[Federal Register Volume 59, Number 129 (Thursday, July 7, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-16400]


[[Page Unknown]]

[Federal Register: July 7, 1994]


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Part III





Department of Education





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34 CFR Parts 668, 682, and 690



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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; 
Correction; Extension of comment period; Compliance with information 
collection requirements.

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SUMMARY: On April 29, 1994, the Secretary of Education published in the 
Federal Register interim final regulations with an invitation for 
comment for the Student Assistance General Provisions, Federal Family 
Education Loan programs, and the Federal Pell Grant (59 FR 22348). The 
final regulations listed the comment period end date as June 20, 1994.
    Members of the financial aid community have requested an extension 
of the comment period. The Secretary agrees that a longer comment 
period would give the financial aid community a better opportunity to 
thoroughly evaluate the final regulations and submit more comprehensive 
comments to the Department. Therefore, the Secretary extends the 
comment period to July 28, 1994, which is 90 days following the April 
29 publication date.
    This document also clarifies the Secretary's intent in publishing 
``interim final regulations with invitation for comment,'' adds an 
Office of Management and Budget (OMB) control number to certain 
sections of the regulations, and corrects the effective date statement 
and corrects an error in the preamble in the final regulations 
published in the Federal Register on April 29.

DATES: Comments must be received on or before July 28, 1994. The 
corrections to the April 29 regulations and the addition of OMB control 
numbers in 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 
are effective July 7, 1994.

ADDRESSES: All comments concerning the final 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 20202-5342.

FOR FURTHER INFORMATION CONTACT:
Greg Allen and Wendy L. 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 8 
p.m., Eastern time, Monday through Friday.

SUPPLEMENTARY INFORMATION: The final regulations published on April 29 
had an effective date of July 1, 1994, in accordance with 20 U.S.C. 
1089(c), which required that the Secretary publish such regulations 
``in final form by May 1, 1994'' to be in effect for the 1994-1995 
award year, which begins on July 1, 1994. Under the terms of 20 U.S.C. 
1089(c), any regulatory changes that the Secretary published after May 
1, 1994, could not take effect, at the earliest, until July 1, 1995. 
Thus, the April 29 regulations are final and effective at least with 
respect to the period July 1, 1994 through June 30, 1995. The 
``interim'' nature of the April 29 regulations reflected the 
possibility that changes might be made to take effect on July 1, 1995.

    The Secretary solicited public comment in the April 29 final 
regulations to determine whether any changes should be made to take 
effect on July 1, 1995, the earliest that any such changes can take 
effect under 20 U.S.C. 1089(c). In order for any such changes to take 
effect by July 1, 1995, the changes would, under 20 U.S.C. 1089(c), 
have to be published in final form by December 1, 1994.
    Compliance with the information collection requirements in certain 
sections of the regulations published on April 29 was delayed until 
those requirements were approved by OMB under the Paperwork Reduction 
Act of 1990, as amended. On June 23, 1994, OMB approved those 
information collection requirements, and affected parties must now 
comply with those requirements. The Secretary corrects the effective 
date statement in the April 29 regulations to reflect this more 
accurately.
    A section of the Analysis of Comments and Responses was omitted 
from the final regulations published on April 29. The Secretary notes 
that the changes to the regulatory text corresponding to this omitted 
section of the preamble were included in the April 29 final 
regulations. The omitted material, which is included in this document, 
is the explanation for those changes.

(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; 64.032 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.

    Dated: June 30, 1994.
Richard W. Riley,
Secretary of Education.

    1. The authority citation for part 668 of title 34 of the Code of 
Federal Regulations continues to read as follows:

    Authority: 20 U.S.C. 1091, 1092, and 1094, unless otherwise 
noted.

    2. The following sections are amended by adding ``(Approved by the 
Office of Management and Budget under control number 1840-0537)'' at 
the end of each of these sections: 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 690.083.
    3. The following corrections are made in FR Doc. 94-10140, 
published on April 29, 1994 (59 FR 22348):
    a. On page 22348, column column 1, the first sentence after 
``DATES: Effective Date:'' is corrected to read as follows: These 
regulations take effect July 1, 1994, except that compliance is not 
required with the information collection requirements in 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 until 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.
    On page 22382, column 2, the following text is added after 
``Changes: None.''
    Comments: One commenter expressed concern that the Secretary had 
not defined the circumstances in which an institution could satisfy the 
financial responsibility requirements added through the Technical 
Amendments of 1993 by demonstrating that it had sufficient resources to 
ensure against precipitous closure. The commenter suggested that the 
regulations need to provide specific guidance to institutions showing 
when the exception can be used. Several other commenters also 
questioned whether the general financial responsibility standards in 
the proposed regulations were consistent with the statutory exception 
permitting an institution to participate without restrictions by 
demonstrating that it has sufficient resources to ensure against 
precipitous closure.
    Discussion: The Secretary agrees to establish a standard in the 
regulations that is consistent with the explanation made by Senator 
Pell that the technical amendments were intended to make sure that 
financially at-risk institutions are subject to careful scrutiny, to 
protect institutions that are not financially at risk, and to 
accomplish these aims without weakening the general standards for 
financial responsibility. See 139 Cong. Rec. 162-2, S16593 (daily ed. 
November 19, 1993). The Secretary therefore considers it necessary to 
define the limited circumstances in which an institution may satisfy 
the statutory exception in a manner that will not create a lower 
standard for financial responsibility.
    Because an institution using this exception will not be required to 
post surety or enter into provisional certification, the Secretary has 
minimized the Federal risks in such unprotected participation by making 
the exception only available to an institution that met the financial 
responsibility requirements in its last timely submitted audited 
financial statement. This structure will permit an institution that now 
fails the financial responsibility requirements but meets the alternate 
standards in the exception to have an opportunity to improve its 
financial condition for one year without having to post surety or be 
placed under provisional certification. This requirement prevents this 
exception from becoming a means to continue participating under a lower 
standard of financial responsibility than that required for all other 
institutions. An institution that has not satisfied the general 
standards of financial responsibility in its previous audit and has not 
improved its operations to meet current financial responsibility 
standards is not permitted to participate on an unrestricted basis 
under this provision, and is required to provide the additional 
safeguards presented through a surety or through provisional 
certification.
    If an institution that met the standards of financial 
responsibility, as demonstrated by its last audited financial 
statement, fails to meet these standards in its current audit, it can 
show that it meets the alternate standards in this provision in order 
to participate on an unrestricted basis for one year to give it an 
opportunity to solidify its operations and demonstrate that it meets 
financial responsibility standards in its next timely submitted audited 
financial statement. Such participation without surety or provisional 
certification can only be permitted where the institution meets all of 
the requirements in Sec. 668.15(d)(2)(ii)(A) to show that it is current 
in all tax obligations, its equity and operating income have not 
materially decreased since its last audit, and that it is not shifting 
the institution's operating capital to its owners or related parties. 
These standards are necessary to show that the institution's financial 
condition has not significantly deteriorated since it last demonstrated 
financial responsibility, and that the institution's failure to meet 
the current financial responsibility standards is not exacerbated by 
benefits given to its owners or related parties.
    In order to participate without restriction under this provision, 
an institution that now fails to demonstrate financial responsibility 
after having done so in its last audit, must show that it has not 
accelerated the funds going to its owners or related parties through 
disproportionately large salary increases, or through making 
uncollateralized loans to these parties. The institution must also show 
that all loans made to the institution's owners or related parties are 
in repayment, and that a demand has been made for repayment of any 
loans that did not carry fixed payment terms. These measures will help 
ensure that the institution's failure to demonstrate financial 
responsibility is not due to capital diverted to its owners or related 
parties.
    The institution must also show that there have been no material 
findings in the institution's latest compliance audit, and that there 
are no pending administrative or legal actions pending before a member 
of the Triad or other Federal or State entity.
    Changes: Section 668.15(d) now provides that the Secretary 
considers an institution to be financially responsible, even if the 
institution does not meet the general standards of financial 
responsibility (except for the minimum cash reserve requirement) if the 
institution establishes to the satisfaction of the Secretary, with the 
support of an audited financial statement, that the institution has 
sufficient resources to ensure against its precipitous closure. As a 
part of this showing, an institution must establish that it has 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 the institution 
formerly demonstrated financial responsibility under the standards of 
financial responsibility in its preceding audited financial statement 
and that its most recent audited financial statement indicates the 
following (if no prior audited financial statement was requested by the 
Secretary, the institution must demonstrate in conjunction with its 
current audit that it would have satisfied the following): (a) All 
taxes owed by the institution are current; (b) 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; 
(c) 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; (d) The equity of a for-profit 
institution, or the total net assets of a nonprofit institution, have 
not decreased by more than 10 percent of the prior year's total equity; 
(e) Compensation for owners or other related parties (including 
bonuses, fringe benefits, employee stock option allowances, 401(k) 
contributions, deferred compensation allowances) has not increased from 
the prior year at a rate higher than for all other employees; (f) 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; (g) All obligations owed to the institution by related 
parties are current, and the institution has demanded and is receiving 
payment of all funds owed from related parties that are payable upon 
demand. The regulations clarify that, for purposes of these provisions, 
a person does not become a related party by attending an institution as 
a student.
    Finally, in order for the Secretary to consider the institution to 
have sufficient resources to ensure against precipitous closure, the 
institution would also have to demonstrate that (1) there have been no 
material findings in the institution's latest compliance audit of its 
administration of the Title IV, HEA programs and (2) there are no 
pending administrative or legal actions being taken against the 
institution by the Secretary, and other Federal agency, the 
institution's nationally recognized accrediting agency, or any State 
entity.

[FR Doc. 94-16400 Filed 7-6-94; 8:45 am]
BILLING CODE 4000-01-M