Title IV, HEA program records as bargaining chips 
in a pay dispute. Access to those records is required for uninterrupted 
administration of those programs. No servicer should hold these records 
hostage.
    Changes: None.
    Comments: Several commenters were concerned with the provisions in 
this section that limited a third-party servicer's ability to enter 
into a written contract with an eligible institution if the servicer 
had been limited, suspended, or terminated by the Secretary within the 
past five years.
    Discussion: The Secretary understands the commenters' concerns but 
does not believe that those concerns are justified. As the Secretary 
explained in the NPRM, if a third-party servicer is found to exhibit 
indicators of a questionable past performance, the servicer would be 
prohibited from entering into a written contract with an institution to 
administer any aspect of the institution's participation in the Title 
IV, HEA programs. However, notwithstanding this prohibition, the 
Secretary would consider the servicer still eligible to contract with 
an institution if persons or entities with substantial control over the 
servicer agree to be responsible for any potential liability arising 
from the servicer's administration of the Title IV, HEA programs.
    Changes: None.

Section 668.26  End of an Institution's Participation

    Comments: Several commenters believed that if an institution's 
participation ends, it would be less disruptive to currently enrolled 
students who are receiving Title IV, HEA program assistance to allow 
the students to continue to be enrolled and receive Title IV, HEA 
program assistance until they complete their educational program. The 
commenters suggested that immediate termination of all funds under the 
Title IV, HEA programs would likely cause closure of the institution 
and costs to the government resulting from forgiveness of the students' 
loans. A few commenters argued that if an institution's participation 
has ended, it would be unrealistic to require the institution to inform 
immediately the State in which the institution is located of its loss 
of participation in the NEISP or SSIG Program, because there would be 
no one to make the notification. The commenters suggested that it would 
be more appropriate for the Secretary to make the notification in this 
case.
    Discussion: Commenters misunderstood that immediate termination of 
Title IV, HEA program funds occurs for students at an institution whose 
participation ends but that does not close. The availability of those 
funds continues through the end of the payment period or period of 
enrollment in which the participation ends for enrolled students who 
have received a commitment for those funds. To provide funds beyond 
that point, however, would oblige the Secretary in effect to continue 
an institution's participation after the institution no longer 
qualifies for that participation. With regard to the commenters' 
objections to notifying a State upon the loss of an institution's 
participation in the NEISP or SSIG Program, it is no more unreasonable 
to expect an institution to notify the State than to expect the 
institution to notify the Secretary of the loss of participation in any 
other program. Institutions have been complying with this requirement 
for 20 years.
    Changes: None.
    Comments: Many commenters contended that if the Secretary receives 
a notice from a SPRE that the institution's participation should be 
withdrawn, the institution's participation should not end until the 
institution has had the opportunity to appeal to the Secretary or 
appropriate authority. Many commenters believed that an institution's 
participation should not end if the institution's program participation 
agreement expires due to the Secretary's failure to approve the 
application for a renewal of participation in a timely manner. One 
commenter suggested that, if an institution's participation is 
terminated as a result of misuse of funds under the Title IV, HEA 
programs, the Secretary prohibit the institution from crediting to a 
student's account or delivering to the student the proceeds of a second 
or subsequent disbursement of a Federal Stafford or Federal SLS loan 
after the institution's participation in the Title IV, HEA programs 
ends. The commenter believes it would be inappropriate to allow an 
institution that had previously misused funds under the Title IV, HEA 
program to disburse additional funds.
    One commenter disagreed with the requirement that, if an 
institution's participation in a Title IV, HEA program ends, the 
institution must submit a letter of engagement for an audit of all 
funds received under that program within 45 days. The commenter stated 
that engagement letters are not required under generally accepted 
auditing standards or Government auditing standards.
    Discussion: Under the State Postsecondary Review Program, a SPRE 
does not inform the Secretary that an institution's participation 
should be terminated until the SPRE has afforded the institution its 
full appeal rights. A further discussion of this process is found in 
the preamble to the regulations for the State Postsecondary Review 
Program. The Secretary agrees with those commenters who were concerned 
about the expiration of an institution's participation if the review of 
a properly completed application, submitted in a timely manner, has not 
been completed before the expiration of participation. An explanation 
of the changes made to accommodate this circumstance is found in the 
section of the Analysis of Comments and Changes that addresses 
certification procedures (Sec. 668.13).
    The Secretary appreciates the concern of the commenter that an 
institution terminated for misuse of Title IV, HEA program funds ought 
not be permitted to continue to handle those funds, even for a limited 
period. The Secretary, however, considers that the honoring of 
commitments made to students is equally important and, provided that 
the institution continues to offer education, insists that those 
commitments be honored. The Secretary can also take additional steps to 
safeguard these remaining funds when appropriate. The institution 
remains liable for the proper handling of Title IV, HEA program funds 
even after its participation is terminated. Naturally, should the 
institution reapply for participation in a Title IV, HEA program or 
should a person with substantial control over the institution also have 
substantial control over another institution, the way that the 
terminated institution complied with the requirements of this section 
will be a factor in determining the institution's readmission into the 
programs or the person's continued role in the administration of the 
programs.
    The Secretary needs assurance that if an institution's 
participation in a Title IV, HEA program ends, the institution will 
make arrangements for a final audit of the institution's administration 
of the program. A letter of engagement provides the Secretary 
authoritative notification that the institution is carrying out its 
responsibility to end its participation in a way that will allow the 
Secretary to determine whether any further liabilities or corrective 
action is required. Generally accepted auditing standards and the GAO's 
Standards for Audit of Governmental Organizations, Programs, 
Activities, and Functions do not prohibit this requirement.
    Changes: None.
    Comments: Two commenters recommended that the Secretary expand the 
exception for institutions that close as a result of a natural 
disaster. They suggested that the exemption apply to an institution 
that closes as a result of fire, a weather emergency, or other causes 
beyond the control of the institution. One commenter suggested that an 
institution that is closed or stops providing educational programs for 
fewer than seven instructional days should remain a participating 
institution.
    Discussion: The Secretary adopts the exception for closures as a 
result of a natural disaster because this event is readily verifiable. 
The Secretary acknowledges that other circumstances may require an 
institution to close on a temporary basis, but does not consider these 
other circumstances sufficient to establish additional exceptions to 
the requirements of this section, because the period of closure will be 
too short. In most such instances, the institution has recourse to 
other remedies, such as the arrangement for the use of other 
facilities. Indeed, the definition of academic year for most purposes 
actually recognizes that a week of instructional time can include a 
number of days in which instruction does not occur.
    Changes: None.
Subpart G--Fine, Limitation, Suspension, and Termination Proceedings

Section 668.81  Scope and Special Definitions

    Comments: Several commenters believed that the appeal procedures of 
this section should apply to institutions that were provisionally 
certified if the Secretary revokes the institution's provisional 
certification. Many commenters believed that the appeal procedures of 
this section should apply to institutions if the institution's period 
of participation has expired. Several commenters suggested that the 
Secretary limit, suspend, or terminate the eligibility of a third-party 
servicer to contract with an institution only to those services and 
Title IV, HEA programs for which the servicer has been found to be in 
violation and only to those institutions on whose behalf the servicer 
committed the violation. The commenters claimed that the servicer's 
activities and the Secretary's sanctions might sometimes concern 
violations would have no material relationship to the servicer's 
ability to provide other servicing functions to institutions which it 
serves and to other institutions unaffected by the original violations.
    Discussion: See discussions under the section of the Analysis of 
Comments and Changes that address certification procedures 
(Sec. 668.13). The Secretary does not agree with the commenters' 
suggestion that the Secretary should limit, suspend, or terminate the 
eligibility of a third-party servicer to contract with an institution 
only to those services and Title IV, HEA programs for which the 
servicer has been found to be in violation and only to those 
institutions on whose behalf the servicer committed the violation. The 
Secretary imposes a sanction against a third-party servicer for a 
violation of a Title IV, HEA program requirement for a specific reason, 
to protect the integrity of the Title IV, HEA program. The Secretary, 
if necessary, must reserve the right to limit, suspend, or terminate a 
third-party servicer's eligibility to administer any aspect of the 
Title IV, HEA programs for any institution to ensure that further harm 
does not occur to one or all of those programs. However, where 
appropriate, any limitation, suspension or termination action may be 
limited in scope as suggested.
    Changes: None.

Section 668.82  Standard of Conduct

    Comments: One commenter believed that individual employees should 
not be responsible for actions beyond their control; instead, they 
should be held responsible for actions that are reasonable. For 
example, to be held responsible for accounting errors of other 
departments may be going beyond what is reasonable. Two commenters 
argued that the servicer is merely under contract to provide particular 
services, and is in no position to monitor the institution's compliance 
with other fiduciary matters. They also claimed that establishing a 
fiduciary standard also would establish enormous liability for areas 
beyond the servicer's control. These commenters recommended that 
clarification is needed in the regulations to ensure that a third-party 
servicer could only be held to a fiduciary standard for funds under 
that servicer's direct control.
    Discussion: The Secretary holds a third-party servicer to a 
fiduciary standard of care and diligence only in the exercise of the 
servicer's Title IV, HEA program responsibilities that the servicer has 
contracted with the institution to perform. The Secretary does not 
expect a third-party servicer to be responsible for aspects of 
administration of the Title IV, HEA programs or funds attributed to 
those programs that the servicer has not contracted with an institution 
to administer. With respect to the comment on the responsibility of 
individual employees, the Secretary notes that these regulations apply 
a standard of conduct only to the third-party servicer itself; 
individual employees are not held accountable under this provision. 
However, the Secretary expects a third-party servicer to train its 
employees to perform their duties consistent with the servicer's 
fiduciary obligations.
    Changes: None.
    Comments: One commenter was concerned that the provisions governing 
a third-party servicer's fiduciary duty would limit the servicer's 
ability to acquire its servicing fees from funds administered by the 
servicer.
    Discussion: A third-party servicer entrusted with Title IV, HEA 
program funds may not use those funds to compensate itself for fees 
owed to the servicer by an institution. As provided in Sec. 668.18, 
federal funds may only be used for Title IV, HEA program purposes, and 
may not be hypothecated or used for collateral. The only exception 
would be where an institution has agreed to pay to the servicer all or 
part of the administrative cost allowance payable to an institution 
under the Title IV, HEA program regulations. Otherwise, the Secretary 
will regard any effort to take servicing fees directly from federal 
funds as a grave violation of a third-party servicer's fiduciary 
obligation, for which its eligibility to contract with any institution 
should be terminated.
    Changes: None.
    Comments: Several commenters believed that it is unreasonable to 
expect a third-party servicer to be held to the same fiduciary 
standards as the institution.
    Many commenters stated that the proposed language could be read to 
mean that if any employee of a third-party servicer (e.g., janitor or 
painter) has been convicted of or has pled nolo contendere to any crime 
involving government funds (not specifically Federal student aid), the 
servicer is subject to termination. Four of these commenters voiced 
concern about the issue of due process, because the ability to screen 
all applicants is very limited due to laws regarding privacy and 
nondiscrimination in hiring. One of the commenters stated that such 
removal may be prevented by State or Federal laws and perhaps expose 
the servicer to liability. One commenter believed that the provisions 
should be effective only for new contracts, because many servicers 
currently have contracts with subcontractors that do not contain the 
restriction regarding removal of an affiliation, and the servicer could 
be liable for breach of contract.
    Discussion: The Secretary does not agree with the comment that a 
third-party servicer should not be held to the same fiduciary standard 
as an institution. As an agent of an institution, a third-party 
servicer administers aspects of the institution's participation in the 
Title IV, HEA programs. Therefore, it is necessary to hold a third-
party servicer to the same level of fiduciary responsibility as the 
institution in handling or influencing the use of Title IV, HEA program 
funds.
    The Secretary agrees with those commenters who argued that a third-
party servicer should not be considered to have violated its fiduciary 
duty with regard to the conduct of any person, entity, or officer or 
employee of an entity with which the servicer contracts, if that person 
or entity does not have Title IV-related responsibilities. For example, 
the Secretary would not hold the conduct of a custodian employed by a 
third-party servicer as an element in determining that the third-party 
servicer has violated its fiduciary duty, if that custodian had no 
responsibility for administering a Title IV, HEA program.
    With respect to those commenters who were concerned that the 
removal of an agent of a third-party may violate due process or may be 
prohibited by Federal or State law or may be a breach of contract, the 
Secretary does not believe that those prohibitions exist. However, the 
Secretary recommends that third-party servicers modify their contract 
terms to specify that the servicer is prohibited from engaging any 
entity to administer any aspect of the Title IV, HEA programs that 
meets the criteria in paragraph (d)(1)(i)(D) of this section.
    The Secretary expects a third-party servicer to apply these 
provisions to existing contracts as well as to any new contracts that 
the servicer may enter. These provisions supersede provisions of 
existing contracts that the servicer may have with outside entities.
    Changes: Paragraph (d)(1)(i)(D) of this section is revised so that 
a third-party servicer violates its fiduciary duty in instances where 
the servicer uses or contracts with, in a capacity that involves the 
administration of any aspect of the Title IV, HEA programs, any other 
person, agency, or organization that has been or whose officers or 
employees have been convicted of, or pled nolo contendere or guilty to, 
a crime involving the acquisition, use, or expenditure of Federal, 
State, or local government funds, or has been administratively or 
judicially determined to have committed fraud or other material 
violation of law with respect to those funds.
    Comments: One commenter suggested that paragraph (d)(1)(i)(B) of 
this section should be amended to exclude those instances in which the 
funds that were fraudulently or criminally obtained or spent were 
repaid. The same commenter believed that this provision is too broad in 
scope, and should be restricted only to crime and fraud involving funds 
covered by the contract between the institution and the servicer.
    Discussion: The Secretary disagrees with the commenter. A person 
that has been convicted of, pled guilty to, or has been determined to 
have engaged in criminal misconduct or fraud with respect to government 
funds poses a danger to the Title IV, HEA programs and the funds 
appropriated for use by those programs. Such a person has violated the 
public trust by misusing public funds. The Secretary does not believe 
that payment of restitution by that person is sufficient to guarantee 
that the person will not repeat the offense.
    Changes: None.
    Comments: Several commenters thought that the requirements in 
paragraph (d)(2) of this section were unreasonable by specifying that 
an institution or third-party servicer would violate its fiduciary 
responsibility if the servicer or a principal or affiliate of the 
servicer violated any Title IV, HEA program requirement. The commenters 
thought that the cure--to sever all ties with that servicer, or a 
principle or affiliate of that servicer, or to remove all 
responsibilities of administration of the Title IV, HEA programs--was 
too punitive in its scope.
    Discussion: The Secretary agrees with those commenters. An 
institution or third-party servicer should not be considered to have 
automatically violated its fiduciary responsibility if the servicer or 
a principal or affiliate of that servicer violates a Title IV, HEA 
program requirement. The Secretary has recourse to apply the 
appropriate sanctions in this subpart against an institution or third-
party servicer if the servicer or a principal or affiliate of the 
servicer commits a violation of any Title IV, HEA program requirement.
    Changes: The Secretary removes the provisions of paragraph (d)(2) 
of this section.

Section 668.83  Emergency Action

    Comments: Three commenters stated that no emergency action should 
be taken until the servicer has been given the opportunity to defend 
its actions. One of these commenters remarked that the Secretary could 
be subject to lawsuit if the servicer were proved innocent. Two 
commenters voiced concern that emergency actions could have a severe 
impact on an institution or servicer without a promulgation of 
evidence. One of these commenters suggested that the language be 
revised to read, ``Receives verifiable information, determined by the 
official to be reliable * * *.'' Four commenters felt that emergency 
action should only be taken when the errors are intentional or the 
servicer or institution refuses to take corrective action. One 
commenter felt that due process mandates that the burden of proof be on 
the Secretary to show cause why an emergency action is necessary, and 
that the burden should shift only after the Secretary has made a prima 
facie case. Several commenters stated that an emergency action against 
a third-party servicer should not, as a matter of law, prohibit the 
servicer from engaging in the administration of any aspect of an 
institution's participation in the Title IV, HEA programs, but should 
only be limited to that aspect where emergency action is absolutely 
necessitated. The commenters felt this was necessary to provide a 
smooth turnover of servicing responsibilities rather than a sudden halt 
which could cause chaos, confusion and loss throughout the industry, 
including the Department of Education, the institution, and the 
borrower.
    Discussion: The HEA specifies that the Secretary shall take an 
emergency action against a third-party servicer if the Secretary 
receives information, determined by the Secretary to be reliable, that 
a third-party servicer under contract with an eligible institution is 
violating any statutory or regulatory provision applicable to Title IV 
of the HEA, or any applicable special arrangement, agreement, or 
limitation and the Secretary determines that immediate action is 
necessary to prevent the misuse of Federal funds and the likelihood of 
loss outweighs the importance of waiting for the final outcome of a 
limitation, suspension, or termination action against the servicer. An 
emergency action is effective on the date that a notice and statement 
of the basis of the emergency action is mailed to the third-party 
servicer. If a third-party servicer does not think that such action is 
warranted, the servicer may request a prompt show-cause hearing. As to 
the concerns expressed over possible disruption, the Secretary will 
tailor emergency actions as he determines necessary to protect federal 
interests. The Secretary also refers the reader to the discussions of 
emergency actions with respect to institutions in the regulations 
published on March 10, 1993 (58 FR 13336).
    Changes: None.

Sections 668.84  Fine Proceedings, 668.85 Suspension Proceedings, and 
668.86 Limitation or Termination Proceedings

    Comments: A few commenters felt that proposed Secs. 668.84 
(governing fine proceedings), 668.85 (governing suspension 
proceedings), and 668.86 (governing limitation and termination 
proceedings) violate due process and privacy rights by requiring that a 
third-party servicer apprise all clients of proposed actions. The 
commenters thought that notification at that time is at a minimum 
premature if not inappropriate and would serve to create adversarial 
relations between parties that should have a cooperative working 
relationship. Several commenters felt that fines should be imposed only 
if the violation was ``willful'' or ``knowing.'' Another commenter felt 
that notification of a fine proceeding against a third-party servicer 
should not be sent until the appeal process is completed because it 
could damage a third-party servicer's reputation among unaffected 
parties and could unnecessarily alarm the servicer's client base. One 
commenter recommended that the notice be limited to affected clients 
and suggested that if the Secretary does not want to eliminate the 
notice at the beginning of a fine proceeding, the Secretary should be 
required to send a notice when the decision to fine has been reversed.
    Discussion: Quite the contrary to the commenters' views that 
notification to a third-party servicer's clients at the initiation of a 
fine or other proceeding against the servicer violates due process, 
this provision protects those rights. The potential consequences to an 
institution if the institution's agent violates a Title IV, HEA 
requirement can be severe, covering the full range of sanctions under 
this subpart. Thus, notice to an institution allows the institution the 
opportunity to participate in the process on behalf of its agent and in 
its own defense.
    In addition, a sanction imposed against the servicer could have an 
adverse effect on the participation of an institution that contracts 
with the servicer, including the severing or limiting of the 
contractual relationship. Early notice to affected institutions permits 
them to judge the potential effect of the action on their participation 
and to prepare accordingly. As the Secretary noted in the NPRM, early 
notice also allows an institution to take corrective action before the 
conclusion of a proceeding under this subpart. The Secretary also 
corrects here two misunderstandings of these commenters: it is the 
designated department official, not the third-party servicer, who 
provides notice under this subpart; and the designated department 
official notifies only those institutions affected by the servicer's 
violations, not all institutions that contract with the servicer.
    The Secretary is sensitive to those who were concerned about how 
notification in the initiation of a fine proceeding could affect a 
third-party servicer's reputation, but notes that information about 
actions the Secretary takes with regard to violations of Title IV, HEA 
program requirements is publicly available and is required by section 
494C of the HEA to be shared at least with SPREs and by 34 CFR part 603 
with accrediting agencies. The Secretary has provided, in Sec. 668.90, 
for notification to all affected institutions that contract with a 
third-party servicer of the Secretary's final decision with regard to 
appeals under this subpart.
    In determining whether to impose a fine, the amount of a fine, or 
whether to impose any other sanction for a violation of a Title IV, HEA 
program requirement, the Secretary always considers the extent to which 
the violation was deliberate. The Secretary does not consider it 
necessary to specify that consideration in these regulations.
    Changes: None.
    Comments: Several commenters suggested that in the case of a 
proceeding against an institution, the Secretary should notify the 
third-party servicers that contract with that institution, because the 
functions performed by certain third-party servicers could continue to 
be performed inadvertently when, in fact, the Secretary has limited, 
suspended, or terminated those activities. The commenters further 
recommended that in the case of a suspension, limitation, or 
termination against an institution the Secretary inform each third-
party servicer that contracts with the institution of the consequences 
of the action to the servicer. The commenters also request parallel 
notification provisions concerning hearings and the submission of 
written material in the absence of a hearing.
    Discussion: The Secretary expects an institution to provide 
immediate notice as necessary to its employees, agents and third-party 
servicers to comply with the terms of any action taken by the 
Department. The Secretary notes that he does not hold a third-party 
servicer responsible for violations of Title IV, HEA program 
requirements committed solely by an institution. Therefore, the 
Secretary does not consider it necessary to establish provisions for 
the notification separately to third-party servicers in every case.
    Changes: None.
    Comments: Two commenters strongly objected to the proposal to 
include, as a specific basis for any of these proceedings against an 
institution or a third-party servicer, a substantial misrepresentation 
of the institution's educational program, financial charges, or 
employability of the institution's graduates by an institution or 
servicer under contract with an institution, as applicable. The 
commenters felt that this proposal would require a third-party servicer 
to monitor a client institution's marketing of its educational program, 
its admissions process and the appropriateness of the financial charges 
as well as the statements made, verbal or written, regarding the 
employability of the institution's graduates. One commenter suggested 
that the application of this provision be limited to third-party 
servicers that provide services such as marketing for institutions. One 
commenter suggested that misrepresentation of eligibility of a location 
be added to the violations subject to the imposition of a fine.
    Discussion: These provisions, with respect to third-party 
servicers, are aimed at just such servicers as those mentioned by one 
of the commenters--those that provide marketing or other services 
designed to represent an institution to prospective students and the 
public. However, the provisions can apply equally to any other third-
party servicer that, in the conduct of its activities under a contract 
with an institution, deliberately misrepresents the nature of the 
institution's educational program or other relevant information. These 
provisions do not require a third-party servicer to take any special 
steps to monitor an institution's activities. The servicer being an 
agent of the institution is expected simply to avoid misrepresenting 
the institution. Subpart F of this part describes what constitutes 
misrepresentation. Misrepresentation of the eligibility of an 
institution's educational program clearly falls within the meaning of 
the term under subpart F and further may constitute fraud under the 
provisions of Sec. 668.83, providing a potential basis for an emergency 
action. In the February 17, 1994, NPRM, the Secretary emphasized the 
seriousness with which he regards misrepresentation and the potential 
danger that misrepresentation poses to the Title IV, HEA programs. 
Commenters have not persuaded the Secretary to modify that view.
    Changes: None.
    Comments: One commenter felt that the Secretary should not pursue 
action against a contracting institution until the matter with the 
third-party servicer is resolved and also requested that the Secretary 
not fine both the servicer and the institution for the same occurrence. 
The commenter recommended that the proposed effective date of the 
suspension, limitation, or termination, which is at least 20 days after 
the mailing of the notice of intent, be revised to either 30 calendar 
days or 20 business days to allow sufficient time for preparation of a 
response. A commenter suggested that a fine be imposed only for 
material violations of Title IV, HEA program requirements.
    Discussion: The Secretary reserves the right to initiate an action 
against an institution at any point at which the Secretary determines 
that the action is necessary. The protection of the Title IV, HEA 
programs requires this flexibility. Whether to impose fines on both an 
institution and a third-party servicer, and the amount of those fines, 
for the same occurrence depends on the degree to which each party 
caused or is otherwise responsible for the violation.
    The Secretary considers 20 days generally to be sufficient time for 
the notified party to prepare a response. The Secretary notes, however, 
that this provision establishes a minimum time frame. The Secretary may 
allow additional time if the Secretary determines that the 
circumstances of the proceeding require more.
    The Secretary does not consider it advisable to restrict the 
imposition of fines to material violations of Title IV, HEA program 
requirements. However, Sec. 668.92 describes generally the factors that 
the Secretary may consider in determining the amount of a fine.
    Changes: None.

Sections 668.87  Prehearing Conference, 668.88 Hearing, 668.89 
Authority and Responsibilities of the Hearing Official, 668.90 Initial 
and Final Decisions--Appeals, and 668.91 Filing of Requests for 
Hearings and Appeals; Confirmation of Mailing and Receipt Dates

    Comments: Several commenters questioned the absence of criteria in 
the regulations for the qualification of the hearing officer. The 
commenters also suggested that procedures should be established to 
allow for the participants to inform the hearing officer of details of 
the issues given the generally complex issues involved in most cases. 
The commenters recommended that the Secretary be required to provide a 
copy of the transcript described in Sec. 668.88(d) to all parties 
within ten days of the hearing. Several commenters felt that any 
decision should be governed by a ``reasonableness'' standard to limit 
the liabilities of parties participating or providing servicing of the 
Title IV, HEA programs in good faith. The commenters thought that the 
process should allow for extenuating circumstances and that the hearing 
official should have the authority to interpret regulations and to rule 
them inapplicable. Another commenter believed that the hearing official 
should be bound by not only all applicable statutes and regulations but 
also other guidance deemed to be in effect by the Secretary to ensure 
that ``Dear Colleague'' letters and other written guidance from the 
Department of Education be included. One commenter believed that any 
prehearing conference with a third-party servicer should include any 
institution that has a contract with that servicer and who could 
potentially be affected by the Secretary's action. One commenter 
suggested that Sec. 668.89 be modified to require that the hearing 
official be bound not only by ``all applicable statutes and 
regulations'' but also by all applicable judicial precedent, the 
Constitution, Federal statutes of general applicability, including the 
United States Bankruptcy Code.
    One commenter questioned the statement that if the hearing officer 
finds that a termination is warranted, the Secretary affirms that 
decision asking if the Secretary intends to automatically affirm the 
hearing official's decision. A few commenters suggested that an 
institution or third-party servicer should be able to introduce new 
evidence on appeal noting that the Secretary should have the 
opportunity to have complete information that may not have been 
presented at the original fact-finding sessions. These commenters 
thought that the emphasis in resolving the issue should be on arriving 
at the most fair and most logical conclusion as opposed to conforming 
to a stringent pattern or process. One commenter felt that the 
Secretary should not have a special process for fraud investigations 
and there should not be limitations placed on a hearing official's 
ability to act. The commenter believed that the proposed procedures 
would unfairly limit the due process procedures available to 
participants in the system and that the current procedures do not 
require further modification.
    Discussion: The Secretary has considered the suggestions from the 
commenters that some minimum standards be set out in the regulations to 
establish qualifications for the hearing officer, but does not believe 
that any such actions are appropriate. The hearing official is charged 
with the responsibility of resolving the issues requested in the 
appeal, and the parties bear the responsibility of presenting the 
issues in controversy. The hearing official meets requirements for 
experience and capability in accordance with internal Department 
procedures, and no additional requirements are needed in these 
regulations. Additionally, the hearing official's decisions involving 
limitations, suspensions, terminations and fines may be appealed to the 
Secretary under this subpart. This appeal to the Secretary provides an 
additional procedural safeguard that the issue will be resolved fairly 
in a manner that is consistent with other decisions issued by the 
Secretary.
    The Secretary does not agree with the suggestion that additional 
regulations are necessary to permit the participants to inform the 
hearing officer of details of the issues due to the generally complex 
issues involved in some cases. Under the regulations, any party may 
request a prehearing conference that would address how the parties 
could present the relevant issues to the hearing official. In addition, 
the parties have the opportunity to make their position known in the 
pleadings required by the hearing official.
    The Secretary agrees with the commenters that an institution or 
third-party servicer who is the respondent in an administrative hearing 
should be provided with a copy of a transcript when one is prepared by 
the Department of Education. Under current procedures, a transcription 
is routinely made of any adverse action initiated under this subpart, 
and a copy of the transcript is provided to the respondent.
    The Secretary disagrees with the suggestion that the regulations 
establish a ``reasonableness'' standard to limit the liabilities of 
parties participating or providing servicing of the Title IV, HEA 
programs in good faith. Institutions and third-party servicers are 
fiduciaries that are entrusted with properly administering the Title 
IV, HEA programs. Establishing a lesser negligence is inappropriate, 
particularly given the advance system of Title IV, HEA funding used by 
the overwhelming majority of participating institutions. As 
fiduciaries, these parties are held to one of the highest standards of 
accountability, and it is inappropriate to excuse or reduce a liability 
that is caused by a subjective good faith belief purportedly held by 
the institution or third-party servicer. Business decisions that 
concern the degree of care and oversight required by institutions and 
third-party servicers must take into consideration their responsibility 
for adhering to the applicable program requirements.
    The Secretary also rejects any suggestion that the hearing official 
be given discretion to refuse to apply applicable regulations to a 
dispute. The regulations constitute final determinations by the 
Secretary concerning the requirements that must be followed by 
institutions and third-party servicers to participate in the HEA 
programs. The hearing official must apply the regulations as written. 
This process provides certainty to all parties, and enables the 
development and enforcement of a consistent body of administrative 
rulings.
    The Secretary appreciates the suggestion of commenters who urged 
that guidance issued by the Department in the form of manuals, 
handbooks, other publications or Dear Colleague letters should be 
binding the hearing official in the same manner as regulations. 
However, such guidance does not have the same legal force as 
regulations issued pursuant to formal rulemaking. The Secretary 
believes that such guidance does provide a foundation against which the 
reasonableness of the institution's or third-party servicer's conduct 
may be judged. In the context of resolving whether the institution or 
third-party servicer violated a regulation or statute, or breached its 
fiduciary duties, the hearing official should evaluate the 
institution's or third-party servicer's actions based upon whether it 
made a good faith effort to apply and follow the guidance issued by the 
Department. The Secretary believes that actions taken contrary to such 
guidance would be presumptively improper and should be viewed as such 
by a hearing official. The Secretary further believes it will be a rare 
instance where a party can demonstrate that it fulfilled its fiduciary 
obligation and complied with statutory or regulatory requirements while 
failing to heed or apply guidance issued by the Department of Education 
as to the proper application of statutory or regulatory provisions.
    The Secretary does not agree that it is necessary to list all 
possible authority binding on the hearing official. The parties are 
free to cite any authority they feel may govern a particular case or 
issue. Section 668.89(d) is included to preclude hearing official from 
ignoring or refusing to apply departmental statutes and regulations. If 
a hearing otherwise fails to apply applicable authority, a party may 
appeal to the Secretary.
    The Secretary does not agree that an adverse action initiated 
against a third-party servicer must necessarily include any institution 
that has a contract with that servicer who could potentially be 
affected by the Secretary's action. The particular facts in each case 
will determine the party or parties against whom an adverse action is 
taken, and in some instances it may be appropriate for an institution 
and its servicer to both be named as respondents. In some cases, a 
third-party servicer against whom an adverse action is initiated may 
ask the Department to expand the administrative action to encompass the 
institutions that are relevant to the administrative action. Again, the 
Secretary believes that the particular facts of each case will have to 
be considered to determine the appropriate actions, rather than 
expanding the scope of the regulations to require such participation by 
other parties in every case.
    The commenter also suggested that such participation by a third-
party servicer's customers should be considered because an adverse 
ruling would have an impact on every other client for that servicer, 
especially where a termination or debarment action were sought. 
However, the resulting impact of a termination or a debarment of a 
third-party servicer on the servicer's customers is not a sufficient 
basis for these parties to be given a right to be represented in any 
prehearing conference. To invite all potentially affected parties to 
the hearing would complicate the proceedings. The proper focus of the 
administrative proceeding is determining whether the limitation, 
termination, or suspension should be imposed based upon the cited 
program violations.
    The Secretary has modified the proposed regulation to provide that 
any initial decision by a hearing official that is appealed to the 
Secretary may be affirmed, reversed, remanded to the hearing official, 
or modified. The Secretary also notes that the regulations require a 
hearing official to uphold certain adverse actions when specific 
findings are made as set out in Sec. 668.90. Although the Secretary 
reserves the discretion to review such rulings on appeal, these 
administrative decisions already reflect the Secretary's judgment that 
such action is appropriate under those facts, and modification of any 
such ruling will be rare.
    The Secretary disagrees with the suggestion that an institution or 
third-party servicer should be able to introduce new evidence on 
appeal. The administrative process requires that the relevant 
information necessary for the decision will be presented to the hearing 
official within the time limits set out in the regulations. Any appeal 
to the Secretary must be based solely upon that information already in 
the administrative record and upon items which may be judicially 
noticed. Any subsequent opportunity to introduce new evidence on appeal 
would deprive the hearing official of the opportunity to have issued a 
decision based upon a complete record, and could discourage a 
respondent from placing its complete case before the hearing official 
at the appropriate time. This system of resolution is fairer and more 
efficient because it provides each party with an opportunity to have 
their complete case heard by a hearing official and then, where 
appropriate, have the initial decision reviewed by the Secretary on 
appeal.
    The Secretary believes that it is appropriate to include fraud as a 
finding in Sec. 668.90 for which an adverse action must be upheld where 
the hearing official makes a determination that the underlying activity 
has occurred. This addition to the regulation reelects the Secretary's 
determination that any fraud committed by an institution or third-party 
servicer is serious enough to warrant the imposition of the adverse 
action sought. In such instances, and consistent with the other items 
that have been placed into this category in the past such as missed 
audit submissions, it is appropriate to limit the discretion of the 
hearing official in accordance with the Secretary's determination that 
this category of finding warrants the adverse action initiated by the 
designated Department official. Furthermore, the regulation provides 
certainty to all parties concerning the gravity of the underlying 
violation, while providing an institution or third-party servicer an 
opportunity to request an administrative appeal to a hearing official 
concerning whether the respondent committed fraud.
    Changes: The regulations have been changed to provide that the 
Secretary may affirm, reverse, remand to the hearing official, or 
modify any initial decision that is appealed to the Secretary. Section 
668.88 has also been amended to specify that no charge is made to 
provide one copy of the transcript to the hearing to an institution or 
a third-party servicer.

Section 668.92  Fines

    Comments: A number of commenters responded to the Secretary's 
request for comment and agreed that repeated mechanical systemic 
unintentional errors should be treated as a single violation for 
purposes of assessing a fine against a third-party servicer. However, 
one commenter argued that total compensation for the value of the error 
should be expected. Another commenter suggested that the Secretary 
should address cases in which the third-party servicer deliberately 
failed to implement a regulation or failed to institute programming 
corrections relating to previously cited findings identified by an 
auditor, client, or the Secretary. The commenter believes that in these 
situations the fines should be significant based upon the risk of loss 
due to the servicer's negligence.
    Several commenters felt that it would be inappropriate to adjust 
the amount of a fine simply based upon the size of the institution or 
servicer, claiming that a small organization should not benefit and a 
large organization should not be penalized solely on their size. One 
commenter suggested that the purpose of considering the size of the 
servicer's business was to take into consideration the dollar value of 
the violation in comparison to the overall value of the contracts being 
serviced by the servicer and suggested that language be added 
concerning the assessment of materiality of the violation. A few 
commenters supported a position that the determination of the size of 
any fine take into account the extensiveness and gravity of the 
violation and should be assessed in direct correlation to any loss of 
funds. The commenters also felt that the fines should only be assessed 
against the party who was directly responsible for the violation and 
supported the provision that the servicer may provide evidence that the 
institution contributed to the violation.
    One commenter felt that any references to special arrangements 
should be deleted and noted that performing any statutory and 
regulatory requirement should cover all applicable situations.
    Discussion: The Secretary agrees with the commenter who suggested 
that, in determining the amount of the fine to be assessed against a 
third-party servicer for a violation of a Title IV, HEA program 
requirement, a repeated mechanical systemic unintentional error need 
not be counted as a single violation if the servicer had been 
previously cited for this type of error and had failed to implement 
corrections. With respect to the commenter who suggested that in 
determining the amount of a fine with respect to a repeated mechanical 
systemic unintentional error, that the amount of the fine should at 
least be equal to the total value caused by the error, the Secretary 
does not agree with that comment. However, the Secretary does agree 
that the determination of the amount of the fine should take into 
consideration the amount of Title IV, HEA program funds that were lost 
due to the error.
    With respect to the concerns expressed about the relationship of 
the amount of a fine to the size of an institution or of a third-party 
servicer's business, the Secretary points out that the size of an 
institution or business has a bearing on whether the institution or 
servicer has overextended its capability of properly administering the 
Title IV, HEA programs and the extent to which harm has been done to 
the programs.
    With respect to the commenter who thought that the phrase special 
arrangement should be deleted from this section, the Secretary does not 
agree with that commenter. Special arrangements are based on individual 
circumstance and therefore should be taken into consideration. However, 
as noted elsewhere in the comments and discussion section, the 
Secretary clarifies special arrangements to refer to those special 
arrangements entered into under the authority of statutes applicable to 
Title IV of the HEA.
    Changes: Paragraph (a)(5) is revised to specify that as one of the 
criteria in determining the extent to which violations are caused by a 
repeated mechanical systemic unintentional error, the total number of 
violations is considered to be a single violation, provided the third-
party servicer has not previously been cited for this type of error and 
had failed to make the appropriate corrections to the system where the 
violation originated. In determining the amount of a fine, the 
Secretary also takes into consideration, as applicable, the financial 
loss to the Title IV, HEA programs that was attributable to the 
repeated mechanical systemic unintentional error.

Section 668.94  Termination

    Comments: One commenter recommended that the regulations be amended 
to terminate the eligibility to perform some but not all of the 
services provided by the third-party servicer, claiming that some 
functions provided by the servicer may continue to meet the applicable 
requirements of the program. This change would recognize that a third-
party servicer may provide multiple and unrelated functions under the 
Title IV, HEA programs. Many commenters expressed concern about the 
provision in Sec. 668.94(c) requiring the servicer to return to each 
institution that contracts with the servicer all records pertaining to 
the servicer's administration of that program on behalf of that 
institution. One commenter suggested that since the institution may 
contract with another servicing entity, the records should be passed to 
the new servicer as specified by the institution. Many commenters 
pointed out that the records maintained by the third-party servicer 
appear on microfiche, imaging disc, microfilm, or in paper form and the 
servicer will be able to provide copies of such records but not the 
original records. One commenter suggested an expansion to require the 
servicer to return servicer notes, related documents, records or copies 
of such notes, related documents and records that pertain to the 
servicer's administration of the program on behalf of the institution. 
The commenter further suggested that the servicer certify copies as 
exact copies whenever required by law. The commenter also suggested 
that a sentence be added to protect the proprietary rights of the 
servicer to data base media, servicing procedures, computer programs, 
software packages, servicer forms, and other proprietary information, 
procedures and materials. Another commenter noted that copies of 
records for a single institution's loans may be commingled with records 
pertaining to other institutions and suggested that servicers should be 
permitted to provide records upon request rather than all at once.
    Discussion: The Secretary agrees with the commenters that it may be 
appropriate to terminate the eligibility of a third-party servicer to 
perform some but not all of the activities under certain circumstances. 
In other situations, however, a violation may be so egregious that 
complete termination from being able to administer any aspect of the 
institution's participation is appropriate. The Secretary believes that 
the regulations provide the needed flexibility to determine the correct 
action to be taken.
    Records relating to a third-party servicer's administration of any 
aspect of an institution's participation in the Title IV, HEA programs 
are the institution's property. A third-party servicer may make copies 
of the original records that it provides to an institution if the 
contract between the servicer and institution is terminated. See the 
discussion in Sec. 668.25 on records.
    The Secretary does not agree that the regulations need to be 
expanded to cover servicer notes, related documents, records, or copies 
of such notes; that is a matter between the institution and the 
servicer. The Secretary does not believe that it is necessary to add 
regulatory language to protect the proprietary rights of the servicer 
since adequate protection already exists through copyright laws to 
serve this purpose.
    Changes: None.

Section 668.95  Reimbursements, Refunds, and Offsets

    Comments: Several commenters recommended that the reference to 
third-party servicer in Sec. 668.95(c) be removed because the servicer 
generally makes no claims for benefits on its own behalf therefore 
funds would not be available to be offset. Another commenter noted that 
if the Secretary is transmitting funds directly to a third-party 
servicer on behalf of institutions, the funds are for multiple 
institutions and to offset an unaffected institution's funds would not 
be reasonable or fair. One commenter requested that the provision in 
paragraph (b)(1)(ii) of this section that would have the servicer or 
institution repay any discounts, premiums, or excess interest paid 
under 34 CFR part 682 be eliminated stating that the payment of 
premiums and discounts are contract issues between two lenders in the 
FFEL programs and should not be assessed to other parties or repaid to 
the Secretary.
    Discussion: The Secretary disagrees with those commenters who 
recommended removing reference to a third-party servicer from the 
provision governing the ability of the Secretary to offset any benefits 
or claims due to an institution or third-party servicer against any 
payment that an institution or third-party servicer may owe to the 
Secretary. A situation may arise where a third-party servicer makes a 
claim against the Department of Education for funds owed to the 
servicer and the Secretary wants to offset that claim because the 
servicer has not repaid a liability owed the Department of Education 
for a violation of the Title IV, HEA program requirement.
    The Secretary also does not accept the comment that paragraph 
(b)(1)(ii) of this section should be removed. This provision is 
particularly relevant to an institution's participation in the FFEL 
programs.
    Changes: None.
Subpart H--Appeal procedures for Audit Determinations and Program 
Review Determinations

Section 668.114  Notification of Hearing

    Comments: Several commenters suggested that with respect to a 
third-party servicer's request for review, the hearing official only 
notify the institutions to whom the findings were originally disclosed 
since a third-party servicer may have added new clients during the 
period between the publication of the findings and the announcement of 
the hearing and the new clients would not be aware of the findings and 
could be confused by the notice of the hearing. Another commenter felt 
only institutions that contract with the servicer of the affected 
functions should be notified.
    Discussion: The Secretary agrees that subsequent notices from the 
hearing official should be sent only to the actual parties to the 
proceeding. In the cases of institutions receiving similar services to 
those at issue in the proceeding, they need not be notified. As 
discussed above, the need for notice to other affected institutions is 
satisfied with notice of the final determination. Therefore, there is 
no need to impose the burden on the hearing official of providing 
notice to every institution with which a third-party servicer 
contracts.
    Changes: Section 668.114(b) is revised to require notice only to 
the actual parties to the proceeding.

Section 668.116  Hearing

    Comments: Several commenters recommended that an institution or 
third-party servicer also have the burden of proving that the findings 
are not substantial in nature. The commenters felt that some findings 
or alleged violations may be irrefutable, but their effect may be 
strictly limited, posing immaterial impact on the integrity of the 
servicer's or lender's portfolio. One commenter felt that a third-party 
servicer should only have the burden of proving that the ``expenditures 
questioned or disallowed were proper'' to the extent that the servicer 
contracts with the institution for cash management of Title IV, HEA 
program funds and that the Secretary should not question servicing fee 
income since it is not considered Title, IV HEA program funds. A few 
commenters suggested deleting references to the time frames within 
which an institution must have provided documentation previously 
stating that any legitimate documentation regarding the subject at 
issue should be admissible and the time frames within which it was 
previously submitted are irrelevant to their authenticity or material 
relationship to the case. Several commenters felt that the transcribed 
records of the proceeding should only be made available to the hearing 
participants and not to any institution that contracts with the 
servicer.
    Discussion: With respect to the suggestion that an institution or 
third-party servicer need only prove that findings are ``not 
substantial,'' the Secretary disagrees that the standard for 
accountability for Federal funds should be relaxed. An institution, or 
its third-party servicer, is a fiduciary and duty bound to use the 
highest standard of care and diligence at all times in the 
administration of the Title IV HEA programs. The suggested language 
would weaken this standard. If, as suggested by the commenters, a 
violation truly has an immaterial impact, then there will no 
significant liabilities assessed.
    The commenter who felt that a third-party servicer should not have 
to justify expenditure of its fee income is correct. Section 668.116(d) 
only requires proof that Title IV HEA program funds were properly 
expended.
    With respect to the comments on altering the time periods for 
submission of documentation by institutions, the Secretary notes that 
the purpose of this rulemaking it to make existing regulations 
applicable to third-party servicers and not to extensively modify the 
hearing procedures. The Secretary believes that the present procedures 
are consistent with an institution's record-keeping and fiduciary 
obligations; institution's complying with these obligations should 
have, and have had, no difficulty in meeting established deadlines. 
Further, requiring submission of documentation with a request for 
review allows cases to be resolved without hearing.
    With respect to the comment that hearing transcripts need only be 
provided to the hearing participants, the Secretary agrees. Further 
since the records of these proceedings are generally available under 
the Freedom of Information Act, the Secretary agrees that reference to 
availability under that act is unnecessary. Those who are not parties 
to the proceedings can request the transcript pursuant to that act, 
subject to any applicable exceptions to release of the requested 
information.
    Changes: Section 668.116(g)(2) is revise to require that the 
hearing transcript be sent only to the parties to the proceeding and 
eliminate the reference to the Freedom of Information Act.

Part 682--Federal Family Education Loan Programs

Subpart D--Guaranty Agency Programs

Section 682.401  Basic Program Agreement

    Comments: Several commenters suggested that the provision in this 
section relating to contract submissions be modified so that a third-
party servicer would not be required to submit a copy of its contract 
to the Secretary unless so requested by the Secretary.
    Discussion: The Secretary understands the commenters concerns that 
the copy of a third-party servicer's contract with a guaranty agency 
contains proprietary information that the servicer does not wish to be 
made public. Many of the commenters were concerned that a copy of a 
third-party servicer's contract would be released under the Freedom of 
Information Act (FOIA). The Secretary wishes to assure third-party 
servicers that trade secrets and confidential commercial or financial 
information is not releasable under FOIA. Parties concerned over 
possible release should, however, take appropriate precautions by 
marking submitted contracts as confidential. This provision is intended 
only to facilitate oversight and make the Secretary aware of all the 
services the third-party servicer has contracted to provide. Although 
many commenters believed that a third-party servicer could accomplish 
this by summarizing the services it has contracted to provide. In order 
to verify this information, the Secretary would need a copy of the 
actual contract. Therefore, the Secretary has decided to retain this 
requirement in the final rule.
    Changes: None.

Section 682.413  Remedial Actions

    Comments: Several commenters objected to a third-party servicer 
being held jointly and severally liable for any interest benefits and 
special allowance its client received on its FFELP loan portfolio when 
the servicer may not have been responsible for billing the Department 
for such monies. Some commenters believed that clarification to this 
provision is necessary to ensure that a third-party servicer is not 
held jointly or severally liable for any violations which it did not 
commit.
    Discussion: The Secretary agrees with the commenters that a third-
party servicer should not be held responsible for any program 
violations it did not commit. The regulations do not hold a third-party 
servicer jointly or severally liable for any interest benefits or 
special allowance received by a lender for which the lender was not 
eligible if that servicer complied with program regulations. However, a 
third-party servicer that is not responsible for billing the Department 
for interest benefits and special allowance may be responsible for the 
lender receiving interest benefits and special allowance for which the 
lender is not eligible because the servicer has violated other program 
requirements. The Secretary believes that a third-party servicer should 
be responsible for its actions and that holding a third-party servicer 
potentially liable for Federal monies expended because it has committed 
program violations helps accomplish this. The Secretary also believes 
that holding lenders and servicers jointly and severally liable is the 
best way to protect the Federal fiscal interest. See prior discussion 
on this issue under Sec. 668.25 and in the February 17, 1994 NPRM.
    The Secretary is sensitive that this provision makes a significant 
change in how responsibility for liabilities may be covered in 
contracts that servicers enter with lenders. Therefore, the Secretary 
has established an order in which he will attempt to collect such 
liabilities. The Secretary will first attempt to collect such 
liabilities from the lender and, if necessary, offset the lender's 
first future claim to the Secretary for interest benefits and special 
allowance for the amount of the liability. The Secretary believes that 
this is the most effective and efficient means to collect a liability 
and that he will be successful in collecting from the lender in most 
cases. However, the situation may arise when the Secretary is not able 
to collect these monies from a lender because the lender chooses not to 
submit further claims, discontinues its participation in the FFEL 
programs, or becomes insolvent and is taken over by banking regulators. 
Because such circumstances may arise, the Secretary retains the option 
of holding a third-party servicer jointly and severally liable with a 
lender for such liabilities. However, the Secretary intends to exercise 
his authority to collect a liability from a third-party servicer under 
this provision only when he is unable to collect such monies from the 
lender.
    Changes: The Secretary has revised this provision so that the 
Secretary will not attempt to collect interest benefits or special 
allowance from a third-party servicer unless the Secretary is unable to 
collect from the lender with which the servicer has contracted.
    Comments: Several commenters asked the Secretary to clarify this 
section to specify when the 30-day period begins that determines when a 
lender must repay or make satisfactory arrangements to repay a 
liability resulting from a third-party servicer's action before the 
Secretary will attempt to collect from the servicer. Several commenters 
also suggested that the Secretary should attempt to collect such monies 
by offsetting a lender's claim for interest benefits and special 
allowance.
    Discussion: The Secretary agrees with the commenters that 
clarification is needed. The Secretary also agrees with the commenters 
that offsetting a lender's bill for interest benefits and special 
allowance for the amount of the liability may prove to be an effective 
means to collect the liability from the lender. The Secretary will 
exercise this option to collect such liabilities from a lender whenever 
he believes this method is in the best interests of the FFEL programs 
and the Federal fiscal interest.
    Changes: The Secretary has amended this section to clarify that the 
lender must repay or make satisfactory arrangements to repay a 
liability within 30 days from the date the Secretary originally 
requests such repayment from the lender before the Secretary will 
attempt to collect from the third-party servicer.
    Comments: Many commenters suggested that the liability of a third-
party servicer acting as an agent for a guaranty agency be removed 
because the commenters believed that the servicer does not play a role 
under this provision that would subject it a liability.
    Discussion: The Secretary does not agree with the commenters. A 
third-party servicer that is administering any aspect of a guaranty 
agency's FFEL programs may be responsible for the guaranty agency 
paying a claim that is not eligible for reinsurance. This situation may 
occur when the servicer is negligent in reviewing the history of the 
loans consolidated in a Federal Consolidation loan under 34 CFR 
682.206(f) when a default claim is submitted that results in the agency 
subsequently receiving reinsurance on such a claim. This would result 
in a liability being created by the servicer's actions.
    Changes: None.

Section 682.416  Requirements for Third-Party Servicers and Lenders 
Contracting With Third-Party Servicers

    Standards for administrative capability.
    Comments: Many commenters suggested that the Secretary qualify the 
term business systems so that it was clear that such systems included 
combined automatic and manual systems. The commenters believed that 
this term, without qualification, implied only computer-supported 
systems.
    Discussion: The Secretary agrees with the commenters that it is 
appropriate to qualify the term ``business systems.''
    Changes: The Secretary has amended this provision to clarify that 
business systems include combined automated and manual systems.
    Standards of financial responsibility. Comments: Many commenters 
believed that the financial standards the Secretary was proposing for 
an institution should not be used for third-party servicers because a 
third-party servicer in the FFEL programs has different financial 
obligations and responsibilities than an institution. Many commenters 
believed that any requirements related exclusively to functions that 
are not required by FFEL programs servicers should be deleted, such as 
deferred tuition accounts.
    Discussion: The Secretary agrees with the commenters in that a 
third-party servicer should not be held responsible for meeting 
financial standards that are unrelated to the functions which it is not 
responsible to perform. The Secretary does not intend to require a 
third-party servicer that is administering aspects of the FFEL programs 
on behalf of a lender or guaranty agency to be required to meet 
financial standards with respect to items that are unrelated its 
contractual obligations with the lender or guaranty agency. The 
Secretary does not agree with the commenters that a third-party 
servicer should not otherwise meet financial standards that are similar 
to those an institution is required to meet. The Secretary believes 
that it was the intent of Congress to ensure that the FFEL programs are 
protected from any risk that may involve the servicer's financial 
status, persons responsible for administering or controlling the 
servicer, or the servicer's performance. Therefore, the Secretary has 
decided to require a third-party servicer to meet the standards for 
financial responsibility similar to those required of institutions of 
higher education.
    Changes: The Secretary has clarified the regulations so that only 
the provisions of 34 CFR 668.15(b) (1) through (4) and (6) through (9) 
will apply to a third-party servicer under this part.
    Past performance of third-party servicer or persons affiliated with 
servicer. Comments: Many commenters believed that these provisions are 
too inclusive and should only include corporate officers of only those 
third-party servicers handling Federal funds. Other commenters believed 
that the Secretary should qualify this restriction with respect to 
entities with which a third-party servicer contracts. The commenters 
suggested that only persons, entities, or officers or employees of an 
entity with which a third-party servicer contracts that act in a 
capacity that involves the administration of Title IV, HEA program 
funds should cause the servicer to not be considered financially 
responsible.
    Discussion: The Secretary believes that a third-party servicer that 
has persons affiliated with it that have been convicted of or pled nolo 
contendere to the crimes described in these sections presents an 
unreasonable risk to the integrity of the FFEL programs and places 
Federal monies at risk. However, the Secretary believes that such risk 
is evident only when a person or entity acts in a capacity that 
involves the administration of Title IV, HEA program funds.
    Changes: The Secretary has amended this provision to clarify that a 
third-party servicer that contracts with an outside entity will not be 
considered financially responsible if any person, entity, or officer or 
employee of such entity acts in a capacity that involves the 
administration of Title IV, HEA program funds.
Subpart G--Limitation, Suspension, or Termination of Lender Eligibility 
Under the FFEL Program and the PLUS Program

Section 682.701  Definitions and Terms Used in This Subpart

    Comments: Many commenters suggested that a suspension of a third-
party servicer should only apply to that servicer's ability to enter 
into new contracts with Title IV, HEA program participants.
    Discussion: The Secretary does not agree with the commenters. The 
Secretary believes that when the servicer's actions are serious enough 
to warrant suspending that servicer, it presents an unreasonable risk 
to Federal monies to allow that servicer to continue to perform FFEL 
programs functions for any Title IV, HEA program participant for the 
duration of the suspension.
    Changes: None.

Section 682.704  Emergency Action

    Comments: Many commenters suggested that an emergency action should 
become effective after a period of time has elapsed after the third-
party servicer receives notification from the Department that it 
intends to take such action.
    Discussion: The Secretary does not agree with the commenters. The 
Secretary believes that an emergency action should be taken when 
continued participation of an entity in the FFEL programs seriously 
jeopardizes the integrity of the FFEL programs and puts Federal funds 
at risk. The Secretary believes that such action should be taken 
immediately when the behavior of the entity justifies taking such 
action.
    Changes: None.

PART 690--FEDERAL PELL GRANT PROGRAM

Section 690.83  Submission of Reports

    Comments: Four commenters believed that Sec. 690.83(e) of the 
proposed regulations does not comply with the statute because, in 
implementing section 487(c)(7) of the HEA, it places undue restrictions 
on an institution seeking additional funds which the institution would 
have been eligible to receive if it had met Federal Pell Grant Program 
reporting deadlines. One commenter stated that the Secretary had unduly 
limited the scope of section 487(c)(7) of the HEA by making the 
provision of this section applicable only to funds received under the 
Federal Pell Grant Program.
    Discussion: The Secretary believes that the proposed rule in 
Sec. 690.83(e) is in accordance with the program statute. When an 
institution's auditor identifies underreported Federal Pell Grant 
expenditures beyond the normal reporting and reconciliation deadlines 
for the Federal Pell Grant Program, Sec. 690.83(e) provides a mechanism 
for an institution to receive credit for having properly expended those 
funds. Congress intended that an institution have such a mechanism 
available. However, the Secretary does not believe that Congress 
intended for such accounting recaptures of properly expended funds to 
continue in perpetuity. In order for the Department to complete its own 
accounting for the Federal Pell Grant Program appropriations, 
institutions are expected to timely reconcile the expenditures 
throughout the award year, with a final accounting made on or before 
September 30. The procedures in Sec. 690.83(e) will provide a further 
opportunity for an institution to seek credit for having properly 
expended these funds during a prior award year, but the Secretary 
believes it is appropriate to limit the circumstances and timing for 
receiving credit for such prior expenditures. Furthermore, 
Sec. 690.83(e) is limited to the Federal Pell Grant Program because the 
auditing procedure permitted under Sec. 690.83(e) results in an 
adjustment to the institution's prior year funding authorization for 
the Federal Pell Grant Program. There is no corresponding capability to 
adjust prior year funding for the other Title IV, HEA programs.
    Changes: None.

Paperwork Reduction Act of 1980

    Comments: Several commenters disagreed with the Department's 
computation of the annual public reporting and recordkeeping burden 
contained in the regulations. Another commenter questioned whether the 
Department had complied with the requirements of the Paperwork 
Reduction Act and its implementing regulations in 5 CFR part 1320. This 
commenter also believed that students should be considered in computing 
the burden.
    Discussion: The Department's computation of the annual public 
reporting and recordkeeping burden in the regulations is an estimate 
based on the best information available. The Department identified 
sections of the regulations containing information collection 
requirements in the preamble to the proposed regulations and complied 
with all applicable requirements of the Paperwork Reduction Act and its 
implementing regulations in 5 CFR part 1320. The Department appreciates 
the additional information provided by commenters regarding the 
estimated burden. To the extent that commenters identified specific 
regulatory provisions as imposing burdens or provided estimates of the 
amount of burden imposed, this information has been considered in 
developing the final regulations. The Department did not consider 
students in computing the estimated burden of the information 
collection requirements in the regulations because the regulations 
govern postsecondary institutions participating in the Title IV student 
financial assistance programs. If any burden is imposed on students, it 
is indirect and not subject to computation under the Paperwork 
Reduction Act. 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 123,485 burden hours for the 
package.
    Changes: None.

Regulatory Flexibility Act Certification

    Comments: In the NPRMs, 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.

Executive Order 12866

    These final regulations have been reviewed in accordance with 
Executive Order 12866. Under the terms of the order the Secretary has 
assessed the potential costs and benefits of this regulatory action.
    The potential costs associated with the final regulations are those 
resulting from statutory requirements and those determined by the 
Secretary to be necessary for administering the Title IV, HEA programs 
effectively and efficiently. Burdens specifically associated with 
information collection requirements were identified and explained in 
the NPRMs that were published on February 17 and February 28, 1994, 
respectively.
    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.

Invitation To Comment

    Interested persons are invited to submit comments and 
recommendations regarding these regulations. The Secretary will 
consider any comments received within the designated comment period in 
determining whether to make any changes in these rules. After reviewing 
any comments received during the comment period, the Secretary will 
publish changes to the regulations or will publish a notice in the 
Federal Register indicating that no further changes will be made.

Paperwork Reduction Act of 1980

    Sections 668.3, 668.8, 668.12, 668.13, 668.14, 668.15, 668.16, 
668.17, 668.22, 668.23, 668.25, 668.26, 668.90, 668.96, 668.113, 
appendix A to 34 CFR part 668, 682.414, 682.416, 682.711, and 690.83 
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 affect the following types of entities that 
participate in the programs authorized under Title IV of the HEA: 
Individuals, States, large and small businesses, for-profit 
institutions or other for-profit organizations, non-profit 
institutions, and public institutions. The Department needs and uses 
the information to enable the Secretary to improve the monitoring and 
accountability of institutions and third-party servicers participating 
in the Title IV, HEA programs.
    Annual public collecting, reporting, and recordkeeping burden for 
this collection of information is estimated to total 123,485 hours for 
64,695 respondents, including time for reviewing instructions, 
searching existing data sources, gathering and maintaining the data 
needed, and completing and reviewing the collection of information. 
These numbers represent aggregate totals. For further information 
contact the Department of Education contact person.
    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 Notices of Proposes Rulemaking published on February 17 and 
February 28, 1994, the Secretary requested comment on whether the 
proposed regulations in this document would require transmission of 
information that is being gathered by or is available from any other 
agency or authority of the United States.
    Based on the response to the proposed rules 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

34 CFR Part 668

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

34 CFR Part 682

    Administrative practice and procedure, Colleges and universities, 
Loan programs--education, Reporting and recordkeeping requirements, 
Student Aid, Vocational education.

34 CFR Part 690

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


(Catalog of Federal Domestic Assistance Numbers: 84.007 Federal 
Supplemental Educational Opportunity Grant Program; 84.032 Federal 
Stafford Loan Program; 84.032 Federal PLUS Program; 84.032 Federal 
Supplemental Loans for Students Program; 84.033 Federal Work-Study 
Program; 84.038 Federal Perkins Loan Program; 84.063 Federal Pell 
Grant Program; 84.069 State Student Incentive Grant Program; 84.268 
Federal Direct Student Loan Program; and 84.272 National Early 
Intervention Scholarship and Partnership Program. Catalog of Federal 
Domestic Assistance Number for the Presidential Access Scholarship 
Program has not been assigned)

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

    The Secretary amends Parts 668, 682, and 690 of Title 34 of the 
Code of Federal Regulations as follows:

PART 668--STUDENT ASSISTANCE GENERAL PROVISIONS

    1. The authority citation for part 668 is revised to read as 
follows:


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


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


Sec. 668.1  Scope.

    (a) This part establishes general rules that apply to an 
institution that participates in any student financial assistance 
program authorized by Title IV of the Higher Education Act of 1965, as 
amended (Title IV, HEA program). To the extent that an institution 
contracts with a third-party servicer to administer any aspect of the 
institution's participation in any Title IV, HEA program, the 
applicable rules in this part also apply to that servicer. An 
institution's use of a third-party servicer does not alter the 
institution's responsibility for compliance with the rules in this 
part.
    (b) * * *
    (2) A proprietary institution of higher education as defined in 34 
CFR 600.5; and
    (3) A postsecondary vocational institution as defined in 34 CFR 
600.6.
    (c) The Title IV, HEA programs include--
    (1) The Federal Pell Grant Program (20 U.S.C. 1070a et seq.; 34 CFR 
part 690);
    (2) The National Early Intervention Scholarship and Partnership 
(NEISP) Program (20 U.S.C. 1070a-21 et seq.; 34 CFR part 693);
    (3) The Presidential Access Scholarship (PAS) Program (20 U.S.C. 
1070a-31 et seq.; 34 CFR part 691);
    (4) The Federal Supplemental Educational Opportunity Grant (FSEOG) 
Program (20 U.S.C. 1070b et seq.; 34 CFR part 676);
    (5) The State Student Incentive Grant (SSIG) Program (20 U.S.C. 
1070c et seq.; 34 CFR part 692);
    (6) The Federal Stafford Loan Program (20 U.S.C. 1071 et seq.; 34 
CFR part 682);
    (7) The Federal Supplemental Loans for Students (Federal SLS) 
Program (20 U.S.C. 1078-1; 34 CFR part 682);
    (8) The Federal PLUS Program (20 U.S.C. 1078-2; 34 CFR part 682);
    (9) The Federal Consolidation Loan Program (20 U.S.C. 1078-3; 34 
CFR part 682);
    (10) The Federal Work-Study (FWS) Program (42 U.S.C. 2751 et seq.; 
34 CFR part 675);
    (11) The Federal Direct Student Loan (FDSL) Program (20 U.S.C. 
1087a et seq.; 34 CFR part 685); and
    (12) The Federal Perkins Loan Program (20 U.S.C. 1087aa et seq.; 34 
CFR part 674).

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

    3. Section 668.2 is revised to read as follows:


Sec. 668.2  General definitions.

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

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

    (b) The following definitions apply to all Title IV, HEA programs:
    Academic year: (1) A period that begins on the first day of classes 
and ends on the last day of classes or examinations and that is a 
minimum of 30 weeks (except as provided in Sec. 668.3) of instructional 
time during which, for an undergraduate educational program, a full-
time student is expected to complete at least--
    (i) Twenty-four semester or trimester hours or 36 quarter hours in 
an educational program whose length is measured in credit hours; or
    (ii) Nine hundred clock hours in an educational program whose 
length is measured in clock hours.
    (2) For purposes of this definition--
    (i) A week is a consecutive seven-day period;
    (ii)(A) For an educational program using a semester, trimester, or 
quarter system or an educational program using clock hours, the 
Secretary considers a week of instructional time to be any week in 
which at least one day of regularly scheduled instruction, 
examinations, or preparation for examinations occurs; and
    (B) For an educational program using credit hours but not using a 
semester, trimester, or quarter system, the Secretary considers a week 
of instructional time to be any week in which at least 5 days of 
regularly scheduled instruction, examinations, or preparation for 
examinations occurs; and
    (iii) Instructional time does not include periods of orientation, 
counseling, vacation, or other activity not related to class 
preparation or examinations.


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


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


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


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


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

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


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


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


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

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


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


    Federal Direct Student loan: A loan made under Title IV-D of the 
HEA after August 10, 1993.


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


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


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


    Federal Pell Grant Program: The grant program authorized by Title 
IV-A-1 of the HEA.


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


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


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


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

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


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


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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

    FFELP loan: A loan made under the FFEL programs.

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

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


                     Number of credit hours per term                    
------------------------------------------------------------------------
                                   12                                   
                                    +                                   
                     Number of clock hours per week                     
------------------------------------------------------------------------
                                   24                                   
                                                                        


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


         Number of semester or trimester hours per academic year        
------------------------------------------------------------------------
                                   24                                   
                                    +                                   
                Number of quarter hours per academic year               
------------------------------------------------------------------------
                                   36                                   
                                    +                                   
                     Number of clock hours per week                     
------------------------------------------------------------------------
                                   24                                   
                                                                        


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

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

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

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

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

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

    Initiating official: The designated department official authorized 
to begin an emergency action under 34 CFR 668.83.
    National Defense Student Loan program: The student loan program 
authorized by Title II of the National Defense Education Act of 1958.

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

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

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

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

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

    One-third of an academic year: A period that is at least one-third 
of an academic year as determined by an institution. At a minimum, one-
third of an academic year must be a period that begins on the first day 
of classes and ends on the last day of classes or examinations and is a 
minimum of 10 weeks of instructional time during which, for an 
undergraduate educational program, a full-time student is expected to 
complete at least 8 semester or trimester hours or 12 quarter hours in 
an educational program whose length is measured in credit hours or 300 
clock hours in an educational program whose length is measured in clock 
hours. For an institution whose academic year has been reduced under 
Sec. 668.3, one-third of an academic year is the pro-rated equivalent, 
as measured in weeks and credit or clock hours, of at least one-third 
of the institution's academic year.

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

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

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

    Show-cause official: The designated department official authorized 
to conduct a show-cause proceeding for an emergency action under 34 CFR 
668.83.
    State Student Incentive Grant (SSIG) program: The grant program 
authorized by Title IV-A-3 of the HEA.

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

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

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

    Two-thirds of an academic year: A period that is at least two-
thirds of an academic year as determined by an institution. At a 
minimum, two-thirds of an academic year must be a period that begins on 
the first day of classes and ends on the last day of classes or 
examinations and is a minimum of 20 weeks of instructional time during 
which, for an undergraduate educational program, a full-time student is 
expected to complete at least 16 semester or trimester hours or 24 
quarter hours in an educational program whose length is measured in 
credit hours or 600 clock hours in an educational program whose length 
is measured in clock hours. For an institution whose academic year has 
been reduced under Sec. 668.3, two-thirds of an academic year is the 
pro-rated equivalent, as measured in weeks and credit or clock hours, 
of at least two-thirds of the institution's academic year.

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

    U.S. citizen or national: (1) A citizen of the United States; or
    (2) A person defined in the Immigration and Nationality Act, 8 
U.S.C. 1101(a)(22), who, though not a citizen of the United States, 
owes permanent allegiance to the United States.

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

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

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

    4. A new Sec. 668.3 is added to part 668 to read as follows:


Sec. 668.3  Reductions in the length of an academic year.

    (a) General. (1) An institution that provides at least a 2-year or 
4-year educational program for which the institution awards an 
associate or baccalaureate degree, respectively, may request the 
Secretary to reduce the minimum period of instructional time of the 
academic year for any of the institution's educational programs to not 
less than 26 weeks.
    (2) The institution must submit its request to the Secretary in 
writing and must include in the request--
    (i) Identification of each educational program for which the 
institution requests a reduction and the requested length of its 
academic year, in weeks of instructional time, for that educational 
program. The requested length for its academic year may not be less 
than 26 weeks of instructional time;
    (ii) Information demonstrating that the institution satisfies the 
requirements of this section; and
    (iii) Any other information that the Secretary may require to 
determine whether to grant the request.
    (b) Transition period for institutions participating in at least 
one Title IV, HEA program on the effective date of this section. The 
Secretary grants, for a period not to exceed 2 years from the effective 
date of this section, the request of an institution participating in at 
least one Title IV, HEA program on the effective date of this section 
for a reduction in the minimum period of instructional time of the 
academic year if the institution--
    (1) Satisfies the requirements of paragraph (a) of this section;
    (2) Has an academic year of less than 30 weeks of instructional 
time on the effective date of these regulations;
    (3) Demonstrates that the institution awards, disburses, and 
delivers, and has since July 23, 1992, awarded, disbursed, and 
delivered, Title IV, HEA program funds in accordance with the 
definition of academic year in section 481(d) of the HEA; and
    (4) Demonstrates that the institution is in the process of changing 
to a minimum of a 30-week academic year.
    (c) Institutions in general. (1) The Secretary may grant the 
request of any institution that satisfies the requirements of paragraph 
(a) of this section. In making this determination, the Secretary 
considers circumstances including, but not limited to:
    (i) A demonstration to the satisfaction of the Secretary by the 
institution of unique circumstances that justify granting the request;
    (ii) In the case of a participating institution, demonstration that 
the institution awards, disburses, and delivers, and has since July 23, 
1992, awarded, disbursed, and delivered, Title IV, HEA program funds in 
accordance with the definition of academic year in section 481(d) of 
the HEA;
    (iii) Approval of the institution's nationally recognized 
accrediting agency or State body that legally authorizes the 
institution to provide postsecondary education, including specific 
review and approval of the length of the academic year for each 
educational program offered at the institution; and
    (iv) The number of hours of attendance and other coursework that a 
full-time student is required to complete in the academic year for each 
of the institution's educational programs.
    (2) An institution that is granted a reduction in the minimum of 30 
weeks of instructional time for an academic year in accordance with 
paragraph (c)(1) of this section and that wishes to continue to use a 
reduced number of weeks of instructional time must reapply to the 
Secretary for a reduction whenever the institution is required to apply 
to continue to participate in a Title IV, HEA program.

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

    5. Section 668.8 is revised to read as follows:


Sec. 668.8  Eligible program.

    (a) General. An eligible program is an educational program that--
    (1) Is provided by a participating institution; and
    (2) Satisfies the other relevant requirements contained in this 
section.
    (b) Definitions. For purposes of this section--
    (1) The Secretary considers the ``equivalent of an associate 
degree'' to be--
    (i) An associate degree; or
    (ii) The successful completion of at least a two-year program that 
is acceptable for full credit toward a bachelor's degree and qualifies 
a student for admission into the third year of a bachelor's degree 
program;
    (2) A week is a consecutive seven-day period; and
    (3)(i) For an educational program using a semester, trimester, or 
quarter system or an educational program using clock hours, the 
Secretary considers a week of instruction to be any week in which at 
least one day of regularly scheduled instruction, examinations, or 
preparation for examinations occurs; or
    (ii) For an educational program using credit hours but not using a 
semester, trimester, or quarter system, the Secretary considers a week 
of instruction to be any week in which at least 5 days of regularly 
scheduled instruction, examinations, or preparation for examinations 
occurs; and
    (4) Instruction does not include periods of orientation, 
counseling, vacation, or other activity not related to class 
preparation or examinations.
    (c) Institution of higher education. An eligible program provided 
by an institution of higher education must--
    (1) Lead to an associate, bachelor's, professional, or graduate 
degree;
    (2) Be at least a two-academic-year program that is acceptable for 
full credit toward a bachelor's degree; or
    (3) Be at least a one-academic-year training program that leads to 
a certificate, degree, or other recognized educational credential and 
that prepares a student for gainful employment in a recognized 
occupation.
    (d) Proprietary institution of higher education and postsecondary 
vocational institution. An eligible program provided by a proprietary 
institution of higher education or postsecondary vocational 
institution--
    (1)(i) Must require a minimum of 15 weeks of instruction, beginning 
on the first day of classes and ending on the last day of classes or 
examinations;
    (ii) Must be at least 600 clock hours, 16 semester or trimester 
hours, or 24 quarter hours;
    (iii) Must provide undergraduate training that prepares a student 
for gainful employment in a recognized occupation; and
    (iv) May admit as regular students persons who have not completed 
the equivalent of an associate degree;
    (2) Must--
    (i) Require a minimum of 10 weeks of instruction, beginning on the 
first day of classes and ending on the last day of classes or 
examinations;
    (ii) Be at least 300 clock hours, 8 semester or trimester hours, or 
12 quarter hours;
    (iii) Provide training that prepares a student for gainful 
employment in a recognized occupation; and
    (iv)(A) Be a graduate or professional program; or
    (B) Admit as regular students only persons who have completed the 
equivalent of an associate degree; or
    (3) For purposes of the Federal Stafford Loan, Federal PLUS, and 
Federal SLS programs only, must--
    (i) Require a minimum of 10 weeks of instruction, beginning on the 
first day of classes and ending on the last day of classes or 
examinations;
    (ii) Be at least 300 clock hours but less than 600 clock hours;
    (iii) Provide undergraduate training that prepares a student for 
gainful employment in a recognized occupation;
    (iv) Admit as regular students some persons who have not completed 
the equivalent of an associate degree; and
    (v) Satisfy the requirements of paragraph (e) of this section.
    (e) Qualitative factors. (1) An educational program that satisfies 
the requirements of paragraphs (d)(3)(i) through (iv) of this section 
qualifies as an eligible program only if--
    (i) The program has a substantiated completion rate of at least 70 
percent, as calculated under paragraph (f) of this section;
    (ii) The program has a substantiated placement rate of at least 70 
percent, as calculated under paragraph (g) of this section;
    (iii) The number of clock hours provided in the program does not 
exceed by more than 50 percent the minimum number of clock hours 
required for training in the recognized occupation for which the 
program prepares students, as established by the State in which the 
program is offered, if the State has established such a requirement, or 
as established by any Federal agency; and
    (iv) The program has been in existence for at least one year. The 
Secretary considers an educational program to have been in existence 
for at least one year only if an institution has been legally 
authorized to provide, and has continuously provided, the program 
during the 12 months (except for normal vacation periods and, at the 
discretion of the Secretary, periods when the institution closes due to 
a natural disaster that directly affects the institution or the 
institution's students) preceding the date on which the institution 
applied for eligibility for that program.
    (2) An institution shall substantiate the calculation of its 
completion and placement rates by having the certified public 
accountant who prepares its audit report required under Sec. 668.23 
report on the institution's calculation based on performing an 
attestation engagement in accordance with the Statements on Standards 
for Attestation Engagements of the American Institute of Certified 
Public Accountants (AICPA).
    (f) Calculation of completion rate. An institution shall calculate 
its completion rate for an educational program for any award year as 
follows:
    (1) Determine the number of regular students who were enrolled in 
the program during the award year.
    (2) Subtract from the number of students determined under paragraph 
(f)(1) of this section, the number of regular students who, during that 
award year, withdrew from, dropped out of, or were expelled from the 
program and were entitled to and actually received, in a timely manner 
in accordance with Sec. 668.22(i)(2), a refund of 100 percent of their 
tuition and fees (less any permitted administrative fee) under the 
institution's refund policy.
    (3) Subtract from the total obtained under paragraph (f)(2) of this 
section the number of students who were enrolled in the program at the 
end of that award year.
    (4) Determine the number of regular students who, during that award 
year, received within 150 percent of the published length of the 
educational program the degree, certificate, or other recognized 
educational credential awarded for successfully completing the program.
    (5) Divide the number determined under paragraph (f)(4) of this 
section by the total obtained under paragraph (f)(3) of this section.
    (g) Calculation of placement rate. (1) An institution shall 
calculate its placement rate for an educational program for any award 
year as follows:
    (i) Determine the number of students who, during the award year, 
received the degree, certificate, or other recognized educational 
credential awarded for successfully completing the program.
    (ii) Of the total obtained under paragraph (g)(1)(i) of this 
section, determine the number of students who, within 180 days of the 
day they received their degree, certificate, or other recognized 
educational credential, obtained gainful employment in the recognized 
occupation for which they were trained or in a related comparable 
recognized occupation and, on the date of this calculation, are 
employed, or have been employed, for at least 13 weeks following 
receipt of the credential from the institution.
    (iii) Divide the number of students determined under paragraph 
(g)(1)(ii) of this section by the total obtained under paragraph 
(g)(1)(i) of this section.
    (2) An institution shall document that each student described in 
paragraph (g)(1)(ii) of this section obtained gainful employment in the 
recognized occupation for which he or she was trained or in a related 
comparable recognized occupation. Examples of satisfactory 
documentation of a student's gainful employment include, but are not 
limited to--
    (i) A written statement from the student's employer;
    (ii) Signed copies of State or Federal income tax forms; and
    (iii) Written evidence of payments of Social Security taxes.
    (h) Eligibility for Federal Pell Grant and FSEOG programs. In 
addition to satisfying other relevant provisions of this section, an 
educational program qualifies as an eligible program for purposes of 
the Federal Pell Grant or FSEOG Program only if the educational program 
is an undergraduate program.
    (i) Flight training. In addition to satisfying other relevant 
provisions of this section, for a program of flight training to be an 
eligible program, it must have a current valid certification from the 
Federal Aviation Administration.
    (j) English as a second language (ESL). (1) In addition to 
satisfying the relevant provisions of this section, an educational 
program that consists solely of instruction in ESL qualifies as an 
eligible program if--
    (i) The institution admits to the program only students who the 
institution determines need the ESL instruction to use already existing 
knowledge, training, or skills; and
    (ii) The program leads to a degree, certificate, or other 
recognized educational credential.
    (2) An institution shall test each student at the end of the 
educational program to substantiate that the student has attained 
adequate proficiency in written and spoken English to use already 
existing knowledge, training, or skills. The institution shall identify 
the test or tests given to the students and the basis for the judgment 
that the student has attained the adequate proficiency.
    (3) An institution shall document its determination that ESL 
instruction is necessary to enable each student enrolled in its ESL 
program to use already existing knowledge, training, or skills with 
regard to the students that it admits to its ESL program under 
paragraph (j)(1)(i) of this section.
    (4) An ESL program that qualifies as an eligible program under this 
paragraph is eligible for purposes of the Federal Pell Grant Program 
only.
    (k) Undergraduate educational program in credit hours. If an 
institution offers an undergraduate educational program in credit 
hours, the institution must use the formula contained in paragraph (l) 
of this section to determine whether that program satisfies the 
requirements contained in paragraph (c)(3) or (d) of this section, and 
the number of credit hours in that educational program for purposes of 
the Title IV, HEA programs, unless--
    (1) The program is at least two academic years in length and 
provides an associate degree, a bachelor's degree, or a professional 
degree; or
    (2) Each course within the program is acceptable for full credit 
toward that institution's associate degree, bachelor's degree, or 
professional degree, provided that the institution's degree requires at 
least two academic years of study.
    (l) Formula. For purposes of determining whether a program 
described in paragraph (k) of this section satisfies the requirements 
contained in paragraph (c)(3) or (d) of this section, and the number of 
credit hours in that educational program with regard to the Title IV, 
HEA programs--
    (1) A semester hour must include at least 30 clock hours of 
instruction;
    (2) A trimester hour must include at least 30 clock hours of 
instruction; and
    (3) A quarter hour must include at least 20 hours of instruction.

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

    6. Section 668.9 is revised to read as follows:


Sec. 668.9  Relationship between clock hours and semester, trimester, 
or quarter hours in calculating Title IV, HEA program assistance.

    In determining the amount of Title IV, HEA program assistance that 
a student who is enrolled in a program described in Sec. 668.8(k) is 
eligible to receive, the institution shall apply the formula contained 
in Sec. 668.8(l) to determine the number of semester, trimester, or 
quarter hours in that program, if the institution measures academic 
progress in that program in semester, trimester, or quarter hours.

(Authority: 20 U.S.C. 1082, 1085, 1088, 1091, 1141)

    7. Section 668.11 is revised to read as follows:


Sec. 668.11  Scope.

    (a) This subpart establishes standards that an institution must 
meet in order to participate in any Title IV, HEA program.
    (b) Noncompliance with these standards by an institution already 
participating in any Title IV, HEA program or with applicable standards 
in this subpart by a third-party servicer that contracts with the 
institution may subject the institution or servicer, or both, to 
proceedings under subpart G of this part. These proceedings may lead to 
any of the following actions:
    (1) An emergency action.
    (2) The imposition of a fine.
    (3) The limitation, suspension, or termination of the participation 
of the institution in a Title IV, HEA program.
    (4) The limitation, suspension, or termination of the eligibility 
of the servicer to contract with any institution to administer any 
aspect of the institution's participation in a Title IV, HEA program.

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


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

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


Sec. 668.12  Application procedures.

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

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

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


Sec. 668.13  Certification procedures.

    (a) Requirements for certification. The Secretary certifies that an 
institution meets the standards of this subpart only if--
    (1) The institution is an eligible institution;
    (2) The institution meets the standards of this subpart;
    (3) Each branch campus to be included in the institution's 
participation meets the applicable standards of this subpart; and
    (4)(i) Except as provided in paragraph (a)(4)(ii) of this section, 
in the case of an institution seeking to participate for the first time 
in the Federal Pell Grant Program, the campus-based programs, the FDSL 
Program, or the Federal Stafford Loan, Federal SLS, or Federal PLUS 
Program, the institution requires the following individuals to complete 
Title IV, HEA program training provided or approved by the Secretary:
    (A) The individual designated by the institution under 
Sec. 668.16(b)(1).
    (B)(1) In the case of a for-profit institution, the chief 
administrator of the institution; or
    (2) In the case of an institution other than a for-profit 
institution, the chief administrator of the institution, or another 
administrative official of the institution designated by the chief 
administrator.
    (ii) If either one of the two individuals who is otherwise required 
to complete training under paragraph (a)(4)(i) of this section has 
previously completed Title IV, HEA program training provided or 
approved by the Secretary, the institution may elect to request an on-
site Title IV, HEA program certification review by the Secretary 
instead of requiring that individual to complete again the Title IV, 
HEA program training provided or approved by the Secretary.
    (iii) An institution may not begin participation in the applicable 
Title IV, HEA program or programs--
    (A) In the case of an institution that requires individuals to 
complete training in accordance with paragraph (a)(4)(i) of this 
section, until the individuals complete the required training; or
    (B) In the case of an institution that requests an on-site review 
in accordance with paragraph (a)(4)(ii) of this section, until the 
Secretary conducts the review and notifies the institution that it is 
in compliance with Title IV, HEA program requirements.
    (b) Period of participation. (1) If the Secretary certifies that an 
institution meets the standards of this subpart, the Secretary also 
specifies the period for which the institution may participate in a 
Title IV, HEA program. An institution's period of participation expires 
four years after the date that the Secretary certifies that the 
institution meets the standards of this subpart, except that the 
Secretary may specify a shorter period.
    (2) Provided that an institution has submitted an application for a 
renewal of certification that is materially complete at least 90 days 
prior to the expiration of its current period of participation, the 
institution's existing certification will be extended on a month to 
month basis following the expiration of the institution's period of 
participation until the end of the month in which the Secretary issues 
a decision on the application for recertification.
    (c) Provisional certification. (1) The Secretary may provisionally 
certify an institution if--
    (i) The institution seeks initial participation in a Title IV, HEA 
program;
    (ii) The institution is an eligible institution that has undergone 
a change in ownership that results in a change in control according to 
the provisions of 34 CFR part 600;
    (iii) The institution is a participating institution--
    (A) That is applying for a certification that the institution meets 
the standards of this subpart;
    (B) That the Secretary determines has jeopardized its ability to 
perform its financial responsibilities by not meeting the factors of 
financial responsibility under Sec. 668.15 or the standards of 
administrative capability under Sec. 668.16; and
    (C) Whose participation has been limited or suspended under subpart 
G of this part, or voluntarily enters into provisional certification;
    (iv) The institution seeks a renewal of participation in a Title 
IV, HEA program after the expiration of a prior period of participation 
in that program; or
    (v) The institution is a participating institution that was 
accredited or preaccredited by a nationally recognized accrediting 
agency on the day before the Secretary withdrew the Secretary's 
recognition of that agency according to the provisions contained in 34 
CFR part 603.
    (2) If the Secretary provisionally certifies an institution, the 
Secretary also specifies the period for which the institution may 
participate in a Title IV, HEA program. Except as provided in 
paragraphs (c) (3) and (4) of this section, a provisionally certified 
institution's period of participation expires--
    (i) Not later than the end of the first complete award year 
following the date on which the Secretary provisionally certified the 
institution under paragraph (c)(1)(i) of this section;
    (ii) Not later than the end of the third complete award year 
following the date on which the Secretary provisionally certified the 
institution under paragraph (c)(1)(ii), (iii), (iv), or (v) or (e)(2) 
of this section; and
    (iii) If the Secretary provisionally certified the institution 
under paragraph (c)(1)(vi) of this section, not later than 18 months 
after the date that the Secretary withdrew recognition from the 
institution's nationally recognized accrediting agency.
    (3) Notwithstanding the maximum periods of participation provided 
for in paragraph (c)(2) of this section, if the Secretary provisionally 
certifies an institution, the Secretary may specify a shorter period of 
participation for that institution.
    (4) For the purposes of this section, ``provisional certification'' 
means that the Secretary certifies that an institution has demonstrated 
to the Secretary's satisfaction that the institution--
    (i) Is capable of meeting the standards of this subpart within a 
specified period; and
    (ii) Is able to meet the institution's responsibilities under its 
program participation agreement, including compliance with any 
additional conditions specified in the institution's program 
participation agreement that the Secretary requires the institution to 
meet in order for the institution to participate under provisional 
certification.
    (d) Requirements for provisional certification to participate on a 
limited basis for institutions that are not financially responsible. 
Notwithstanding paragraph (c)(1) of this section, the Secretary does 
not provisionally certify an institution that--
    (1) Fails to meet the general standards of financial responsibility 
in Sec. 668.15(b) or the exceptions to the general standards of 
financial responsibility in Sec. 668.15(d), unless the institution--
    (i) Demonstrates to the satisfaction of the Secretary that it has 
sufficient financial and administrative resources to participate in the 
Title IV, HEA programs under a funding arrangement other than the 
Department of Education's standard advance funding arrangement;
    (ii) Submits to the Secretary a letter of credit in an amount and 
form acceptable to the Secretary equal to not less than 10 percent of 
the Title IV, HEA program funds received by the institution during the 
last complete award year for which figures are available; and
    (iii) Demonstrates that, during the preceding two award years, it 
has met all of its financial obligations and was current on its debt 
payments in accordance with the provisions in Sec. 668.15(b) (3) and 
(4); or
    (2) Is not financially responsible under Sec. 668.15(c)(2), or is 
required, and has been required at least one other time during the 
five-year period preceding the Secretary's decision, to certify the 
institution provisionally, to comply with paragraph (d)(1) of this 
section, unless--
    (i) The institution, or one or more persons or entities that the 
Secretary determines under the provisions of Sec. 668.15 exercise 
substantial control over the institution, or both, submit to the 
Secretary financial guarantees in an amount determined by the Secretary 
to be sufficient to satisfy the institution's potential liabilities 
arising from the institution's participation in the Title IV, HEA 
programs; and
    (ii) One or more persons or entities that the Secretary determines 
under the provisions of Sec. 668.15 exercise substantial control over 
the institution agree to be jointly or severally liable for any 
liabilities arising from the institution's participation in the Title 
IV, HEA programs and civil and criminal monetary penalties authorized 
under Title IV of the HEA.
    (e) Consequences for an institution whose State does not 
participate in the State Postsecondary Review program. Notwithstanding 
any other provision of this section, if an institution or branch campus 
of the institution is in a State that does not participate in the State 
Postsecondary Review Program (34 CFR part 667), the Secretary, with 
regard to any particular Title IV, HEA program--
    (1) Does not certify that the institution or branch campus, as 
applicable meets the standards of this subpart; and
    (2) May provisionally certify the institution or branch campus, as 
applicable, unless--
    (i) The institution or branch campus, as applicable, seeks initial 
participation in that program; or
    (ii) The institution has undergone a change of ownership that 
results in a change of control, as determined under 34 CFR 600.31.
    (f) Revocation of provisional certification. (1) If, before the 
expiration of a provisionally certified institution's period of 
participation in a Title IV, HEA program, the Secretary determines that 
the institution is unable to meet its responsibilities under its 
program participation agreement, the Secretary may revoke the 
institution's provisional certification for participation in that 
program.
    (2)(i) If the Secretary revokes the provisional certification of an 
institution under paragraph (f)(1) of this section, the Secretary sends 
the institution a notice by certified mail, return receipt requested. 
The Secretary also may transmit the notice by other, more expeditious 
means, if practical.
    (ii) The revocation takes effect on the date that the Secretary 
mails the notice to the institution.
    (iii) The notice states the basis for the revocation, the 
consequences of the revocation to the institution, and that the 
institution may request the Secretary to reconsider the revocation. The 
consequences of a revocation are described in Sec. 668.26.
    (3)(i) An institution may request reconsideration of a revocation 
under this section by submitting to the Secretary, within 20 days of 
the institution's receipt of the Secretary's notice, written evidence 
that the revocation is unwarranted. The institution must file the 
request with the Secretary by hand-delivery, mail, or facsimile 
transmission.
    (ii) The filing date of the request is the date on which the 
request is--
    (A) Hand-delivered;
    (B) Mailed; or
    (C) Sent by facsimile transmission.
    (iii) Documents filed by facsimile transmission must be transmitted 
to the Secretary in accordance with instructions provided by the 
Secretary in the notice of revocation. An institution filing by 
facsimile transmission is responsible for confirming that a complete 
and legible copy of the document was received by the Secretary.
    (iv) The Secretary discourages the use of facsimile transmission 
for documents longer than five pages.
    (4)(i) The designated department official making the decision 
concerning an institution's request for reconsideration of a revocation 
is different from, and not subject to supervision by, the official who 
initiated the revocation of the institution's provisional 
certification. The deciding official promptly considers an 
institution's request for reconsideration of a revocation and notifies 
the institution, by certified mail, return receipt requested, of the 
final decision. The Secretary also may transmit the notice by other, 
more expeditious means, if practical.
    (ii) If the Secretary determines that the revocation is warranted, 
the Secretary's notice informs the institution that the institution may 
apply for reinstatement of participation only after the later of the 
expiration of--
    (A) Eighteen months after the effective date of the revocation; or
    (B) A debarment or suspension of the institution under Executive 
Order (E.O.) 12549 (3 CFR, 1986 comp., p. 189) or the Federal 
Acquisition Regulations, 48 CFR part 9, subpart 9.4.
    (iii) If the Secretary determines that the revocation of the 
institution's provisional certification is unwarranted, the Secretary's 
notice informs the institution that the institution's provisional 
certification is reinstated, effective on the date that the Secretary's 
original revocation notice was mailed, for a specified period of time.
    (5)(i) The mailing date of a notice of revocation or a request for 
reconsideration of a revocation is the date evidenced on the original 
receipt of mailing from the U.S. Postal Service.
    (ii) The date on which a request for reconsideration of a 
revocation is submitted is--
    (A) If the request was sent by a delivery service other than the 
U.S. Postal Service, the date evidenced on the original receipt by that 
service; and
    (B) If the request was sent by facsimile transmission, the date 
that the document is recorded as received by facsimile equipment that 
receives the transmission.

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

    11. Newly redesignated Sec. 668.14 is revised to read as follows:


Sec. 668.14  Program participation agreement.

    (a)(1) An institution may participate in any Title IV, HEA program, 
other than the SSIG and NEISP programs, only if the institution enters 
into a written program participation agreement with the Secretary, on a 
form approved by the Secretary. A program participation agreement 
conditions the initial and continued participation of an eligible 
institution in any Title IV, HEA program upon compliance with the 
provisions of this part, the individual program regulations, and any 
additional conditions specified in the program participation agreement 
that the Secretary requires the institution to meet.
    (2) An institution's program participation agreement applies to 
each branch campus and other location of the institution that meets the 
applicable requirements of this part unless otherwise specified by the 
Secretary.
    (b) By entering into a program participation agreement, an 
institution agrees that--
    (1) It will comply with all statutory provisions of or applicable 
to Title IV of the HEA, all applicable regulatory provisions prescribed 
under that statutory authority, and all applicable special 
arrangements, agreements, and limitations entered into under the 
authority of statutes applicable to Title IV of the HEA, including the 
requirement that the institution will use funds it receives under any 
Title IV, HEA program and any interest or other earnings thereon, 
solely for the purposes specified in and in accordance with that 
program;
    (2) As a fiduciary responsible for administering Federal funds, if 
the institution is permitted to request funds under a Title IV, HEA 
program advance payment method, the institution will time its requests 
for funds under the program to meet the institution's immediate Title 
IV, HEA program needs;
    (3) It will not request from or charge any student a fee for 
processing or handling any application, form, or data required to 
determine a student's eligibility for, and amount of, Title IV, HEA 
program assistance;
    (4) It will establish and maintain such administrative and fiscal 
procedures and records as may be necessary to ensure proper and 
efficient administration of funds received from the Secretary or from 
students under the Title IV, HEA programs, together with assurances 
that the institution will provide, upon request and in a timely manner, 
information relating to the administrative capability and financial 
responsibility of the institution to--
    (i) The Secretary;
    (ii) The State postsecondary review entity designated under 34 CFR 
part 667 for the State or States in which the institution or any of the 
institution's branch campuses or other locations are located if the 
institution was referred by the Secretary under 34 CFR 667.5;
    (iii) A guaranty agency, as defined in 34 CFR part 682, that 
guarantees loans made under the Federal Stafford Loan, Federal PLUS, 
and Federal SLS programs for attendance at the institution or any of 
the institution's branch campuses or other locations;
    (iv) The nationally recognized accrediting agency that accredits or 
preaccredits the institution or any of the institution's branch 
campuses, other locations, or educational programs;
    (v) The State agency that legally authorizes the institution and 
any branch campus or other location of the institution to provide 
postsecondary education; and
    (vi) In the case of a public postsecondary vocational educational 
institution that is approved by a State agency recognized for the 
approval of public postsecondary vocational education, that State 
agency;
    (5) It will comply with the provisions of Sec. 668.15 relating to 
factors of financial responsibility;
    (6) It will comply with the provisions of Sec. 668.16 relating to 
standards of administrative capability;
    (7) It will submit reports to the Secretary and, in the case of an 
institution participating in the Federal Stafford Loan, Federal PLUS, 
Federal SLS, or the Federal Perkins Loan Program, to holders of loans 
made to the institution's students under that program at such times and 
containing such information as the Secretary may reasonably require to 
carry out the purpose of the Title IV, HEA programs;
    (8) It will not provide any statement to any student or 
certification to any lender under the Federal Stafford Loan, Federal 
PLUS, or Federal SLS Program that qualifies the student for a loan or 
loans in excess of the amount that the student is eligible to borrow in 
accordance with sections 425(a), 428(a)(2), 428(b)(1) (A) and (B), and 
428H of the HEA;
    (9) It will comply with the requirements of subpart D of this part 
concerning institutional and financial assistance information for 
students and prospective students;
    (10) In the case of an institution that advertises job placement 
rates as a means of attracting students to enroll in the institution, 
it will make available to prospective students, at or before the time 
that those students apply for enrollment--
    (i) The most recent available data concerning employment 
statistics, graduation statistics, and any other information necessary 
to substantiate the truthfulness of the advertisements; and
    (ii) Relevant State licensing requirements of the State in which 
the institution is located for any job for which an educational program 
offered by the institution is designed to prepare those prospective 
students;
    (11) In the case of an institution participating in the Federal 
Stafford Loan, Federal PLUS, or Federal SLS Program, the institution 
will inform all eligible borrowers, as defined in 34 CFR part 682, 
enrolled in the institution about the availability and eligibility of 
those borrowers for State grant assistance from the State in which the 
institution is located, and will inform borrowers from another State of 
the source for further information concerning State grant assistance 
from that State;
    (12) It will provide the certifications described in paragraph (c) 
of this section;
    (13) In the case of an institution whose students receive financial 
assistance pursuant to section 484(d) of the HEA, the institution will 
make available to those students a program proven successful in 
assisting students in obtaining the recognized equivalent of a high 
school diploma;
    (14) It will not deny any form of Federal financial aid to any 
eligible student solely on the grounds that the student is 
participating in a program of study abroad approved for credit by the 
institution;
    (15) In the case of an institution seeking to participate for the 
first time in the Federal Stafford Loan, Federal PLUS, and Federal SLS 
programs, the institution has included a default management plan as 
part of its application under Sec. 668.12 for participation in those 
programs and will use the plan for at least two years from the date of 
that application. The Secretary considers the requirements of this 
paragraph to be satisfied by a default management plan developed in 
accordance with the default reduction measures described in appendix D 
to this part;
    (16) In the case of an institution that changes ownership that 
results in a change of control, or that changes its status as a main 
campus, branch campus, or an additional location, the institution will, 
to participate in the Federal Stafford Loan, Federal PLUS, and Federal 
SLS programs, develop a default management plan for approval by the 
Secretary and implement the plan for at least two years after the 
change in control or status. The Secretary considers the requirements 
of this paragraph to be satisfied by a default management plan 
developed in accordance with the default reduction measures described 
in appendix D to this part;
    (17) The Secretary, guaranty agencies and lenders as defined in 34 
CFR part 682, nationally recognized accrediting agencies, the Secretary 
of Veterans Affairs, State postsecondary review entities designated 
under 34 CFR part 667, State agencies recognized under 34 CFR part 603 
for the approval of public postsecondary vocational education, and 
State agencies that legally authorize institutions and branch campuses 
or other locations of institutions to provide postsecondary education, 
have the authority to share with each other any information pertaining 
to the institution's eligibility for or participation in the Title IV, 
HEA programs or any information on fraud and abuse;
    (18) It will not knowingly--
    (i) Employ in a capacity that involves the administration of the 
Title IV, HEA programs or the receipt of funds under those programs, an 
individual who has been convicted of, or has pled nolo contendere or 
guilty to, a crime involving the acquisition, use, or expenditure of 
Federal, State, or local government funds, or has been administratively 
or judicially determined to have committed fraud or any other material 
violation of law involving Federal, State, or local government funds;
    (ii) Contract with an institution or third-party servicer that has 
been terminated under section 432 of the HEA for a reason involving the 
acquisition, use, or expenditure of Federal, State, or local government 
funds, or that has been administratively or judicially determined to 
have committed fraud or any other material violation of law involving 
Federal, State, or local government funds; or
    (iii) Contract with or employ any individual, agency, or 
organization that has been, or whose officers or employees have been--
    (A) Convicted of, or pled nolo contendere or guilty to, a crime 
involving the acquisition, use, or expenditure of Federal, State, or 
local government funds; or
    (B) Administratively or judicially determined to have committed 
fraud or any other material violation of law involving Federal, State, 
or local government funds;
    (19) It will complete, in a timely manner and to the satisfaction 
of the Secretary, surveys conducted as a part of the Integrated 
Postsecondary Education Data System (IPEDS) or any other Federal 
collection effort, as designated by the Secretary, regarding data on 
postsecondary institutions;
    (20) In the case of an institution that offers athletically related 
student aid, it will comply with the provisions of paragraph (d) of 
this section;
    (21) It will not impose any penalty, including, but not limited to, 
the assessment of late fees, the denial of access to classes, 
libraries, or other institutional facilities, or the requirement that 
the student borrow additional funds for which interest or other charges 
are assessed, on any student because of the student's inability to meet 
his or her financial obligations to the institution as a result of the 
delayed disbursement of the proceeds of a Title IV, HEA program loan 
due to compliance with statutory and regulatory requirements of or 
applicable to the Title IV, HEA programs, or delays attributable to the 
institution;
    (22) It will not provide, nor contract with any entity that 
provides, any commission, bonus, or other incentive payment based 
directly or indirectly on success in securing enrollments or financial 
aid to any persons or entities engaged in any student recruiting or 
admission activities or in making decisions regarding the awarding of 
student financial assistance, except that this requirement shall not 
apply to the recruitment of foreign students residing in foreign 
countries who are not eligible to receive Federal student assistance. 
This provision does not apply to the giving of token gifts to students 
or alumni for referring students for admission to the institution as 
long as: The gift is not in the form of money, check, or money order; 
no more than one such gift is given to any student or alumnus; and the 
gift has a value of not more than $25;
    (23) It will meet the requirements established pursuant to part H 
of Title IV of the HEA by the Secretary, State postsecondary review 
entities designated under 34 CFR part 667, and nationally recognized 
accrediting agencies;
    (24) It will comply with the institutional refund policy 
established in Sec. 668.22;
    (25) It is liable for all--
    (i) Improperly spent or unspent funds received under the Title IV, 
HEA programs, including any funds administered by a third-party 
servicer; and
    (ii) Refunds that the institution or its servicer may be required 
to make; and
    (26) If the stated objectives of an educational program of the 
institution are to prepare a student for gainful employment in a 
recognized occupation, the institution will--
    (i) Demonstrate a reasonable relationship between the length of the 
program and entry level requirements for the recognized occupation for 
which the program prepares the student. The Secretary considers the 
relationship to be reasonable if the number of clock hours provided in 
the program does not exceed by more than 50 percent the minimum number 
of clock hours required for training in the recognized occupation for 
which the program prepares the student, as established by the State in 
which the program is offered, if the State has established such a 
requirement, or as established by any Federal agency; and
    (ii) Establish the need for the training for the student to obtain 
employment in the recognized occupation for which the program prepares 
the student.
    (c) In order to participate in any Title IV, HEA program (other 
than the SSIG and NEISP programs), the institution must certify that 
it--
    (1) Has in operation a drug abuse prevention program that the 
institution has determined to be accessible to any officer, employee, 
or student at the institution; and
    (2)(i) Has established a campus security policy in accordance with 
section 485(f) of the HEA; and
    (ii) Has complied with the disclosure requirements of Sec. 668.47 
as required by section 485(f) of the HEA.
    (d) In order to participate in any Title IV, HEA program (other 
than the SSIG and NEISP programs), an institution that offers 
athletically related student aid must--
    (1) Cause an annual compilation, independently audited not less 
often than every 3 years, to be prepared within 6 months after the end 
of the institution's fiscal year, of--
    (i) The revenues derived by the institution from the institution's 
intercollegiate athletics activities, according to the following 
categories:
    (A) Total revenues.
    (B) Revenues from football.
    (C) Revenues from men's basketball.
    (D) Revenues from women's basketball.
    (E) Revenues from all other men's sports combined.
    (F) Revenues from all other women's sports combined;
    (ii) Expenses made by the institution for the institution's 
intercollegiate athletics activities, according to the following 
categories:
    (A) Total expenses.
    (B) Expenses attributable to football.
    (C) Expenses attributable to men's basketball.
    (D) Expenses attributable to women's basketball.
    (E) Expenses attributable to all other men's sports combined.
    (F) Expenses attributable to all other women's sports combined; and
    (iii) The total revenues and operating expenses of the institution; 
and
    (2) Make the compilation and, where allowable by State law, the 
results of the audits required by paragraph (d)(1) of this section 
available for inspection by the Secretary and the public.
    (e) For the purposes of paragraph (d) of this section--
    (1) Revenues from intercollegiate athletics activities allocable to 
a sport shall include without limitation gate receipts, broadcast 
revenues and other conference distributions, appearance guarantees and 
options, concessions, and advertising;
    (2) Revenues such as student activities fees, alumni contributions, 
and investment interest income that are not allocable to a sport shall 
be included in the calculation of total revenues only;
    (3) Expenses for intercollegiate athletics activities allocable to 
a sport shall include without limitation grants-in-aid, salaries, 
travel, equipment, and supplies; and
    (4) Expenses such as general and administrative overhead that are 
not allocable to a sport shall be included in the calculation of total 
expenses only.
    (f)(1) A program participation agreement becomes effective on the 
date that the Secretary signs the agreement.
    (2) A new program participation agreement supersedes any prior 
program participation agreement between the Secretary and the 
institution.
    (g)(1) Except as provided in paragraphs (h) and (i) of this 
section, the Secretary terminates a program participation agreement 
through the proceedings in subpart G of this part.
    (2) An institution may terminate a program participation agreement.
    (3) If the Secretary or the institution terminates a program 
participation agreement under paragraph (g) of this section, the 
Secretary establishes the termination date.
    (h) An institution's program participation agreement automatically 
expires on the date that--
    (1) The institution changes ownership that results in a change in 
control as determined by the Secretary under 34 CFR part 600; or
    (2) The institution's participation ends under the provisions of 
Sec. 668.26(a) (1), (2), (4), or (7).
    (i) An institution's program participation agreement no longer 
applies to or covers a location of the institution as of the date on 
which that location ceases to be a part of the participating 
institution.

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

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


Sec. 668.15  Factors of financial responsibility.

    (a) General. To begin and to continue to participate in any Title 
IV, HEA program, an institution must demonstrate to the Secretary that 
the institution is financially responsible under the requirements 
established in this section.
    (b) General standards of financial responsibility. In general, the 
Secretary considers an institution to be financially responsible only 
if it--
    (1) Is providing the services described in its official 
publications and statements;
    (2) Is providing the administrative resources necessary to comply 
with the requirements of this subpart;
    (3) Is meeting all of its financial obligations, including but not 
limited to--
    (i) Refunds that it is required to make; and
    (ii) Repayments to the Secretary for liabilities and debts incurred 
in programs administered by the Secretary;
    (4) Is current in its debt payments. The institution is not 
considered current in its debt payments if--
    (i) The institution is in violation of any existing loan agreement 
at its fiscal year end, as disclosed in a note to its audited financial 
statement; or
    (ii) the institution fails to make a payment in accordance with 
existing debt obligations for more than 120 days, and at least one 
creditor has filed suit to recover those funds;
    (5)(i) Maintains, at all times, a minimum cash reserve for the 
repayment of refunds equal to at least one quarter of the total dollar 
amount of refunds paid by the institution in the previous fiscal year. 
The cash reserve must be maintained in a cash reserve fund, consisting 
of--
    (A) A cash deposit in a federally insured bank account; or
    (B) U.S. Treasury securities backed by the full faith and credit of 
the United States of America, having an original maturity date of three 
months or less; and
    (ii) Provides, in notes to its audited financial statement, 
information showing the balance maintained in the fund for the 
institution's two most recently completed fiscal years, the 
institution's refund expenditures for it's previous completed fiscal 
year, and any accrued refunds at each fiscal year end;
    (6) Has not had, as part of the audit report for the institution's 
most recently completed fiscal year--
    (i) A statement by the accountant expressing substantial doubt 
about the institution's ability to continue as a going concern; or
    (ii) A disclaimed or adverse opinion by the accountant;
    (7) For a for-profit institution--
    (i)(A) Demonstrates at the end of its latest fiscal year, an acid 
test ratio of at least 1:1. For purposes of this section, the acid test 
ratio shall be calculated by adding cash and cash equivalents to 
current accounts receivable and dividing the sum by total current 
liabilities. The calculation of the acid test ratio shall exclude all 
unsecured or uncollateralized related party receivables. Should 
application of paragraph (b)(5) of this section cause a portion of the 
institution's cash reserves to be classified as a noncurrent asset, 
those cash reserves may be included in cash equivalents in calculating 
the institution's acid test ratio;
    (B) Has not had operating losses over both of its 2 latest fiscal 
years that result in a decrease in tangible net worth in excess of 10 
percent of the institution's tangible net worth at the beginning of the 
first year of the 2-year period. The Secretary may calculate any 
operating loss for an institution by excluding from net income: 
extraordinary gains or losses; income or losses from discontinued 
operations; prior period adjustment; and, the cumulative effect of 
changes in accounting principle. For purposes of this section, the 
calculation of tangible net worth shall exclude all assets defined as 
intangible in accordance with generally accepted accounting principles; 
and
    (C) Had, for its latest fiscal year, a positive tangible net worth. 
In applying this standard, a positive tangible net worth occurs when 
the institution's tangible assets exceed its liabilities. The 
calculation of tangible net worth shall exclude all assets classified 
as intangible in accordance with generally accepted accounting 
principles; or
    (ii) Demonstrates to the satisfaction of the Secretary that it has 
currently issued and outstanding debt obligations that are (without 
insurance, guarantee, or credit enhancement) listed at or above the 
second highest rating level of credit quality given by a nationally 
recognized statistical rating organization;
    (8) For a nonprofit institution--
    (i)(A) Prepares a classified statement of financial position in 
accordance with generally accepted accounting principles or provides 
the required information in notes to the audited financial statements;
    (B) Demonstrates at the end of its latest fiscal year, an acid test 
ratio of at least 1:1. The acid test ratio shall be calculated by 
adding cash and cash equivalents to current accounts receivable and 
dividing the sum by total current liabilities. The calculation of the 
acid test ratio shall exclude all unsecured or uncollateralized related 
party receivables. Should application of paragraph (b)(5) of this 
section cause a portion of the institution's cash reserves to be 
classified as a non-current asset, those cash reserves may be included 
in cash equivalents in calculating the institution's acid test ratio;
    (C)(1) Has, at the end of its latest fiscal year, a positive 
unrestricted current fund balance or positive unrestricted net assets. 
In calculating the unrestricted current fund balance or the 
unrestricted net assets for an institution, the Secretary may include 
funds that are temporarily restricted in use by the institution's 
governing body that can be transferred to the current unrestricted fund 
or added to net unrestricted assets at the discretion of the governing 
body; or
    (2) Has not had, an excess of current fund expenditures over 
current fund revenues over both of its 2 latest fiscal years that 
results in a decrease exceeding 10 percent in either the unrestricted 
current fund balance or the unrestricted net assets at the beginning of 
the first year of the 2-year period. The Secretary may exclude from net 
changes in fund balances for the operating loss calculation: 
Extraordinary gains or losses; income or losses from discontinued 
operations; prior period adjustment; and the cumulative effect of 
changes in accounting principle. In calculating the institution's 
unrestricted current fund balance or the unrestricted net assets, the 
Secretary may include funds that are temporarily restricted in use by 
the institution's governing body that can be transferred to the current 
unrestricted fund or added to net unrestricted assets at the discretion 
of the governing body; or
    (ii) Demonstrates to the satisfaction of the Secretary that it has 
currently issued and outstanding debt obligations which are (without 
insurance, guarantee, or credit enhancement) listed at or above the 
second highest rating level of credit quality given by a nationally 
recognized statistical rating organization.
    (9) For a public institution--
    (i) Has its liabilities backed by the full faith and credit of a 
State, or by an equivalent governmental entity;
    (ii) Has a positive current unrestricted fund balance if reporting 
under the Single Audit Act;
    (iii) Has a positive unrestricted current fund in the State's 
Higher Education Fund, as presented in the general purpose financial 
statements;
    (iv) Submits to the Secretary, a statement from the State Auditor 
General that the institution has, during the past year, met all of its 
financial obligations, and that the institution continues to have 
sufficient resources to meet all of its financial obligations; or
    (v) Demonstrates to the satisfaction of the Secretary that it has 
currently issued and outstanding debt obligations which are (without 
insurance, guarantee, or credit enhancement) listed at or above the 
second highest rating level of credit quality given by a nationally 
recognized statistical rating organization.
    (c) Past performance of an institution or persons affiliated with 
an institution. An institution is not financially responsible if--
    (1) A person who exercises substantial control over the institution 
or any member or members of the person's family alone or together--
    (i)(A) Exercises or exercised substantial control over another 
institution or a third-party servicer that owes a liability for a 
violation of a Title IV, HEA program requirement; or
    (B) Owes a liability for a violation of a Title IV, HEA program 
requirement; and
    (ii) That person, family member, institution, or servicer is not 
making payments in accordance with an agreement to repay that 
liability; or
    (2) The institution has--
    (i) Been limited, suspended, terminated, or entered into a 
settlement agreement to resolve a limitation, suspension, or 
termination action initiated by the Secretary or a guaranty agency (as 
defined in 34 CFR part 682) within the preceding five years;
    (ii) Had--
    (A) An audit finding, during its two most recent audits of its 
conduct of the Title IV, HEA programs, that resulted in the 
institution's being required to repay an amount greater than five 
percent of the funds that the institution received under the Title IV, 
HEA programs for any award year covered by the audit; or
    (B) A program review finding, during its two most recent program 
reviews, of its conduct of the Title IV, HEA programs that resulted in 
the institution's being required to repay an amount greater than five 
percent of the funds that the institution received under the Title IV, 
HEA programs for any award year covered by the program review;
    (iii) Been cited during the preceding five years for failure to 
submit acceptable audit reports required under this part or individual 
Title IV, HEA program regulations in a timely fashion; or
    (iv) Failed to resolve satisfactorily any compliance problems 
identified in program review or audit reports based upon a final 
decision of the Secretary issued pursuant to subpart G or subpart H of 
this part.
    (d) Exceptions to the general standards of financial 
responsibility. (1) An institution is not required to meet the standard 
in paragraph (b)(5) of this section if the Secretary determines that 
the institution--
    (i) Is located in, and is legally authorized to operate within, a 
State that has a tuition recovery fund that is acceptable to the 
Secretary and ensures that the institution is able to pay all required 
refunds; and
    (ii) Contributes to that tuition recovery fund.
    (2) The Secretary considers an institution to be financially 
responsible, even if the institution is not otherwise financially 
responsible under paragraphs (b)(1) through (4) and (b)(6) through (9) 
of this section, if the institution--
    (i) Submits to the Secretary an irrevocable letter of credit that 
is acceptable and payable to the Secretary equal to not less than one-
half of the Title IV, HEA program funds received by the institution 
during the last complete award year for which figures are available; or
    (ii) Establishes to the satisfaction of the Secretary, with the 
support of a financial statement submitted in accordance with paragraph 
(e) of this section, that the institution has sufficient resources to 
ensure against its precipitous closure, including the ability to meet 
all of its financial obligations (including refunds of institutional 
charges and repayments to the Secretary for liabilities and debts 
incurred in programs administered by the Secretary). The Secretary 
considers the institution to have sufficient resources to ensure 
against precipitous closure only if--
    (A) The institution formerly demonstrated financial responsibility 
under the standards of financial responsibility in its preceding 
audited financial statement (or, if no prior audited financial 
statement was requested by the Secretary, demonstrates in conjunction 
with its current audit that it would have satisfied this requirement), 
and that its most recent audited financial statement indicates that--
    (1) All taxes owed by the institution are current;
    (2) The institution's net income, or a change in total net assets, 
before extraordinary items and discontinued operations, has not 
decreased by more than 10 percent from the prior fiscal year, unless 
the institution demonstrates that the decreased net income shown on the 
current financial statement is a result of downsizing pursuant to a 
management-approved business plan;
    (3) Loans and other advances to related parties have not increased 
from the prior fiscal year unless such increases were secured and 
collateralized, and do not exceed 10 percent of the prior fiscal year's 
working capital of the institution;
    (4) The equity of a for-profit institution, or the total net assets 
of a non-profit institution, have not decreased by more than 10 percent 
of the prior year's total equity;
    (5) Compensation for owners or other related parties (including 
bonuses, fringe benefits, employee stock option allowances, 401k 
contributions, deferred compensation allowances) has not increased from 
the prior year at a rate higher than for all other employees;
    (6) The institution has not materially leveraged its assets or 
income by becoming a guarantor on any new loan or obligation on behalf 
of any related party;
    (7) All obligations owed to the institution by related parties are 
current, and that the institution has demanded and is receiving payment 
of all funds owed from related parties that are payable upon demand. 
For purposes of this section, a person does not become a related party 
by attending an institution as a student;
    (B) There have been no material findings in the institution's 
latest compliance audit of its administration of the Title IV HEA 
programs; and
    (C) There are no pending administrative or legal actions being 
taken against the institution by the Secretary, any other Federal 
agency, the institution's nationally recognized accrediting agency, or 
any State entity.
    (3) An institution is not required to meet the acid test ratio in 
paragraph (b)(7)(i)(A) or (b)(8)(i)(B) of this section if the 
institution is an institution that provides a 2-year or 4-year 
educational program for which the institution awards an associate or 
baccalaureate degree that demonstrates to the satisfaction of the 
Secretary that--
    (i) There is no reasonable doubt as to its continued solvency and 
ability to deliver quality educational services;
    (ii) It is current in its payment of all current liabilities, 
including student refunds, repayments to the Secretary, payroll, and 
payment of trade creditors and withholding taxes; and
    (iii) It has substantial equity in institution-occupied facilities, 
the acquisition of which was the direct cause of its failure to meet 
the acid test ratio requirement.
    (4) The Secretary may determine an institution to be financially 
responsible even if the institution is not otherwise financially 
responsible under paragraph (c)(1) of this section if--
    (i) The institution notifies the Secretary, in accordance with 34 
CFR 600.30, that the person referenced in paragraph (c)(1) of this 
section exercises substantial control over the institution; and
    (ii)(A) The person repaid to the Secretary a portion of the 
applicable liability, and the portion repaid equals or exceeds the 
greater of--
    (1) The total percentage of the ownership interest held in the 
institution or third-party servicer that owes the liability by that 
person or any member or members of that person's family, either alone 
or in combination with one another;
    (2) The total percentage of the ownership interest held in the 
institution or servicer that owes the liability that the person or any 
member or members of the person's family, either alone or in 
combination with one another, represents or represented under a voting 
trust, power of attorney, proxy, or similar agreement; or
    (3) Twenty-five percent, if the person or any member of the 
person's family is or was a member of the board of directors, chief 
executive officer, or other executive officer of the institution or 
servicer that owes the liability, or of an entity holding at least a 25 
percent ownership interest in the institution that owes the liability;
    (B) The applicable liability described in paragraph (c)(1) of this 
section is currently being repaid in accordance with a written 
agreement with the Secretary; or
    (C) The institution demonstrates why--
    (1) The person who exercises substantial control over the 
institution should nevertheless be considered to lack that control; or
    (2) The person who exercises substantial control over the 
institution and each member of that person's family nevertheless does 
not or did not exercise substantial control over the institution or 
servicer that owes the liability.
    (e) Documentation of financial responsibility. (1) The Secretary 
determines whether an institution is financially responsible under this 
section by evaluating documents submitted by the institution and 
information obtained from other sources, including outside sources of 
credit information. To enable the Secretary to make this determination, 
the institution shall submit to the Secretary for its two latest 
complete fiscal years, a set of financial statements of the 
institution, prepared on an accrual basis in accordance with generally 
accepted accounting principles and audited by an independent certified 
public accountant in accordance with generally accepted auditing 
standards. The Secretary may also require the institution to submit or 
otherwise make available, the accountant's work papers. If an 
institution submits audited consolidated financial statements of its 
parent corporation for the Secretary to use in determining the 
institution's level of financial responsibility, the consolidated 
financial statements must be supplemented with consolidating schedules 
showing the consolidation of each of the parent corporation's 
subsidiaries and divisions (each separate institution participating in 
the Title IV, HEA programs must be shown separately), intercompany 
eliminating entries, and derived consolidated totals. The Secretary may 
also require the institution to submit additional substantive 
information.
    (2) An institution shall submit the documents required in paragraph 
(e)(1) of this section annually within four months after the end of the 
institution's fiscal year, unless the Secretary requests a more 
frequent submission. Upon a showing of good cause, the Secretary may 
grant a filing extension to an institution.
    (3) The Secretary considers the audit submission requirement of 
this section to be satisfied by an audit conducted in accordance with--
    (i) The Single Audit Act (Chapter 75 of title 31, United States 
Code); or
    (ii) Office of Management and Budget Circular A-133, ``Audits of 
Institutions of Higher Education and Other Nonprofit Organizations.''
    (f) Definitions and terms. For the purposes of this section--
    (1)(i) An ``ownership interest'' is a share of the legal or 
beneficial ownership or control of, or a right to share in the proceeds 
of the operation of, an institution, institution's parent corporation, 
a third-party servicer, or a third-party servicer's parent corporation.
    (ii) The term ``ownership interest'' includes, but is not limited 
to--
    (A) An interest as tenant in common, joint tenant, or tenant by the 
entireties;
    (B) A partnership; and
    (C) An interest in a trust.
    (iii) The term ``ownership interest'' does not include any share of 
the ownership or control of, or any right to share in the proceeds of 
the operation of--
    (A) A mutual fund that is regularly and publicly traded;
    (B) An institutional investor; or
    (C) A profit-sharing plan, provided that all employees are covered 
by the plan;
    (2) The Secretary generally considers a person to exercise 
substantial control over an institution or third-party servicer, if the 
person--
    (i) Directly or indirectly holds at least a 25 percent ownership 
interest in the institution or servicer;
    (ii) Holds, together with other members of his or her family, at 
least a 25 percent ownership interest in the institution or servicer;
    (iii) Represents, either alone or together with other persons, 
under a voting trust, power of attorney, proxy, or similar agreement 
one or more persons who hold, either individually or in combination 
with the other persons represented or the person representing them, at 
least a 25 percent ownership in the institution or servicer; or
    (iv) Is a member of the board of directors, the chief executive 
officer, or other executive officer of--
    (A) The institution or servicer; or
    (B) An entity that holds at least a 25 percent ownership interest 
in the institution or servicer; and
    (3) The Secretary considers a member of a person's family to be a 
parent, sibling, spouse, child, spouse's parent or sibling, or 
sibling's or child's spouse.

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

    13. Newly redesignated Sec. 668.16 is revised to read as follows:


Sec. 668.16  Standards of administrative capability.

    To begin and to continue to participate in any Title IV, HEA 
program, an institution shall demonstrate to the Secretary that the 
institution is capable of adequately administering that program under 
each of the standards established in this section. The Secretary 
considers an institution to have that administrative capability if the 
institution--
    (a) Administers the Title IV, HEA programs in accordance with all 
statutory provisions of or applicable to Title IV of the HEA, all 
applicable regulatory provisions prescribed under that statutory 
authority, and all applicable special arrangements, agreements, and 
limitations entered into under the authority of statutes applicable to 
Title IV of the HEA;
    (b)(1) Designates a capable individual to be responsible for 
administering all the Title IV, HEA programs in which it participates 
and for coordinating those programs with the institution's other 
Federal and non-Federal programs of student financial assistance. The 
Secretary considers an individual to be ``capable'' under this 
paragraph if the individual is certified by the State in which the 
institution is located, if the State requires certification of 
financial aid administrators. The Secretary may consider other factors 
in determining whether an individual is capable, including, but not 
limited to, the individual's successful completion of Title IV, HEA 
program training provided or approved by the Secretary, and previous 
experience and documented success in administering the Title IV, HEA 
programs properly;
    (2) Uses an adequate number of qualified persons to administer the 
Title IV, HEA programs in which the institution participates. The 
Secretary considers the following factors to determine whether an 
institution uses an adequate number of qualified persons--
    (i) The number and types of programs in which the institution 
participates;
    (ii) The number of applications evaluated;
    (iii) The number of students who receive any student financial 
assistance at the institution and the amount of funds administered;
    (iv) The financial aid delivery system used by the institution;
    (v) The degree of office automation used by the institution in the 
administration of the Title IV, HEA programs;
    (vi) The number and distribution of financial aid staff; and
    (vii) The use of third-party servicers to aid in the administration 
of the Title IV, HEA programs;
    (3) Communicates to the individual designated to be responsible for 
administering Title IV, HEA programs, all the information received by 
any institutional office that bears on a student's eligibility for 
Title IV, HEA program assistance; and
    (4) Has written procedures for or written information indicating 
the responsibilities of the various offices with respect to the 
approval, disbursement, and delivery of Title IV, HEA program 
assistance and the preparation and submission of reports to the 
Secretary;
    (c)(1) Administers Title IV, HEA programs with adequate checks and 
balances in its system of internal controls; and
    (2) Divides the functions of authorizing payments and disbursing or 
delivering funds so that no office has responsibility for both 
functions with respect to any particular student aided under the 
programs. For example, the functions of authorizing payments and 
disbursing or delivering funds must be divided so that for any 
particular student aided under the programs, the two functions are 
carried out by at least two organizationally independent individuals 
who are not members of the same family, as defined in Sec. 668.15, or 
who do not together exercise substantial control, as defined in 
Sec. 668.15, over the institution;
    (d) Establishes and maintains records required under this part and 
the individual Title IV, HEA program regulations;
    (e) Establishes, publishes, and applies reasonable standards for 
measuring whether an otherwise eligible student is maintaining 
satisfactory progress in his or her educational program. The Secretary 
considers an institution's standards to be reasonable if the 
standards--
    (1) Conform with the standards of satisfactory progress of the 
nationally recognized accrediting agency that accredits or preaccredits 
the institution, if the institution is accredited or preaccredited, and 
if the agency has those standards;
    (2) For a student enrolled in an eligible program who is to receive 
assistance under a Title IV, HEA program, are the same as or stricter 
than the institution's standards for a student enrolled in the same 
educational program who is not receiving assistance under a Title IV, 
HEA program;
    (3) Include the following elements:
    (i) Grades, work projects completed, or comparable factors that are 
measurable against a norm.
    (ii) A maximum time frame in which a student must complete his or 
her educational program. The time frame must be--
    (A) Based on the student's enrollment status;
    (B) For an undergraduate program, no longer than 150 percent of the 
published length of the educational program for a full-time student; 
and
    (C) Divided into increments of equal size, not to exceed the lesser 
of one academic year or one-half the published length of the 
educational program.
    (iii) A schedule established by the institution designating the 
minimum percentage or amount of work that a student must successfully 
complete at the end of each increment to complete his or her 
educational program within the maximum time frame.
    (iv) A determination at the end of each increment by the 
institution whether the student has successfully completed the 
appropriate percentage or amount of work according to the established 
schedule.
    (v) Consistent application of standards to all students within 
categories of students, e.g., full-time, part-time, undergraduate, and 
graduate students, and educational programs established by the 
institution.
    (vi) Specific policies defining the effect of course incompletes, 
withdrawals, repetitions, and noncredit remedial courses on 
satisfactory progress.
    (vii) Specific procedures under which a student may appeal a 
determination that the student is not making satisfactory progress.
    (viii) Specific procedures for reinstatement of aid; and
    (4) Meet or exceed the requirements of Sec. 668.7(c);
    (f) Develops and applies an adequate system to identify and resolve 
discrepancies in the information that the institution receives from 
different sources with respect to a student's application for financial 
aid under Title IV, HEA programs. In determining whether the 
institution's system is adequate, the Secretary considers whether the 
institution obtains and reviews--
    (1) All student aid applications, need analysis documents, 
Statements of Educational Purpose, Statements of Registration Status, 
and eligibility notification documents presented by or on behalf of 
each applicant;
    (2) Any documents, including any copies of State and Federal income 
tax returns, that are normally collected by the institution to verify 
information received from the student or other sources; and
    (3) Any other information normally available to the institution 
regarding a student's citizenship, previous educational experience, 
documentation of the student's social security number, or other factors 
relating to the student's eligibility for funds under the Title IV, HEA 
programs;
    (g) Refers to the Office of Inspector General of the Department of 
Education for investigation--
    (1) After conducting the review of an application provided for 
under paragraph (f) of this section, any credible information 
indicating that an applicant for Title IV, HEA program assistance may 
have engaged in fraud or other criminal misconduct in connection with 
his or her application. The type of information that an institution 
must refer is that which is relevant to the eligibility of the 
applicant for Title IV, HEA program assistance, or the amount of the 
assistance. Examples of this type of information are--
    (i) False claims of independent student status;
    (ii) False claims of citizenship;
    (iii) Use of false identities;
    (iv) Forgery of signatures or certifications; and
    (v) False statements of income; and
    (2) Any credible information indicating that any employee, third-
party servicer, or other agent of the institution that acts in a 
capacity that involves the administration of the Title IV, HEA 
programs, or the receipt of funds under those programs, may have 
engaged in fraud, misrepresentation, conversion or breach of fiduciary 
responsibility, or other illegal conduct involving the Title IV, HEA 
programs. The type of information that an institution must refer is 
that which is relevant to the eligibility and funding of the 
institution and its students through the Title IV, HEA programs;
    (h) Provides adequate financial aid counseling to eligible students 
who apply for Title IV, HEA program assistance. In determining whether 
an institution provides adequate counseling, the Secretary considers 
whether its counseling includes information regarding--
    (1) The source and amount of each type of aid offered;
    (2) The method by which aid is determined and disbursed, delivered, 
or applied to a student's account; and
    (3) The rights and responsibilities of the student with respect to 
enrollment at the institution and receipt of financial aid. This 
information includes the institution's refund policy, its standards of 
satisfactory progress, and other conditions that may alter the 
student's aid package;
    (i) Has provided all program and fiscal reports and financial 
statements required for compliance with the provisions of this part and 
the individual program regulations in a timely manner;
    (j) Shows no evidence of significant problems that affect, as 
determined by the Secretary, the institution's ability to administer a 
Title IV, HEA program and that are identified in--
    (1) Reviews of the institution conducted by the Secretary, the 
Department of Education's Office of Inspector General, nationally 
recognized accrediting agencies, guaranty agencies as defined in 34 CFR 
part 682, State postsecondary review entities designated under 34 CFR 
part 667, the State agency or official by whose authority the 
institution is legally authorized to provide postsecondary education, 
or any other law enforcement agency; or
    (2) Any findings made in any criminal, civil, or administrative 
proceeding;
    (k) Is not, and does not have any principal or affiliate of the 
institution (as those terms are defined in 34 CFR part 85) that is--
    (1) Debarred or suspended under Executive Order (E.O.) 12549 (3 
CFR, 1986 Comp., p. 189) or the Federal Acquisition Regulations (FAR), 
48 CFR part 9, subpart 9.4; or
    (2) Engaging in any activity that is a cause under 34 CFR 85.305 or 
85.405 for debarment or suspension under E.O. 12549 (3 CFR, 1986 Comp., 
p. 189) or the FAR, 48 CFR part 9, subpart 9.4;
    (l) Does not have more than 33 percent of its undergraduate regular 
students withdraw from the institution during the period specified in 
paragraph (l)(1) of this section. The institution must calculate this 
withdrawal rate according to the following procedure:
    (1)(i) For an institution at which the majority of regular students 
begin and end the academic year on the same date, the institution must 
calculate the rate for that academic year.
    (ii) For an institution at which the majority of regular students 
do not begin and end the academic year on the same date, the 
institution must calculate the rate for any eight-month period.
    (2) The institution must count all regular students who are 
enrolled on the first day of classes of the period specified in 
paragraph (l)(1) of this section, except those students who, during 
that period--
    (i) Withdrew from, dropped out of, or were expelled from the 
institution; and
    (ii) Were entitled to and actually received in a timely manner, in 
accordance with Sec. 668.22(i)(2), a refund of 100 percent of their 
tuition and fees (less any permitted administrative fee) under the 
institution's refund policy;
    (m)(1) Has a cohort default rate--
    (i) As defined in Sec. 668.17, on loans made under the Federal 
Stafford Loan and Federal SLS programs to students for attendance at 
that institution of less than 25 percent for each of the three most 
recent fiscal years for which the Secretary has determined the 
institution's rate; and
    (ii) As defined in 34 CFR 674.5, on loans made under the Federal 
Perkins Loan Program to students for attendance at that institution 
that does not exceed 15 percent;
    (2)(i) Except that, if the Secretary determines that the 
institution is not administratively capable solely because the 
institution fails to comply with paragraph (m)(1) of this section, the 
Secretary will provisionally certify the institution in accordance with 
Sec. 668.13(c); and
    (ii) The institution may appeal the loss of full participation in a 
Title IV, HEA program under paragraph (m)(1) of this section by 
submitting an appeal in writing to the Secretary in accordance with and 
on the grounds specified in Sec. 668.17(d); and
    (n) Does not otherwise appear to lack the ability to administer the 
Title IV, HEA programs competently.

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

    14. Newly redesignated Sec. 668.17 is revised to read as follows:


Sec. 668.17  Default reduction measures.

    (a) Default rates. If the Federal Stafford loan and Federal SLS 
cohort default rate for an institution exceeds 20 percent for any 
fiscal year, the Secretary notifies the institution of that rate and 
may, after consultation as the Secretary deems appropriate with 
cognizant guaranty agencies take one or more of the following actions:
    (1) Initiate a proceeding under subpart G of this part to limit, 
suspend, or terminate the participation of the institution in the Title 
IV, HEA programs, if--
    (i) The institution's Federal Stafford loan and Federal SLS cohort 
default rate exceeds 40 percent for any fiscal year after 1989 and has 
not been reduced by an increment of at least 5 percent from its rate 
for the previous fiscal year (e.g., a 50-percent rate was not reduced 
to 45 percent or below); or
    (ii) The institution's Federal Stafford loan and Federal SLS cohort 
default rate exceeds--
    (A) 60 percent for fiscal year 1989;
    (B) 55 percent for fiscal year 1990;
    (C) 50 percent for fiscal year 1991;
    (D) 45 percent for fiscal year 1992; or
    (E) 40 percent for any fiscal year after fiscal year 1992.
    (2) To help the Secretary make a preliminary determination as to 
the appropriate action to be taken by the Secretary regarding the 
institution, require the institution to submit to the Secretary and one 
or more guaranty agencies, as defined in 34 CFR part 682, any 
information relating to that determination, as reasonably required by 
the Secretary, within a time frame specified by the Secretary.
    (b) Default management plan. If the Federal Stafford loan and 
Federal SLS cohort default rate for an institution--
    (1) Is greater than 20 percent but less than or equal to 40 
percent, the institution must submit a default management plan that 
implements the measures described in appendix D to this part. An 
institution that wishes to submit a default management plan that 
deviates from the measures described in appendix D must submit a 
justification for the deviation that includes a rationale explaining 
why the measures from which the plan deviates are not appropriate for 
the institution's specific situation. The institution must implement 
the default management plan upon notification from the Secretary that 
the plan has been approved; or
    (2) Exceeds 40 percent for any fiscal year, the institution must 
implement all of the default management reduction measures described in 
appendix D to this part no later than 60 days after the institution 
receives the Secretary's notification of the institution's cohort 
default rate. An institution is not required to submit any written 
plans to the Secretary or a guaranty agency unless the Secretary or 
guaranty agency specifically requests the institution to do so.
    (c) End of participation. (1) Except as provided in paragraph 
(c)(6) of this section, an institution's participation in the FFEL 
programs ends if the Secretary determines that the institution's cohort 
default rate, for each of the three most recent fiscal years for which 
the Secretary has determined the institution's rate, is equal to or 
greater than the applicable threshold rates.
    (2) For purposes of the determinations made under paragraph (c)(1) 
of this section, the threshold rates are--
    (i) 35 percent for each of fiscal years 1991 and 1992;
    (ii) 30 percent for fiscal year 1993; and
    (iii) 25 percent for fiscal year 1994 and all subsequent fiscal 
years.
    (3) Except as provided in paragraph (c)(7) of this section, an 
institution whose participation ends under paragraph (c)(1) of this 
section may not participate in the FFEL programs beginning with the 
date that the institution receives notification from the Secretary that 
its cohort default rate exceeds the thresholds specified in paragraph 
(c)(2) of this section and continuing--
    (i) For the remainder of the fiscal year in which the Secretary 
determines that the institution's participation has ended under 
paragraph (c)(1) of this section; and
    (ii) For the two subsequent fiscal years.
    (4) An institution whose participation in the FFEL programs ends 
under paragraph (c)(1) of this section may not participate in the FFEL 
programs until the institution--
    (i) Receives notification from the Secretary that the notice ending 
the institution's participation is withdrawn pursuant to paragraph 
(d)(6) of this section; or
    (ii) Following the period described in paragraph (c)(3) of this 
section, satisfies the Secretary that the institution meets all 
requirements for participation in the FFEL programs and executes a new 
agreement with the Secretary for participation in the FFEL programs.
    (5) If the Secretary withdraws the notification of an institution's 
loss of participation pursuant to paragraph (d)(6) of this section, the 
participation of the institution is restored effective as of the date 
that the institution received notification from the Secretary of the 
loss of participation.
    (6) Until July 1, 1998, the provisions of paragraph (c)(1) of this 
section and the provisions of Sec. 668.16(m) do not apply to a 
historically black college or university within the meaning of section 
322(2) of the HEA, a tribally controlled community college within the 
meaning of section 2(a)(4) of the Tribally Controlled Community College 
Assistance Act of 1978, or a Navajo community college under the Navajo 
Community College Act.
    (7)(i) If the Secretary's designated department official receives 
written notice from an institution whose participation ends under 
paragraph (c)(1) of this section, within seven calendar days from the 
date on which the institution receives notification from the Secretary 
that its cohort default rate exceeds the thresholds specified in 
paragraph (c)(2) of this section, that the institution intends to 
appeal the end of participation under paragraph (d) of this section, 
the institution may, notwithstanding Sec. 668.26(d) continue to 
participate in the FFEL programs until no later than the 30th calendar 
day following the date on which the institution receives notification 
from the Secretary that its cohort default rate exceeds the thresholds 
specified in paragraph (c)(2) of this section, except as provided in 
paragraph (c)(7)(ii) of this section.
    (ii) If an institution satisfies the conditions in paragraph 
(c)(7)(i) of this section for participating in the FFEL programs until 
the 30th calendar day following the date on which the institution 
receives notification from the Secretary that its cohort default rate 
exceeds the thresholds specified in paragraph (c)(2) of this section, 
the institution may, notwithstanding Sec. 668.26(d), continue to 
participate in the FFEL programs after that date, until the Secretary 
issues a decision on the institution's appeal, if the institution, by 
the 30th calendar day following the date on which the institution 
receives notification from the Secretary that its cohort default rate 
exceeds the thresholds specified in paragraph (c)(2) of this section, 
files an appeal that is complete in all respects in accordance with 
paragraph (d) of this section. However, the appeal of an institution 
relying on paragraph (d)(1)(i) of this section is not considered 
incomplete by virtue of a guaranty agency's not having yet complied 
with--or having failed to comply with--34 CFR 682.401(b)(14), which 
requires the agency to respond to an institution's request for 
verification of data within 15 working days, if the institution 
submitted that request within 10 working days from the date on which 
the institution received notification from the Secretary that its 
cohort default rate exceeds the thresholds specified in paragraph 
(c)(2) of this section, and the institution simultaneously submitted a 
copy of that request to the Secretary's designated department official. 
When the institution receives the guaranty agency's response, to 
complete its appeal, the institution must submit the verified data to 
the Secretary's designated department official within five working days 
in order to continue participating in the FFEL programs until the 
Secretary issues a decision on the institution's appeal.
    (d) Appeal procedures. (1) An institution may appeal the loss of 
participation in the FFEL programs under paragraph (c)(1) of this 
section by submitting an appeal in writing to the Secretary's 
designated department official that is postmarked no later than 30 days 
after it receives notification of its loss of participation. The 
institution may appeal on the grounds that--
    (i)(A) The calculation of the institution's cohort default rate for 
any of the three fiscal years relevant to the end of participation is 
not accurate; and
    (B) A recalculation with corrected data verified by the cognizant 
guaranty agency or agencies would produce a cohort default rate for any 
of those fiscal years that is below the threshold percentage specified 
in paragraph (c)(2) of this section; or
    (ii) The institution meets the following criteria:
    (A)(1) Fifteen percent or fewer of the institution's students who 
are enrolled on at least a half-time basis receive Federal Stafford or 
Federal SLS loans for any twenty-four month period ending not more than 
six months prior to the date the institution submits its appeal; or
    (2) For any twenty-four month period ending not more than six 
months prior to the date the institution submits its appeal, two-thirds 
or more of the institution's students who are enrolled on at least a 
half-time basis are individuals from disadvantaged economic 
backgrounds, as established by documentary evidence submitted by the 
institution. Such evidence must relate to qualification by those 
students for an Expected Family Contribution (EFC) (formerly 
institutions were required to use the Pell Grant index), as defined in 
34 CFR 690.2, of zero for the applicable award year or attribution to 
those students of an adjusted gross income of the student and his or 
her parents or spouse, if applicable, reported for the applicable award 
year of less than the poverty level, as determined under criteria 
established by the Department of Health and Human Services.
    (B)(1) Two-thirds or more of the institution's students who were 
enrolled on a full-time basis in any twenty-four month period ending 
not more than six months prior to the date the institution submits its 
appeal completed the educational programs in which they were enrolled. 
This rate is calculated by comparing the number of students who were 
classified as full-time at their initial enrollment in the institution, 
and were originally scheduled, at the time of enrollment, to complete 
their programs within the relevant twenty-four month period, with the 
number of these students who received a degree, certificate, or other 
recognized educational credential from the institution; transferred 
from the institution to a higher level educational program at another 
institution for which the prior program provided substantial 
preparation; or, at the end of the twenty- four month period, remained 
enrolled and were making satisfactory academic progress toward 
completion of their educational programs. The calculation does not 
include students who did not complete their programs because they left 
the institution to serve in the armed forces; and
    (2) The institution had a placement rate of two-thirds or more with 
respect to its former students who received a degree, certificate, or 
other recognized educational credential from the institution in any 
twenty-four month period ending not more than six months prior to the 
date the institution submits its appeal. This rate is calculated by 
determining the percentage of all those students who, based on evidence 
submitted by the institution, are on that date employed, or had been 
employed for at least 13 weeks following receipt of the credential from 
the institution, in the occupation for which the institution provided 
training, or are enrolled or had been enrolled for at least 13 weeks 
following receipt of the credential from the institution, in a higher 
level educational program at another institution for which the prior 
educational program provided substantial preparation.
    (2) For purposes of paragraph (d)(1)(ii)(A) of this section, a 
student is originally scheduled, at the time of enrollment, to complete 
the educational program on the date when the student will have been 
enrolled in the program for the amount of time normally required to 
complete the program. The ``amount of time normally required to 
complete the program'' is the period of time specified in the 
institution's enrollment contract, catalog, or other materials, for 
completion of the program by a full-time student, or the period of time 
between the date of enrollment and the anticipated graduation date 
appearing on the student's loan application, if any, whichever is less.
    (3) An appeal submitted under paragraph (d)(1)(i) of this section 
is considered to be filed in a timely manner if the institution submits 
a letter of appeal by the 30-day deadline notifying the Secretary's 
designated department official that it is appealing on this basis, 
including with that letter a copy of the institution's request to each 
cognizant guaranty agency for verification of the cohort default rate 
data, and submits the verified data to the Secretary's designated 
department official within five working days of its receipt from the 
guaranty agency. For purposes of paragraph (d)(4) of this section, the 
institution's appeal is not considered complete until the institution 
submits the verified data to the Secretary's designated department 
official.
    (4) The Secretary issues a decision on the institution's appeal 
within 45 days after the institution submits a complete appeal that 
addresses the applicable criteria in paragraphs (d)(1) (i) through 
(iii) of this section to the Secretary's designated department 
official.
    (5) The Secretary's decision is based on the consideration of 
written material submitted by the institution. No oral hearing is 
provided.
    (6) The Secretary withdraws the notification of loss of 
participation in the FFEL programs sent to an institution under 
paragraph (c)(1) of this section, if the Secretary determines that the 
institution's appeal satisfies one of the grounds specified in 
paragraphs (d)(1) (i) through (iii) of this section.
    (7)(i) An institution that appeals under paragraph (d)(1)(i) of 
this section must submit a written request to the guaranty agency or 
agencies that guaranteed the loans used in the calculation of its 
cohort default rate to verify the data used to calculate its cohort 
default rate and simultaneously provide a copy of that request to the 
Secretary's designated department official.
    (ii) The written request must include the names and social security 
numbers of the borrowers the institution wishes the agency to verify 
and detailed information on the nature of the suspected inaccuracy in 
the data the institution is requesting the agency to verify.
    (8) An institution must include in its appeal a certification by 
the institution's chief executive officer that all information provided 
by the institution in support of its appeal is true and correct.
    (9) An institution that appeals on the ground that it meets the 
criteria contained in paragraph (d)(1)(ii) of this section must include 
in its appeal the following information:
    (i) For purposes of paragraph (d)(1)(ii)(A)(1) of this section--
    (A) The number of students who were enrolled on at least a half-
time basis at the institution in the relevant twenty-four month period; 
and
    (B) The name, address, and social security number of each of the 
institution's current and former students who received Federal Stafford 
or Federal SLS loans during that twenty-four month period.
    (ii) For purposes of paragraph (d)(1)(ii)(A)(2) of this section:
    (A) The number of students who were enrolled on at least a half-
time basis at the institution in the relevant twenty-four month period; 
and
    (B) The name, address, social security number, and Expected Family 
Contribution (EFC) (formerly institutions were required to use the Pell 
Grant index), if applicable, of each student from a disadvantaged 
economic background who was enrolled on at least a half-time basis at 
the institution in the relevant twenty-four month period and the 
measure and data used to determine that the student is from a 
disadvantaged economic background.
    (iii) For purposes of paragraph (d)(1)(ii)(B)(1) of this section--
    (A) The number of students who were enrolled on a full-time basis 
at the institution in the relevant twenty-four month period;
    (B) For each of those former students who received a degree, 
certificate, or other recognized educational credential from the 
institution, the student's name, address, and social security number;
    (C) For each of those former students who transferred to a higher 
level educational program at another institution, the name, address, 
social security number of the student, and the name and address of the 
institution to which the student transferred and the name of the higher 
level program; and
    (D) For each of those students who remained enrolled and was making 
satisfactory academic progress toward completion of the educational 
program, the student's name, address, and social security number.
    (iv) For purposes of paragraph (d)(1)(ii)(B)(2) of this section--
    (A) The number of students who received a degree, certificate, or 
other recognized educational credential at the institution in the 
relevant twenty-four month period;
    (B) For each of those former students who is employed or had been 
employed for at least 13 weeks following receipt of a degree, 
certificate or other credential from the institution, the student's 
name, address, and social security number, the employer's name and 
address, the student's job title, and the dates the student was so 
employed; and
    (C) For each of those former students who enrolled in a higher 
level educational program at another institution for which the 
appealing institution's educational program provided substantial 
preparation, the former student's name, address, and social security 
number, the subsequent institution's name and address, the name of the 
educational program, and the dates the former student was so enrolled.
    (e) Definitions. The following definitions apply to this section 
and Sec. 668.90:
    (1)(i)(A) For purposes of the Federal Stafford loan and Federal SLS 
cohort default rate, except as provided in paragraph (e)(1)(ii) of this 
section, the term cohort default rate means--
    (1) For any fiscal year in which 30 or more current and former 
students at the institution enter repayment on Federal Stafford loans 
or Federal SLS loans (or on the portion of a loan made under the 
Federal Consolidation Loan Program that is used to repay such loans) 
received for attendance at the institution, the percentage of those 
current and former students who enter repayment in that fiscal year on 
such loans who default before the end of the following fiscal year; and
    (2) For any fiscal year in which fewer than 30 of the institution's 
current and former students enter repayment on Federal Stafford loans 
or Federal SLS loans (or on the portion of a loan made under the 
Federal Consolidation Loan Program that is used to repay such loans) 
received for attendance at the institution, the percentage of those 
current and former students who entered repayment on Federal Stafford 
loans or Federal SLS loans in any of the three most recent fiscal 
years, who default before the end of the fiscal year immediately 
following the year in which they entered repayment.
    (B) In determining the number of students who default before the 
end of that following fiscal year, the Secretary includes only loans 
for which the Secretary or a guaranty agency has paid claims for 
insurance.
    (ii)(A) In the case of a student who has attended and borrowed at 
more than one institution, the student (and his or her subsequent 
repayment or default) is attributed to each institution for attendance 
at which the student received a loan that entered repayment in the 
fiscal year.
    (B) A loan on which a payment is made by the institution, its 
owner, agent, contractor, employee, or any other affiliated entity or 
individual, in order to avoid default by the borrower, is considered as 
in default for purposes of this definition.
    (C) Any loan that has been rehabilitated under section 428F of the 
HEA before the end of that following fiscal year is not considered as 
in default for purposes of this definition.
    (D) For the purposes of this definition, a loan made in accordance 
with section 428A of the HEA (or a loan made under the Federal 
Consolidation Loan Program a portion of which is used to repay a 
Federal SLS loan) shall not be considered to enter repayment until 
after the borrower has ceased to be enrolled in an educational program 
leading to a degree, certificate, or other recognized educational 
credential at the participating institution on at least a half-time 
basis (as determined by the institution) and ceased to be in a period 
of forbearance based on such enrollment. Each eligible lender of a loan 
made under section 428A (or a loan made under the Federal Consolidation 
Loan Program a portion of which is used to repay a Federal SLS loan) of 
the HEA shall provide the guaranty agency with the information 
necessary to determine when the loan entered repayment for purposes of 
this definition, and the guaranty agency shall provide that information 
to the Secretary.
    (iii)(A) A cohort default rate of an institution applies to all 
locations of the institution as the institution exists on the first day 
of the fiscal year for which the rate is calculated.
    (B) A cohort default rate of an institution applies to all 
locations of the institution from the date the institution is notified 
of that rate until the institution is notified by the Secretary that 
the rate no longer applies.
    (iv)(A) For an institution that changes its status from that of a 
location of one institution to that of a free-standing institution, the 
Secretary determines the cohort default rate based on the institution's 
status as of October 1 of the fiscal year for which a cohort default 
rate is being calculated.
    (B) For an institution that changes its status from that of a free-
standing institution to that of a location of another institution, the 
Secretary determines the cohort default rate based on the combined 
number of students who enter repayment during the applicable fiscal 
year and the combined number of students who default during the 
applicable fiscal years from both the former free-standing institution 
and the other institution. This cohort default rate applies to the new, 
consolidated institution and all of its current locations.
    (C) For free-standing institutions that merge to form a new, 
consolidated institution, the Secretary determines the cohort default 
rate based on the combined number of students who enter repayment 
during the applicable fiscal year and the combined number of students 
who default during the applicable fiscal years from all of the 
institutions that are merging. This cohort default rate applies to the 
new consolidated institution.
    (D) For a location of one institution that becomes a location of 
another institution, the Secretary determines the cohort default rate 
based on the combined number of students who enter repayment during the 
applicable fiscal year and the number of students who default during 
the applicable fiscal years from both of the institutions in their 
entirety, not limited solely to the respective locations.
    (2) Fiscal year means the period from and including October 1 of a 
calendar year through and including September 30 of the following 
calendar year.

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

    15. Section 668.22 is revised to read as follows:


Sec. 668.22  Institutional refunds and repayments.

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

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

    16. Section 668.23 is revised to read as follows:


Sec. 668.23  Audits, records, and examinations.

    (a) An institution or a foreign institution as defined in 34 CFR 
600.52 that participates in the Federal Perkins Loan, FWS, FSEOG, 
Federal Stafford Loan, Federal PLUS, Federal Pell Grant, PAS, or FDSL 
Program shall comply with the regulations for that program concerning--
    (1) Fiscal and accounting systems;
    (2) Program and fiscal recordkeeping; and
    (3) Record retention.
    (b)(1) An institution or a foreign institution as defined in 34 CFR 
600.52 that participates in any Title IV, HEA program shall cooperate 
with an independent auditor, the Secretary, the Department of 
Education's Inspector General, the Comptroller General of the United 
States, or their authorized representatives, a guaranty agency in whose 
program the institution participates, the appropriate nationally 
recognized accrediting agency, and the appropriate State postsecondary 
review entity designated under 34 CFR part 667, in the conduct of 
audits, investigations, and program reviews authorized by law.
    (2) A third-party servicer shall cooperate with an independent 
auditor, the Secretary, the Department of Education's Inspector 
General, and the Comptroller General of the United States, or their 
authorized representatives, a guaranty agency in whose program the 
institution contracting with the servicer participates, the appropriate 
nationally recognized accrediting agency of an institution with which 
the servicer contracts, and the State postsecondary review entity 
designated under 34 CFR part 667, in the conduct of audits, 
investigations, and program reviews authorized by law.
    (3) The institution's or servicer's cooperation must include--
    (i) Providing timely access, for examination and copying, to the 
records (including computerized records) required by the applicable 
regulations and to any other pertinent books, documents, papers, 
computer programs, and records;
    (ii) Providing reasonable access to personnel associated with the 
institution's or servicer's administration of the Title IV, HEA 
programs for the purpose of obtaining relevant information. In 
providing reasonable access, the institution or servicer shall not--
    (A) Refuse to supply any relevant information;
    (B) Refuse to permit interviews with those personnel that do not 
include the presence of the institution's or servicer's management; and
    (C) Refuse to permit interviews with those personnel that are not 
tape recorded by the institution or servicer.
    (c)(1)(i) An institution or a foreign institution as defined in 34 
CFR 600.52 that participates in the FDSL, Federal Perkins Loan, FWS, 
FSEOG, Federal Stafford Loan, Federal PLUS, Federal SLS, Federal Pell 
Grant, or PAS Program shall have performed at least annually a 
compliance audit of its Title IV, HEA programs.
    (ii) A third-party servicer shall have performed at least annually 
a compliance audit of every aspect of the servicer's administration of 
the participation in the Title IV, HEA programs of each institution 
with which the servicer has a contract, unless--
    (A) The servicer contracts with only one participating institution; 
and
    (B) The audit of that institution's participation involves every 
aspect of the servicer's administration of that Title IV, HEA program.
    (iii) To meet the requirements of paragraph (c)(1)(ii) of this 
section, a third-party servicer that contracts with more than one 
participating institution may submit a single compliance audit report 
that covers every aspect of the servicer's administration of the 
participation in the Title IV, HEA programs for each institution with 
which the servicer contracts.
    (iv) The audit required under paragraph (c)(1)(i) or (ii) of this 
section shall be conducted by an independent auditor in accordance with 
the general standards and the standards for compliance audits in the 
U.S. General Accounting Office's (GAO's) Standards for Audit of 
Governmental Organizations, Programs, Activities, and Functions. (This 
publication is available from the Superintendent of Documents, U.S. 
Government Printing Office, Washington, DC 20402.)
    (2)(i) The institution's first audit must cover the institution's 
activities for the entire period of time since the institution began to 
participate in the Title IV, HEA program for which the audit is 
performed. Each subsequent audit must cover the institution's 
activities for the entire period of time since the preceding audit.
    (ii) The servicer's first audit must cover the servicer's 
activities for its first full fiscal year beginning on or after July 1, 
1994, and include any period from the effective date to the beginning 
of the first full fiscal year. Each subsequent audit that the servicer 
has performed must cover the servicer's activities for the entire 
period of time since the servicer's preceding audit.
    (3) The institution or servicer, as applicable, shall submit its 
audit report to the Department of Education's Inspector General within 
120 days of the end of the institution's or servicer's fiscal year or, 
if applicable, in accordance with deadlines established in the Single 
Audit Act.
    (4) The Secretary may require the institution or servicer to 
provide, upon request, to cognizant guaranty agencies and eligible 
lenders under the FFEL programs, State agencies, the Secretary of 
Veterans Affairs, nationally recognized accrediting agencies, and State 
postsecondary review entities designated under 34 CFR part 667, the 
results of any audit conducted under this section.
    (d) Procedures for audits are contained in audit guides developed 
by, and available from, the Department of Education's Office of 
Inspector General. These audit guides do not impose any requirements 
beyond those imposed under applicable statutes and regulations and 
GAO's Standards for Audit of Governmental Organizations, Programs, 
Activities, and Functions. (This publication is available from the 
Superintendent of Documents, U.S. Government Printing Office, 
Washington, DC 20402.)
    (e)(1) An institution, a foreign institution as defined 34 CFR 
600.52, or a third-party servicer that has an audit conducted in 
accordance with this section shall--
    (i) Give the Secretary and the Inspector General access to records 
or other documents necessary to review the audit; and
    (ii) Include in any arrangement with an individual or firm 
conducting an audit described in this section a requirement that the 
individual or firm shall give the Secretary and the Inspector General 
access to records or other documents necessary to review the audit.
    (2) A third-party servicer shall give the Secretary and the 
Inspector General access to records or other documents necessary to 
review an institution's audit.
    (3) An institution shall give the Secretary and the Inspector 
General access to records or other documents necessary to review a 
third-party servicer's audit.
    (f) The Secretary considers the audit requirement in paragraph (c) 
of this section to be satisfied by an audit conducted in accordance 
with--
    (1) The Single Audit Act (Chapter 75 of title 31, United States 
Code); or
    (2) Office of Management and Budget Circular A-133, ``Audits of 
Institutions of Higher Education and Other Nonprofit Organizations.''
    (g) Upon written request, an institution, a foreign institution as 
defined in 34 CFR 600.52, or a third-party servicer shall give the 
Secretary access to all Title IV, HEA program and fiscal records, 
including records reflecting transactions with any financial 
institution with which the institution or servicer deposits or has 
deposited any Title IV, HEA program funds.
    (h)(1) In addition to the records required under the applicable 
program regulations and this part, for each recipient of Title IV, HEA 
program assistance, the institution or foreign institution as defined 
in 34 CFR 600.52 shall establish and maintain, on a current basis, 
records regarding--
    (i) The student's admission to, and enrollment status at, the 
institution;
    (ii) The educational program and courses in which the student is 
enrolled;
    (iii) Whether the student is maintaining satisfactory progress in 
his or her educational program;
    (iv) Any refunds due or paid to the student, the Title IV, HEA 
program or accounts, and the student's lender under the Federal 
Stafford Loan, Federal PLUS, and Federal SLS programs;
    (v) The student's placement by the institution in a job if the 
institution provides a placement service and the student uses that 
service;
    (vi) The student's prior receipt of financial aid (see 
Sec. 668.19);
    (vii) The verification of student aid application data.
    (viii) Financial and other institutional records necessary to 
determine the institutional eligibility, financial responsibility, and 
administrative capability of the institution; and
    (2)(i) An institution or a foreign institution as defined in 34 CFR 
600.52 shall establish and maintain records regarding the educational 
qualifications of each regular student it admits, whether or not the 
student receives Title IV, HEA program assistance, that are relevant to 
the institution's admission standards.
    (ii) An institution or a foreign institution as defined in 34 CFR 
600.52 at which only certain educational programs have been determined 
eligible shall establish and maintain records regarding the admission 
requirements and educational qualifications of each regular student 
enrolled in the eligible program or programs, whether the student 
received Title IV, HEA program assistance or not.
    (3) Records required under applicable program regulations and this 
part shall be--
    (i) Systematically organized;
    (ii) Readily available for review by the Secretary at the 
geographical location where the student will receive his or her degree 
or certificate of program or course completion; and
    (iii) Retained by the institution for the longer of at least five 
years from the time the record is established or the period of time 
required under the applicable program regulations or this part.

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

    17. Section 668.24 is revised to read as follows:


Sec. 668.24  Audit exceptions and repayments.

    (a)(1) If, as a result of a Federal audit or an audit performed at 
the direction of an institution or third-party servicer, an expenditure 
made by the institution or servicer or the institution's or servicer's 
compliance with an applicable requirement (including the lack of proper 
documentation), is questioned, the Secretary notifies the institution 
or servicer of the questioned expenditure or compliance.
    (2) If the institution or servicer believes that the questioned 
expenditure or compliance was proper, the institution or servicer shall 
notify the Secretary in writing of the institution's or servicer's 
position and the reasons for that position.
    (3) The institution's or servicer's response must be based on 
performing an attestation engagement in accordance with the Standards 
for Attestation Engagements of the American Institute of Certified 
Public Accountants and must be received by the Secretary within 45 days 
of the date of the Secretary's notification to the institution or 
servicer.
    (b)(1) Based on the audit finding and the institution's or third-
party servicer's response, the Secretary determines the amount of 
liability, if any, owed by the institution or servicer and instructs 
the institution or servicer as to the manner of repayment.
    (2) If the Secretary determines that a third-party servicer owes a 
liability for its administration of an institution's Title IV, HEA 
programs, the servicer shall notify each institution under whose 
contract the servicer owes a liability of the determination. The 
servicer shall also notify every institution that contracts with the 
servicer for the same service that the Secretary determined that a 
liability was owed.
    (c)(1) An institution or third-party servicer that must repay funds 
under the procedures in this section shall repay those funds at the 
direction of the Secretary within 45 days of the date of the 
Secretary's notification, unless--
    (i) The institution or servicer files an appeal under the 
procedures established in subpart H of this part; or
    (ii) The Secretary permits a longer repayment period.
    (2) Notwithstanding paragraphs (b) and (c)(1) of this section--
    (i) If an institution or third-party servicer has posted surety or 
has provided a third-party guarantee and the Secretary questions 
expenditures or compliance with applicable requirements and identifies 
liabilities, then the Secretary may determine that deferring recourse 
to the surety or guarantee is not appropriate because--
    (A) The need to provide relief to students or borrowers affected by 
the act or omission giving rise to the liability outweighs the 
importance of deferring collection action until completion of available 
appeal proceedings; or
    (B) The terms of the surety or guarantee do not provide complete 
assurance that recourse to that protection will be fully available 
through the completion of available appeal proceedings; or
    (ii) The Secretary may use administrative offset pursuant to 34 CFR 
part 30 to collect the funds owed under the procedures of this section.
    (3) If, under the proceedings in subpart H, liabilities asserted in 
the Secretary's notification, under paragraph (a)(1) of this section, 
to the institution or third-party servicer are upheld, the institution 
or third-party servicer shall repay those funds at the direction of the 
Secretary within 30 days of the final decision under subpart H of this 
part unless--
    (i) The Secretary permits a longer repayment period; or
    (ii) The Secretary determines that earlier collection action is 
appropriate pursuant to paragraph (c)(2) of this section.
    (d) An institution is held responsible for any liability owed by 
the institution's third-party servicer for a violation incurred in 
servicing any aspect of that institution's participation in the Title 
IV, HEA programs and remains responsible for that amount until that 
amount is repaid in full.

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

    18. Section 668.25 is redesignated as Sec. 668.26 and a new 
Sec. 668.25 is added to read as follows:


Sec. 668.25  Contracts between an institution and a third-party 
servicer.

    (a) An institution may enter into a written contract with a third-
party servicer for the administration of any aspect of the 
institution's participation in any Title IV, HEA program only to the 
extent that the servicer's eligibility to contract with the institution 
has not been limited, suspended, or terminated under the proceedings of 
subpart G of this part.
    (b) Subject to the provisions of paragraph (d) of this section, a 
third-party servicer is eligible to enter into a written contract with 
an institution for the administration of any aspect of the 
institution's participation in any Title IV, HEA program only to the 
extent that the servicer's eligibility to contract with the institution 
has not been limited, suspended, or terminated under the proceedings of 
subpart G of this part.
    (c) In a contract with an institution, a third-party servicer shall 
agree to--
    (1) Comply with all statutory provisions of or applicable to Title 
IV of the HEA, all regulatory provisions prescribed under that 
statutory authority, and all special arrangements, agreements, 
limitations, suspensions, and terminations entered into under the 
authority of statutes applicable to Title IV of the HEA, including the 
requirement to use any funds that the servicer administers under any 
Title IV, HEA program and any interest or other earnings thereon solely 
for the purposes specified in and in accordance with that program;
    (2) Refer to the Office of Inspector General of the Department of 
Education for investigation any information indicating there is 
reasonable cause to believe that the institution might have engaged in 
fraud or other criminal misconduct in connection with the institution's 
administration of any Title IV, HEA program or an applicant for Title 
IV, HEA program assistance might have engaged in fraud or other 
criminal misconduct in connection with his or her application. Examples 
of the type of information that must be referred are--
    (i) False claims by the institution for Title IV, HEA program 
assistance;
    (ii) False claims of independent student status;
    (iii) False claims of citizenship;
    (iv) Use of false identities;
    (v) Forgery of signatures or certifications; and
    (vi) False statements of income;
    (3) Be jointly and severally liable with the institution to the 
Secretary for any violation by the servicer of any statutory provision 
of or applicable to Title IV of the HEA, any regulatory provision 
prescribed under that statutory authority, and any applicable special 
arrangement, agreement, or limitation entered into under the authority 
of statutes applicable to Title IV of the HEA;
    (4) In the case of a third-party servicer that disburses funds 
(including funds received under the Title IV, HEA programs) or delivers 
Federal Stafford Loan or Federal SLS Program proceeds to a student--
    (i) Confirm the eligibility of the student before making that 
disbursement or delivering those proceeds. This confirmation must 
include, but is not limited to, any applicable information contained in 
the records required under Sec. 668.23(h); and
    (ii) Calculate and pay refunds and repayments due a student, the 
Title IV, HEA program accounts, and the student's lender under the 
Federal Stafford Loan, Federal PLUS, and Federal SLS programs in 
accordance with the institution's refund policy, the provisions of 
Secs. 668.21 and 668.22, and applicable program regulations; and
    (5) If the servicer or institution terminates the contract, or if 
the servicer stops providing services for the administration of a Title 
IV, HEA program, goes out of business, or files a petition under the 
Bankruptcy Code, return to the institution all--
    (i) Records in the servicer's possession pertaining to the 
institution's participation in the program or programs for which 
services are no longer provided; and
    (ii) Funds, including Title IV, HEA program funds, received from or 
on behalf of the institution or the institution's students, for the 
purposes of the program or programs for which services are no longer 
provided.
    (d) A third-party servicer may not enter into a written contract 
with an institution for the administration of any aspect of the 
institution's participation in any Title IV, HEA program, if--
    (1)(i) The servicer has been limited, suspended, or terminated by 
the Secretary within the preceding five years;
    (ii) The servicer has had, during the servicer's two most recent 
audits of the servicer's administration of the Title IV, HEA programs, 
an audit finding that resulted in the servicer's being required to 
repay an amount greater than five percent of the funds that the 
servicer administered under the Title IV, HEA programs for any award 
year; or
    (iii) The servicer has been cited during the preceding five years 
for failure to submit audit reports required under Title IV of the HEA 
in a timely fashion; and
    (2)(i) In the case of a third-party servicer that has been 
subjected to a termination action by the Secretary, either the 
servicer, or one or more persons or entities that the Secretary 
determines (under the provisions of Sec. 668.15) exercise substantial 
control over the servicer, or both, have not submitted to the Secretary 
financial guarantees in an amount determined by the Secretary to be 
sufficient to satisfy the servicer's potential liabilities arising from 
the servicer's administration of the Title IV, HEA programs; and
    (ii) One or more persons or entities that the Secretary determines 
(under the provisions of Sec. 668.15) exercise substantial control over 
the servicer have not agreed to be jointly or severally liable for any 
liabilities arising from the servicer's administration of the Title IV, 
HEA programs and civil and criminal monetary penalties authorized under 
Title IV of the HEA.
    (e)(1)(i) An institution that participates in a Title IV, HEA 
program shall notify the Secretary within 10 days of the date that--
    (A) The institution enters into a new contract or significantly 
modifies an existing contract with a third-party servicer to administer 
any aspect of that program;
    (B) The institution or a third-party servicer terminates a contract 
for the servicer to administer any aspect of that program; or
    (C) A third-party servicer that administers any aspect of the 
institution's participation in that program stops providing services 
for the administration of that program, goes out of business, or files 
a petition under the Bankruptcy Code.
    (ii) The institution's notification must include the name and 
address of the servicer.
    (2) An institution that contracts with a third-party servicer to 
administer any aspect of the institution's participation in a Title IV, 
HEA program shall provide to the Secretary, upon request, a copy of the 
contract, including any modifications, and provide information 
pertaining to the contract or to the servicer's administration of the 
institution's participation in any Title IV, HEA program.

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

    19. Newly redesignated Sec. 668.26 is revised to read as follows:


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

    (a) An institution's participation in a Title IV, HEA program ends 
on the date that--
    (1) The institution closes or stops providing educational programs 
for a reason other than a normal vacation period or a natural disaster 
that directly affects the institution or the institution's students;
    (2) The institution loses its institutional eligibility under 34 
CFR part 600;
    (3) The institution's participation is terminated under the 
proceedings in subpart G of this part;
    (4) The institution's period of participation, as specified under 
Sec. 668.13, expires, or the institution's provisional certification is 
revoked under Sec. 668.13;
    (5) The institution's program participation agreement is terminated 
or expires under Sec. 668.14;
    (6) The institution's participation ends under Sec. 668.17(c); or
    (7) The Secretary receives a notice from the appropriate State 
postsecondary review entity designated under 34 CFR part 667 that the 
institution's participation should be withdrawn.
    (b) If an institution's participation in a Title IV, HEA program 
ends, the institution shall--
    (1) Immediately notify the Secretary of that fact;
    (2) Submit to the Secretary within 45 days after the date that the 
participation ends--
    (i) All financial, performance, and other reports required by 
appropriate Title IV, HEA program regulations; and
    (ii) A letter of engagement for an independent audit of all funds 
that the institution received under that program, the report of which 
shall be submitted to the Secretary within 45 days after the date of 
the engagement letter;
    (3) Inform the Secretary of the arrangements that the institution 
has made for the proper retention and storage for a minimum of five 
years of all records concerning the administration of that program;
    (4) If the institution's participation in the Federal Perkins Loan 
or FDSL Program ended, inform the Secretary of how the institution will 
provide for the collection of any outstanding loans made under that 
program;
    (5) If the institution's participation in the NEISP or SSIG Program 
ended--
    (i) Inform immediately the State in which the institution is 
located of that fact; and
    (ii) Notwithstanding paragraphs (c) through (e) of this section, 
follow the instructions of that State concerning the end of that 
participation;
    (6) If the institution's participation in all the Title IV, HEA 
programs ended, inform the Secretary of how the institution will 
provide for the collection of any outstanding loans made under the 
National Defense/Direct Student Loan and ICL programs; and
    (7) Continue to distribute refunds according to Sec. 668.22.
    (c) If an institution closes or stops providing educational 
programs for a reason other than a normal vacation period or a natural 
disaster that directly affects the institution or the institution's 
students, the institution shall--
    (1) Return to the Secretary, or otherwise dispose of under 
instructions from the Secretary, any unexpended funds that the 
institution has received under the Title IV, HEA programs for 
attendance at the institution, less the institution's administrative 
allowance, if applicable; and
    (2) Return to the appropriate lenders any Federal Stafford Loan and 
Federal SLS program proceeds that the institution has received but not 
delivered to, or credited to the accounts of, students attending the 
institution.
    (d)(1) An institution may use funds that it has received under the 
Federal Pell Grant or PAS Program or a campus-based program or request 
additional funds from the Secretary, under conditions specified by the 
Secretary, if the institution does not possess sufficient funds, to 
satisfy any unpaid commitment made to a student under that Title IV, 
HEA program only if--
    (i) The institution's participation in that Title IV, HEA program 
ends during a payment period;
    (ii) The institution continues to provide, from the date that the 
participation ends until the scheduled completion date of that payment 
period, educational programs to otherwise eligible students enrolled in 
the formerly eligible programs of the institution;
    (iii) The commitment was made prior to the end of the 
participation; and
    (iv) The commitment was made for attendance during that payment 
period or a previously completed payment period.
    (2) An institution may credit to a student's account or deliver to 
the student the proceeds of a disbursement of a Federal Stafford or 
Federal SLS loan to satisfy any unpaid commitment made to the student 
under the Federal Stafford Loan or Federal SLS Program only if--
    (i) The institution's participation in that Title IV, HEA program 
ends during a period of enrollment;
    (ii) The institution continues to provide, from the date that the 
participation ends until the scheduled completion date of that period 
of enrollment, educational programs to otherwise eligible students 
enrolled in the formerly eligible programs of the institution;
    (iii) The commitment was made prior to the end of the 
participation;
    (iv) The commitment was made for attendance during that period of 
enrollment; and
    (v) The proceeds of the first disbursement of the loan were 
delivered to the student or credited to the student's account prior to 
the end of the participation.
    (3) An institution may use funds that it has received under the 
FDSL Program or request additional funds from the Secretary, under 
conditions specified by the Secretary, if the institution does not 
possess sufficient funds, to credit to a student's account or deliver 
to the student the proceeds of a disbursement of a Federal Direct 
Student loan only if--
    (i) The institution's participation in the FDSL Program ends during 
a period of enrollment;
    (ii) The institution continues to provide, from the date that the 
participation ends until the scheduled completion date of that period 
of enrollment, educational programs to otherwise eligible students 
enrolled in the formerly eligible programs of the institution;
    (iii) The loan was made for attendance during that period of 
enrollment; and
    (iv) The proceeds of the first disbursement of the loan were 
delivered to the student or credited to the student's account prior to 
the end of the participation.
    (e) For the purposes of this section--
    (1) A commitment under the Federal Pell Grant and PAS programs 
occurs when a student is enrolled and attending the institution and has 
submitted a valid Student Aid Report to the institution or when an 
institution has received a valid institutional student information 
report;
    (2) A commitment under the campus-based programs occurs when a 
student is enrolled and attending the institution and has received a 
notice from the institution of the amount that he or she can expect to 
receive and how and when that amount will be paid; and
    (3) A commitment under the Federal Stafford and Federal SLS 
programs occurs when the Secretary or a guaranty agency notifies the 
lender that the loan is guaranteed.

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

    20. Section 668.81 is amended by redesignating paragraph (a)(1) 
introductory text as paragraph (a) introductory text; revising newly 
redesignated paragraph (a) introductory text; removing paragraph 
(a)(2); redesignating paragraph (a)(1)(i) through (a)(1)(iii) as 
paragraph (a)(1) through (3), respectively; adding a new paragraph 
(a)(4); revising paragraphs (b), (c), and (d); and removing paragraph 
(f) to read as follows:


Sec. 668.81  Scope and special definitions.

    (a) This subpart establishes regulations for the following actions 
with respect to a participating institution or third-party servicer:
* * * * *
    (4) The limitation, suspension, or termination of the eligibility 
of the servicer to contract with any institution to administer any 
aspect of the institution's participation in a Title IV, HEA program.
    (b) This subpart applies to an institution or a third-party 
servicer that violates any statutory provision of or applicable to 
Title IV of the HEA, any regulatory provision prescribed under that 
statutory authority, or any applicable special arrangement, agreement, 
or limitation entered into under the authority of statutes applicable 
to Title IV of the HEA.
    (c) This subpart does not apply to a determination that--
    (1) An institution or any of its locations or educational programs 
fails to qualify for initial designation as an eligible institution, 
location, or educational program because the institution, location, or 
educational program fails to satisfy the statutory and regulatory 
provisions that define an eligible institution or educational program 
with respect to the Title IV, HEA program for which a designation of 
eligibility is sought;
    (2) An institution fails to qualify for initial certification or 
provisional certification to participate in any Title IV, HEA program 
because the institution does not meet the factors of financial 
responsibility and standards of administrative capability contained in 
subpart B of this part;
    (3) A participating institution's or a provisionally certified 
participating institution's period of participation, as specified under 
Sec. 668.13, has expired; or
    (4) A participating institution's provisional certification is 
revoked under the procedures in Sec. 668.13.
    (d) This subpart does not apply to a determination by the Secretary 
of the system to be used to disburse Title IV, HEA program funds to a 
participating institution (i.e., advance payments and payments by way 
of reimbursements).
* * * * *
    21. Section 668.82 is revised to read as follows:


Sec. 668.82  Standard of conduct.

    (a) A participating institution or a third-party servicer that 
contracts with that institution acts in the nature of a fiduciary in 
the administration of the Title IV, HEA programs. To participate in any 
Title IV, HEA program, the institution or servicer must at all times 
act with the competency and integrity necessary to qualify as a 
fiduciary.
    (b) In the capacity of a fiduciary--
    (1) A participating institution is subject to the highest standard 
of care and diligence in administering the programs and in accounting 
to the Secretary for the funds received under those programs; and
    (2) A third-party servicer is subject to the highest standard of 
care and diligence in administering any aspect of the programs on 
behalf of the institutions with which the servicer contracts and in 
accounting to the Secretary and those institutions for any funds 
administered by the servicer under those programs.
    (c) The failure of a participating institution or any of the 
institution's third-party servicers to administer a Title IV, HEA 
program, or to account for the funds that the institution or servicer 
receives under that program, in accordance with the highest standard of 
care and diligence required of a fiduciary, constitutes grounds for--
    (1) An emergency action against the institution, a fine on the 
institution, or the limitation, suspension, or termination of the 
institution's participation in that program; or
    (2) An emergency action against the servicer, a fine on the 
servicer, or the limitation, suspension, or termination of the 
servicer's eligibility to contract with any institution to administer 
any aspect of the institution's participation in that program.
    (d)(1) A participating institution or a third-party servicer with 
which the institution contracts violates its fiduciary duty if--
    (i)(A) The servicer has been convicted of, or has pled nolo 
contendere or guilty to, a crime involving the acquisition, use, or 
expenditure of Federal, State, or local government funds, or has been 
administratively or judicially determined to have committed fraud or 
any other material violation of law involving those funds;
    (B) A person who exercises substantial control over the servicer, 
as determined according to Sec. 668.15, has been convicted of, or has 
pled nolo contendere or guilty to, a crime involving the acquisition, 
use, or expenditure of Federal, State, or local government funds, or 
has been administratively or judicially determined to have committed 
fraud or any other material violation of law involving those funds;
    (C) The servicer employs a person in a capacity that involves the 
administration of Title IV, HEA programs or the receipt of Title IV, 
HEA program funds who has been convicted of, or has pled nolo 
contendere or guilty to, a crime involving the acquisition, use, or 
expenditure of Federal, State, or local government funds, or who has 
been administratively or judicially determined to have committed fraud 
or any other material violation of law involving those funds; or
    (D) The servicer uses or contracts in a capacity that involves any 
aspect of the administration of the Title IV, HEA programs with any 
other person, agency, or organization that has been or whose officers 
or employees have been--
    (1) Convicted of, or pled nolo contendere or guilty to, a crime 
involving the acquisition, use, or expenditure of Federal, State, or 
local government funds; or
    (2) Administratively or judicially determined to have committed 
fraud or any other material violation of law involving Federal, State, 
or local government funds; and
    (ii) Upon learning of a conviction, plea, or administrative or 
judicial determination described in paragraph (d)(1)(i) of this 
section, the institution or servicer, as applicable, does not promptly 
remove the person, agency, or organization from any involvement in the 
administration of the institution's participation in Title IV, HEA 
programs, or, as applicable, the removal or elimination of any 
substantial control, as determined according to Sec. 668.15, over the 
servicer.
    (2) A violation for a reason contained in paragraph (d)(1) of this 
section is grounds for terminating--
    (i) The servicer's eligibility to contract with any institution to 
administer any aspect of the institution's participation in a Title IV, 
HEA program; and
    (ii) The participation in any Title IV, HEA program of any 
institution under whose contract the servicer committed the violation, 
if that institution had been aware of the violation and had failed to 
take the appropriate action described in paragraph (d)(1)(ii) of this 
section.
    (e)(1) A participating institution or third-party servicer, as 
applicable, violates its fiduciary duty if--
    (i)(A) The institution or servicer, as applicable, is debarred or 
suspended under Executive Order (E.O.) 12549 (3 CFR, 1986 Comp., p. 
189) or the Federal Acquisition Regulations (FAR), 48 CFR part 9, 
subpart 9.4; or
    (B) Cause exists under 34 CFR 85.305 or 85.405 for debarring or 
suspending the institution, servicer, or any principal or affiliate of 
the institution or servicer under E.O. 12549 (3 CFR, 1986 Comp., p. 
189) or the FAR, 48 CFR part 9, subpart 9.4; and
    (ii) Upon learning of the debarment, suspension, or cause for 
debarment or suspension, the institution or servicer, as applicable, 
does not promptly--
    (A) Discontinue the affiliation; or
    (B) Remove the principal from responsibility for any aspect of the 
administration of an institution's or servicer's participation in the 
Title IV, HEA programs.
    (2) A violation for a reason contained in paragraph (e)(1) of this 
section is grounds for terminating--
    (i) The institution's participation in any Title IV, HEA program; 
and
    (ii) The servicer's eligibility to contract with any institution to 
administer any aspect of the institution's participation in any Title 
IV, HEA program. The violation is also grounds for terminating, under 
this subpart, the participation in any Title IV, HEA program of any 
institution under whose contract the servicer committed the violation, 
if that institution knew or should have known of the violation.
    (f)(1) The debarment of a participating institution or third-party 
servicer, as applicable, under E.O. 12549 (3 CFR, 1986 Comp., p. 189) 
or the FAR, 48 CFR part 9, subpart 9.4, by the Secretary or another 
Federal agency from participation in Federal programs, under procedures 
that comply with 5 U.S.C. 554-557 (formal adjudication requirements 
under the Administrative Procedure Act), terminates, for the duration 
of the debarment--
    (i) The institution's participation in any Title IV, HEA program; 
and
    (ii) The servicer's eligibility to contract with any institution to 
administer any aspect of the institution's participation in any Title 
IV, HEA program.
    (2)(i) The suspension of a participating institution or third-party 
servicer, as applicable, under E.O. 12549 (3 CFR, 1986 Comp., p. 189) 
or the FAR, 48 CFR part 9, subpart 9.4, by the Secretary or another 
Federal agency from participation in Federal programs, under procedures 
that comply with 5 U.S.C. 554-557, suspends--
    (A) The institution's participation in any Title IV, HEA program; 
and
    (B) The servicer's eligibility to contract with any institution to 
administer any aspect of the institution's participation in any Title 
IV, HEA program.
    (ii) A suspension under this paragraph lasts for a period of 60 
days, beginning on the date of the suspending official's decision, 
except that the suspension may last longer if--
    (A) The institution or servicer, as applicable, and the Secretary, 
agree to an extension of the suspension; or
    (B) The Secretary begins a limitation or termination proceeding 
against the institution or servicer, as applicable, under this subpart 
before the 60th day of the suspension.

(Authority: E.O. 12549 (3 CFR, 1986 Comp., p. 189), E.O. 12689 (3 
CFR, 1989 Comp., p. 235); 20 U.S.C. 1070, et seq., 1082(a)(1) and 
(h)(1), 1094(c)(1)(D) and (H), and 3474)

    22. Section 668.83 is revised to read as follows:


Sec. 668.83  Emergency action.

    (a) Under an emergency action, the Secretary may--
    (1) Withhold Title IV, HEA program funds from a participating 
institution or its students, or from a third-party servicer, as 
applicable;
    (2)(i) Withdraw the authority of the institution or servicer, as 
applicable, to commit, disburse, deliver, or cause the commitment, 
disbursement, or delivery of Title IV, HEA program funds; or
    (ii) Withdraw the authority of the institution or servicer, as 
applicable, to commit, disburse, deliver, or cause the commitment, 
disbursement, or delivery of Title IV, HEA program funds except in 
accordance with a particular procedure; and
    (3)(i) Withdraw the authority of the servicer to administer any 
aspect of any institution's participation in any Title IV, HEA program; 
or
    (ii) Withdraw the authority of the servicer to administer any 
aspect of any institution's participation in any Title IV, HEA program 
except in accordance with a particular procedure.
    (b)(1) An initiating official begins an emergency action against an 
institution or third-party servicer by sending the institution or 
servicer a notice by registered mail, return receipt requested. In an 
emergency action against a third-party servicer, the official also 
sends the notice to each institution that contracts with the servicer. 
The official also may transmit the notice by other, more expeditious 
means if practical.
    (2) The emergency action takes effect on the date the initiating 
official mails the notice to the institution or servicer, as 
applicable.
    (3) The notice states the grounds on which the emergency action is 
based, the consequences of the emergency action, and that the 
institution or servicer, as applicable, may request an opportunity to 
show cause why the emergency action is unwarranted.
    (c)(1) An initiating official takes emergency action against an 
institution or third-party servicer only if that official--
    (i) Receives information, determined by the official to be 
reliable, that the institution or servicer, as applicable, is violating 
any statutory provision of or applicable to Title IV of the HEA, any 
regulatory provision prescribed under that statutory authority, or any 
applicable special arrangement, agreement, or limitation entered into 
under the authority of statutes applicable to Title IV of the HEA;
    (ii) Determines that immediate action is necessary to prevent 
misuse of Title IV, HEA program funds; and
    (iii) Determines that the likelihood of loss from that misuse 
outweighs the importance of awaiting completion of any proceeding that 
may be initiated to limit, suspend, or terminate, as applicable--
    (A) The participation of the institution in one or more Title IV, 
HEA programs; or
    (B) The eligibility of the servicer to contract with any 
institution to administer any aspect of the institution's participation 
in a Title IV, HEA program.
    (2) Examples of violations of a Title IV, HEA program requirement 
that cause misuse and the likely loss of Title IV, HEA program funds 
include--
    (i) Causing the commitment, disbursement, or delivery by any party 
of Title IV, HEA program funds in an amount that exceeds--
    (A) The amount for which students are eligible; or
    (B) The amount of principal, interest, or special allowance 
payments that would have been payable to the holder of a Federal 
Stafford, Federal PLUS, or Federal SLS loan if a refund allocable to 
that loan had been made in the amount and at the time required;
    (ii) Using, offering to make available, or causing the use or 
availability of Title IV, HEA program funds for educational services 
if--
    (A) The institution, servicer, or agents of the institution or 
servicer have made a substantial misrepresentation as described in 
Secs. 668.72, 668.73, or 668.74 related to those services;
    (B) The institution lacks the administrative or financial ability 
to provide those services in full; or
    (C) The institution, or servicer, as applicable, lacks the 
administrative or financial ability to compensate by appropriate refund 
for any portion of an educational program not completed by a student; 
and
    (iii) Engaging in fraud involving the administration of a Title IV, 
HEA program. Examples of fraud include--
    (A) Falsification of any document received from a student or 
pertaining to a student's eligibility for assistance under a Title IV, 
HEA program;
    (B) Falsification, including false certifications, of any document 
submitted by the institution or servicer to the Secretary;
    (C) Falsification, including false certifications, of any document 
used for or pertaining to--
    (1) The legal authority of an institution to provide postsecondary 
education in the State in which the institution is located; or
    (2) The accreditation or preaccreditation of an institution or any 
of the institution's educational programs or locations;
    (D) Falsification, including false certifications, of any document 
submitted to a guaranty agency under the Federal Stafford Loan, Federal 
PLUS, and Federal SLS programs or an independent auditor;
    (E) Falsification of any document submitted to a third-party 
servicer by an institution or to an institution by a third-party 
servicer pertaining to the institution's participation in a Title IV, 
HEA program; and
    (F) Falsification, including false certifications, of any document 
pertaining to the performance of any loan collection activity, 
including activity that is not required by the HEA or applicable 
program regulations.
    (3) If the Secretary begins an emergency action against a third-
party servicer, the Secretary may also begin an emergency action 
against any institution under whose contract a third-party servicer 
commits the violation.
    (d)(1) Except as provided in paragraph (d)(2) of this section, 
after an emergency action becomes effective, an institution or third-
party servicer, as applicable, may not--
    (i) Make or increase awards or make other commitments of aid to a 
student under the applicable Title IV, HEA program;
    (ii) Disburse either program funds, institutional funds, or other 
funds as assistance to a student under that Title IV, HEA program;
    (iii) In the case of an emergency action pertaining to 
participation in the Federal Stafford Loan, Federal PLUS, or Federal 
SLS Program--
    (A) Certify an application for a loan under that program;
    (B) Deliver loan proceeds to a student under that program; or
    (C) Retain the proceeds of a loan made under that program that are 
received after the emergency action takes effect; or
    (iv) In the case of an emergency action against a third-party 
servicer, administer any aspect of any institution's participation in 
any Title IV, HEA program.
    (2) If the initiating official withdraws, by an emergency action, 
the authority of the institution or servicer to commit, disburse, 
deliver, or cause the commitment, disbursement, or delivery of Title 
IV, HEA program funds, or the authority of the servicer to administer 
any aspect of any institution's participation in any Title IV, HEA 
program, except in accordance with a particular procedure specified in 
the notice of emergency action, the institution or servicer, as 
applicable, may not take any action described in paragraph (d)(1) of 
this section except in accordance with the procedure specified in the 
notice.
    (e)(1) Upon request by the institution or servicer, as applicable, 
the Secretary provides the institution or servicer, as soon as 
practicable, with an opportunity to show cause that the emergency 
action is unwarranted or should be modified.
    (2) An opportunity to show cause consists of an opportunity to 
present evidence and argument to a show-cause official. The initiating 
official does not act as the show-cause official for any emergency 
action that the initiating official has begun. The show-cause official 
is authorized to grant relief from the emergency action. The 
institution or servicer may make its presentation in writing or, upon 
its request, at an informal meeting with the show-cause official.
    (3) The show-cause official may limit the time and manner in which 
argument and evidence may be presented in order to avoid unnecessary 
delay or the presentation of immaterial, irrelevant, or repetitious 
matter.
    (4) The institution or servicer, as applicable, has the burden of 
persuading the show-cause official that the emergency action imposed by 
the notice is unwarranted or should be modified because--
    (i) The grounds stated in the notice did not, or no longer, exist;
    (ii) The grounds stated in the notice will not cause loss or misuse 
of Title IV, HEA program funds; or
    (iii) The institution or servicer, as applicable, will use 
procedures that will reliably eliminate the risk of loss from the 
misuse described in the notice.
    (5) The show-cause official continues, modifies, or revokes the 
emergency action promptly after consideration of any argument and 
evidence presented by the institution or servicer, as applicable, and 
the initiating official.
    (6) The show-cause official notifies the institution or servicer, 
as applicable, of that official's determination promptly after the 
completion of the show-cause meeting or, if no meeting is requested, 
after the official receives all the material submitted by the 
institution in opposition to the emergency action. In the case of a 
notice to a third-party servicer, the official also notifies each 
institution that contracts with the servicer of that determination. The 
show-cause official may explain that determination by adopting or 
modifying the statement of reasons provided in the notice of emergency 
action.
    (f)(1) An emergency action does not extend more than 30 days after 
initiated unless the Secretary initiates a limitation, suspension, or 
termination proceeding under this part or under 34 CFR part 600 against 
the institution or servicer, as applicable, within that 30-day period, 
in which case the emergency action continues until a final decision is 
issued in that proceeding, as provided in Sec. 668.90(c), as 
applicable.
    (2) Until a final decision is issued by the Secretary in a 
proceeding described in paragraph (f)(1) of this section, the 
continuation, modification, or revocation of the emergency action is at 
the sole discretion of the initiating official, or, if a show-cause 
proceeding is conducted, the show-cause official.
    (3) If an emergency action extends beyond 180 days by virtue of 
paragraph (f)(1) of this section, the institution or servicer, as 
applicable, may then submit written material to the show-cause official 
to demonstrate that because of facts occurring after the later of the 
notice by the initiating official or the show-cause meeting, 
continuation of the emergency action is unwarranted and the emergency 
action should be modified or ended. The show-cause official considers 
any written material submitted and issues a determination that 
continues, modifies, or revokes the emergency action.
    (g) The expiration, modification, or revocation of an emergency 
action against an institution or third-party servicer does not bar 
subsequent emergency action against that institution on grounds other 
than those specifically identified in the notice imposing the prior 
emergency action. Separate grounds may include violation by an 
institution or third-party servicer of an agreement or limitation 
imposed or resulting from the prior emergency action.

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

    23. Section 668.84 is revised to read as follows:


Sec. 668.84  Fine proceedings.

    (a) Scope and consequences. (1) The Secretary may impose a fine of 
up to $25,000 per violation on a participating institution or third-
party servicer that--
    (i) Violates any statutory provision of or applicable to Title IV 
of the HEA, any regulatory provision prescribed under that statutory 
authority, or any applicable special arrangement, agreement, or 
limitation entered into under the authority of statutes applicable to 
Title IV of the HEA; or
    (ii) Substantially misrepresents the nature of--
    (A) In the case of an institution, its educational program, its 
financial charges, or the employability of its graduates; or
    (B) In the case of a third-party servicer, as applicable, the 
educational program, financial charges, or employability of the 
graduates of any institution that contracts with the servicer.
    (2) If the Secretary begins a fine proceeding against a third-party 
servicer, the Secretary also may begin a fine, limitation, suspension, 
or termination proceeding against any institution under whose contract 
a third-party servicer commits the violation.
    (b) Procedures. (1) A designated department official begins a fine 
proceeding by sending the institution or servicer, as applicable, a 
notice by certified mail, return receipt requested. In the case of a 
fine proceeding against a third-party servicer, the official also sends 
the notice to each institution that is affected by the alleged 
violations identified as the basis for the fine action, and, to the 
extent possible, to each institution that contracts with the servicer 
for the same service affected by the violation. This notice--
    (i) Informs the institution or servicer of the Secretary's intent 
to fine the institution or servicer, as applicable, and the amount of 
the fine and identifies the alleged violations that constitute the 
basis for the action;
    (ii) Specifies the proposed effective date of the fine, which is at 
least 20 days from mailing of the notice of intent;
    (iii) Informs the institution or servicer that the fine will not be 
effective on the date specified in the notice if the designated 
department official receives from the institution or servicer, as 
applicable, by that date a written request for a hearing or written 
material indicating why the fine should not be imposed; and
    (iv) In the case of a fine proceeding against a third-party 
servicer, informs each institution that is affected by the alleged 
violations of the consequences of the action to the institution.
    (2) If the institution or servicer does not request a hearing but 
submits written material, the designated department official, after 
considering that material, notifies the institution or, in the case of 
a third-party servicer, the servicer and each institution affected by 
the alleged violations that--
    (i) The fine will not be imposed; or
    (ii) The fine is imposed as of a specified date, and in a specified 
amount.
    (3) If the institution or servicer requests a hearing by the time 
specified in paragraph (b)(1)(iii) of this section, the designated 
department official sets the date and the place. The date is at least 
15 days after the designated department official receives the request.
    (4) A hearing official conducts a hearing in accordance with 
Sec. 668.88.
    (c) Expedited proceedings. With the approval of the hearing 
official and the consent of the designated department official and the 
institution or servicer, any time schedule specified in this section 
may be shortened.

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

    24. Section 668.85 is revised to read as follows:


Sec. 668.85  Suspension proceedings.

    (a) Scope and consequences.  (1) The Secretary may suspend an 
institution's participation in a Title IV, HEA program or the 
eligibility of a third-party servicer to contract with any institution 
to administer any aspect of the institution's participation in any 
Title IV, HEA program, if the institution or servicer--
    (i) Violates any statutory provision of or applicable to Title IV 
of the HEA, any regulatory provision prescribed under that statutory 
authority, or any applicable special arrangement, agreement, or 
limitation entered into under the authority of statutes applicable to 
Title IV of the HEA; or
    (ii) Substantially misrepresents the nature of--
    (A) In the case of an institution, its educational program, its 
financial charges, or the employability of its graduates; or
    (B) In the case of a third-party servicer, as applicable, the 
educational program, financial charges, or employability of the 
graduates of any institution that contracts with the servicer.
    (2) If the Secretary begins a suspension proceeding against a 
third-party servicer, the Secretary also may begin a fine, limitation, 
suspension, or termination proceeding against any institution under 
whose contract a third-party servicer commits the violation.
    (3) The suspension may not exceed 60 days unless--
    (i) The institution or servicer and the Secretary agree to an 
extension if the institution or servicer, as applicable, has not 
requested a hearing; or
    (ii) The designated department official begins a limitation or 
termination proceeding under Sec. 668.86.
    (b) Procedures. (1) A designated department official begins a 
suspension proceeding by sending a notice to an institution or third-
party servicer by certified mail, return receipt requested. In the case 
of a suspension proceeding against a third-party servicer, the official 
also sends the notice to each institution that contracts with the 
servicer. The designated department official may also transmit the 
notice by other, more expeditious means if practical. The notice--
    (i) Informs the institution or servicer of the intent of the 
Secretary to suspend the institution's participation or the servicer's 
eligibility, as applicable, cites the consequences of that action, and 
identifies the alleged violations that constitute the basis for the 
action;
    (ii) Specifies the proposed effective date of the suspension, which 
is at least 20 days after the date of mailing of the notice of intent;
    (iii) Informs the institution or servicer that the suspension will 
not be effective on the date specified in the notice, except as 
provided in Sec. 668.90(b)(2), if the designated department official 
receives from the institution or servicer, as applicable, by that date 
a request for a hearing or written material indicating why the 
suspension should not take place; and
    (iv) In the case of a suspension proceeding against a third-party 
servicer, informs each institution that contracts with the servicer of 
the consequences of the action to the institution.
    (2) If the institution or servicer does not request a hearing, but 
submits written material, the designated department official, after 
considering that material, notifies the institution or, in the case of 
a third-party servicer, the servicer and each institution that 
contracts with the servicer that--
    (i) The proposed suspension is dismissed; or
    (ii) The suspension is effective as of a specified date.
    (3) If the institution or servicer requests a hearing by the time 
specified in paragraph (b)(1)(iii) of this section, the designated 
department official sets the date and the place. The date is at least 
15 days after the designated department official receives the request. 
The suspension does not take place until after the requested hearing is 
held.
    (4) A hearing official conducts a hearing in accordance with 
Sec. 668.88.
    (c) Expedited proceedings. With the approval of the hearing 
official and the consent of the designated department official and the 
institution or servicer, as applicable, any time period specified in 
this section may be shortened.

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

    25. Section 668.86 is revised to read as follows:


Sec. 668.86  Limitation or termination proceedings.

    (a) Scope and consequences. (1) The Secretary may limit or 
terminate an institution's participation in a Title IV, HEA program or 
the eligibility of a third-party servicer to contract with any 
institution to administer any aspect of the institution's participation 
in any Title IV, HEA program, if the institution or servicer--
    (i) Violates any statutory provision of or applicable to Title IV 
of the HEA, any regulatory provision prescribed under that statutory 
authority, or any applicable special arrangement, agreement, or 
limitation entered into under the authority of statutes applicable to 
Title IV of the HEA; or
    (ii) Substantially misrepresents the nature of--
    (A) In the case of an institution, its educational program, its 
financial charges, or the employability of its graduates; or
    (B) In the case of a third-party servicer, as applicable, the 
educational program, financial charges, or employability of the 
graduates of any institution that contracts with the servicer.
    (2) If the Secretary begins a limitation or termination proceeding 
against a third-party servicer, the Secretary also may begin a fine, 
limitation, suspension, or termination proceeding against any 
institution under whose contract a third-party servicer commits the 
violation.
    (3) The consequences of the limitation or termination of the 
institution's participation or the servicer's eligibility are described 
in Secs. 668.93 and 668.94, respectively.
    (b) Procedures. (1) A designated department official begins a 
limitation or termination proceeding by sending an institution or 
third-party servicer a notice by certified mail, return receipt 
requested. In the case of a limitation or termination proceeding 
against a third-party servicer, the official also sends the notice to 
each institution that contracts with the servicer. The designated 
department official may also transmit the notice by other, more 
expeditious means if practical. This notice--
    (i) Informs the institution or servicer of the intent of the 
Secretary to limit or terminate the institution's participation or 
servicer's eligibility, as applicable, cites the consequences of that 
action, and identifies the alleged violations that constitute the basis 
for the action, and, in the case of a limitation proceeding, states the 
limits to be imposed;
    (ii) Specifies the proposed effective date of the limitation or 
termination, which is at least 20 days after the date of mailing of the 
notice of intent;
    (iii) Informs the institution or servicer that the limitation or 
termination will not be effective on the date specified in the notice 
if the designated department official receives from the institution or 
servicer, as applicable, by that date a request for a hearing or 
written material indicating why the limitation or termination should 
not take place; and
    (iv) In the case of a limitation or termination proceeding against 
a third-party servicer, informs each institution that contracts with 
the servicer of the consequences of the action to the institution.
    (2) If the institution or servicer does not request a hearing but 
submits written material, the designated department official, after 
considering that material, notifies the institution or, in the case of 
a third-party servicer, the servicer and each institution that 
contracts with the servicer that--
    (i) The proposed action is dismissed;
    (ii) Limitations are effective as of a specified date; or
    (iii) The termination is effective as of a specified date.
    (3) If the institution or servicer requests a hearing by the time 
specified in paragraph (b)(1)(iii) of this section, the designated 
department official sets the date and the place. The date is at least 
15 days after the designated department official receives the request. 
The limitation or termination does not take place until after the 
requested hearing is held.
    (4) A hearing official conducts a hearing in accordance with 
Sec. 668.88.
    (c) Expedited proceeding. With the approval of the hearing official 
and the consent of the designated department official and the 
institution or servicer, as applicable, any time schedule specified in 
this section may be shortened.

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

    26. Section 668.87 is revised to read as follows:


Sec. 668.87  Prehearing conference.

    (a) A hearing official may convene a prehearing conference if he or 
she thinks that the conference would be useful, or if the conference is 
requested by--
    (1) The designated department official who brought a proceeding 
against an institution or third-party servicer under this subpart; or
    (2) The institution or servicer, as applicable.
    (b) The purpose of a prehearing conference is to allow the parties 
to settle or narrow the dispute.
    (c) If the hearing official, the designated department official, 
and the institution, or servicer, as applicable, agree, a prehearing 
conference may consist of--
    (1) A conference telephone call;
    (2) An informal meeting; or
    (3) The submission and exchange of written material.

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

    27. Section 668.88 is amended by revising paragraph (b) 
introductory text and paragraph (d) to read as follows:


Sec. 668.88  Hearing.

* * * * *
    (b) If the hearing official, the designated department official who 
brought a proceeding against an institution or third-party servicer 
under this subpart, and the institution or servicer, as applicable, 
agree, the hearing process may be expedited. Procedures to expedite the 
hearing process may include, but are not limited to, the following--
* * * * *
    (d) The designated department official makes a transcribed record 
of the proceeding and makes one copy of the record available to the 
institution or servicer.

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

    28. Section 668.89 is amended by revising paragraphs (a), (b)(2), 
and (c) introductory text, and adding a new paragraph (d) to read as 
follows:


Sec. 668.89  Authority and responsibilities of the hearing official.

    (a) The hearing official regulates the course of a hearing and the 
conduct of the parties during the hearing. The hearing official takes 
all necessary steps to conduct a fair and impartial hearing.
    (b) * * *
    (2) If requested by the hearing official, the parties to a hearing 
shall provide available personnel who have knowledge about the matter 
under review for oral or written examination.
    (c) The hearing official takes whatever measures are appropriate to 
expedite a hearing. These measures may include, but are not limited to, 
the following--
* * * * *
    (d) The hearing official is bound by all applicable statutes and 
regulations. The hearing official may not--
    (1) Waive applicable statutes and regulations; or
    (2) Rule them invalid.

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

    29. Section 668.90 is revised to read as follows:


Sec. 668.90  Initial and final decisions--Appeals.

    (a)(1)(i) A hearing official issues a written initial decision in a 
hearing by certified mail, return receipt requested to--
    (A) The designated department official who began a proceeding 
against an institution or third-party servicer;
    (B) The institution or servicer, as applicable; and
    (C) In the case of a proceeding against a third-party servicer, 
each institution that contracts with the servicer.
    (ii) The hearing official may also transmit the notice by other, 
more expeditious means if practical.
    (iii) The hearing official issues the decision within the latest of 
the following dates:
    (A) The 30th day after the last submission is filed with the 
hearing official.
    (B) The 60th day after the last submission is filed with the 
hearing official if the Secretary, upon request of the hearing 
official, determines that the unusual complexity of the case requires 
additional time for preparation of the decision.
    (C) The 50th day after the last day of the hearing, if the hearing 
official does not request the parties to make any posthearing 
submission.
    (2) The hearing official's initial decision states whether the 
imposition of the fine, limitation, suspension, or termination sought 
by the designated department official is warranted, in whole or in 
part. If the designated department official brought a termination 
action against the institution or servicer, the hearing official may, 
if appropriate, issue an initial decision to fine the institution or 
servicer, as applicable, or, rather than terminating the institution's 
participation or servicer's eligibility, as applicable, impose one or 
more limitations on the institution's participation or servicer's 
eligibility.
    (3) Notwithstanding the provisions of paragraph (a)(2) of this 
section--
    (i) If, in a termination action against an institution, the hearing 
official finds that the institution has violated the provisions of 
Sec. 668.14(b)(18), the hearing official also finds that termination of 
the institution's participation is warranted;
    (ii) If, in a termination action against a third-party servicer, 
the hearing official finds that the servicer has violated the 
provisions of Sec. 668.82(d)(1), the hearing official also finds that 
termination of the institution's participation or servicer's 
eligibility, as applicable, is warranted;
    (iii) If an action brought against an institution or third-party 
servicer involves its failure to provide surety in the amount specified 
by the Secretary under Sec. 668.15, the hearing official finds that the 
amount of the surety established by the Secretary was appropriate, 
unless the institution can demonstrate that the amount was 
unreasonable;
    (iv) In a limitation, suspension, or termination proceeding 
commenced on the grounds described in Sec. 668.17(a)(1), if the hearing 
official finds that an institution's Federal Stafford loan and Federal 
SLS cohort default rate, as defined in Sec. 668.17(e), meets the 
conditions specified in Sec. 668.17(a)(1) for initiation of limitation, 
suspension, or termination proceedings, the hearing official also finds 
that the sanction sought by the designated department official is 
warranted, except that the hearing official finds that no sanction is 
warranted if the institution demonstrates that it has implemented the 
default reduction measures described in Appendix D to this part;
    (v) In a termination action taken against an institution or third-
party servicer based on the grounds that the institution or servicer 
failed to comply with the requirements of Sec. 668.23(c)(3), if the 
hearing official finds that the institution or servicer failed to meet 
those requirements, the hearing official finds that the termination is 
warranted;
    (vi) In a termination action against an institution based on the 
grounds that the institution is not financially responsible under 
Sec. 668.15(c)(1), the hearing official finds that the termination is 
warranted unless the institution demonstrates that all applicable 
conditions described in Sec. 668.15(d)(4) have been met; and
    (vii) In a termination action against an institution or third-party 
servicer on the grounds that the institution or servicer, as 
applicable, engaged in fraud involving the administration of any Title 
IV, HEA program, the hearing official finds that the termination action 
is warranted if the hearing official finds that the institution or 
servicer, as applicable, engaged in that fraud. Examples of fraud 
include--
    (A) Falsification of any document received from a student or 
pertaining to a student's eligibility for assistance under a Title IV, 
HEA program;
    (B) Falsification, including false certifications, of any document 
submitted by the institution or servicer to the Department of 
Education;
    (C) Falsification, including false certifications, of any document 
used for or pertaining to--
    (1) The legal authority of an institution to provide postsecondary 
education in the State in which the institution is located; or
    (2) The accreditation or preaccreditation of an institution or any 
of the institution's educational programs or locations;
    (D) Falsification, including false certifications, of any document 
submitted to a guaranty agency under the Federal Stafford Loan, Federal 
PLUS, and Federal SLS programs, an independent auditor, an eligible 
institution, or a third-party servicer;
    (E) Falsification of any document submitted to a third-party 
servicer by an institution or to an institution by a third-party 
servicer pertaining to the institution's participation in a Title IV, 
HEA program; and
    (F) Falsification, including false certifications, of any document 
pertaining to the performance of any loan collection activity, 
including activity that is not required by the HEA or applicable 
program regulations.
    (4) The hearing official bases findings of fact only on evidence 
considered at the hearing and on matters given judicial notice. If a 
hearing is conducted solely through written submissions, the parties 
must agree to findings of fact.
    (b) (1) In a suspension proceeding, the Secretary reviews the 
hearing official's initial decision and issues a final decision within 
20 days after the initial decision. The Secretary adopts the initial 
decision unless it is clearly unsupported by the evidence presented at 
the hearing.
    (2) The Secretary notifies the institution or servicer and, in the 
case of a suspension proceeding against a third-party servicer, each 
institution that contracts with the servicer of the final decision. If 
the Secretary suspends the institution's participation or servicer's 
eligibility, the suspension takes effect on the later of--
    (i) The day that the institution or servicer receives the notice; 
or
    (ii) The date specified in the designated department official's 
original notice of intent to suspend the institution's participation or 
servicer's eligibility.
    (3) A suspension may not exceed 60 days unless a designated 
department official begins a limitation or termination proceeding under 
this subpart before the expiration of that period. In that case, the 
period may be extended until a final decision is issued in that 
proceeding according to paragraph (c) of this section.
    (c) (1) In a fine, limitation, or termination proceeding, the 
hearing official's initial decision automatically becomes the 
Secretary's final decision 30 days after the initial decision is issued 
and received by both parties unless, within that 30-day period, the 
institution or servicer, as applicable, or the designated department 
official appeals the initial decision to the Secretary.
    (2) (i) A party may appeal the hearing official's initial decision 
by submitting to the Secretary, within 30 days after the party receives 
the initial decision, a brief or other written statement that explains 
why the party believes that the Secretary should reverse or modify the 
decision of the hearing official.
    (ii) At the time the party files its appeal submission, the party 
shall provide a copy of that submission to the opposing party.
    (iii) The opposing party shall submit its brief or other responsive 
statement to the Secretary, with a copy to the appellant, within 30 
days after the opposing party receives the appellant's brief or written 
statement.
    (iv) The appealing party may submit proposed findings of fact or 
conclusions of law. However, the proposed findings of fact must be 
supported by--
    (A) The evidence introduced into the record at the hearing;
    (B) Stipulations of the parties if the hearing consisted of written 
submissions; or
    (C) Matters that may be judicially noticed.
    (v) Neither party may introduce new evidence on appeal.
    (vi) The initial decision of the hearing official imposing a fine 
or limiting or terminating the institution's participation or 
servicer's eligibility does not take effect pending the appeal.
    (vii) The Secretary renders a final decision. The Secretary may 
delegate to a designated department official the functions described in 
paragraph (c)(2) (vii) through (ix) of this section.
    (viii) In rendering a final decision, the Secretary considers only 
evidence introduced into the record at the hearing and facts agreed to 
by the parties if the hearing consisted only of written submissions and 
matters that may be judicially noticed.
    (ix) If the hearing official finds that a termination is warranted 
pursuant to paragraph (a)(3) of this section, the Secretary may affirm, 
modify, or reverse the initial decision, or may remand the case to the 
hearing official for further proceedings consistent with the 
Secretary's decision. If the Secretary affirms the initial decision 
without issuing a statement of reasons, the Secretary adopts the 
opinion of the hearing official as the decision of the Secretary. If 
the Secretary modifies, remands, or reverses the initial decision, in 
whole or in part, the Secretary's decision states the reasons for the 
action taken.

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

    30. Section 668.91 is amended by revising the heading; and revising 
paragraphs (a)(1), (a)(2), (b) heading, (b)(1), (b)(2) introductory 
text, and (c) to read as follows:


Sec. 668.91  Filing of requests for hearings and appeals; confirmation 
of mailing and receipt dates.

    (a) * * *
    (1) A request by an institution or third-party servicer for a 
hearing or show-cause opportunity, other material submitted by an 
institution or third-party servicer in response to a notice of proposed 
action under this subpart, or an appeal to the Secretary under this 
subpart must be filed with the designated department official by hand-
delivery, mail, or facsimile transmission.
    (2) Documents filed by facsimile transmission must be transmitted 
to the designated department official identified, either in the notice 
initiating the action, or, for an appeal, in instructions provided by 
the hearing official, as the individual responsible to receive them. A 
party filing a document by facsimile transmission must confirm that a 
complete and legible copy of the document was received by the 
Department of Education, and may be required by the designated 
department official to provide a hard copy of the document.
* * * * *
    (b) Confirmation of mailing and receipt dates. (1) The mailing date 
of a notice from a designated department official initiating an action 
under this subpart is the date evidenced on the original receipt of 
mailing from the U.S. Postal Service.
    (2) The date on which a request for a show-cause opportunity, a 
request for a hearing, other material submitted in response to a notice 
of action under this subpart, a decision by a hearing official, or a 
notice of appeal is received is, as applicable--
* * * * *
    (c) Refusals. If an institution or third-party servicer refuses to 
accept a notice mailed under this subpart, the Secretary considers the 
notice as being received on the date that the institution or servicer 
refuses to accept the notice.

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

    31. Section 668.92 is revised to read as follows:


Sec. 668.92  Fines.

    (a) In determining the amount of a fine, the designated department 
official, hearing official, and Secretary take into account--
    (1) (i) The gravity of an institution's or third-party servicer's 
violation or failure to carry out the relevant statutory provision, 
regulatory provision, special arrangement, agreement, or limitation 
entered into under the authority of statutes applicable to Title IV of 
the HEA; or
    (ii) The gravity of the institution's or servicer's 
misrepresentation;
    (2) The size of the institution;
    (3) The size of the servicer's business, including the number of 
institutions and students served by the servicer;
    (4) In the case of a violation by a third-party servicer, the 
extent to which the servicer can document that the institution 
contributed to that violation; and
    (5) For purposes of assessing a fine on a third-party servicer, the 
extent to which--
    (i) Violations are caused by repeated mechanical systemic 
unintentional errors. The Secretary counts the total of violations 
caused by a repeated mechanical systemic unintentional error as a 
single violation, unless the servicer has been cited for a similar 
violation previously and had failed to make the appropriate corrections 
to the system; and
    (ii) The financial loss of Title IV, HEA program funds was 
attributable to a repeated mechanical systemic unintentional error.
    (b) In determining the gravity of the institution's or servicer's 
violation, failure, or misrepresentation under paragraph (a) of this 
section, the designated department official, hearing official, and 
Secretary take into account the amount of any liability owed by the 
institution and any third-party servicer that contracts with the 
institution, and the number of students affected as a result of that 
violation, failure, or misrepresentation on--
    (1) Improperly expended or unspent Title IV, HEA program funds 
received by the institution or servicer, as applicable; or
    (2) Required refunds.
    (c) Upon the request of the institution or third-party servicer, 
the Secretary may compromise the fine.

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

    32. Section 668.93 is revised to read as follows:


Sec. 668.93  Limitation.

    A limitation may include, as appropriate to the Title IV, HEA 
program in question--
    (a) A limit on the number or percentage of students enrolled in an 
institution who may receive Title IV, HEA program funds;
    (b) A limit, for a stated period of time, on the percentage of an 
institution's total receipts from tuition and fees derived from Title 
IV, HEA program funds;
    (c) A limit on the number or size of institutions with which a 
third-party servicer may contract;
    (d) A limit on the number of borrower or loan accounts that a 
third-party servicer may service under a contract with an institution;
    (e) A limit on the responsibilities that a third-party servicer may 
perform under a contract with an institution;
    (f) A requirement for a third-party servicer to perform additional 
responsibilities under a contract with an institution;
    (g) A requirement that an institution obtain surety, in a specified 
amount, to assure its ability to meet its financial obligations to 
students who receive Title IV, HEA program funds;
    (h) A requirement that a third-party servicer obtain surety, in a 
specified amount, to assure the servicer's ability to meet the 
servicer's financial obligations under a contract; or
    (i) Other conditions as may be determined by the Secretary to be 
reasonable and appropriate.

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

    33. Section 668.94 is revised to read as follows:


Sec. 668.94  Termination.

    (a) A termination.
    (1) Ends an institution's participation in a Title IV, HEA program 
or ends a third-party servicer's eligibility to contract with any 
institution to administer any aspect of the institution's participation 
in a Title IV, HEA program;
    (2) Ends the authority of a third-party servicer to administer any 
aspect of any institution's participation in that program;
    (3) Prohibits an institution or third-party servicer, as 
applicable, or the Secretary from making or increasing awards under 
that program;
    (4) Prohibits an institution or third-party servicer, as 
applicable, from making any other new commitments of funds under that 
program; and
    (5) If an institution's participation in the Federal Stafford Loan, 
Federal PLUS, or Federal SLS Program has been terminated, prohibits 
further guarantee commitments by the Secretary for loans under that 
program to students to attend that institution, and, if the institution 
is a lender under that program, prohibits further disbursements by the 
institution (whether or not guarantee commitments have been issued by 
the Secretary or a guaranty agency for those disbursements).
    (b) After its participation in a Title IV, HEA program has been 
terminated, an institution may disburse or deliver funds under that 
Title IV, HEA program to students enrolled at the institution only in 
accordance with Sec. 668.26 and with any additional requirements 
imposed under this part.
    (c) If a third-party servicer's eligibility is terminated, the 
servicer must return to each institution that contracts with the 
servicer any funds received by the servicer under the applicable Title 
IV, HEA program on behalf of the institution or the institution's 
students or otherwise dispose of those funds under instructions from 
the Secretary. The servicer also must return to each institution that 
contracts with the servicer all records pertaining to the servicer's 
administration of that program on behalf of that institution.

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

    34. Section 668.95 is revised to read as follows:


Sec. 668.95  Reimbursements, refunds, and offsets.

    (a) The designated department official, hearing official, or 
Secretary may require an institution or third-party servicer to take 
reasonable and appropriate corrective action to remedy the 
institution's or servicer's violation, as applicable, of any statutory 
provision of or applicable to Title IV of the HEA, any regulatory 
provision prescribed under that statutory authority, or any applicable 
special arrangement, agreement, or limitation entered into under the 
authority of statutes applicable to Title IV of the HEA.
    (b) The corrective action may include payment of any funds to the 
Secretary, or to designated recipients, that the institution or 
servicer, as applicable, improperly received, withheld, disbursed, or 
caused to be disbursed. Corrective action may, for example, relate to--
    (1) With respect to the Federal Stafford Loan, Federal PLUS, and 
Federal SLS programs--
    (i) Ineligible interest benefits, special allowances, or other 
claims paid by the Secretary; and
    (ii) Discounts, premiums, or excess interest paid in violation of 
34 CFR part 682; and
    (2) With respect to all Title IV, HEA programs--
    (i) Refunds required under program regulations; and
    (ii) Any grants, work-study assistance, or loans made in violation 
of program regulations.
    (c) If any final decision requires an institution or third-party 
servicer to reimburse or make any other payment to the Secretary, the 
Secretary may offset these claims against any benefits or claims due to 
the institution or servicer.

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

    35. Section 668.96 is revised to read as follows:


Sec. 668.96  Reinstatement after termination.

    (a) (1) An institution whose participation in a Title IV, HEA 
program has been terminated may file a request for reinstatement of 
that participation.
    (2) A third-party servicer whose eligibility to contract with any 
institution to administer any aspect of the institution's participation 
in a Title IV, HEA program has been terminated may file a request for 
reinstatement of that eligibility.
    (b) An institution whose participation has been terminated or a 
third-party servicer whose eligibility has been terminated may request 
reinstatement only after the later of the expiration of--
    (1) Eighteen months from the effective date of the termination; or
    (2) A debarment or suspension under Executive Order 12549 (3 CFR, 
1986 Comp., p. 189) or the Federal Acquisition Regulations, 48 CFR part 
9, subpart 9.4.
    (c) To be reinstated, an institution or third-party servicer must 
submit its request for reinstatement in writing to the Secretary and 
must--
    (1) Demonstrate to the Secretary's satisfaction that it has 
corrected the violation or violations on which its termination was 
based, including payment in full to the Secretary or to other 
recipients of funds that the institution or servicer, as applicable, 
has improperly received, withheld, disbursed, or caused to be 
disbursed;
    (2) Meet all applicable requirements of this part; and
    (3) In the case of an institution, enter into a new program 
participation agreement with the Secretary.
    (d) The Secretary, within 60 days of receiving the reinstatement 
request--
    (1) Grants the request;
    (2) Denies the request; or
    (3) Grants the request subject to a limitation or limitations.

(Authority: 20 U.S.C. 1094; E.O. 12549 (3 CFR, 1986 Comp., p. 189), 
12689 (3 CFR, 1989 Comp., p. 235))

    36. Section 668.97 is revised to read as follows:


Sec. 668.97  Removal of limitation.

    (a) An institution whose participation in a Title IV, HEA program 
has been limited may not apply for removal of the limitation before the 
expiration of 12 months from the effective date of the limitation.
    (b) A third-party servicer whose eligibility to contract with any 
institution to administer any aspect of the institution's participation 
in a Title IV, HEA program has been limited may request removal of the 
limitation.
    (c) The institution or servicer may not apply for removal of the 
limitation before the later of the expiration of--
    (1) Twelve months from the effective date of the limitation; or
    (2) A debarment or suspension under Executive Order 12549 (3 CFR, 
1986 Comp., p. 189) or the Federal Acquisition Regulations, 48 CFR part 
9, subpart 9.4.
    (d) If the institution or servicer requests removal of the 
limitation, the request must be in writing and show that the 
institution or servicer, as applicable, has corrected the violation or 
violations on which the limitation was based.
    (e) No later than 60 days after the Secretary receives the request, 
the Secretary responds to the institution or servicer--
    (1) Granting its request;
    (2) Denying its request; or
    (3) Granting the request subject to other limitation or 
limitations.
    (f) If the Secretary denies the request or establishes other 
limitations, the Secretary grants the institution or servicer, upon the 
institution's or servicer's request, an opportunity to show cause why 
the participation or eligibility, as applicable, should be fully 
reinstated.
    (g) The institution's or servicer's request for an opportunity to 
show cause does not waive--
    (1) The institution's right to participate in any or all Title IV, 
HEA programs if it complies with the continuing limitation or 
limitations pending the outcome of the opportunity to show cause; and
    (2) The servicer's right to contract with any institution to 
administer any aspect of the institution's participation in any Title 
IV, HEA program, if the servicer complies with the continuing 
limitation pending the outcome of the opportunity to show cause.

(Authority: 20 U.S.C. 1094; E.O. 12549 (3 CFR, 1986 Comp., p. 189), 
12689 (3 CFR, 1989 Comp., p. 235))

    37. Section 668.111 is amended by revising paragraphs (a) and (b) 
to read as follows:


Sec. 668.111  Scope and purpose.

    (a) This subpart establishes rules governing the appeal by an 
institution or third-party servicer from a final audit determination or 
a final program review determination arising from an audit or program 
review of the institution's participation in any Title IV, HEA program 
or of the servicer's administration of any aspect of an institution's 
participation in any Title IV, HEA program.
    (b) This subpart applies to any participating institution or third-
party servicer that appeals a final audit determination or final 
program review determination.
* * * * *
    38. Section 668.112 is revised to read as follows:


Sec. 668.112  Definitions.

    The following definitions apply to this subpart:
    (a) Final audit determination means the written notice of a 
determination issued by a designated department official based on an 
audit of--
    (1) An institution's participation in any or all of the Title IV, 
HEA programs; or
    (2) A third-party servicer's administration of any aspect of an 
institution's participation in any or all of the Title IV, HEA 
programs.
    (b) Final program review determination means the written notice of 
a determination issued by a designated department official and 
resulting from a program compliance review of--
    (1) An institution's participation in any or all of the Title IV, 
HEA programs; or
    (2) A third-party servicer's administration of any aspect of an 
institution's participation in any Title IV, HEA program.

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

    39. Section 668.113 is revised to read as follows:


Sec. 668.113  Request for review.

    (a) An institution or third-party servicer seeking the Secretary's 
review of a final audit determination or a final program review 
determination shall file a written request for review with the 
designated department official.
    (b) The institution or servicer shall file its request for review 
and any records or materials admissible under the terms of 
Sec. 668.116(e) and (f), no later than 45 days from the date that the 
institution or servicer receives the final audit determination or final 
program review determination.
    (c) The institution or servicer shall attach to the request for 
review a copy of the final audit determination or final program review 
determination, and shall--
    (1) Identify the issues and facts in dispute; and
    (2) State the institution's or servicer's position, as applicable, 
together with the pertinent facts and reasons supporting that position.

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

    40. Section 668.114 is revised to read as follows:


Sec. 668.114  Notification of hearing.

    (a) Upon receipt of an institution's or third-party servicer's 
request for review, the designated department official arranges for a 
hearing before a hearing official.
    (b) Within 30 days of the designated department official's receipt 
of an institution's or third-party servicer's request for review, the 
hearing official notifies the designated department official and the 
parties to the proceeding of the schedule for the submission of briefs 
by both the designated department official and, as applicable, the 
institution or servicer.
    (c) The hearing official schedules the submission of briefs and of 
accompanying evidence admissible under the terms of Sec. 668.116 (e) 
and (f) to occur no later than 120 days from the date that the hearing 
official notifies the institution or servicer.

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

    41. Section 668.116 is amended by revising paragraphs (b), (d), 
(e)(1), (f), and (g) to read as follows:


Sec. 668.116  Hearing.

* * * * *
    (b) The hearing process consists of the submission of written 
briefs to the hearing official by the institution or third-party 
servicer, as applicable, and by the designated department official, 
unless the hearing official determines, under paragraph (g) of this 
section, that an oral hearing is also necessary.
* * * * *
    (d) An institution or third-party servicer requesting review of the 
final audit determination or final program review determination issued 
by the designated department official shall have the burden of proving 
the following matters, as applicable:
    (1) That expenditures questioned or disallowed were proper.
    (2) That the institution or servicer complied with program 
requirements.
    (e) (1) A party may submit as evidence to the hearing official only 
materials within one or more of the following categories:
    (i) Department of Education audit reports and audit work papers for 
audits performed by the department's Office of Inspector General.
    (ii) In the case of an institution, institutional audit work 
papers, records, and other materials, if the institution provided those 
work papers, records, or materials to the Department of Education no 
later than the date by which the institution was required to file its 
request for review in accordance with Sec. 668.113.
    (iii) In the case of a third-party servicer, the servicer's audit 
work papers and the records and other materials of the servicer or any 
institution that contracts with the servicer, if the servicer provided 
those work papers, records, or materials to the Department of Education 
no later than the date that the servicer was required to file the 
request for review under Sec. 668.113.
    (iv) Department of Education program review reports and work papers 
for program reviews.
    (v) Institutional or servicer records and other materials 
(including records and other materials of any institution that 
contracts with the servicer) provided to the Department of Education in 
response to a program review, if the records or materials were provided 
to the Department of Education by the institution or servicer no later 
than the date by which the institution or servicer was required to file 
its request for review in accordance with Sec. 668.113.
    (vi) Other Department of Education records and materials if the 
records and materials were provided to the hearing official no later 
than 3 days after the institution's or servicer's filing of its request 
for review.
* * * * *
    (f) The hearing official accepts only evidence that is both 
admissible and timely under the terms of paragraph (e) of this section, 
and relevant and material to the appeal. Examples of evidence that 
shall be deemed irrelevant and immaterial except upon a clear showing 
of probative value respecting the matters described in paragraph (d) of 
this section include--
    (1) Evidence relating to a period of time other than the period of 
time covered by the audit or program review;
    (2) Evidence relating to an audit or program review of an 
institution or third-party servicer other than the institution or 
servicer bringing the appeal, or the resolution thereof; and
    (3) Evidence relating to the current practice of the institution or 
servicer bringing the appeal in the program areas at issue in the 
appeal.
    (g) (1) The hearing official may schedule an oral argument if he or 
she determines that an oral argument is necessary to clarify the issues 
and the positions of the parties as presented in the parties' written 
submissions.
    (2) In the event that an oral argument is conducted, the designated 
department official makes a transcribed record of the proceedings and 
makes one copy of that record available to each of the parties to the 
proceeding.
* * * * *
    42. Section 668.123 is revised to read as follows:


Sec. 668.123  Collection.

    To the extent that the decision of the Secretary sustains the final 
audit determination or program review determination, subject to the 
provisions of Sec. 668.24(c)(3), the Department of Education will take 
steps to collect the debt at issue or otherwise effect the 
determination that was subject to the request for review.

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

    43. A new Appendix A to part 668 is added to read as follows:

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

    For purposes of Sec. 668.22(b)(1)(iv)(A), the Secretary 
considers an institution to have a fair and equitable refund policy 
if the institution uses a policy that meets the minimum requirements 
of this appendix. These requirements do not affect an institution's 
obligation to comply with other Department of Education regulations.
    (I) The governing board of the institution must review and 
approve the schedule of all institutional charges and refund 
policies applicable to students. The pricing of services and refund 
policies have important consequences to students, parents, the 
institution, and society; as such, pricing and refund policies must 
receive board attention and approval.
    (II) The institution must seek consumer views in the process of 
establishing and amending charge and refund structures. Decisions 
regarding institutional funds are ultimately the sole responsibility 
of the institution's legally designated fund custodians. However, 
consumer concerns do affect decision making, and involving consumers 
in decision making related to charges and refunds is an essential 
approach for assessing student needs and creating public awareness 
of institutional requirements.
    (III) The institution must publish a current schedule of all 
student charges (including the costs of required supplies and 
equipment), publish a statement of the purpose for such charges and 
related refund policies, have those statements readily available 
free of charge to current and prospective students, and substantiate 
that the costs of required supplies and equipment are reasonably 
related to the cost of providing the supplies and equipment to the 
students. Students and parents have a right to know what charges 
they will be expected to pay and what will or will not be refunded. 
They also have a right to know what services accompany payment of 
the charges. Informational materials published free for students and 
prospective students are ideal for this purpose.
    (IV) The institution must clearly designate all optional charges 
as ``optional'' in all published schedules and related materials. 
Charges that are mandatory and charges that are optional must be 
plainly differentiated in all printed materials. Statements 
accompanying the schedule may include institutional endorsements of 
the optional program or service. The institution must state clearly 
in its schedule if a charge is optional for some students but 
required for others.
    (V) The institution must clearly identify charges and deposits 
that are nonrefundable as ``nonrefundable'' on all published 
schedules. Institutions determine on an individual basis which of 
their charges are refundable or nonrefundable. In general, admission 
fees, application fees, laboratory fees, facility and student 
activity fees, and other similar charges are not refundable. These 
fees are generally charged to cover the cost of activities such as 
processing applications and other student information, reserving 
academic positions and establishing the limits of institutional 
programs and services, reserving housing space, and otherwise 
setting the fixed costs of the institution for the coming academic 
periods.
    Institutions determine on an individual basis which of their 
deposits are refundable or nonrefundable. Some deposits will be 
nonrefundable or will be credited to a student's account (e.g., 
tuition deposits). Others are refundable according to the terms of 
the deposit agreement (e.g., deposits for breakage).
    (VI) The institution must refund housing rental charges, less a 
deposit, as long as written notification of cancellation is made 
prior to a well-publicized date that provides reasonable opportunity 
to make the space available to other students. Written notification 
on or before the beginning of the term of the contract is necessary 
to ensure utilization of housing units. During the term of the 
contract, room charges are generally not refundable. However, based 
on the program offered, space availability, debt service 
requirements, State and local laws, and other individual 
circumstances, institutions may provide for some more flexible 
refund guideline for housing.
    (VII) The institution must refund board charges in full, less a 
deposit, if written notification of cancellation is made prior to a 
well-publicized date that falls on or before the beginning of the 
term of the contract. Subsequent board charges should be refunded on 
a pro rata basis. It is reasonable to make a refund for those goods 
and services not consumed. The deposit should reflect that portion 
of an institution's costs that are fixed for the term of the 
contract.
    (VIII) The institutional refund policy must include the 
following requirements:
    A. The institution must refund 100 percent of the tuition 
charges, less an administrative fee that does not exceed the lesser 
of $100 or 5 percent of the tuition, if the student submits written 
notice of cancellation on or before one week preceding the first day 
of classes for the period of enrollment for which the student was 
charged.
    B. The institution must refund at least 90 percent of the 
tuition charges if the student submits written notice of 
cancellation between the end of the period of time specified in 
(VIII) A. and the end of the first 10 percent (in time) of the 
period of enrollment for which the student was charged.
    C. The institution must refund at least 50 percent of the 
tuition charges if the student submits written notice of 
cancellation between the end of the first 10 percent (in time) of 
the period of enrollment for which the student was charged and the 
end of the first 25 percent (in time) of that period of enrollment.
    D. The institution must refund at least 25 percent of the 
tuition charges if the student submits written notice of 
cancellation between the end of the first 25 percent (in time) of 
the period of enrollment for which the student was charged and the 
end of the first 50 percent (in time) of the period of enrollment.
    E. For purposes of this policy, ``tuition charges'' include, but 
are not limited to, charges for any equipment (including books and 
supplies) issued by an institution to a student if the institution 
specifies in the enrollment agreement a separate charge for 
equipment that the student actually obtains or if the institution 
refers the student to a vendor operated by the institution or an 
entity affiliated or related to the institution.
    (F) The institution may exclude from the calculation of a refund 
owed under this paragraph the documented cost to the institution of 
unreturnable equipment issued to the student in accordance with 
paragraph (VIII)E of this appendix or of returnable equipment issued 
to the student in accordance with paragraph (VIII)E of this appendix 
if the student does not return the equipment in good condition, 
allowing for reasonable wear and tear, within 20 days following the 
date of the student's withdrawal. For example, equipment is not 
considered to be returned in good condition and, therefore, is 
unreturnable, if the equipment cannot be reused because of clearly 
recognized health and sanitary reasons. The institution must clearly 
and conspicuously disclose in the enrollment agreement any 
restrictions on the return of equipment, including equipment that is 
unreturnable. The institution must notify the student in writing 
prior to enrollment that return of the specific equipment involved 
will be required within 20 days of the student's withdrawal.
    (IX) The institution must assess no penalty charges where the 
institution, as opposed to the student, is in error. Penalty 
charges, such as those involving late registration fees, change-of-
schedule fees, and late payment fees, must not be assessed if it is 
determined that the student is not responsible for the action 
causing the charges to be levied.
    (X) The institution must advise students that any notifications 
of withdrawal or cancellation and requests for refund must be in 
writing and addressed to the designated institution officer. A 
student's written notification of withdrawal or cancellation and 
request for a refund provides an accurate record of transactions and 
also ensures that the request will be processed on a timely basis. 
Acceptance of oral requests is an undesirable practice.
    (XI) The institution must pay or credit refunds due in 
accordance with Sec. 668.22(i)(2).
    (XII) The institution must publicize, as a part of its 
dissemination of information on charges and refunds, that an appeals 
process exists for students or parents who believe that individual 
circumstances warrant exceptions from published policy. The 
informational materials must include the name, title, and address of 
the official responsible for handling appeals. Although charges and 
refund policies should reflect extensive consideration of student 
and institutional needs, it will not be possible to encompass in 
these structures the variety of personal circumstances that may 
exist or develop. Institutions are required to provide a system of 
due process to their students, and charges and refund policies are 
legitimately a part of that process. Students and parents should be 
informed regularly of procedures for requesting information 
concerning exceptions to published policies.
    44. Appendix D to part 668 is amended by revising the 
introductory paragraphs to read as follows:

Appendix D to Part 668--Default Reduction Measures

    This appendix describes measures that an institution with a high 
default rate under the Federal Stafford Loan and Federal SLS 
programs should find helpful in reducing defaults. An institution 
with a fiscal year default rate that exceeds the threshold rate for 
a limitation, suspension, or termination action under Sec. 668.17 
may avoid that sanction by demonstrating that the institution has 
implemented the measures included in this appendix. Other 
institutions should strongly consider taking these steps as well.
    To reduce defaults, the Secretary recommends that the 
institution take the following measures:
* * * * *

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

    45. The authority citation for part 682 continues to read as 
follows:

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

    46. In Sec. 682.200 paragraph (b) is amended by revising paragraph 
(1) and adding a new paragraph (5) in the definition of ``Lender'' and 
adding a new definition of ``Third-party servicer'' in alphabetical 
order, and by revising the authority citation to read as follows:


Sec. 682.200  Definitions.

* * * * *
    (b) * * *
    Lender. (1) The term ``eligible lender'' is defined in section 
435(d) of the Act, and in paragraphs (2)-(5) of this definition.
* * * * *
    (5) The term eligible lender does not include any lender that--
    (i) Is debarred or suspended, or any of whose principals or 
affiliates (as those terms are defined in 34 CFR part 85) is debarred 
or suspended under Executive Order (E.O.) 12549 (3 CFR, 1986 Comp., p. 
189) or the Federal Acquisition Regulation (FAR), 48 CFR part 9, 
subpart 9.4;
    (ii) Is an affiliate, as defined in 34 CFR part 85, of any person 
who is debarred or suspended under E.O. 12549 (3 CFR, 1986 Comp., p. 
189) or the FAR, 48 CFR part 9, subpart 9.4; or
    (iii) Employs a person who is debarred or suspended under E.O. 
12549 (3 CFR, 1986 Comp., p. 189) or the FAR, 48 CFR part 9, subpart 
9.4, in a capacity that involves the administration or receipt of FFEL 
Program funds.
* * * * *
    Third-party servicer. Any State or private, profit or nonprofit 
organization or any individual that enters into a contract with a 
lender or guaranty agency to administer, through either manual or 
automated processing, any aspect of the lender's or guaranty agency's 
FFEL programs required by any statutory provision of or applicable to 
Title IV of the HEA, any regulatory provision prescribed under that 
statutory authority, or any applicable special arrangement, agreement, 
or limitation entered into under the authority of statutes applicable 
to Title IV of the HEA that governs the FFEL programs, including, any 
applicable function described in the definition of third-party servicer 
in 34 CFR part 668; originating, guaranteeing, monitoring, processing, 
servicing, or collecting loans; claims submission; or billing for 
interest benefits and special allowance.
* * * * *
(Authority: 8 U.S.C. 1101; 20 U.S.C. 1070 to 1087-2, 1088-1098, 
1141; E.O. 12549 (3 CFR, 1986 Comp., p. 189), E.O. 12689 (3 CFR, 
1989 Comp., p. 235))

    47. Section 682.401 is amended by adding a new paragraph (b)(23) to 
read as follows:


Sec. 682.401  Basic program agreement.

* * * * *
    (b) * * *
    (23) Third-party servicers. The guaranty agency may not enter into 
a contract with a third-party servicer that the Secretary has 
determined does not meet the financial and compliance standards under 
Sec. 682.416. The guaranty agency shall provide the Secretary with the 
name and address of any third-party servicer with which the agency 
enters into a contract and, upon request by the Secretary, a copy of 
that contract.
* * * * *
    48. Section 682.413 is amended by revising paragraphs (a), (b), 
(c), and (d) to read as follows:


Sec. 682.413  Remedial actions.

    (a) (1) The Secretary requires a lender and its third-party 
servicer administering any aspect of the FFEL programs under a contract 
with the lender to repay interest benefits and special allowance or 
other compensation received on a loan guaranteed by a guaranty agency, 
pursuant to paragraph (a)(2) of this section--
    (i) For any period beginning on the date of a failure by the lender 
or servicer, with respect to the loan, to comply with any of the 
requirements set forth in Sec. 682.406(a)(1)-(a)(6), (a)(9), and 
(a)(12);
    (ii) For any period beginning on the date of a failure by the 
lender or servicer, with respect to the loan, to meet a condition of 
guarantee coverage established by the guaranty agency, to the date, if 
any, on which the guaranty agency reinstated the guarantee coverage 
pursuant to policies and procedures established by the agency;
    (iii) For any period in which the lender or servicer, with respect 
to the loan, violates the requirements of subpart C of this part; and
    (iv) For any period beginning on the day after the Secretary's 
obligation to pay special allowance on the loan terminates under 
Sec. 682.302(d).
    (2) For purposes of this section, a lender and any applicable 
third-party servicer shall be considered jointly and severally liable 
for the repayment of any interest benefits and special allowance paid 
as a result of a violation of applicable requirements by the servicer 
in administering the lender's FFEL programs.
    (3) For purposes of paragraph (a)(2) of this section, the relevant 
third-party servicer shall repay any outstanding liabilities under 
paragraph (a)(2) of this section only if--
    (i) The Secretary has determined that the servicer is jointly and 
severally liable for the liabilities; and
    (ii) (A) The lender has not repaid in full the amount of the 
liability within 30 days from the date the lender receives notice from 
the Secretary of the liability;
    (B) The lender has not made other satisfactory arrangements to pay 
the amount of the liability within 30 days from the date the lender 
receives notice from the Secretary of the liability; or
    (C) The Secretary is unable to collect the liability from the 
lender by offsetting the lender's bill to the Secretary for interest 
benefits or special allowance, if--
    (1) The bill is submitted after the 30 day period specified in 
paragraph (a)(3)(ii)(A) of this section has passed; and
    (2) The lender has not paid, or made satisfactory arrangements to 
pay, the liability.
    (b) The Secretary requires a guaranty agency to repay reinsurance 
payments received on a loan if the lender, third-party servicer, if 
applicable, or the agency failed to meet the requirements of 
Sec. 682.406(a).
    (c) (1) In addition to requiring repayment of reinsurance payments 
pursuant to paragraph (b) of this section, the Secretary may take one 
or more of the following remedial actions against a guaranty agency or 
third-party servicer administering any aspect of the FFEL programs 
under a contract with the guaranty agency, that makes an incomplete or 
incorrect statement in connection with any agreement entered into under 
this part or violates any applicable Federal requirement:
    (i) Require the agency to return payments made by the Secretary to 
the agency.
    (ii) Withhold payments to the agency.
    (iii) Limit the terms and conditions of the agency's continued 
participation in the FFEL programs.
    (iv) Suspend or terminate agreements with the agency.
    (v) Impose a fine on the agency or servicer. For purposes of 
assessing a fine on a third-party servicer, a repeated mechanical 
systemic unintentional error shall be counted as one violation, unless 
the servicer has been cited for a similar violation previously and had 
failed to make the appropriate corrections to the system.
    (vi) Require repayment from the agency and servicer pursuant to 
paragraph (c)(2) of this section, of interest, special allowance, and 
reinsurance paid on Consolidation loan amounts attributed to 
Consolidation loans that violate Sec. 682.206(f)(1).
    (vii) Require repayment from the agency or servicer, pursuant to 
paragraph (c)(2) of this section, of any related payments that the 
Secretary became obligated to make to others as a result of an 
incomplete or incorrect statement or a violation of an applicable 
Federal requirement.
    (2) For purposes of this section, a guaranty agency and any 
applicable third-party servicer shall be considered jointly and 
severally liable for the repayment of any interest benefits, special 
allowance, reinsurance paid, or other compensation on Consolidation 
loan amounts attributed to Consolidation loans that violate 
Sec. 682.206(f)(1) as a result of a violation by the servicer 
administering any aspect of the FFEL programs under a contract with 
that guaranty agency.
    (3) For purposes of paragraph (c)(2) of this section, the relevant 
third-party servicer shall repay any outstanding liabilities under 
paragraph (c)(2) of this section only if--
    (i) The Secretary has determined that the servicer is jointly and 
severally liable for the liabilities; and
    (ii) (A) The guaranty agency has not repaid in full the amount of 
the liability within 30 days from the date the guaranty agency receives 
notice from the Secretary of the liability;
    (B) The guaranty agency has not made other satisfactory 
arrangements to pay the amount of the liability within 30 days from the 
date the guaranty agency receives notice from the Secretary of the 
liability; or
    (C) The Secretary is unable to collect the liability from the 
guaranty agency by offsetting the guaranty agency's first reinsurance 
claim to the Secretary, if--
    (1) The claim is submitted after the 30-day period specified in 
paragraph (c)(3)(ii)(A) of this section has passed; and
    (2) The guaranty agency has not paid, or made satisfactory 
arrangements to pay, the liability.
    (d) (1) The Secretary follows the procedures described in 34 CFR 
part 668, subpart G, applicable to fine proceedings against schools, in 
imposing a fine against a lender, guaranty agency, or third-party 
servicer. References to ``the institution'' in those regulations shall 
be understood to mean the lender, guaranty agency, or third-party 
servicer, as applicable, for this purpose.
    (2) The Secretary also follows the provisions of section 432(g) of 
the Act in imposing a fine against a guaranty agency or lender.
* * * * *
    49. Section 682.414 is amended by revising paragraph (a)(1)(i) to 
read as follows:


Sec. 682.414  Records, reports, and inspection requirements for 
guaranty agency programs.

    (a) Records. (1)(i) The guaranty agency shall maintain current, 
complete, and accurate records of each loan that it holds, including, 
but not limited to, the records described in paragraph (a)(1)(ii) of 
this section. The records must be maintained in a system that allows 
ready identification of each loan's current status, updated at least 
once every 10 business days. Any reference to a guaranty agency under 
this section includes a third-party servicer that administers any 
aspect of the FFEL programs under a contract with the guaranty agency, 
if applicable.
* * * * *
    50. A new Sec. 682.416 is added to subpart D to read as follows:


Sec. 682.416  Requirements for third-party servicers and lenders 
contracting with third-party servicers.

    (a) Standards for administrative capability. A third-party servicer 
is considered administratively responsible if it--
    (1) Provides the services and administrative resources necessary to 
fulfill its contract with a lender or guaranty agency, and conducts all 
of its contractual obligations that apply to the FFEL programs in 
accordance with FFEL programs regulations;
    (2) Has business systems including combined automated and manual 
systems, that are capable of meeting the requirements of part B of 
Title IV of the Act and with the FFEL programs regulations; and
    (3) Has adequate personnel who are knowledgeable about the FFEL 
programs.
    (b) Standards of financial responsibility. The Secretary applies 
the provisions of 34 CFR 668.15(b) (1)-(4) and (6)-(9) to determine 
that a third-party servicer is financially responsible under this part. 
References to ``the institution'' in those provisions shall be 
understood to mean the third-party servicer, for this purpose.
    (c) Special review of third-party servicer. (1) The Secretary may 
review a third-party servicer to determine that it meets the 
administrative capability and financial responsibility standards in 
this section.
    (2) In response to a request from the Secretary, the servicer shall 
provide evidence to demonstrate that it meets the administrative 
capability and financial responsibility standards in this section.
    (3) The servicer may also provide evidence of why administrative 
action is unwarranted if it is unable to demonstrate that it meets the 
standards of this section.
    (4) Based on the review of the materials provided by the servicer, 
the Secretary determines if the servicer meets the standards in this 
part. If the servicer does not, the Secretary may initiate an 
administrative proceeding under subpart G.
    (d) Past performance of third-party servicer or persons affiliated 
with servicer. Notwithstanding paragraphs (b) and (c) of this section, 
a third-party servicer is not financially responsible if--
    (1) (i) The servicer; its owner, majority shareholder, or chief 
executive officer; any person employed by the servicer in a capacity 
that involves the administration of a Title IV, HEA program or the 
receipt of Title IV, HEA program funds; any person, entity, or officer 
or employee of an entity with which the servicer contracts where that 
person, entity, or officer or employee of the entity acts in a capacity 
that involves the administration of a Title IV, HEA program or the 
receipt of Title IV, HEA program funds has been convicted of, or has 
pled nolo contendere or guilty to, a crime involving the acquisition, 
use, or expenditure of Federal, State, or local government funds, or 
has been administratively or judicially determined to have committed 
fraud or any other material violation of law involving such funds, 
unless--
    (A) The funds that were fraudulently obtained, or criminally 
acquired, used, or expended have been repaid to the United States, and 
any related financial penalty has been paid;
    (B) The persons who were convicted of, or pled nolo contendere or 
guilty to, a crime involving the acquisition, use, or expenditure of 
the funds are no longer incarcerated for that crime; and
    (C) At least five years have elapsed from the date of the 
conviction, nolo contendere plea, guilty plea, or administrative or 
judicial determination; or
    (ii) The servicer, or any principal or affiliate of the servicer 
(as those terms are defined in 34 CFR part 85), is--
    (A) Debarred or suspended under Executive Order (E.O.) 12549 (3 
CFR, 1986 Comp., p. 189) or the Federal Acquisition Regulations (FAR), 
48 CFR part 9, subpart 9.4; or
    (B) Engaging in any activity that is a cause under 34 CFR 85.305 or 
85.405 for debarment or suspension under E.O. 12549 (3 CFR, 1986 Comp., 
p. 189) or the FAR, 48 CFR part 9, subpart 9.4; and
    (2) Upon learning of a conviction, plea, or administrative or 
judicial determination described in paragraph (d)(1) of this section, 
the servicer does not promptly remove the person, agency, or 
organization from any involvement in the administration of the 
servicer's participation in Title IV, HEA programs, including, as 
applicable, the removal or elimination of any substantial control, as 
determined under 34 CFR 668.15, over the servicer.
    (e) Independent audits. (1) A third-party servicer shall arrange 
for an independent audit of its administration of the FFELP loan 
portfolio unless--
    (i) The servicer contracts with only one lender or guaranty agency; 
and
    (ii) The audit of that lender's or guaranty agency's FFEL programs 
involves every aspect of the servicer's administration of those FFEL 
programs.
    (2) The audit must--
    (i) Examine the servicer's compliance with the Act and applicable 
regulations;
    (ii) Examine the servicer's financial management of its FFEL 
program activities;
    (iii) Be conducted in accordance with the standards for audits 
issued by the United States General Accounting Office's (GAO's) 
Standards for Audit of Governmental Organizations, Programs, 
Activities, and Functions. (This publication is available from the 
Superintendent of Documents, U.S. Government Printing Office, 
Washington, DC 20402.) Procedures for audits are contained in an audit 
guide developed by and available from the Office of Inspector General 
of the Department of Education; and
    (iv) Except for the initial audit, be conducted at least annually 
and be submitted to the Secretary within six months of the end of the 
audit period. The initial audit must be an annual audit of the 
servicer's first full fiscal year beginning on or after July 1, 1994, 
and include any period from the beginning of the first full fiscal 
year. The audit report must be submitted to the Secretary within six 
months of the end of the audit period. Each subsequent audit must cover 
the servicer's activities for the one-year period beginning no later 
than the end of the period covered by the preceding audit.
    (3) With regard to a third-party servicer that is a governmental 
entity, the audit required by this paragraph must be conducted in 
accordance with 31 U.S.C. 7502 and 34 CFR part 80, Appendix G.
    (4) With regard to a third-party servicer that is a nonprofit 
organization, the audit required by this paragraph must be conducted in 
accordance with Office of Management and Budget (OMB) Circular A-133, 
``Audit of Institutions of Higher Education and Other Nonprofit 
Institutions,'' as incorporated in 34 CFR 74.61(h)(3).
    (f) Contract responsibilities. A lender that participates in the 
FFEL programs may not enter into a contract with a third-party servicer 
that the Secretary has determined does not meet the requirements of 
this section. The lender must provide the Secretary with the name and 
address of any third-party servicer with which the lender enters into a 
contract and, upon request by the Secretary, a copy of that contract. A 
third-party servicer that is under contract with a lender to perform 
any activity for which the records in Sec. 682.414(a)(3)(ii) are 
relevant to perform the services for which the servicer has contracted 
shall maintain current, complete, and accurate records pertaining to 
each loan that the servicer is under contract to administer on behalf 
of the lender. The records must be maintained in a system that allows 
ready identification of each loan's current status.

(Authority: 20 U.S.C. 1078, 1078-1, 1078-2, 1078-3, 1082; E.O. 12549 
(3 CFR, 1986 Comp., p. 189), 12689 (3 CFR, 1989 Comp., p. 235))

Subpart G--Limitation, Suspension, or Termination of Lender or 
Third-party Servicer Eligibility and Disqualification of Lenders 
and Schools

    51. The title of subpart G is revised to read as set forth above.
    52. Section 682.700 is amended by revising paragraphs (a) and 
(b)(1) to read as follows:


Sec. 682.700  Purpose and scope.

    (a) This subpart governs the limitation, suspension, or termination 
by the Secretary of the eligibility of an otherwise eligible lender to 
participate in the FFEL programs or the eligibility of a third-party 
servicer to enter into a contract with an eligible lender to administer 
any aspect of the lender's FFEL programs. The regulations in this 
subpart apply to a lender or third-party servicer that violates any 
statutory provision governing the FFEL programs or any regulations, 
special arrangements, agreements, or limitations entered into under the 
authority of statutes applicable to Title IV of the HEA prescribed 
under the FFEL programs. These regulations apply to lenders that 
participate only in a guaranty agency program, lenders that participate 
in the FFEL programs, and third-party servicers that administer aspects 
of a lender's FFELP portfolio. These regulations also govern the 
Secretary's disqualification of a lender or school from participation 
in the FFEL programs under section 432(h)(2) and (h)(3) of the Act.
    (b) * * *
    (1) (i) To a determination that an organization fails to meet the 
definition of ``eligible lender'' in section 435(d)(1) of the Act or 
the definition of ``lender'' in Sec. 682.200, for any reason other than 
a violation of the prohibitions in section 435(d)(5) of the Act; or
    (ii) To a determination that an organization fails to meet the 
standards in Sec. 682.416;
* * * * *
    53. Section 682.701 is amended by revising the definitions of 
Limitation, Suspension, and Termination to read as follows:


Sec. 682.701  Definitions of terms used in this subpart.

* * * * *
    Limitation. The continuation of a lender's or third-party 
servicer's eligibility subject to compliance with special conditions 
established by agreement with the Secretary or a guaranty agency, as 
applicable, or imposed as the result of a limitation or termination 
proceeding.
    Suspension. The removal of a lender's eligibility, or a third-party 
servicer's eligibility to contract with a lender or guaranty agency, 
for a specified period of time or until the lender or servicer fulfills 
certain requirements.
    Termination. (1) The removal of a lender's eligibility for an 
indefinite period of time--
    (i) By a guaranty agency; or
    (ii) By the Secretary, based on an action taken by the Secretary, 
or a designated Departmental official under Sec. 682.706; or
    (2) The removal of a third-party servicer's eligibility to contract 
with a lender or guaranty agency for an indefinite period of time by 
the Secretary based on an action taken by the Secretary, or a 
designated Departmental official under Sec. 682.706.

(Authority: 20 U.S.C. 1080, 1082, 1085, 1094)

     54. Section 682.702 is amended by redesignating paragraph (c) as 
paragraph (d); adding a new paragraph (c); and removing ``(c)'' in 
paragraph (a) and adding, in its place ``(d)'' to read as follows:


Sec. 682.702  Effect on participation.

* * * * *
    (c) A limitation imposes on a third-party servicer--
    (1) A limit on the number of loans or accounts or total amount of 
loans that the servicer may service;
    (2) A limit on the number of loans or accounts or total amount of 
loans that the servicer is administering under its contract with a 
lender or guaranty agency; or
    (3) Other reasonable requirements or conditions, including those 
described in Sec. 682.709.
* * * * *
    55. Section 682.703 is amended by revising paragraph (a) and 
paragraph (b) introductory text to read as follows:


Sec. 682.703  Informal compliance procedure.

    (a) The Secretary may use the informal compliance procedure in 
paragraph (b) of this section if the Secretary receives a complaint or 
other reliable information indicating that a lender or third-party 
servicer may be in violation of applicable laws, regulations, special 
arrangements, agreements, or limitations entered into under the 
authority of statutes applicable to Title IV of the HEA.
    (b) Under the informal compliance procedure, the Secretary gives 
the lender or servicer a reasonable opportunity to--
* * * * *
    56. Section 682.704 is amended by revising paragraphs (a)(1), (b), 
(c), and (d)(2)(ii) to read as follows:


Sec. 682.704  Emergency action.

    (a) * * *
    (1) Receives reliable information that the lender or a third-party 
servicer with which the lender contracts is in violation of applicable 
laws, regulations, special arrangements, agreements, or limitations 
entered into under the authority of statutes applicable to Title IV of 
the HEA pertaining to the lender's portfolio of loans;
* * * * *
    (b) The Secretary begins an emergency action by notifying the 
lender or third-party servicer, by certified mail, return receipt 
requested, of the action and the basis for the action.
    (c) The action becomes effective on the date the notice is mailed 
to the lender or third-party servicer.
    (d) * * *
    (2) * * *
    (ii) Upon the written request of the lender or third-party 
servicer, the Secretary may provide the lender or servicer with an 
opportunity to demonstrate that the emergency action is unwarranted.

(Authority: 20 U.S.C. 1080, 1082, 1085, 1094)

    57. Section 682.705 is revised to read as follows:


Sec. 682.705  Suspension proceedings.

    (a) Scope. (1) A suspension by the Secretary removes a lender's 
eligibility under the FFEL programs or a third-party servicer's ability 
to enter into contracts with eligible lenders, and the Secretary does 
not guarantee or reinsure a new loan made by the lender or new loan 
serviced by the servicer during a period not to exceed 60 days from the 
date the suspension becomes effective, unless--
    (i) The lender or servicer and the Secretary agree to an extension 
of the suspension period, if the lender or third-party servicer has not 
requested a hearing; or
    (ii) The Secretary begins a limitation or a termination proceeding.
    (2) If the Secretary begins a limitation or a termination 
proceeding before the suspension period ends, the Secretary may extend 
the suspension period until the completion of that proceeding, 
including any appeal to the Secretary.
    (b) Notice. (1) The Secretary, or a designated Departmental 
official, begins a suspension proceeding by sending the lender or 
servicer a notice by certified mail with return receipt requested.
    (2) The notice--
    (i) Informs the lender or servicer of the Secretary's intent to 
suspend the lender's or servicer's eligibility for a period not to 
exceed 60 days;
    (ii) Describes the consequences of a suspension;
    (iii) Identifies the alleged violations on which the proposed 
suspension is based;
    (iv) States the proposed date the suspension becomes effective, 
which is at least 20 days after the date of mailing of the notice;
    (v) Informs the lender or servicer that the suspension will not 
take effect on the proposed date, except as provided in paragraph 
(c)(8) of this section, if the Secretary receives at least five days 
prior to that date a request for an oral hearing or written material 
showing why the suspension should not take effect; and
    (vi) Asks the lender or servicer to correct voluntarily any alleged 
violations.
    (c) Hearing. (1) If the lender or servicer does not request an oral 
hearing but submits written material, the Secretary, or a designated 
Departmental official, considers the material and--
    (i) Dismisses the proposed suspension; or
    (ii) Determines that the proposed suspension should be implemented 
and notifies the lender or servicer of the effective date of the 
suspension.
    (2) If the lender or servicer requests an oral hearing within the 
time specified in paragraph (b)(2)(v) of this section, the Secretary 
schedules the date and place of the hearing. The date is at least 15 
days after receipt of the request from the lender or servicer. No 
proposed suspension takes effect until a hearing is held.
    (3) The oral hearing is conducted by a presiding officer who--
    (i) Ensures that a written record of the hearing is made;
    (ii) Considers relevant written material presented before the 
hearing and other relevant evidence presented during the hearing; and
    (iii) Issues a decision based on findings of fact and conclusions 
of law that may suspend the lender's or servicer's eligibility only if 
the presiding officer is persuaded that the suspension is warranted by 
the evidence.
    (4) The formal rules of evidence do not apply, and no discovery, as 
provided in the Federal Rules of Civil Procedure, (28 U.S.C. Appendix) 
is required.
    (5) The presiding officer shall base findings of fact only on 
evidence considered at or before the hearing and matters given official 
notice.
    (6) The initial decision of the presiding officer is mailed to the 
lender or servicer.
    (7) The Secretary automatically reviews the initial decision of the 
presiding officer. The Secretary notifies the lender or servicer of the 
Secretary's decision by mail.
    (8) A suspension takes effect on either a date that is at least 20 
days after the date the notice of a decision imposing the suspension is 
mailed to the lender or servicer, or on the proposed effective date 
stated in the notice sent under paragraph (b) of this section, 
whichever is later.

(Authority: 20 U.S.C. 1080, 1082, 1085, 1094)

    58. Section 682.706 is revised to read as follows:


Sec. 682.706  Limitation or termination proceedings.

    (a) Notice. (1) The Secretary, or a designated Departmental 
official, begins a limitation or termination proceeding, whether a 
suspension proceeding has begun, by sending the lender or third-party 
servicer a notice by certified mail with return receipt requested.
    (2) The notice--
    (i) Informs the lender or servicer of the Secretary's intent to 
limit or terminate the lender's or servicer's eligibility;
    (ii) Describes the consequences of a limitation or termination;
    (iii) Identifies the alleged violations on which the proposed 
limitation or termination is based;
    (iv) States the limits which may be imposed, in the case of a 
limitation proceeding;
    (v) States the proposed date the limitation or termination becomes 
effective, which is at least 20 days after the date of mailing of the 
notice;
    (vi) Informs the lender or servicer that the limitation or 
termination will not take effect on the proposed date if the Secretary 
receives, at least five days prior to that date, a request for an oral 
hearing or written material showing why the limitation or termination 
should not take effect;
    (vii) Asks the lender or servicer to correct voluntarily any 
alleged violations; and
    (viii) Notifies the lender or servicer that the Secretary may 
collect any amount owed by means of offset against amounts owed to the 
lender by the Department and other Federal agencies.
    (b) Hearing. (1) If the lender or servicer does not request an oral 
hearing but submits written material, the Secretary, or a designated 
Departmental official, considers the material and--
    (i) Dismisses the proposed limitation or termination; or
    (ii) Notifies the lender or servicer of the date the limitation or 
termination becomes effective.
    (2) If the lender or servicer requests a hearing within the time 
specified in paragraph (a)(2)(vi) of this section, the Secretary 
schedules the date and place of the hearing. The date is at least 15 
days after receipt of the request from the lender or servicer. No 
proposed limitation or termination takes effect until a hearing is 
held.
    (3) The hearing is conducted by a presiding officer who--
    (i) Ensures that a written record of the hearing is made;
    (ii) Considers relevant written material presented before the 
hearing and other relevant evidence presented during the hearing; and
    (iii) Issues an initial decision, based on findings of fact and 
conclusions of law, that may limit or terminate the lender's or 
servicer's eligibility if the presiding officer is persuaded that the 
limitation or termination is warranted by the evidence.
    (4) The formal rules of evidence do not apply, and no discovery, as 
provided in the Federal Rules of Civil Procedure (28 U.S.C. appendix), 
is required.
    (5) The presiding officer shall base findings of fact only on 
evidence presented at or before the hearing and matters given official 
notice.
    (6) If a termination action is brought against a lender or third-
party servicer and the presiding officer concludes that a limitation is 
more appropriate, the presiding officer may issue a decision imposing 
one or more limitations on a lender or third-party servicer rather than 
terminating the lender's or servicer's eligibility.
    (7) The initial decision of the presiding officer is mailed to the 
lender or servicer.
    (8) Any time schedule specified in this section may be shortened 
with the approval of the presiding officer and the consent of the 
lender or servicer and the Secretary or designated Departmental 
official.
    (9) The presiding officer's initial decision automatically becomes 
the Secretary's final decision 20 days after it is issued and received 
by both parties unless the lender, servicer, or designated Departmental 
official appeals the decision to the Secretary within this period.
    (c) Notwithstanding the other provisions of this section, if a 
lender or a lender's owner or officer or third-party servicer or 
servicer's owner or officer, respectively, is convicted of or pled nolo 
contendere or guilty to a crime involving the unlawful acquisition, 
use, or expenditure of FFEL program funds, that conviction or guilty 
plea is grounds for terminating the lender's or servicer's eligibility, 
respectively, to participate in the FFEL programs.

(Authority: 20 U.S.C. 1080, 1082, 1085, 1094)

    59. Section 682.707 is amended by revising paragraphs (a) 
introductory text and (d) to read as follows:


Sec. 682.707  Appeals in a limitation or termination proceeding.

    (a) If the lender, third-party servicer, or designated Departmental 
official appeals the initial decision of the presiding officer in 
accordance with Sec. 682.706(b)(9)--
* * * * *
    (d) If the presiding officer's initial decision would limit or 
terminate the lender's or servicer's eligibility, it does not take 
effect pending the appeal unless the Secretary determines that a stay 
of the date it becomes effective would seriously and adversely affect 
the FFEL programs or student or parent borrowers.

(Authority: 20 U.S.C. 1080, 1082, 1085, 1094)

    60. Section 682.708 is amended by revising paragraph (b) to read as 
follows:


Sec. 682.708  Evidence of mailing and receipt dates.

* * * * *
    (b) If a lender or third-party servicer refuses to accept a notice 
mailed under this subpart, the Secretary considers the notice as being 
received on the date that the lender or servicer refuses to accept the 
notice.

(Authority: 20 U.S.C. 1080, 1082, 1085, 1094)

    61. Section 682.709 is revised to read as follows:


Sec. 682.709  Reimbursements, refunds, and offsets.

    (a) As part of a limitation or termination proceeding, the 
Secretary, or a designated Departmental official, may require a lender 
or third-party servicer to take reasonable corrective action to remedy 
a violation of applicable laws, regulations, special arrangements, 
agreements, or limitations entered into under the authority of statutes 
applicable to Title IV of the HEA.
    (b) The corrective action may include payment to the Secretary or 
recipients designated by the Secretary of any funds, and any interest 
thereon, that the lender, or, in the case of a third-party servicer, 
the servicer or the lender that has a contract with a third-party 
servicer, improperly received, withheld, disbursed, or caused to be 
disbursed. A third-party servicer may be held liable up to the amounts 
specified in Sec. 682.413(a)(2).
    (c) If a final decision requires a lender, a lender that has a 
contract with a third-party servicer, or a third-party servicer to 
reimburse or make any payment to the Secretary, the Secretary may, 
without further notice or opportunity for a hearing, proceed to offset 
or arrange for another Federal agency to offset the amount due against 
any interest benefits, special allowance, or other payments due to the 
lender, the lender that has a contract with the third-party servicer, 
or the third-party servicer. A third-party servicer may be held liable 
up to the amounts specified in Sec. 682.413(a)(2).

(Authority: 20 U.S.C. 1080, 1082, 1094)

    62. Section 682.710 is amended by revising paragraphs (a), (b), and 
(d) to read as follows:


Sec. 682.710  Removal of limitation.

    (a) A lender or third-party servicer may request removal of a 
limitation imposed by the Secretary in accordance with the regulations 
in this subpart at any time more than 12 months after the date the 
limitation becomes effective.
    (b) The request must be in writing and must show that the lender or 
servicer has corrected any violations on which the limitation was 
based.
* * * * *
    (d)(1) If the Secretary denies the request or establishes other 
limitations, the lender or servicer, upon request, is given an 
opportunity to show why all limitations should be removed.
    (2) A lender or third-party servicer may continue to participate in 
the FFEL programs, subject to any limitation imposed by the Secretary 
under paragraph (c)(3) of this section, pending a decision by the 
Secretary on a request under paragraph (d)(1) of this section.

(Authority: 20 U.S.C. 1080, 1082, 1085, 1094)

    63. Section 682.711 is amended by revising paragraphs (a), (b)(1), 
(b)(2), (e), and the authority citation following the section to read 
as follows:


Sec. 682.711  Reinstatement after termination.

    (a) A lender or third-party servicer whose eligibility has been 
terminated by the Secretary in accordance with the regulations in this 
subpart may request reinstatement of its eligibility at any time more 
than 18 months after the date the termination becomes effective.
    (b) * * *
    (1) The lender or servicer has corrected any violations on which 
the termination was based; and
    (2) The lender or servicer meets all requirements for eligibility.
* * * * *
    (e) (1) If the Secretary denies the lender's or servicer's request 
or allows reinstatement subject to limitations, the lender or servicer, 
upon request, is given an opportunity to show why its eligibility 
should be reinstated and all limitations removed.
    (2) A lender or third-party servicer whose eligibility to 
participate in the FFEL programs is reinstated subject to limitations 
imposed by the Secretary pursuant to paragraph (d)(3) of this section, 
may participate in those programs, subject to those limitations, 
pending a decision by the Secretary on a request under paragraph (e)(1) 
of this section.

(Authority: 20 U.S.C. 1080, 1082, 1085, 1094)
* * * * *

PART 690--FEDERAL PELL GRANT PROGRAM

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

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

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


Sec. 690.83  Submission of reports.

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

(Authority: 20 U.S.C. 1070a, 1094, 1226a-1)

[FR Doc. 94-10140 Filed 4-28-94; 8:45 am]
BILLING CODE 4000-01-P