[Federal Register Volume 59, Number 188 (Thursday, September 29, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-24115]


[[Page Unknown]]

[Federal Register: September 29, 1994]


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Part IV





Department of Education





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34 CFR Part 668




Student Assistance General Provisions; Proposed Rule
DEPARTMENT OF EDUCATION

34 CFR Part 668

RIN 1840-AC13

 
Student Assistance General Provisions

AGENCY: Department of Education.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Secretary proposes to amend the Student Assistance General 
Provisions regulations by revising subpart B and adding a new subpart 
K. The proposed regulations would govern the management of funds an 
institution receives under the Federal Pell Grant, Federal Supplemental 
Educational Opportunity Grant (FSEOG), Federal Work-Study (FWS), 
Federal Perkins Loan, Federal Family Education Loan (FFEL), Federal 
Direct Student Loan (Direct Loan), and Presidential Access Scholarship 
(PAS) programs authorized by title IV of the Higher Education Act of 
1965, as amended (title IV, HEA programs). The purpose of the proposed 
regulations is to promote sound cash management practices by 
institutions that participate in the title IV, HEA programs by 
strengthening and making uniform the cash management rules for those 
programs. In so doing, the Secretary expects to reduce the cost to the 
Federal government of making title IV, HEA program funds available to 
students and institutions under these programs.

DATES: Comments must be received on or before October 31, 1994.

ADDRESSES: All comments concerning these proposed regulations should be 
addressed to John Kolotos, U.S. Department of Education, 600 
Independence Avenue, S.W., Room 4318, ROB-3, Washington, D.C. 20202-
5244. (Internet address: [email protected]).
    A copy of any comments that concern information collection 
requirements should also be sent to the Office of Management and Budget 
at the address listed in the Paperwork Reduction Act section of this 
preamble.

FOR FURTHER INFORMATION CONTACT: John Kolotos or Kim Goto. Telephone: 
(202) 708-7888. (Internet address: [email protected]). 
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 rules and procedures under which an 
institution requests, maintains, disburses, and otherwise manages funds 
that the institution receives under each title IV, HEA program in which 
it participates are currently codified in those program regulations, or 
described in Department of Education publications. In this notice of 
proposed rulemaking, the Secretary proposes to consolidate, in a new 
subpart K of the Student Assistance General Provisions regulations, 
most of the current cash management requirements in the title IV, HEA 
program regulations. Also, the Secretary proposes to codify in subpart 
K existing cash management policies and procedures currently specified 
in subregulatory guidance. Lastly, the Secretary proposes new 
requirements and proposes to amend some existing requirements to 
promote sound cash management practices by institutions.
    The Secretary wishes to make clear that while proposed subpart K 
would establish a common set of cash management rules and procedures, 
subpart K would not contain all of the rules and procedures that an 
institution would follow with regard to managing title IV, HEA program 
funds. An institution would continue to follow other cash management 
rules and procedures particular to a title IV, HEA program.
    The Secretary intends to amend the appropriate sections of each of 
the title IV, HEA program regulations on or before December 1, 1994 to 
eliminate conflicting requirements between the program regulations and 
proposed subpart K of the General Provisions regulations and to 
otherwise harmonize the proposed subpart K requirements with other 
Federal cash management requirements. In this regard, the Secretary has 
identified throughout the following discussion the major sections of 
the title IV, HEA program regulations and sections of other relevant 
Federal regulations that would be amended and consolidated in subpart 
K.

Provisions Proposed by the Regulations

    The following discussion reflects the proposed provisions under 
which an institution would request, maintain, disburse, and otherwise 
manage title IV, HEA program funds. The provisions are discussed in the 
order in which they appear in the proposed regulations. If a provision 
applies to more than one section, it is discussed the first time it 
appears and with an appropriate cross-reference to its other 
appearances.

Proposed Sec. 668.161  Scope and Purpose

    The purpose of these regulations is to promote sound cash 
management practices by institutions and to minimize the financing 
costs to the Federal Government of making available title IV, HEA 
program funds to students and institutions. To achieve these 
objectives, the Secretary proposes new requirements, proposes to amend 
existing regulations, and proposes to establish in this subpart uniform 
rules and procedures under which an institution requests, maintains, 
disburses, and otherwise manages funds that it receives under each 
title IV, HEA program in which it participates. To establish uniformity 
in title IV, HEA program requirements, the Secretary proposes to 
consolidate in this subpart the cash management rules that are now in 
each of title IV, HEA program regulations and to codify existing 
departmental cash management policies and practices.
    In proposed Sec. 668.161(b), the Secretary would adopt the 
provision in Sec. 668.18 that specifies that funds received by an 
institution under the title IV, HEA programs are held in trust for the 
intended student beneficiaries and the Secretary and that as a trustee 
of Federal funds, the institution may not use or hypothecate those 
funds for any other purpose.
    In addition, the Secretary wishes to make clear the rules and 
procedures that apply to an institution under this subpart would also 
apply to a third-party servicer.

Proposed Sec. 668.162  Definitions

    Disburse: The Secretary proposes to define the term disburse to 
encompass all the methods by which an institution pays title IV, HEA 
program funds to a student or parent. Accordingly, under this proposal, 
these methods would be (1) Crediting the student's account at the 
institution, (2) issuing a check or cash to the student or a parent 
borrower under the Direct Loan or FFEL programs, and (3) initiating an 
electronic funds transfer (EFT) to a bank account designated by the 
student or by a parent borrower under the Direct Loan or FFEL programs.
    The Secretary acknowledges that the term disburse has a different 
meaning under the FFEL programs (34 CFR 682.200). Under those programs, 
a disbursement is defined as ``The transfer of loan proceeds by a 
lender to a borrower, a school, or an escrow agent by issuance of a 
check or by electronic funds transfer.'' Because the Secretary does not 
intend to change the definition of the term disbursement under the FFEL 
programs, the Secretary wishes to make clear that solely for the 
purposes of these proposed regulations that the term disburse would 
correspond to the concept of the delivery of proceeds under the FFEL 
programs.
    Issue checks. The Secretary proposes to define very broadly the 
term issue checks to include any means by which an institution pays a 
student or parent by check. Under the proposed definition, an 
institution would be considered to have issued a check to a student or 
parent when the institution has released, distributed, or otherwise 
made that check available to the student or parent. Although the 
Secretary does not wish to regulate the mechanisms that an institution 
may use to issue checks, the Secretary intends to enforce rigorously 
the liability provisions described in proposed Sec. 668.166 on any 
institution that does not issue checks to students shortly after the 
institution writes those checks.

Proposed 668.163  Requesting Funds

    In proposed Sec. 668.163, the Secretary would codify existing 
policy and practice under which the Secretary provides title IV, HEA 
program funds, other than FFEL program funds, to institutions. The 
Secretary provides title IV, HEA program funds to institutions under 
either the advance payment method or the reimbursement payment method.
    Under the advance payment method, the Secretary accepts an 
institution's request for cash and transfers the amount requested to a 
bank account designated by the institution. The amount of the 
institution's request for cash may not exceed the institution's 
``immediate need.'' Since 1986 the Secretary has required an 
institution to limit the amounts of its cash requests to the amounts 
needed to make disbursements to students within 3 business days. The 
Department's current policy regarding the meaning of the term 
``immediate need'' is articulated in the following publications:
    (1) OMB Circular A-110, as contained in the Education Department 
General Administrative Regulations (EDGAR), July 6, 1994, 34 CFR 
74.22(b);
    (2) The Recipient's Guide for the Department of Education Payment 
Management System (EDPMS), October 1993, Chapter 5;
    (3) The Audit Guide, U.S. Department of Education, Office of the 
Inspector General, March 1990, Section II;
    (4) The Blue Book, U.S. Department of Education, December 22, 1988, 
Chapter 5; and
    (5) The Department of the Treasury regulations, September 24, 1992, 
31 CFR part 205.
    As noted in these publications, an institution on the advance 
payment method must limit the amount of its request for cash to the 
amount needed to make disbursements to students and must time its 
request for cash to be in accordance with its actual and immediate cash 
requirements.
    In proposed Sec. 668.163(b), the Secretary would codify this 
longstanding 3-day immediate-need standard for the following reasons. 
First, the Department can deliver reliably by EFT title IV, HEA program 
funds to institutions. Second, the Secretary believes that 3 business 
days provides an institution sufficient time to make disbursements to 
students. Moreover, the Secretary believes that the 3-day immediate-
need standard furthers the objective of minimizing the financing costs 
to the Treasury of making title IV, HEA program funds available to 
students and institutions.
    In proposed Sec. 668.163(c), the Secretary would merely codify 
existing procedures under which the Secretary provides title IV, HEA 
program funds to an institution on the reimbursement payment method. 
Under those procedures, an institution must first disburse funds to 
eligible students before the institution may submit a request for cash. 
The amount of the institution's request for cash may not exceed the 
amount of the actual disbursements the institution made to those 
students. The Secretary approves the institution's request for cash if 
the Secretary determines that the institution (1) Determined properly 
the eligibility for title IV, HEA program funds of each student 
identified in its request for cash, (2) made disbursements for the 
correct amounts of title IV, HEA program funds to those students, and 
(3) submitted any documentation required by the Secretary to 
substantiate the information provided by the institution on its request 
for cash.

Proposed Sec. 668.164  Maintaining Funds

    In proposed Sec. 668.164, the Secretary would consolidate and 
amend, as noted below, several requirements that are currently in 
Sec. 674.19 of the Federal Perkins Loan Program, Sec. 675.19 of the FWS 
Program, Sec. 676.19 of the FSEOG Program, Sec. 690.81 of the Federal 
Pell Grant Program, and proposed Sec. 685.308 of the Direct Loan 
Program regulations regarding the account into which an institution 
deposits and otherwise maintains Federal funds.
    First, the Secretary proposes to consolidate in one place, with a 
minor modification, current provisions that require an institution to 
maintain a bank account into which the Secretary transfers or the 
institution deposits Federal funds (other than FFEL program funds) that 
the institution receives from the title IV, HEA programs. Under current 
regulations, an institution must either (1) Ensure that the name of the 
account discloses clearly that Federal funds are deposited into that 
account, or (2) notify the bank of the accounts that contain Federal 
funds and retain a record of that notice in its recordkeeping system. 
Under proposed Sec. 668.164(a), an institution would have to comply 
with both of these requirements. The Secretary notes that this proposal 
is consistent with the requirements under Sec. 685.308(h) of the 
proposed Direct Loan Program regulations.
    Second, the Secretary proposes to incorporate in Sec. 668.164(b) 
the current provisions that require an institution to maintain an 
interest-bearing account for the deposit of Federal Perkins Loan 
Program funds. Specifically, the account must be (1) An interest-
bearing account that is either federally insured or secured by 
collateral of value reasonably equivalent to the amount of funds in the 
account, or (2) an investment account consisting predominantly of low-
risk, income-producing securities.
    The Secretary believes, however, that where it is cost-effective an 
institution should be required to maintain all title IV, HEA program 
funds (except FFEL program funds) it receives in a federally insured, 
interest-bearing account. Therefore, in proposed Sec. 668.164(b), the 
Secretary would require an institution to maintain in any award year an 
interest-bearing account if the institution drew down in the prior 
award year a total amount greater than $1 million from the title IV, 
HEA programs. The Secretary notes that this requirement does not 
preclude an institution that is below the proposed $1 million threshold 
from choosing to maintain title IV, HEA program funds in an interest-
bearing account.
    Under section 487 of the HEA and 34 CFR 668.14(b)(1), an 
institution must use interest earned on funds it receives under the 
title IV, HEA programs solely for purposes of those programs. In 
proposed Sec. 668.164(b)(4), the institution would have to remit at 
least annually to the Federal government interest earned on all title 
IV, HEA program funds except Federal Perkins Loan Program funds (see, 
34 CFR 674.18, 34 CFR 674.19, and section 463 of the HEA). In proposing 
the $1 million threshold, the Secretary weighed the benefits to the 
Federal government of recovering the interest earned on title IV, HEA 
program funds maintained in interest-bearing accounts against the cost 
to, and administrative burden on, institutions of maintaining those 
accounts. The Secretary wishes to make clear that, except for Federal 
Perkins Loan Program funds, the proposed interest-bearing account would 
be merely a temporary holding account for title IV, HEA program funds, 
and that any interest earned on funds maintained in that account, 
including interest earned on funds pending the clearance of checks, 
would be remitted to the Federal government.
    The Secretary notes, however, that under the referenced EDGAR and 
OMB provisions (see 34 CFR 74.22 and OMB Circular A-110, subpart C, 
respectively) an institution must maintain Federal funds in an 
interest-bearing account unless: (1) The institution receives less than 
$120,000 in Federal funds per year (other than title IV, HEA program 
funds), (2) the best reasonably available interest-bearing account 
would not be expected to earn interest in excess of $250 per year on 
Federal cash balances, or (3) the bank would require an average or 
minimum balance so high that it would not be feasible within the 
expected Federal and non-Federal cash resources. In addition, the EDGAR 
and OMB provisions allow an institution to retain interest earnings in 
an amount up to $250 per year for the administrative expense of 
maintaining an interest-bearing account. (The Secretary proposes to 
adopt this allowance.)
    The Secretary especially invites comment on the appropriateness of 
the requirement for a $1 million threshold and on the extent to which 
the Secretary should adopt the EDGAR and OMB provisions described above 
regarding interest-bearing accounts.
    In proposing a requirement for interest-bearing accounts, the 
Secretary does not wish to imply that the Secretary is in any way 
encouraging an institution to maintain Federal funds in excess of its 
immediate need solely to earn interest on those funds. To the contrary, 
the Secretary simply recognizes that an institution may not always be 
able to disburse title IV, HEA program funds to students immediately 
upon receiving those funds, and wishes only to recover for the Treasury 
the interest earned on those funds while the funds are in the 
institution's account.
    Third, in Sec. 668.164(c), the Secretary proposes to require an 
institution to maintain a separate bank account for title IV, HEA 
program funds if the Secretary finds that the institution is unable to 
account adequately for the receipt, disbursement, or use of those 
funds. These requirements are consistent with current title IV, HEA 
program regulations and with the standards described in OMB Circular A-
110 and 34 CFR 74.22 that govern the use of banks as depositories of 
Federal funds.
    Finally, because the Secretary has proposed that institutions 
maintain an interest-bearing account for all title IV, HEA program 
funds (except FFEL program funds), the Secretary clarifies that an 
institution must exercise the level of care and diligence required of a 
fiduciary with regard to depositing and investing Federal funds (see 34 
CFR 668.82).

Proposed Sec. 668.165  Disbursing Funds

    The Secretary proposes to consolidate and amend, as noted below, 
several requirements that are currently in Sec. 674.16 of the Federal 
Perkins Loan Program, Sec. 675.16 of the FWS Program, Sec. 676.16 of 
the FSEOG Program, Sec. 690.78 of the Federal Pell Grant Program, and 
proposed Sec. 685.303 of the Direct Loan Program regulations under 
which an institution disburses title IV, HEA program funds to eligible 
students.
    In proposed Sec. 668.165(a) the Secretary would consolidate the 
provisions common to all the program regulations, except the FWS 
Program, with respect to paying a student. An institution must continue 
to follow the disbursement procedures contained in 34 CFR 675.16 for 
paying a student his or her wages under the FWS Program. To encourage 
the use of more efficient methods of payment than issuing checks, the 
Secretary proposes to allow an institution to make a payment to a 
student by EFT. Under this proposal, the institution would have to 
obtain once each award year written authorization from a student or 
parent to make EFT payments to the student's or parent's bank account, 
as applicable.
    In proposed Sec. 668.165(b), the Secretary would clarify and make 
uniform the procedures under which an institution credits a student's 
account. For example, the campus-based program regulations (see, for 
example, 34 CFR 676.16(c)) require only that an institution may credit 
a student's account or pay the student directly. (The campus-based 
programs are the Federal Perkins Loan, FSEOG, and FWS programs.) Under 
the Federal Pell Grant Program regulations (see 34 CFR 690.78(a)(2)), 
an institution may credit a student's account only for specified 
institutional charges. Assuming that the institution drew down the 
entire amount of the student's award, the institution would pay the 
student directly any amount of his or her Federal Pell Grant award in 
excess of the specified institutional charges. However, under current 
policy the Secretary allows an institution, for accounting purposes and 
for administrative convenience, to apply to a student's account his or 
her entire award, and if that amount exceeds allowable institutional 
charges, directly pay the student that balance. The proposed procedures 
would codify existing policy and specify the period of time within 
which an institution would pay a student any balance on his or her 
account.
    Under the proposed procedures, an institution would credit a 
student's account by applying the student's title IV, HEA program funds 
to allowable institutional charges. (However, consistent with current 
policy, the institution would not be permitted to credit the student's 
account for charges the institution assessed the student in a prior 
award year.) If the amount of title IV, HEA program funds the 
institution applies to the student's account exceeds the amount of 
allowable institutional charges, the Secretary proposes to require the 
institution to pay the balance remaining on the account directly to the 
student as soon as possible but within the later of (1) 7 days after 
the date that balance occurs, (2) 14 days after the first day of 
classes of the payment period or period of enrollment, as applicable 
(the Secretary intends this provision to apply also to second 
disbursements of Direct Loan and FFEL program funds), or (3) 7 days 
after the date the student rescinds his or her permission regarding the 
charges for which the institution may credit the student's account. The 
Secretary believes that these procedures strike an appropriate balance 
between the institution's obligation to provide title IV, HEA program 
funds to students in a timely manner and the administrative needs of an 
institution.
    However, the Secretary is concerned over findings by the Office of 
Inspector General and other offices within the Department that some 
institutions maintain for long periods, and use for their own purposes, 
title IV, HEA program funds in excess of allowable institutional 
charges. Those funds belong to students and to the Secretary. The 
Secretary believes it is imperative that institutions, as stewards of 
Federal funds, request funds only when needed and provide those funds 
to their students as expeditiously as possible. On the other hand, the 
Secretary recognizes that it does not make sense to require an 
institution immediately to pay a student the balance on his or her 
account if the student will incur within a short period of time 
additional institutional charges as a result of adding classes to his 
or her schedule. Consequently, in proposed Sec. 668.165(b)(2)(ii), an 
institution would be permitted to maintain the balance on a student's 
account for up to 14 days after the student's first day of classes. The 
Secretary particularly invites comments on this 14-day credit balance 
provision. In addition, the Secretary seeks comments on alternative 
approaches that would provide administrative relief to institutions for 
dealing with situations where students incur additional institutional 
charges by adding classes, while still requiring prompt payment for the 
majority of students who do not incur those charges.
    In proposed Sec. 668.165(b)(3), the Secretary would adopt for all 
title IV, HEA programs, the Federal Pell Grant Program and Direct Loan 
Program statutory provisions, sections 401(e) and 455(j) of the HEA, 
respectively, under which an institution may credit a student's account 
only for allowable institutional charges. Those charges are (1) Tuition 
and fees and (2) room and board, if the student contracts with the 
institution for room and board. In addition, the Secretary proposes to 
adopt the Federal Pell Grant Program requirement that an institution 
must obtain permission from a student to credit his or her account for 
other cost-of-attendance charges (but no other charges), as defined in 
section 472 of the HEA. Implicit in this requirement, and consistent 
with current policy, a student may at any time withdraw that permission 
and request the institution to pay him or her the remaining balance on 
his or her account.
    In proposed Sec. 668.165(b)(4), the Secretary would adopt for all 
title IV, HEA programs, the procedures in the Direct Loan and FFEL 
program regulations (see, proposed Sec. 685.303(c)(3), and 34 CFR 
682.604(d), respectively) under which an institution holds title IV, 
HEA program funds for the benefit of the student. Under those 
procedures, a student may request an institution to hold funds in 
excess of allowable institutional charges to assist him or her in 
managing those funds during an award year. If the institution chooses 
to hold those funds for the student, it must maintain those funds in a 
separate account established solely for that purpose. In addition, the 
institution may not commingle those funds with other funds or use those 
funds for any other purpose. The Secretary wishes to make clear that 
the account into which an institution deposits student funds under this 
provision may be an interest-bearing or a noninterest-bearing account. 
If the account is interest-bearing the interest would accrue to the 
institution and the institution may rebate that interest to students.
    In addition, the Secretary proposes to amend and make uniform the 
early payment requirements common to the title IV, HEA programs 
governed under this subpart (see, for example, 34 CFR 676.16(d) and 
690.78(b)). Under those requirements, the earliest an institution may 
credit a student's account is 21 days before the first day of a payment 
period or period of enrollment. The 21-day requirement was established 
at a time when the Federal government provided to institutions title 
IV, HEA program funds by Treasury check. Under the standards of that 
time, an institution requested cash for an amount the institution 
anticipated it needed to meet its disbursement needs for 30 days. 
Because it usually took several weeks for the Treasury to deliver the 
check to the institution, the institution could not determine with 
certainty when it would receive that check. However, with the advent of 
EFT, the Federal government can reliably transmit within 3 business 
days title IV, HEA program funds to an institution. Therefore, in 
proposed Sec. 668.165(c), the Secretary would provide that the earliest 
an institution may credit a student's account is 10 days before the 
first day of a payment period or period of enrollment. The Secretary 
believes that under this proposal an institution will not be 
financially burdened, as it may have been under the 30-day need 
standard with Treasury checks, because the institution may request 
funds as often as needed and the Federal government is able to provide 
those funds quickly and reliably. Moreover, sound financial management 
supports the conclusion that the Department of Treasury should not make 
available Federal funds to institutions for such extended periods.
    Finally, the Secretary recognizes that a student may incur 
educational expenses before he or she starts classes, and therefore has 
decided to adopt for all title IV, HEA programs the current requirement 
in the Federal Pell Grant, campus-based, FFEL, and Direct Loan program 
regulations under which the earliest an institution may directly pay a 
student is 10 days before the first day of a payment period or period 
of enrollment.
    The Secretary notes that under section 428G(b)(1) of the HEA and 
proposed Sec. 685.303(b)(4) of the Direct Loan Program regulations, an 
institution must delay releasing for 30 days the first installment of a 
FFEL or Direct Loan program loan, as applicable, to a first-year, 
first-time borrower.

Proposed Sec. 668.166  Excess Cash

    In proposed Sec. 668.166(a), the Secretary would define excess cash 
as any amount of title IV, HEA program funds, other than FFEL or 
Federal Perkins Loan Program funds, that an institution does not 
disburse to students by the end of the 3rd business day following the 
date the institution received those funds. As discussed previously, the 
selection of 3 business days is consistent with departmental guidance 
in the Blue Book, a publication setting out the procedures for 
``Accounting, Recordkeeping, and Reporting By Postsecondary Educational 
Institutions for Federally-Funded Student Financial Aid Programs,'' 
with audit guidelines issued by the Department of Education Office of 
Inspector General, and with requirements from the Department of the 
Treasury. Except as discussed below, an institution must return 
promptly to the Secretary any excess funds in its account.
    The Secretary realizes that an institution may be unable to 
disburse title IV, HEA program funds within 3 business days because of 
circumstances beyond the institution's control (for example, changes in 
student enrollment status, failure of a student to attend classes as 
scheduled, changes in a student's award as a result of verification). 
Although the Secretary does not intend to prescribe the methods by 
which an institution determines its 3-day immediate cash needs, the 
Secretary expects the institution to take into consideration the 
circumstances identified above, and any other circumstances the 
institution knows of, to determine more accurately its actual cash 
needs. Therefore, in proposed Sec. 668.166(b), the Secretary would 
merely as practical matter allow an institution to maintain nominal 
excess cash balances under certain conditions and only on an exception 
basis. First, an institution would not have to return excess cash for 
amounts of $5,000 or less. In making this proposal, the Secretary 
expects the institution to eliminate its excess cash balance by 
reducing the amount of its next request for cash by that amount. 
Second, an institution would not have to return immediately an excess 
cash balance if (1) The amount of that excess cash is less than one-
half of 1 percent of its total prior-year drawdowns where such prior 
annual drawdowns exceeded $1 million and (2) the institution makes 
within 7 calendar days a cash request greater than the amount of its 
excess cash. Although the Secretary believes that these excess-cash 
thresholds are reasonable, the Secretary seeks comment on the level and 
appropriateness of the proposed thresholds.
    Finally, because the Secretary expects institutions to establish 
procedures that minimize the potential for excess cash, in proposed 
Sec. 668.166(b)(3) the Secretary would require an institution to return 
immediately any amount of excess cash that the institution would 
otherwise be able to maintain under the thresholds discussed above if 
the institution routinely maintained excess cash balances at or below 
the threshold levels.
    The Department has also established a policy of reviewing 
institutions to determine where excess cash balances have been 
maintained and to seek recovery from those institutions of the losses 
to the government caused by having made those funds available to 
institutions in advance of their immediate needs. In proposed 
Sec. 668.166(c), upon a finding of excess cash, including a finding 
that an institution maintained routinely excess cash balances at or 
below the threshold levels, the Secretary would require an institution 
to reimburse the Department for the costs, as those costs would be 
calculated under proposed Sec. 668.166(c)(2), that the government 
incurred in making those excess funds available to the institution. In 
addition, where the excess cash balances are disproportionately large 
to the size of the institution or represent a continuing problem with 
the institution's responsibility to administer efficiently the title 
IV, HEA programs, the Secretary may initiate a proceeding to fine, 
limit, suspend, or terminate the institution's participation in one or 
more of those programs under subpart G of this part.
    In proposed Sec. 668.166(c)(2), in calculating whether an 
institution has excess cash, the Secretary would consider the 
institution to have issued a check on the date that check cleared the 
institution's bank account, unless the institution demonstrates to the 
satisfaction of the Secretary that it issued the check to the student 
shortly after the institution wrote that check. Finally, the Secretary 
proposes to assess against an institution that maintains excess cash 
balances a liability that is equal to the difference between the 
earnings those cash balances would have yielded under a Treasury-
derived rate and the actual interest earned on those cash balances.

Executive Order 12866

1. Assessment of Costs and Benefits

    These proposed regulations have been reviewed in accordance with 
Executive Order 12866. Under the terms of the order the Secretary has 
assessed the potential costs and benefits of this regulatory action.
    The potential costs associated with the proposed regulations are 
those resulting from statutory requirements and those determined by the 
Secretary to be necessary for administering this program effectively 
and efficiently. Burdens specifically associated with information 
collection requirements, if any, are identified and explained elsewhere 
in this preamble under the heading Paperwork Reduction Act of 1980.
    In assessing the potential costs and benefits--both quantitative 
and qualitative--of these proposed regulations, the Secretary has 
determined that the benefits of the proposed regulations justify the 
costs.
    The Secretary has also determined that this regulatory action does 
not unduly interfere with State, local, or tribal governments in the 
exercise of their governmental functions.
    To assist the Department in complying with the specific 
requirements of Executive Order 12866, the Secretary invites comment on 
whether there may be further opportunities to reduce any potential 
costs or increase potential benefits resulting from these proposed 
regulations without impeding the effective and efficient administration 
of the program.

2. Clarity of the Regulations

    Executive Order 12866 requires each agency to write regulations 
that are easy to understand.
    The Secretary invites comments on how to make these regulations 
easier to understand, including answers to questions such as the 
following: (1) Are the requirements in the regulations clearly stated? 
(2) Do the regulations contain technical terms or other wording that 
interferes with their clarity? (3) Does the format of the regulations 
(grouping and order of sections, use of headings, paragraphing, etc.) 
aid or reduce their clarity? Would the regulations be easier to 
understand if they were divided into more (but shorter) sections? (A 
``section'' is preceded by the symbol ``Sec. '' and a numbered heading; 
for example, 668.161 Scope and purpose.) (4) Is the description of the 
proposed regulations in the Supplementary Information section of this 
preamble helpful in understanding the proposed regulations? How could 
this description be more helpful in making the proposed regulations 
easier to understand? (5) What else could the Department do to make the 
regulations easier to understand?
    A copy of any comments that concern how the Department could make 
these proposed regulations easier to understand should be sent to 
Stanley M. Cohen, Regulations Quality Officer, U.S. Department of 
Education, 600 Independence Avenue, SW., (Room 5121, FB10), Washington, 
DC 20202-2241.

Regulatory Flexibility Act Certification

    The Secretary certifies that these proposed regulations would not 
have a significant economic impact on a substantial number of small 
entities. The small entities that would be affected by these 
regulations are small institutions of higher education. These 
regulations would safeguard Federal funds and reduce potential abuse in 
the title IV, HA programs. These changes would not significantly 
increase institutions' workloads or costs associated with administering 
the title IV, HEA programs. In the case of institutions that are 
required to maintain interest-bearing accounts, those institution may 
retain interest earnings to offset the costs of maintaining those 
accounts. Therefore, these regulations will not have a significant 
economic impact on a substantial number of small entities.

Paperwork Reduction Act of 1980

    Section 668.164 contains information collection requirements. As 
required by the Paperwork Reduction Act of 1980, the Department of 
Education will submit a copy of this section to the Office of 
Management and Budget (OMB) for its review. (44 U.S.C. 3504(h)).
    These proposed regulations contain information collection 
requirements regarding the bank account that all participating 
institutions must maintain for the deposit of title IV, HEA program 
funds. Specifically, institutions must notify their bank of the 
accounts into which they deposit Federal funds and must maintain a 
record of that notice in their recordkeeping system. In addition, 
institutions that draw down more than $1 million in title IV, HEA 
program funds must deposit those funds in interest-bearing accounts and 
keep records for any interest earned on those funds. Institutions may 
retain annually interest earnings on title IV, HEA program funds for an 
amount up to $250, must keep records for the amount retained, and must 
return to the Department any interest earnings greater than the amount 
retained. The Department needs and uses this information to determine 
whether institutions have complied with these requirements.
    For approximately 8500 institutions, a one-time public reporting 
burden for this collection of information is estimated at 5610 hours 
for institutions to notify banks of the accounts that contain title IV, 
HEA program funds and maintain a record of that notice in their 
recordkeeping system. In addition, the annual public reporting burden 
for this collection of information is estimated at 4250 hours for those 
institutions to account for the interest earned on title IV, HEA 
program funds and return to the Federal government any interest 
earnings in excess of $250.
    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.

Invitation to Comment

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

Assessment of Educational Impact

    The Secretary particularly requests comments on whether the 
proposed regulations in this document would require transmission of 
information that is being gathered by or is available from any other 
agency or authority in the United States.

List of Subjects in 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.

(Catalog of Federal Domestic Assistance Number: 84.007 Federal 
Supplemental Education Opportunity Grant Program; 84.032 Federal 
Family Educational 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 Federal 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: September 15, 1994.
Richard W. Riley,
Secretary of Education.

    The Secretary proposes to amend Part 668 of title 34 of the Code of 
Federal Regulations as follows:

PART 668--STUDENT ASSISTANCE GENERAL PROVISIONS

    1. The authority citation for Part 668 continues to read as 
follows:

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

    2. The Table of Contents of Part 668 is amended by adding subpart K 
to read as follows:

Subpart K--Cash Management

668.161  Scope and purpose.
668.162  Definitions.
668.163  Requesting funds.
668.164  Maintaining funds.
668.165  Disbursing funds.
668.166  Excess cash.


Sec. 668.18  [Removed]

    3. Section 668.18 is removed and reserved.
    4. Subpart K is added to Part 668 to read as follows:

Subpart K--Cash Management


Sec. 668.161  Scope and purpose.

    (a) General. (1) This subpart establishes uniform rules and 
procedures under which a participating institution requests, maintains, 
disburses, and otherwise manages funds that the institution receives 
under any title IV, HEA program. An institution must also follow rules 
and procedures for managing title IV, HEA program funds under each 
program in which it participates.
    (2) For purposes of this subpart, the title IV, HEA programs 
include only the Federal Pell Grant, PAS, FSEOG, Federal Perkins Loan, 
FWS, Direct Loan, and FFEL programs.
    (3) The rules and procedures that apply to an institution under 
this subpart also apply to a third-party servicer.
    (b) Federal interest in title IV, HEA program funds. Funds received 
by an institution under the title IV, HEA programs are held in trust 
for the intended student beneficiaries and the Secretary. Except for 
funds received by an institution for administering those programs, the 
institution, as a trustee of Federal funds, may not use or hypothecate 
(i.e., use as collateral) title IV, HEA program funds for any other 
purpose.

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


Sec. 668.162  Definitions.

    The following definitions apply to terms used in this subpart:
    Check: A negotiable demand draft or warrant.
    Credit an account: To post a payment of funds to an account 
maintained for a student by an institution.
    Day: A calendar day unless otherwise specified.
    Disburse: To make a payment of title IV, HEA program funds, or 
deliver the proceeds of a loan under the FFEL programs, to or on behalf 
of a student by--
    (1) Crediting the student's account at the institution;
    (2) Issuing a check or cash to--
    (i) The student; or
    (ii) In the case of a parent borrower under the Direct Loan or FFEL 
programs, the student's parent; or
    (3) Initiating an electronic funds transfer to a bank account 
designated by the student, or in the case of a parent borrower under 
the Direct Loan or FFEL programs, to a bank account designated by the 
parent.
    Drawdown: A process whereby an institution requests and receives 
Federal funds. The phrase ``draw down'' is used as a verb form of this 
word.
    Issue checks: To release, distribute, or make available checks to 
students or parents.
    Period of enrollment: (1) With respect to the Direct Loan Program, 
a period of enrollment as defined in 34 CFR 685.102;
    (2) With respect to the FFEL Program, a period of enrollment as 
defined in 34 CFR 682.200.
    Request for cash: A solicitation for cash that is completed and 
submitted in accordance with procedures contained in the Recipient's 
Guide for the Department of Education Payment Management System. This 
guide is published by the Department of Education, 600 Independence 
Avenue, SW., Room 3321, FB10, Washington, DC 20202-4331, and contains 
the procedures institutions use to request, report, and account for 
Federal funds.

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


Sec. 668.163  Requesting funds.

    (a) General. The Secretary pays an institution in advance, or by 
reimbursement, for the institution to disburse title IV, HEA program 
funds, other than FFEL program funds, to students who qualify to 
receive those funds.
    (b) Advance payment method. (1) Under the advance payment method, 
the Secretary accepts an institution's request for cash and transfers 
electronically the amount requested into a bank account designated by 
the institution.
    (2) An institution's request for cash must not exceed the amount of 
funds the institution needs immediately to make disbursements to 
students. The institution must make the disbursements as soon as 
administratively feasible, but no later than 3 business days following 
the date the institution received those funds.
    (c) Reimbursement payment method. (1) To receive payment of title 
IV, HEA program funds under the reimbursement method, an institution 
must first make disbursements to eligible students before it submits a 
request for cash.
    (2) The amount of the institution's request for cash may not exceed 
the amount of the actual disbursements the institution made to students 
included in that request.
    (3) The Secretary may require the institution to submit 
documentation that each student included in the request was eligible to 
receive, and received, payment for the title IV, HEA program funds for 
which the institution is seeking reimbursement.
    (4) The Secretary approves the amount of the institution's request 
and transfers electronically that amount into a bank account designated 
by the institution if the Secretary determines that the institution--
    (i) Determined properly the eligibility of each student for title 
IV, HEA program funds;
    (ii) Made disbursements for the correct amounts of title IV, HEA 
program funds to the students included in its request; and
    (iii) Submitted any documentation required under paragraph (c)(3) 
of this section.

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


Sec. 668.164  Maintaining funds.

    (a) General. (1) Other than for funds an institution receives under 
the FFEL programs, an institution must maintain an account at a bank 
into which the Secretary transfers or the institution deposits Federal 
funds that the institution receives from the title IV, HEA programs. 
Except as provided in paragraph (c) of this section, an institution is 
not required to open or maintain a separate account for depositing 
Federal funds.
    (2) An institution must notify the bank in which it deposits 
Federal funds of the account into which those funds are deposited by--
    (i) Ensuring that the name of the account discloses clearly that 
Federal funds are deposited into that account; and
    (ii) Notifying the bank of the account into which the institution 
deposits Federal funds.
    (3) The institution must retain in its recordkeeping system a 
record of the notice required under paragraph (a)(2) of this section.
    (b) Interest-bearing account. (1) Except as provided in paragraph 
(b)(2) of this section, for any award year, an institution must ensure 
that the account into which it deposits Federal funds is an interest-
bearing account that is federally insured, if the institution, during 
the prior award year, drew down a total amount greater than $1 million 
from the title IV, HEA programs.
    (2) For any award year, an institution that participates in the 
Federal Perkins Loan Program must deposit Federal Perkins Loan Program 
funds in--
    (i) An interest-bearing account that is--
    (A) Federally insured; or
    (B) Secured by collateral of value reasonably equivalent to the 
amount of funds in the account; or
    (ii) An investment account consisting predominantly of low-risk 
income-producing securities, such as obligations issued or guaranteed 
by the United States.
    (3) Except as provided in paragraphs (b)(3) (i) and (ii) of this 
section, an institution must remit at least annually to the Secretary 
the interest earned on title IV, HEA program funds maintained in an 
interest-bearing account.
    (i) Pursuant to 34 CFR part 674, an institution must retain for the 
purposes of the Federal Perkins Loan Program all interest or investment 
revenue earned on Federal Perkins Loan Program funds maintained in an 
interest-bearing or investment account.
    (ii) Other than interest or investment revenue earned on Federal 
Perkins Loan Program funds, an institution may retain for 
administrative expense up to $250 per year of the interest earned on 
title IV, HEA program funds maintained in an interest-bearing account.
    (c) Separate account. The Secretary may require an institution to 
maintain title IV, HEA program funds in a separate bank account that 
contains no other funds if the Secretary determines that--
    (1) The institution's accounting and internal control systems do 
not--
    (i) Identify the cash balances of title IV, HEA program funds 
maintained in the institution's bank account as readily as if those 
funds were maintained for each program in a separate account; or
    (ii) Identify adequately the interest or investment revenue earned 
on title IV, HEA program funds maintained in its bank account;
    (2) The institution's financial records--
    (i) Are not maintained on a current basis;
    (ii) Do not reflect accurately all title IV, HEA program 
transactions; or
    (iii) Are not reconciled at least monthly; or
    (3) The institution has otherwise failed to comply with the 
recordkeeping and reporting requirements in subpart B of this part or 
in the regulations that govern each title IV, HEA program in which the 
institution participates.
    (d) Standard of conduct. An institution must exercise the level of 
care and diligence required of a fiduciary with regard to depositing 
and investing Federal funds.

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


Sec. 668.165  Disbursing funds.

    (a) Method of payment. (1) An institution must notify a student of 
the amount of title IV, HEA program funds the student can expect to 
receive and how that amount will be paid.
    (2) If the institution chooses to disburse to the student or the 
student's parent by initiating an electronic funds transfer to the bank 
account designated by the student or parent, as applicable, the 
institution must obtain each award year written authorization from the 
student or parent, as applicable, to disburse by that method.
    (3) An institution must follow the disbursement procedures in 34 
CFR 675.16 for paying a student his or her wages under the FWS Program.
    (b) Crediting a student's account.--(1) General. An institution may 
disburse to a student by crediting the student's account. In crediting 
the student's account with title IV, HEA program funds, the institution 
may apply those funds only to allowable charges described under 
paragraph (b)(3) of this section, except that the institution may not 
apply the student's title IV, HEA program funds to any charges the 
institution assessed the student in a prior award year.
    (2) Student account balances. Except as provided in paragraph 
(b)(4) of this section, if the amount of title IV, HEA program funds 
the institution applies to a student's account exceeds the amount of 
allowable charges, the institution must pay the balance remaining on 
the student's account directly to the student as soon as possible but 
within the later of--
    (i) 7 days after the date that balance occurs;
    (ii) 14 days after the first day of classes of the payment period 
or period of enrollment, as applicable; or
    (iii) 7 days after the date the student rescinds his or her 
permission under paragraph (b)(3)(ii) of this section.
    (3) Allowable charges. For the purpose of determining a student's 
account balance under paragraph (b)(2) of this section, allowable 
charges include--
    (i) Only--(A) Tuition and fees;
    (B) Board, if the student contracts with the institution for board; 
and
    (C) Room, if the student contracts with the institution for room; 
and
    (ii) Other cost-of-attendance charges, as provided under section 
472 of the HEA, for which the institution obtains the student's 
permission. The institution must obtain from the student each award 
year permission to use his or her title IV, HEA program funds to pay 
for these cost-of-attendance charges. The institution--
    (A) May not require the student to grant that permission; and
    (B) Must allow the student to rescind that permission at any time.
    (4) Holding student funds. An institution, as a fiduciary for the 
benefit of a student, may hold student funds from the title IV, HEA 
programs in excess of institutional charges included in paragraph 
(b)(3) of this section, if the student requests in writing that the 
institution retain those excess funds to assist the student in managing 
his or her funds for an award year. The institution must maintain these 
funds in a separate account established solely for the purpose of 
holding excess student funds and may not commingle these funds with 
other funds or use these funds for any other purpose.
    (c) Early payments. (1) An institution may not make a payment to a 
student for a payment period or period of enrollment, as applicable, 
until the student is enrolled for classes for that period.
    (2) Except as provided in paragraph (c)(3) of this section, the 
earliest an institution may pay directly, or credit the account of, an 
enrolled student is 10 days before the first day of a payment period or 
period of enrollment, as applicable.
    (3) Pursuant to 34 CFR 682.604(c) and 34 CFR 685.303(b)(4), if a 
student is enrolled in the first year of an undergraduate program of 
study and the student has not previously received an FFEL or Direct 
Loan Program loan, the institution may not release to the student for 
endorsement the first installment of his or her FFEL or Direct Loan 
Program loan, as applicable, until 30 days after the first day of the 
student's classes.

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


Sec. 668.166  Excess cash.

    (a) General. The Secretary considers excess cash to be any amount 
of title IV, HEA program funds, other than FFEL or Federal Perkins Loan 
Program funds, that an institution does not disburse to students by the 
end of the 3d business day following the date the institution received 
those funds. Except as provided in paragraph (b) of this section, an 
institution must return promptly to the Secretary any amount of excess 
cash in its account.
    (b) Excess cash tolerances. If an institution draws down title IV, 
HEA program funds in excess of its immediate cash needs, the 
institution may maintain the excess cash in its account only if--
    (1) The amount of that excess cash is less than $5,000; or
    (2)(i) In the award year preceding that drawdown, the institution 
drew down more than $1 million of title IV, HEA program funds, and the 
amount of that excess cash is less than one-half of 1 percent of its 
total prior-year drawdowns; and
    (ii) The institution makes within 7 days a cash request greater 
than the amount of its excess cash; and
    (3) The institution does not maintain routinely in its account the 
excess cash balances described in paragraph (b)(1) or (b)(2) of this 
section.
    (c) Consequences for maintaining excess cash balances. (1) If the 
Secretary finds that an institution maintains in its account excess 
cash balances greater than those allowed under paragraph (b) of this 
section or maintains routinely excess cash balances allowed under 
paragraph (b) of this section, the Secretary--
    (i) As provided in paragraph (c)(2) of this section, requires the 
institution to reimburse the Secretary for the costs the Secretary 
deems to have incurred in making those excess funds available to the 
institution; and
    (ii) May initiate a proceeding to fine, limit, suspend, or 
terminate the institution's participation in one or more title IV, HEA 
programs under subpart G of this part.
    (2) For the purposes of this section, upon a finding that an 
institution has maintained excess cash, the Secretary--
    (i) Considers the institution to have issued a check to a student 
on the date that the check cleared the institution's bank account, 
unless the institution demonstrates to the satisfaction of the 
Secretary that it issued the check shortly after the institution wrote 
the check; and
    (ii) Calculates, or requires the institution to calculate, a 
liability for maintaining excess cash balances in accordance with 
procedures established by the Secretary. Under those procedures, the 
Secretary assesses a liability that is equal to the difference between 
the earnings that the excess cash balances would have yielded if 
invested under the applicable current value of funds rate and the 
actual interest earned on those balances. The current value of funds 
rate is an annual percentage rate, published in a Treasury Financial 
Manual (TFM) bulletin, that reflects the current value of funds to the 
Department of the Treasury based on certain investment rates. The 
current value of funds rate is computed each year by averaging 
investment rates for the 12-month period ending every September. The 
TFM bulletin is published annually by the Department of the Treasury. 
Each annual bulletin identifies the current value of funds rate and the 
effective date of that rate.

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

[FR Doc. 94-24115 Filed 9-28-94; 8:45 am]
BILLING CODE 4000-01-P