[Federal Register Volume 59, Number 228 (Tuesday, November 29, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-29048]


[[Page Unknown]]

[Federal Register: November 29, 1994]


      
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Part VI





Department of Education





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34 CFR Part 600, et al.;




Institutional Eligibility; Student Assistance General Provisions; 
Federal Family Education Loan Programs; Final Rule
DEPARTMENT OF EDUCATION

34 CFR Parts 600, 668, and 682

RIN 1840-AB87, 1840-AB85 and 1840-AB80

 
Institutional Eligibility; Student Assistance General Provisions; 
Federal Family Education Loan Programs

AGENCY: Department of Education.

ACTION: Final regulations.

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SUMMARY: The Secretary amends the Institutional Eligibility 
regulations, the Student Assistance General Provisions regulations, and 
the Federal Family Education Loan (FFEL) Program regulations to further 
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 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.

EFFECTIVE DATE: These regulations take effect on July 1, 1995, with the 
exception of Sec. 668.9(b), which is effective as of July 1, 1994. 
However, affected parties do not have to comply with the information 
collection requirements in Secs. 668.3, 668.8, 668.15, 668.16, 668.22, 
and 668.23 until the Department of Education publishes in the Federal 
Register the control numbers assigned by the Office of Management and 
Budget (OMB) to these information collection requirements. Publication 
of the control numbers notifies the public that OMB has approved these 
information collection requirements under the Paperwork Reduction Act 
of 1980.

FOR FURTHER INFORMATION CONTACT: Wendy Macias or Greg Allen, U.S. 
Department of Education, 600 Independence Avenue, S.W. (Regional Office 
Building 3, Room 4318), Washington, D.C. 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: On April 29, 1994 the Secretary published 
interim final regulations (denominated final regulations) amending the 
Student Assistance General Provisions regulations and the regulations 
for the Federal Family Education Loan Programs and the Federal Pell 
Grant Program (59 FR 22348). These regulations became effective on July 
1, 1994. At the time these final regulations were published, the 
Secretary requested additional public comment on whether further 
changes in the regulations were warranted. A notice correcting the 
regulations and extending the comment period until July 28, 1994 was 
published on July 7, 1994 (59 FR 34964).
    Based on the comments received, the Secretary is making further 
changes in the regulations. These changes will take effect July 1, 
1995. The Secretary also received comments on other provisions of the 
regulations and may make further changes in the regulations based on 
these comments. However, if the Secretary determines that additional 
changes are necessary, these future changes would not become effective 
before July 1, 1996.
    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.
    The April 29, 1994 final regulations included a discussion of the 
major issues which will not be repeated here. The following list 
summarizes those issues and identifies the pages of the preamble to the 
April 29, 1994 final regulations on which a discussion of those issues 
can be found:
    The Secretary clarified the terms used in the statutory definition 
of academic year (pages 22351 and 22361-22363);
    The Secretary added 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 (pages 22364-22365);
    The Secretary amended the 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 included 
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 added further provisions to evaluate 
the quality of short-term programs. The Secretary also amended the 
provisions for English as a second language programs (pages 22351-22352 
and 22365-22368);
    The Secretary added 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 added procedures to codify new statutory 
provisions governing provisional certification procedures for 
participation in a Title IV, HEA program (pages 22352-22353 and 22368-
22374);
    The Secretary amended 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 
added provisions to amend the regulations governing program 
participation agreements (pages 22353 and 22374-22377);
    The Secretary made significant changes to the section governing the 
evaluation of an institution's financial responsibility. The Secretary 
strengthened the factors used to evaluate an institution's financial 
responsibility to reflect statutory changes (pages 22353-22354 and 
22378-22383);
    The Secretary strengthened and expanded the standards of 
administrative capability for participating institutions, addressing 
areas previously not regulated or for which there were only guidelines 
(pages 22354 and 22383-22391);
    The Secretary amended the provisions governing default reduction 
measures to reflect statutory changes made by the Amendments of 1992 
and current departmental practices (pages 22355 and 22391-22394);
    The Secretary clarified the terms used in the statutory definition 
of a fair and equitable refund policy (pages 22355-22359 and 22394-
22401);
    The Secretary implemented the statutory requirement that 
institutions have annual compliance audits (pages 22359 and 22401-
22403);
    The Secretary expanded the factors of financial responsibility of 
an institution to take into consideration substantial control over both 
institutions and third-party servicers (page 22381);
    The Secretary implemented annual audit requirements for third-party 
servicers as necessary to implement statutory provisions under the 
Amendments of 1992 (pages 22401-22403);
    The Secretary amended the regulations to require a third-party 
servicer to notify any institution under whose contract the third-party 
servicer is assessed a liability and any institution that receives the 
same services for which a liability was assessed, of the assessment of 
the liability against the servicer (page 22408);
    The Secretary created 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 is 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 22405-22407);
    The Secretary amended the regulations to apply against a third-
party servicer the sanctions under subpart G of the Student Assistance 
General Provisions for any violation of a Title IV, HEA program 
requirement (page 22408);
    The Secretary amended the regulations to apply fiduciary standards 
to third-party servicers so that a third-party servicer is required to 
act at all times with the competency necessary to qualify as a 
fiduciary (pages 22408-22409);
    The Secretary amended the regulations 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 22415);
    The Secretary added a new section to codify Federal requirements 
for third-party servicers that contract with lenders or guaranty 
agencies. A third-party servicer is 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 implements statutory authority to require that a 
third-party servicer must have performed an annual audit of the 
servicer's administration of a lender's or guaranty agency's 
participation in the FFEL programs (pages 22415-22416); and
    The Secretary amended 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 
(pages 22416-22417).

Substantive Changes to the Final Regulations

PART 668--STUDENT ASSISTANCE GENERAL PROVISIONS

Subpart A--General

Section 668.2  General Definitions

Academic Year
    In the April 29, 1994 final regulations, the Secretary addressed 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. A modification was 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. In response to public comment, 
the Secretary has amended the definition of an academic year 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 12 hours of regularly scheduled instruction, 
examinations, or preparation for examinations occurs. A corresponding 
change has been made to the definition of an eligible program in 
Sec. 668.8(b)(3)(ii). Third-party Servicer.
    In response to public comment, the definition of third-party 
servicer has been amended to specifically exclude the function of 
providing computer services or software. This change merely codifies 
the Secretary's determination in the preamble to the April 29, 1994 
final regulations, that the function of providing computer services or 
software is simply a technological means to assist in carrying out 
certain administrative functions that are already included in the 
definition third-party servicer under this part.
    In response to public comment, the definition of third-party 
servicer has been modified to expressly exclude employees of an 
institution. For purposes of determining which individuals are 
employees of an institution, with respect to administering any aspect 
of an institution's participation in the Title IV, HEA programs, the 
regulations now specify that an employee is an individual that works on 
a full-time, part-time, or temporary basis at the institution; performs 
all required duties that are relevant to the administration of the 
institution's participation in the Title IV, HEA programs on site at 
the institution under the supervision of the institution; is paid as an 
individual directly by the institution; is not employed by or 
associated with a third-party servicer; and is not a third-party 
servicer for any other institution.

Section 668.3  Reductions in the Length of an Academic Year.

    In the April 29, 1994 final regulations, the Secretary promulgated 
regulations 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. In response to 
public comment the Secretary has amended Sec. 668.3(c) to clarify that 
an institution may apply for a longterm reduction in the length of an 
academic year if it wishes to continue operating with a reduced 
academic year on a longterm basis. An institution's other option would 
be to ask for a temporary reduction in the length of an academic year 
while the institution changes to at least a 30 week academic year. The 
Secretary notes that Sec. 668.3(c)(2) requires an institution that is 
granted a longterm reduction in the length of an academic year to 
reapply to the Secretary in order to continue the reduction whenever 
the institution is required to apply to continue to participate in a 
Title IV, HEA program.
    The April 29, 1994 final regulations require that an institution 
applying for a transitional or longterm reduction in the length of an 
academic year must demonstrate that the institution has awarded, 
disbursed, and delivered Title IV, HEA program funds in accordance with 
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. In response to public comment, the Secretary has 
added Sec. 668.3(d) to specify that an institution may demonstrate 
compliance with this requirement by making arrangements that are 
satisfactory to the Secretary to repay any overawards that resulted 
from the improper awarding, disbursing, or delivering of Title IV, HEA 
program funds.

Section 668.8  Eligible Program

English as a Second Language (ESL)
    In response to public comment, the Secretary has removed 
Sec. 668.8(j)(2) that required an institution to assess each student at 
the end of an ESL program to substantiate that the student has attained 
adequate proficiency in written and spoken English to use already 
existing knowledge, training, or skills.
Undergraduate Educational Program in Credit Hours.
    In response to public comment, the clock-hour/credit-hour 
conversion regulations have been amended to reinstate the exemption 
from the clock-hour/credit-hour conversion formula for programs of at 
least two academic years in length that lead to an equivalent degree, 
as determined by the Secretary. A similar change has been made for 
programs offered by an institution that are fully creditable toward 
that institution's equivalent degree, as determined by the Secretary.

Section 668.9  Relationship Between Clock Hours and Semester, 
Trimester, or Quarter Hours in Calculating Title IV, HEA Program 
Assistance

    On October 20, 1994, Pub. L. 103-382 was signed by the President of 
the United States. Pub. L. 103-382 amends the HEA to specify that 
public or private nonprofit hospital-based diploma schools of nursing 
are exempt from any regulations promulgated by the Department 
concerning the relationship between clock hours and semester, 
trimester, or quarter hours in calculating student grant, loan, or work 
assistance under Title IV of the HEA. Accordingly, this section is 
amended to provide for that exemption. This provision took effect on 
July 1, 1994.

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

Section 668.12  Application Procedures

    In response to public comment, the Secretary has revised 
Sec. 668.12(b) to no longer automatically require an institution to 
apply to the Secretary for a certification that the institution 
continues to meet the standards for participation in the Title IV, HEA 
programs if the institution adds an additional location that offers 100 
percent of a program. The regulations have been revised to require that 
if an institution adds an additional location that offers 100 percent 
of a program, the institution is required to notify the Secretary in 
accordance with 34 CFR 600.30. If the Secretary determines that the 
addition of the location may impair an institution's administrative 
capacity or financial strength, the Secretary may require the 
institution to apply to the Secretary for a certification that the 
institution continues to meet the standards for participation in the 
Title IV, HEA programs.

Section 668.15  Factors of Financial Responsibility

    In response to public comment, the Secretary has revised the cash 
reserve requirement to provide that an institution will be deemed to 
have sufficient cash reserves to make refunds if the institution 
demonstrates that it meets the factors of financial responsibility in 
Sec. 668.15 and demonstrates that it has paid refunds in a timely 
manner over a two-year period. If the institution does not demonstrate 
financial responsibility, the institution will have to post a letter of 
credit in accordance with existing regulations. If the institution did 
not demonstrate timely payment of refunds, the institution will have to 
post a letter of credit equal to 25 percent of the Title IV refunds it 
was required to make over the past year.
    Based upon the change in requirements for the cash reserve related 
to refund payments set out in 668.15, the Secretary has amended 
Secs. 668.15(b)(7)(i)(A) and (8)(i)(B) to remove the reference to the 
cash reserve fund in the delineation of items that would be included in 
the list of institutional assets for the acid test analysis.
    The Secretary has also amended the language in 668.15(b)(7)(i)(B) 
to clarify that the determination of an institution's financial 
responsibility depends, in part, upon an analysis of the relative size 
of an institution's net operating losses over the prior two year 
period. This clarification is being made to reflect the discussion on 
59 FR 22382 of the April 29 final regulations, where the Secretary 
explained that an analysis of an institution's operating losses was 
made to determine if the losses in either or both of the institution's 
two most recently completed fiscal years 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 has amended Sec. 668.16(d) to delineate items that 
the Secretary will consider in determining whether a State tuition 
recovery fund is an acceptable substitute for the federal cash reserve 
requirement.

Section 668.16  Standards of Administrative Capability

    In response to public comment, the Secretary has modified the 
provisions governing satisfactory academic progress in Sec. 668.16(e) 
to provide clarification.
    In response to public comment, the Secretary has revised 
Sec. 668.16(l) that required that, to be administratively capable, an 
institution was required to meet the 33 percent withdrawal rate 
specified in the regulations. This provision is now applicable only to 
institutions that seek to participate in a Title IV, HEA program for 
the first time (``new'' schools). The Secretary has also changed the 
withdrawal date provision to require institutions to report their 
withdrawal rates for an award year time period, rather than an academic 
year time period.

Section 668.22  Institutional Refunds and Repayments

    Section 668.22(a)(1) has been amended to clarify that the 
requirement that an institution have a fair and equitable refund policy 
under which the institution makes a refund of certain charges to a 
student who received Title IV, HEA program assistance, includes any 
student whose parent received a Federal Direct PLUS loan on behalf of 
the student. In addition, Sec. 668.22(i) has been amended to clarify 
that ``financial aid'' includes Federal Direct PLUS loans received on 
the student's behalf.
    In response to public comment, changes have been made to remove 
language that would have required an institution to treat a student on 
a leave of absence as a withdrawal for purposes of this section. 
Language has been removed from Secs. 668.22(a)(1)(ii), (e)(1)(i), and 
(g)(2)(iv) of the April 29, 1994 final regulations to reflect this 
change. Section 668.22(j)(1)(ii) has been amended to define the 
withdrawal date for a student who does not return to the institution at 
the expiration of an approved leave of absence or takes a leave of 
absence that is not approved, as the student's last recorded date of 
class attendance as documented by the institution. Section 668.22(j)(2) 
has been added to specify that a leave of absence is approved for 
purposes of this section if no other leave of absence has been granted 
within a twelve-month period, the leave of absence does not exceed 60 
days, the student makes a written request to be granted the leave of 
absence, and the leave of absence does not involve additional charges 
by the institution to the student. Section 668.22(j)(4)(iii)(A) has 
been amended to require that an institution pay a refund that is due to 
a student who does not return to the institution at the expiration of 
an approved leave of absence, within 30 days of the date of expiration 
of the leave of absence. Section 668.22(j)(4)(iii)(B) has been added to 
require that an institution pay a refund that is due to a student who 
is taking an unapproved leave of absence, within 30 days after the 
student's last recorded date of class attendance as documented by the 
institution.
    In response to public comment, Sec. 668.22(b)(1)(iv)(A) has been 
amended to reflect that the Secretary has removed Appendix A to this 
part, Standards for Acceptable Refund Policies by Participating 
Institutions, and replaced it with the Federal refund calculation 
described in new Sec. 668.22(d).
    Sections 668.22(c)(2)(ii) and 668.22(g)(2)(ii)(B) permit an 
institution to exclude allowable late disbursements of loans made under 
the Federal Direct Student Loan Program from a student's scheduled cash 
payment. These sections have been amended to clarify that late 
disbursements of loans made under the Federal Direct Student Loan 
Program must be made in accordance with 34 CFR 685.303(d) of the 
Federal Direct Student Loan Program regulations.
    In response to public comment, Sec. 668.22(e)(i) has been amended 
to define the minimum ``period of enrollment for which the student has 
been charged'' as the semester, trimester, quarter, or other academic 
term in the case of an educational program that is measured in credit 
hours or clock hours and uses semesters, trimesters, quarters, or other 
academic terms. Section 668.22(e)(ii) has been amended to define the 
minimum ``period of enrollment for which the student has been charged'' 
in the case of an educational program that is measured in credit hours 
or clock hours and does not use terms and is longer than or equal to 
the academic year in length, as the greater of the payment period or 
one-half of the academic year. Section 668.22(e)(ii) is also amended to 
define the minimum ``period of enrollment for which the student has 
been charged'' in the case of an educational program that is measured 
in credit hours or clock hours and does not use terms and is shorter 
than the academic year in length, as the length of the educational 
program.
    Section 668.22(f)(1)(ii), (f)(2)(i), (g)(3)(ii), (h)(1), (h)(2)(ii) 
and (h)(2)(v) have been amended to clarify that, for purposes of this 
section an institution is not required to determine whether a student 
has received an overpayment and, therefore, is not required to return 
any amount of a repayment, for noninstitutional costs for Federal 
Direct Stafford, or Federal Direct PLUS program funds. This is 
consistent with requirements for Federal Work Study (FWS), Federal 
Stafford loan, Federal PLUS, and Federal SLS program funds.
    In response to public comment, Sec. 668.22(g)(3)(iii)(B) has been 
added to provide that an institution does not have to pay a refund if 
the institution demonstrates that the amount of a refund would be $25 
or less, provided that the institution has obtained written 
authorization from the student in the enrollment agreement to retain 
any amount of the refund that would be allocated to the Title IV, HEA 
loan programs.
    Consistent with the allocation order for the return of unsubsidized 
and subsidized Federal Stafford loans, Sec. 668.22(h)(1)(v) has been 
added and Sec. 668.22(h)(1)(vi) has been amended to clarify that an 
institution must allocate a refund to eliminate outstanding balances on 
unsubsidized Federal Direct Stafford loans received by the student 
before allocating any portion of the refund to eliminate outstanding 
balances on subsidized Federal Direct Stafford loans received by the 
student.
    Section 668.22(j)(3) has been amended to clarify that this 
paragraph specifies the timely determination of withdrawal for students 
who drop out of an institution. It is unnecessary to specify the timely 
determination of a student's withdrawal in the case of students who 
officially withdraw, are expelled, or take an unapproved leave of 
absence, because the institution has either been informed of the 
withdrawal, or has taken action to withdraw the student. Further, the 
Secretary would expect an institution to be aware that a student has 
failed to return from an approved leave of absence on the day that the 
student is scheduled to return to the institution.
    In order to provide further guidance on the refund process, the 
Secretary has included flow charts that demonstrate the basic 
procedures for determining which refund policy to use and general 
guidance on how to calculate refunds. These flow charts are located in 
a new Appendix A to this part (Flow Charts for Procedures for 
Calculating Refunds Under Sec. 668.22).

Section 668.23  Audits, Records, and Examinations

    References to a foreign institution have been removed from this 
section to clarify that an institution, as that term is used throughout 
the regulations, includes a foreign institution, as defined in 34 CFR 
600.52, unless otherwise specified.
    In response to public comment, Sec. 668.23(c)(1)(i) and (iii) have 
been amended to specify that a third-party servicer's annual compliance 
audit must meet the compliance audit standards for institutions. This 
change reflects the Secretary's determination that a third-party 
servicer, as an agent of an institution, must be examined with the same 
standards that are applied to institutions.
    The Secretary is making a technical change to Sec. 668.23(c)(1)(iv) 
and (d) to specify that the U.S. General Accounting Office's 
publication concerning general standards and standards for compliance 
audits is now published under the title: Government Auditing Standards.
    In response to public comment, a foreign institution's first audit 
report is only required to cover the two most recently concluded award 
years in which the foreign institution participated in the Title IV, 
HEA programs, unless otherwise specified by the Secretary. If a foreign 
institution has been participating in the Title IV, HEA programs for 
less than two award years, the foreign institution's first audit report 
must cover the entire period of time since the foreign institution 
began to participate in the Title IV, HEA programs. This change to the 
final regulations that were published on April 29, 1994, reduces the 
burden that is placed upon a foreign institution that has been 
participating in the Title IV, HEA programs for a long time. A new 
Sec. 668.23(c)(2)(i)(B) incorporates this change.
    In response to public comment, Sec. 668.23(c)(3) has been revised 
to require that an institution's or third-party servicer's annual 
compliance audit must be based upon the award year and submitted to the 
Department of Education within six months after the end of the 
institution's or third-party servicer's fiscal year that ends on or 
after the most recently concluded award year for which the audit is 
performed. A corresponding change has also been made to new 
Sec. 668.23(c)(2)(i)(B) and to Sec. 668.23(c)(2)(ii).
    In response to public comment, Sec. 668.23(h)(1)(v), which required 
an institution to document a Title IV, HEA program recipient's 
placement in a job, if the institution had a placement service and the 
student used that service, has been removed. In addition, 
Sec. 668.23(h)(2) (i) and (ii), which require an institution to 
establish and maintain records regarding the admission requirements and 
educational qualifications of each regular student the institution 
admits into an eligible program, have been combined under 
Sec. 668.23(h)(2) to simplify the regulations.

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

Section 668.81  Scope and Special Definitions

    Under the State Postsecondary Review Program (SPRP) authorized 
under Part H-1 of Title IV of the HEA, a State Postsecondary Review 
Entity (SPRE) reviews institutions referred to a State to determine if 
the referred institutions meet applicable State standards. If a SPRE 
determines, after affording an institution the opportunity to contest 
that determination, that an institution should no longer participate in 
the Title IV, HEA programs because it violates state standards, it 
notifies the Secretary of that determination. Under 34 CFR 667.26(b)(2) 
of SPRP regulations, the institution is not allowed to appeal that 
termination determination to the Secretary.
    Upon receipt of that notice, the Secretary immediately terminates 
the institution's participation in the Title IV, HEA programs. 
Accordingly, Sec. 668.81 is amended to clarify that Subpart G of Part 
668 does not apply to terminations under the SPRP.

Subpart H--Appeal Procedures for Audit Determinations and Program 
Review Determinations

Section 668.116  Hearing

    The Secretary has also made a typographical correction to 
668.116(e)(1)(vi) to reflect that institutions and third party 
servicers have up to 30 days following the filing of a request for 
review of an audit determination or a program review determination to 
file certain other records and materials to be considered in 
conjunction with their request. The April 29, 1994 final regulations 
contained a typographical error that defined this period as ``3'' days 
rather than the ``30'' days established for such documentary 
submissions.

PART 682--FEDERAL FAMILY EDUCATION LOAN PROGRAMS

Subpart D--Guaranty Agency Programs

Section 682.413  Remedial Actions

    The April 29, 1994 regulations applied the remedial actions of this 
section to a third-party servicer that contracts with a lender or 
guaranty agency to administer any aspect of the lender's or agency's 
FFEL programs. However, the final regulations did not specify that a 
third-party servicer was entitled to an opportunity to be heard prior 
to the assessment of any remedial actions that the Secretary deems are 
appropriate to the alleged violation. Accordingly, Sec. 682.413(e)(1) 
is amended to provide third-party servicers that contract with lenders 
or guaranty agencies with an opportunity to present evidence or other 
information as to why the remedial action should not be levied against 
the servicer. This change provides due process protection for third-
party servicers that contract with lenders or guaranty agencies.
Analysis of Comments and Changes
    In response to the Secretary's invitation in the April 29, 1994 
final regulations, 706 parties submitted comments. An analysis of the 
comments that have resulted in changes to the final regulations 
follows.
    Major issues are grouped according to subject, with appropriate 
sections of the regulations referenced in parenthesis. Other 
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 (unless the Secretary 
believes it is necessary to do so.)

PART 668--STUDENT ASSISTANCE GENERAL PROVISIONS

Subpart A--General

Section 668.2  General definitions

Academic Year
    Comments: Eighty-seven commenters commented on the Secretary's 
definition of a week of instructional time for purposes of the 
definition of an academic year and a week of instruction for purposes 
of the definition of an eligible program in Sec. 668.8. A few 
commenters asked for clarification on the implementation of the five-
day rule. One commenter suggested that the Secretary clarify the 
definition of a week of instruction, because a strict reading of the 
language implies that an institution would not be able to count as a 
week of instruction any week in which there was not a full five days of 
instruction due to a holiday, teacher workshop day, etc. Some 
commenters were concerned that this provision would require their 
students to make-up time for Federal holidays. One commenter observed 
that given that there are approximately 12 Federal holidays per year, 
even a nine-month program which meets five days per week would not be 
deemed to have 30 weeks of instruction under the current definition of 
an academic year. One commenter expressed concern that its institution 
would have to eliminate a monthly inservice, during which meetings, 
tutoring sessions, and professional lectures are conducted. Another 
commenter stated that the State of Maryland would not permit them to 
reduce the number of hours per day in order to add a fifth day of 
class. The institution was concerned that under this provision, its 
students who attend their weekend program would be ineligible for Title 
IV, HEA program assistance. Another commenter requested that the 
Secretary define a day of instruction, examination, or preparation.
    Many commenters were concerned that requiring students to attend 
classes at least five days per week if the students are attending 
educational programs measured in credit hours without semesters, 
trimesters, or quarters, would create time and economic hardships. The 
commenters said the schedules of these programs are tailored to meet 
the needs of non-traditional students who have family and work 
obligations which require flexible school schedules. Many commenters 
believed that under this provision, students would encounter decreased 
wages and increased child care costs if they were required to spend 
extra days in class. Some commenters stated that this rule would only 
contribute to student absenteeism. Other commenters argued that this 
provision would work as a disincentive for some students to attend 
these programs and would serve as an agent in cutting off equal access 
to students who cannot attend classes five days a week. Some commenters 
feared that this rule would have a substantially negative impact on 
enrollment at their institutions. One commenter stated that he 
specifically chose his program of study because it allowed flexibility 
in attending classes and retaining his job, and this provision would 
prohibit him and many other students from pursuing their education and 
employment opportunities. Some commenters maintained that students who 
travel to institutions for intensified weekend programs would be 
severely impacted by this provision, as they would incur greater 
transportation and lodging costs. Some commenters viewed the provision 
as discriminatory, as it would limit educational access for some 
students. One of the commenters observed that traditional education is 
not effective in low-income, single-parent households. A few commenters 
believed that the Secretary did not take into account the rationale for 
the use of non-standard terms. These institutions offer more starts 
with less students so that staff can better assist students with 
placement upon completion of the program.
    Some commenters remarked that while the current definition 
addresses the required minimum of days per week, it disregards the 
number of hours per day. Many commenters felt that the Secretary should 
focus on the amount of daily instructional time rather than the number 
of days per week spent in the classroom. The commenters questioned the 
relationship between the number of days a student attends classes and 
the quality of a program, especially if the regulation does not 
recognize the length of time a student spends in class per day. One 
commenter suggested that the Secretary define its 30-week academic year 
as any period of at least 30 chronological weeks, i.e., 210 days, in 
which at least 720 clock hours of instruction is scheduled to occur. 
This methodology translates to requiring scheduled attendance of at 
least 24 hours of attendance per week for a full-time student and is 
consistent with the Department's long-standing definition of full-time 
status. The commenter noted that given that non-fixed term institutions 
frequently have weekly or bi-weekly starts which could make it 
difficult for auditors to determine exactly where vacations and/or 
other activities not related to class preparation might fall, this 
proposal is more easily audited since the program reviewer or auditor 
would simply need to look at the program curriculum to determine the 
total number of classroom hours of instruction within the period. The 
commenter maintained that this proposed change is consistent with the 
Department's historical definition of full-time status, is easier to 
audit, satisfies current clock-hour/credit-hour conversion 
requirements, and is less administratively burdensome than the 
definition in the final rule. One commenter believed the effective date 
and the timeframe allowed for institutions to comply with this 
regulation was too stringent. The commenter felt that institutions and 
students should be given sufficient time to rearrange their schedules 
based on the changes necessitated by this requirement.
    Discussion: The Secretary would like to clarify the Department's 
interpretation of the five-day rule under the regulations in effect for 
the 1994-95 award year as it applies to programs which measure progress 
in credit hours but do not use standard terms (semesters, trimesters, 
or quarters). A proprietary institution of higher education or a 
postsecondary vocational institution must, to be eligible, provide an 
eligible program, as defined by Sec. 668.8(d) of the Student Assistance 
General Provisions regulations. Section 668.8(d) provides for three 
types of eligible programs for these institutions which require a 
program to have a specified number of weeks of instruction (see 
Sec. 668.8(d) (1), (2), and (3)). In addition, each participating 
institution is subject to a definition of an academic year in which a 
full-time student (with respect to an undergraduate course of study), 
during a minimum of 30 weeks of instructional time, must complete a 
specified amount of work.
    For purposes of these definitions of an eligible program and an 
academic year, for all educational programs measured in credit hours 
without standard terms (semesters, trimesters, or quarters), a ``week 
of instruction'' and a ``week of instructional time'' must include at 
least five days of instruction, examinations, or preparation for 
examinations within a consecutive seven-day period, as opposed to the 
required one day of instruction, examinations, or preparation for 
examinations per seven day period for all other programs.
    The five-day rule in effect requires an institution to demonstrate 
that certain programs and academic years for those programs have not 
only a minimum number of weeks, but also a minimum number of days. For 
example, in order for a program to meet the eligible program definition 
that requires at least 600 clock hours, 16 semester or trimester hours 
or 24 quarter hours of instruction, examinations, or preparation for 
examinations offered during a minimum of 15 weeks, the program must 
meet for a minimum of 15 weeks over which a minimum of 75 days of 
instruction, examinations, or preparation for examinations occur (five 
days of instruction, examinations, or preparation for examinations for 
15 weeks).
    An institution that wants to set its program to be only 15 weeks 
long would therefore have to meet an average of five days per week for 
the 15 week period in order for the program to be eligible. An 
institution with a program that meets less frequently than five days a 
week would have to meet enough weeks to provide 75 days of instruction, 
examinations, or preparation for examinations. For example, a program 
meeting three times a week would have to be 25 weeks long in order to 
be eligible under this provision.
    This same approach is used to determine an institution's academic 
year. An institution that wants to set its academic year to be only 30 
weeks long would have to meet an average of five days per week for the 
30 week period. An institution with a program that meets less 
frequently than five days a week would have to meet enough weeks to 
provide 150 days of instruction, examinations, or preparation for 
examinations (30 weeks x five days per week) in order to have a program 
offered over a full academic year. For example, a program that meets 
four times a week would have a full academic year of approximately 38 
weeks (37 weeks x four days per week (plus an additional 2 days) = 150 
days of instruction, examinations, or preparation for examinations). An 
institution has the option of pro rating Title IV, HEA program aid 
disbursements if it chooses to offer an eligible program over a period 
of time less than an full academic year.
    The Secretary believes that this interpretation addresses many of 
the concerns of the commenters, as it does not require an institution 
to restructure a program to schedule five days of classes per week or a 
student to be in attendance five days per week. This interpretation 
allows an institution to establish a class schedule that meets the 
needs of its student population, while ensuring that the student is 
provided with a sufficient amount of education. The Secretary does not 
specify what constitutes a day of instruction, examination, or 
preparation for examination. However, the Secretary would expect an 
institution to be able to demonstrate that the amount of instruction, 
examinations, or preparation for examinations offered or required is 
reasonable and necessary for completion of the program.
    The Secretary agrees with the commenters who noted that it would be 
more appropriate for the current definitions of a week of instructional 
time and a week of instruction to take into account the hours of 
education offered to students each week, rather than the days of 
education offered each week. In particular, the Secretary agrees with 
the commenter who suggested that the Secretary define an academic year 
in a manner that relates to the amount of work that a full-time student 
is expected to perform over this period. To this end, the Secretary has 
decided to modify the definition of an academic year and an eligible 
program beginning with the 1995-96 award year to require that, for 
educational programs using credit hours, but not using a semester, 
trimester, or quarter system, a week of instructional time (and a week 
of instruction) is any week in which at least 12 hours of regularly 
scheduled instruction, examinations, or preparation for examinations 
occurs. The Secretary believes that a minimum number of hours, as 
opposed to a minimum number of days per week, will permit even greater 
flexibility to institutions that seek to provide education to 
nontraditional students. The Secretary believes that 12 hours per week 
is a reasonable measure, since full-time students are expected to carry 
a minimum of 12 semester or quarter hours per academic term in an 
educational program using a semester, trimester, or quarter system. 
Thus, full-time students enrolled in such programs are generally 
assumed to be in class attendance at least 12 hours per week, and this 
hourly requirement has been adopted to replace the five day rule to 
measure program eligibility. This provision is to be implemented in the 
same manner as the five-day rule provision. For example, in order for a 
program to meet the eligible program definition that requires at least 
600 clock hours, 16 semester or trimester hours or 24 quarter hours of 
instruction, examinations, or preparation for examinations offered 
during a minimum of 15 weeks, the program must meet for a minimum of 15 
weeks over which a minimum of 180 hours of instruction, examinations, 
or preparation for examinations occur (12 hours of instruction, 
examinations, or preparation for examinations per week for 15 weeks). 
An institution that wants to set its program to be only 15 weeks long 
would therefore have to meet an average of 12 hours per week for the 15 
week period in order for the program to be eligible. An institution 
with a program that meets less frequently than 12 hours per week would 
have to meet enough weeks to provide 180 hours of instruction, 
examinations, or preparation for examinations. For example, a program 
meeting 6 hours per week would have to be 30 weeks long in order to be 
eligible under this provision.
    Because neither the current five-day rule nor the 12-hour per week 
provision requires an institution to offer instruction, examinations, 
or preparation for examinations on specific days, an institution may 
not include a holiday for these calculations unless regularly scheduled 
instruction, examinations, or preparation for examinations occurs on 
that day.
    Because the interpretation detailed above does not require an 
institution to restructure a program to meet 5 days per week, the 
Secretary does not agree that it was necessary to delay implementation 
of this requirement.
    Changes: The definition of an academic year has been amended 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 12 hours of regularly scheduled 
instruction, examinations, or preparation for examinations occurs. A 
corresponding change has been made to the definition of an eligible 
program in Sec. 668.8(b)(3)(ii).
    Comments: One commenter observed that many external degree and 
adult learning programs are trying to reduce the number of days spent 
in the classroom. One commenter requested that the Secretary utilize 
the diversity and plurality of the education system by recognizing the 
amount of time the student spends in different educational settings. 
One commenter remarked that although instruction does not include 
periods of orientation or counseling, that is the time when some 
schools perform their required entrance loan counseling.
    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. Orientation programs and counseling 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: Some commenters were confused as to the specific abuses 
that the Secretary is attempting to curb with the five-day rule. A few 
commenters disagreed with the Secretary's rationale that credit hour 
non-term programs are more susceptible to abuse than a traditional 
academic program. Many of the commenters believed that the 30-week 
academic year and the clock-hour/credit-hour conversion provisions have 
adequately dealt with this situation. One commenter requests that the 
Secretary demonstrate how it is possible to abuse the current 
definition and still meet the requirements for clock-to-credit-hour 
conversions. Several commenters believed that this provision is 
unnecessary, as the abuses that the Secretary is trying to curb with 
this rule are already addressed by other existing provisions (for 
example: certification gatekeeping functions contained in the HEA; 
State requirements which specify hours of instruction or academic 
calendars which consider class attendance on a daily or weekly basis; 
accrediting agencies which are required to look at the relationship 
between tuition and program length as it relates specifically to 
vocational training; and the SPRE standards). The commenters feel that 
the public would be better served by relying on existing regulations 
relating to program length, rather than requiring five days of 
instruction per week. A few commenters did not understand why its 
program met the program contact hours requirements of its accrediting 
agency, yet did not comply with the Department's regulations. One 
commenter requested clarification of the Secretary's policy of 
requiring accreditation of an institution for oversight, but not 
accepting verification by these accrediting agencies that an 
institution's programs are educationally sound.
    Some of the commenters noted that this provision was not addressed 
in the February 28, 1994 notice of proposed rulemaking or during 
negotiated rulemaking and there was no opportunity to comment on this 
provision until publication of the final rule. Some commenters argued 
that the Department is exceeding its statutory authority, as Congress 
did not define this provision during reauthorization. One of these 
commenters believed there was no indication in the proposed rule that 
non-standard term programs would be singled out for discriminatory 
treatment in the definition of an academic year. The commenter 
understood that although the Secretary indicated he was concerned about 
assuring no opportunities for abuse by these programs, he made that 
statement in the context of the possible need to establish a standard 
workload for a full-time student; not in the context of making changes 
to the definition of an academic year and an eligible program. Many of 
the commenters believed that this provision is prejudicial against 
credit hour institutions without terms, and suggested that the 
Secretary apply the same definition of a week of instruction to all 
institutions. One commenter was concerned that the regulation treats 
programs that have a term, but a term that is not a semester, trimester 
or quarter, the same as ``nonterm'' programs. Another commenter felt 
that the interests of the four-year institutions were better 
represented than the nonterm institutions which would be more impacted 
by this provision. One commenter noted that the Secretary has made an 
exception for programs that lead to associate, bachelor, or 
professional degrees, but not for nondegree programs.
    Discussion: As stated in the February 28, 1994 NPRM and the April 
29, 1994 final regulations, the Secretary is correcting an abuse of the 
definition of an academic year whereby an institution that has programs 
that are measured in credit hours without standard 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 believes that provisions 
that address this area of abuse 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 standard terms have more flexibility in shifting the 
workload requirements for their programs over an indefinite period than 
do clock hour programs or credit hour standard term programs. The 
Secretary believes that it is appropriate to establish minimum 
instructional periods that must be used for 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 standard terms.
    It is the Secretary's responsibility, and not an institution's 
accrediting agency, to utilize the definitions of an academic year and 
an eligible program in the HEA to ensure that appropriate amounts of 
Title IV, HEA program funds are disbursed to students. The Secretary 
does not believe that other provisions of the HEA or of the regulations 
address the specific area of abuse that this provision addresses. 
Although the clock-hour/credit-hour provision provides some protection 
against course structuring where an insufficient quantity of 
instruction is offered to support the academic credits assigned to the 
program, it does not prevent an institution from stretching the length 
of an educational program to conform to the minimum number of weeks 
required without offering an appropriate quantity of instruction during 
each of those weeks. Further, the Secretary notes that there are 
programs that must meet the statutory minimum number of weeks under the 
academic year and eligible program definitions that are not subject to 
the clock-hour/credit-hour regulations. For example, a training program 
in which each course is fully acceptable toward the institution's 
associate degree would be exempt from the clock-hour/credit-hour 
provision.
    The Secretary notes that the February 28, 1994 NPRM 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. 
Rather than changing the proposed definition of full-time student to 
require measurement of student workloads, the Secretary believes it is 
more beneficial to stem abuse in this area by modifying the definitions 
of an academic year and an eligible program to require a minimum amount 
of instruction per week for institutions that offer credit hour 
programs without terms.
    The Secretary notes that the statute defines an academic year in 
terms of weeks of instructional time and certain eligible programs in 
terms of weeks. The statute does not apply these terms to the 
definitions of eligible programs that qualify an institution as an 
institution of higher education for purposes of the Title IV, HEA 
programs. For the reasons stated above, the Secretary believes it is 
necessary to define these terms in a manner that will protect Title IV, 
HEA program funds.
    Changes: None.
Third-Party Servicer
    Comments: Five commenters suggested, for the purposes of 34 CFR 
part 668, that the definition of third-party servicer in this section 
should only identify those functions relating to third-party servicers 
that contract with institutions (as opposed to those third-party 
servicers that contract with lenders and guaranty agencies) to provide 
third-party servicers and institutions a clear understanding of which 
provisions are applicable. The five commenters also suggested that the 
definition of third-party servicer should be limited to those 
activities that an institution is required to perform under its 
participation agreement with the Secretary. These commenters believed 
that such a limitation would result in services such as consulting, 
training, computer services, ability to benefit test publishers, and 
legal advice not being covered by these regulations. The five 
commenters recommended clarifying that administration of participation 
is limited to what is specified in the institution's participation 
agreement with the Secretary.
    Discussion: The Secretary does not believe that additional 
clarification of the definition of third-party servicer is necessary in 
the form recommended by the commenters. Section 481(f) of the HEA 
specifies that a third-party servicer is an individual, 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. A third-party servicer that contracts with 
an eligible institution to administer any aspect of the institution's 
participation in the Title IV, HEA programs is required to follow the 
provisions in 34 CFR part 668 that are applicable to third-party 
servicers. Under the program participation agreement that an 
institution signs to participate in the Title IV, HEA programs, the 
institution specifically agrees to abide by all rules and regulations 
pertaining to Title IV of the HEA. Therefore, the suggestion to limit 
the scope of the definition of third-party servicer to what is required 
under a program participation agreement would not narrow the scope of 
the definition of third-party servicer, and could result in confusion 
over the definition of third-party servicer.
    Changes: None.
    Comments: Five commenters contended that the function of processing 
student financial aid applications was ambiguous and needed further 
clarification or else should be removed. The commenters argued that the 
Free Application for Federal Student Aid (FAFSA) is sent to the central 
processor or Multiple Data Entry Processor (MDE) and the function 
therefore should not be covered by the regulations. In addition, the 
commenters recommended that if the Secretary kept the language, that 
processing student financial aid applications should be clarified to 
exclude non-Federal financial aid applications.
    Five commenters recommended that the function of determining 
student eligibility and related activities should not include ``related 
activities.'' The commenters argued that related activities was too 
ambiguous a term and was highly subjective.
    Five commenters recommended clarifying the function of certifying 
loan applications to not include guaranty agency or lender electronic 
processing of loan applications because, the commenters contended, 
these entities merely use data provided by an institution.
    Five commenters were concerned that escrow agents, as that term is 
used pursuant to 34 CFR 682.408, would be considered to be third-party 
servicers under the definition of third-party servicer in 34 CFR part 
668. The commenters recommended that the Secretary specifically exclude 
the function that escrow agents perform from the list of functions that 
the Secretary does not consider administration of the Title IV, HEA 
programs because, the commenters contended, an escrow agent disburses 
funds for a lender under the FFEL programs and not for an institution. 
In addition, the commenters argued that the function of receiving, 
disbursing, or delivering Title IV, HEA program funds should include 
clarification that disbursements of funds are those received by the 
institution from the Secretary or lender.
    One commenter argued that the definition of a third-party servicer 
should include an attorney that is carrying out litigation activities 
on Title IV, HEA program loans. Two commenters recommended that a 
dollar threshold be established so as not to preclude services by local 
attorneys on a small number of accounts. Three commenters argued that 
attorneys should be excluded from the definition of a third-party 
servicer. The commenters pointed out that if attorneys are covered by 
these regulations that conflicts may arise between these regulations 
and other Federal and State rules and regulations governing the conduct 
of attorneys.
    Five commenters recommended excluding data exchange functions from 
the list of functions that the Secretary does not consider 
administration of the Title IV, HEA programs. The commenters believed, 
for example, that the Student Loan Clearinghouse, which the commenters 
stated received and consolidated student enrollment data, should not be 
considered a third-party servicer because the company merely 
consolidates data for institutions, lenders, and guaranty agencies.
    Eight commenters supported the Secretary's decision to not include 
computer services and software providers from the list of functions 
that the Secretary considers to constitute administration of the Title 
IV, HEA programs. Six of the commenters requested that the Secretary 
specifically exclude these services in the regulations. One commenter 
believed that the function of providing industry-specific software or 
service packages should be included in the list of functions that the 
Secretary considers to constitute administration of participation in 
the Title IV, HEA programs because flaws in these programs could result 
in huge liabilities for institutions using the software. However, the 
commenter also believed that computer software packages that are 
modifiable by the user should not be covered by the regulations.
    One commenter recommended that alternate Electronic Data Exchange 
(EDE) destination points that serve only as an electronic conduit from 
the Central Processing System to an institution should be excluded from 
the definition of third-party servicer because this type of activity is 
not a function of administering an institution's participation in the 
Title IV, HEA programs.
    Discussion: The Secretary does not agree with those commenters who 
recommended removing the function of processing financial aid 
applications. The Secretary believes that processing financial aid 
applications is of fundamental importance to the proper delivery of 
program funds authorized under Title IV of the HEA, and third-party 
servicers contracting to perform this type of administration of the 
Title IV, HEA programs must be held accountable for any violations 
caused by the servicer. The Secretary also believes that the definition 
of third-party servicer is sufficiently clear as applying only to the 
function of processing financial aid applications required by the 
Federal government for determinations by an institution of student 
eligibility under the Title IV, HEA programs.
    The Secretary does not agree with those commenters that recommended 
modifying the function of determining student eligibility and related 
activities to exclude ``related activities.'' The statute defines the 
functions of a third-party servicer as administration of any aspect of 
an institution's participation in any Title IV, HEA program. Since 
there was no contention among commenters that determining student 
eligibility was not a third-party servicer function and because the 
statutory definition of third-party servicer is sufficiently broad, the 
Secretary believes that the inclusion of ``related activities,'' such 
as reviewing documents submitted as a result of student verification, 
assists public understanding that a related function of determining 
student eligibility is a third-party servicer activity and avoids the 
possibility of third-party servicers attempting to avoid the 
requirements of these regulations.
    The Secretary agrees with commenters that the function of 
certifying loan applications by an institution or its third-party 
servicer should not include guaranty agency or lender electronic 
processing of loan applications. However, the Secretary does not 
believe that a change to the regulatory language is warranted because 
guaranty agency and lender involvement in the certification of loan 
applications under the FFEL programs is a routine practice of these 
entities and is monitored under the FFEL programs. The Secretary does 
not consider a guaranty agency or lender that electronically processes 
loan applications for the FFEL programs and performs its assigned role 
in the programs that the guaranty agency or lender participates in to 
be considered a third-party servicer of an institution under these 
regulations.
    The Secretary does not agree with commenters that the function of 
an escrow agent, as that term is used pursuant to 34 CFR 682.408, 
should be added to the list of functions that the Secretary does not 
consider to be an administration of an institution's participation in 
the Title IV, HEA programs. Nor does the Secretary believe that the 
function of receiving, disbursing, or delivering Title IV, HEA program 
funds should be clarified to only include disbursements of funds that 
are received by the institution from the Secretary or lender. The 
Secretary believes that commenters have inadvertently misread the 
definition of third-party servicer under 34 CFR part 668 as including 
the functions of an escrow agent under 34 CFR 682.408. Under the 
definition of third-party servicer in 34 CFR part 668, a third-party 
servicer is 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. 
Because an escrow agent under 34 CFR 682.408 contracts with an eligible 
lender or guaranty agency to administer aspects of the lender's or 
guaranty agency's FFEL programs and does not contract with an eligible 
institution, an escrow agent is a third-party servicer of a lender or 
guaranty agency and not of an institution and is considered to be a 
third-party servicer under the definition of third-party servicer in 34 
CFR part 682.
    The Secretary generally agrees with those commenters who believed 
that attorneys should not be covered by the definition of a third-party 
servicer under these regulations. However, as noted in the discussion 
of comments in the final regulations published in the Federal Register 
on April 29, 1994, the Secretary, in promulgating the definition of 
third-party servicer, applied the definition to a list of functions 
relating to the administration of the Title IV, HEA programs, and 
therefore is not regulating or excluding distinct entities by their 
identity but rather the activities that individuals or organizations 
perform in contracting with institutions. Provision of legal advice or 
litigation activities are not included in these functions. However, it 
is possible that an attorney would be considered to be 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 is not 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 signatures or by non-attorneys working for attorneys or their 
law firms.
    With respect to those commenters who recommended establishing a 
dollar threshold to exclude local attorneys providing services on a 
small number of accounts, the Secretary does not believe that such a 
limitation is justifiable in the face of the statutory definition of 
third-party servicer. The statute does not permit the Secretary to 
promulgate a monetary threshold for administration of Title IV, HEA 
program funds to determine whether or not an individual or organization 
is a third-party servicer administering those funds.
    The Secretary disagrees with those commenters who recommended 
specifically excluding data exchange functions under the list of 
activities that the Secretary does not consider administration of the 
Title IV, HEA programs. The Secretary believes that data exchange is an 
overly broad term that encompasses a wide variety of services such as 
processing raw student eligibility data, determining completion rates, 
or transmission of prepared data. With such an encompassing reach, the 
Secretary cannot support excluding all data exchange from the oversight 
of third-party servicers by the Secretary that is afforded by these 
regulations.
    The Secretary agrees with those commenters who supported the 
Secretary's decision to exclude computer software or service providers 
from the list of activities that the Secretary considers to constitute 
administration of an institution's participation in the Title IV, HEA 
programs. As explained in the discussion of comments in the final 
regulations that were published in the Federal Register on April 29, 
1994, the Secretary believes that the function of providing computer 
software or services is simply a technological means to assist in 
carrying out certain administrative functions that are already included 
in the definition of third-party servicer in 34 CFR part 668. The 
Secretary also agrees with the commenters who believed that the 
function of providing computer software or services should be 
specifically excluded from the definition of third-party servicer in 
the list of functions that the Secretary does not consider to 
constitute administration of an institution's participation in the 
Title IV, HEA programs. Because the Secretary has already provided 
explanation in the discussion of comments in the final regulations 
published on April 29, 1994, in the Federal Register, the Secretary 
believes that it is appropriate to provide that exclusion in the 
regulations.
    With respect to the commenter who recommended that alternate EDE 
destination points be excluded from the definition of third-party 
servicer in these regulations, the Secretary does not agree with the 
comment. It is the experience of the Secretary that alternate EDE 
destination points use the data that institutions provide to assist in 
the administration of the institution's participation in the Title IV, 
HEA programs. Alternate EDE destination points provide institutions 
with assurances that the data relayed from the institution to the 
alternate EDE destination point will be provided to the Central 
Processor without error. Therefore, it is the position of the Secretary 
that such a service should be under the oversight of these regulations 
since relaying electronic information to the Central Processor is an 
important function in the processing of Federal student financial 
assistance claims.
    Changes: A change has been made. The definition of third-party 
servicer is amended to specifically exclude the function of providing 
computer software or services from what the Secretary considers to 
constitute the administration of an institution's participation in the 
Title IV, HEA programs.
    Comments: Two commenters believed that temporary employees employed 
on-site at a campus under the complete supervision of an institution's 
financial aid administrator (FAA) to assist in the administration of an 
institution's participation in the Title IV, HEA program should not be 
considered to be a third-party servicer. Two commenters believed that 
``moonlighting'' FAAs who contract with other institutions to assist in 
administering those institutions' participation in the Title IV, HEA 
program should not be considered to fall within the scope of the 
definition of third-party servicer. Another commenter recommended that 
individuals taking on small consulting activities should not be subject 
to the same stringent requirements as corporate consulting firms that 
manage financial aid offices for several institutions. Three commenters 
were concerned that employment contracts would fall within the scope of 
the definition of a third-party servicer thereby making employees that 
administer an institution's participation in the Title IV, HEA programs 
third-party servicers.
    Discussion: The Secretary agrees with those commenters that 
believed that individuals employed on a temporary basis should not be 
considered to be third-party servicers. The Secretary recognizes that 
individuals who work full-time as financial aid administrators at one 
institution often moonlight and provide valuable assistance at other 
institutions during busy periods of the award year. The Secretary 
believes that these individuals can appropriately be considered as 
employees even if they are not paid as a regular salaried or hourly 
employee of the institution.
    With respect to employees hired pursuant to specific employment 
contracts, the Secretary does not believe that such contracts trigger 
the third-party servicer requirements. The Secretary never intended 
that individuals employed by an institution in a capacity that involves 
the administration of any aspect of an institution's participation in 
the Title IV, HEA programs would be considered to be a third-party 
servicer. The Secretary, is concerned however, that a third-party 
servicer not be designated as an employee simply to avoid the 
requirements of these regulations. The Secretary, therefore, considers 
an individual engaged on a temporary basis to be an employee if the 
person performs all required duties that are relevant to the 
administration of the institution's participation in the Title IV, HEA 
programs on site at the institution under the institution's 
supervision, is paid directly by the institution, and is not employed 
by or associated with a third-party servicer and is not engaged as a 
third-party servicer at another institution. This language is not 
intended to enable individuals who perform services for multiple 
institutions during an award year to avoid being considered a third-
party servicer. The Secretary will in the future consider whether 
further regulation is required if the employee designation is abused.
    Changes: Changes have been made. The definition of third-party 
servicer has been amended to clarify that employees of an institution 
are not considered to be third-party servicers. An individual is 
considered an employee of the institution if the individual works on a 
full-time, part-time, or temporary basis at the institution; performs 
all duties on site at the institution under the supervision of the 
institution; is paid as an individual directly by the institution; is 
not employed by or otherwise associated with a third-party servicer; 
and is not a third-party servicer for any other institution.

Section 668.3  Reductions in the Length of an Academic Year.

    Comments: Four commenters asked the Secretary to clarify that on-
going reductions, as opposed to transitional reductions, in the minimum 
length of an academic year are permitted. One commenter questioned when 
the two-year period began for transitional reductions in the minimum 
length of an academic year. One commenter did not understand how an 
institution could 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, and also meet the 
requirement that an institution must have an academic year that is less 
than 30 weeks on the effective date of the regulations in order to 
obtain a transitional reduction. One commenter urged the Department to 
remove the requirement that an institution 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. Another commenter did not believe that Congress or the Department 
intended to force institutions to prove retroactively that they had a 
30-week academic year prior to publication of the regulations. The 
commenter noted that there was no way for an institution to ``make 
amends'' if the institution was not previously in compliance.
    One commenter was pleased that the Secretary had clarified 
preliminary requirements for institutions requesting a reduction in the 
minimum length of an academic year. The commenter further commended the 
Secretary for providing that currently participating institutions may 
be granted a temporary reduction for a period not to exceed two years, 
if the institution demonstrates a commitment to change to a 30 week 
academic year. The commenter felt that it would be beneficial for the 
Secretary to provide examples of what ``unique conditions'' the 
Secretary would look for when evaluating an institution's request for a 
longterm reduction. One commenter felt that the Secretary should 
provide guidance regarding the basis for a denial of a reduction 
request. Specifically, the commenter questioned whether the Secretary 
will abide by the decision of the accrediting agency that the academic 
quality of the institution is satisfactory, or if and when he will 
contravene such a determination.
    Discussion: The Secretary would like to clarify that there are two 
types of minimum academic year reductions for which an institution may 
apply. The first type is a transitional waiver. An institution may ask 
for a temporary reduction in the length of an academic year while the 
institution changes to a 30 week academic year. This transitional 
reduction may not exceed two years from the effective date of the April 
29, 1994 final regulations (July 1, 1994). The second type is a 
longterm waiver. An institution may apply for a longterm reduction in 
the length of an academic year if it wishes to continue operating with 
a reduced academic year on a longterm basis. The Secretary notes, 
however, that Sec. 668.3(c)(2) states that an institution that is 
granted a longterm waiver must reapply to the Secretary for a reduction 
each time the institution is required to apply to continue to 
participate in a Title IV, HEA program.
    The Secretary notes that it is not inconsistent to require an 
institution to 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, and also meet the 
requirement that an institution must have an academic year that is less 
than 30 weeks on the effective date of the regulations. An institution 
is permitted to have an academic year of less than 30 weeks, but may 
not make full payment of Title IV, HEA program funds. However, unless 
and until the institution is granted a reduction in accordance with 
these regulations, the institution must pro rate the amount of Title 
IV, HEA program assistance awarded to students in attendance based on 
the definition of an academic year found in section 481(d) of the HEA.
    The Secretary believes that it is appropriate to require that an 
institution applying for a reduction in the length of an academic year 
demonstrate that the institution has awarded, disbursed, and delivered 
Title IV, HEA program funds in accordance with 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. 
As the statute clearly states that an institution may not be granted a 
reduction in the minimum length of academic year unless the institution 
applies to the Secretary for a reduction, and the Secretary grants a 
reduction, the Secretary expects that institutions with academic years 
of less than 30 weeks that have not been granted a reduction have been 
properly pro rating Title IV, HEA program assistance. The Secretary 
believes institutions must have made a good faith effort to comply with 
the requirements of the statute. The Secretary would like to clarify 
that an institution that is ineligible for a reduction because the 
institution did not properly award, disburse, or deliver Title IV, HEA 
program funds in the past may be eligible for a reduction if the 
institution makes arrangements that are satisfactory to the Secretary 
to repay any overawards that resulted from the improper awarding, 
disbursing, or delivering of Title IV, HEA program funds. The 
Secretary's experience to date has been that this liability amount has 
been insignificant.
    In determining what constitutes ``unique circumstances'' that would 
justify the Secretary granting a longterm reduction, the Secretary may 
look at information such as whether an educational program has 
historically provided instruction in a non-traditional manner for less 
than 30 weeks in previous academic years and cost reduction to 
students. Upon further consideration, the Secretary has decided that 
program placement rates, completion rates or other educational outcomes 
may also be evaluated as part of the Secretary's determination. Other 
factors 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.
    The statute provides that a reduction may be granted by the 
Secretary for good cause on a case-by-case basis. Therefore, the 
Secretary, and not an institution's accrediting agency, is charged with 
ensuring that reductions in the academic year are granted in a manner 
that protects Title IV, HEA program funds. Although the Secretary 
agrees that approval by an institution's nationally recognized 
accrediting agency or State body that authorizes the institution to 
provide postsecondary programs should be considered as a factor in 
determining good cause for granting a reduction, the Secretary does not 
believe that such approval on its own is sufficient reason for granting 
an institution's request, as such an approval will most likely not 
include all areas that the Secretary will look at to determine that a 
reduction is warranted. 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.
    Changes: Section 668.3(c) has been amended to clarify that an 
institution may apply for a longterm reduction in the length of an 
academic year if it wishes to continue operating with a reduced 
academic year on a longterm basis. Section 668.3(d) has been added to 
specify that an institution may demonstrate compliance with this 
requirement by making arrangements that are satisfactory to the 
Secretary to repay any overawards that resulted from the improper 
awarding, disbursing, or delivering of Title IV, HEA program funds.

Section 668.8  Eligible Program

English as a Second Language
    Comments: Many commenters requested the elimination of the 
requirement that institutions test students at the conclusion of 
English-as-a-Second-Language (ESL) programs to substantiate their 
proficiency in English, and that schools only admit students who 
``need'' such training. Commenters suggested that the Department lacks 
the authority to require that institutions test program completers in 
order to evaluate what they have learned or to dictate institutional 
admissions policies. Furthermore, a number of commenters asserted that 
they did not believe that the Department had grounds for limiting 
student aid eligibility for individuals in ESL programs to Federal Pell 
Grants only, as stipulated in the regulations.
    Discussion: Upon further consideration, the Secretary agrees that 
the assessment of whether an ESL program is providing adequate 
instruction in English to allow a student to use already existing 
knowledge, training, or skills should be left to an institution's 
accrediting agency. Although findings from the Department of 
Education's Inspector General have revealed more abuses in these 
programs historically, the Secretary will defer regulating in this area 
for now to provide the accrediting agencies an opportunity to address 
this problem. The Secretary notes that an institution is still required 
to 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. The Secretary notes that section 
401(c)(2) of the HEA limits the eligibility of these ESL programs to 
the Federal Pell Grant Program. A student may receive other Title IV, 
HEA program assistance for ESL coursework that is part of a larger 
eligible program.
    Changes: Section 668.8(j)(2) has been removed from the regulations.
Undergraduate Educational Program in Credit Hours
    Comments: Five commenters requested that the Secretary put back 
into the clock-hour/credit-hour conversion regulations the provision 
that allows the Secretary to determine if a degree is an equivalent 
degree and therefore exempt from the requirements of the clock-hour/
credit-hour conversion formula. Two of the commenters believed that 
programs offered at institutions accredited by the Association of 
Advanced Rabbinical and Talmudic Schools, which in some States lead to 
the First Talmudic degree rather than a baccalaureate degree, is a 
clear example of an equivalent degree and therefore should be exempted 
from the clock-hour/credit-hour conversion requirements. Four 
commenters suggested that the Secretary consider factors such as the 
length of the program or acceptance as equivalent to the baccalaureate 
degree for purposes of licensure by a State agency when determining if 
a degree is in fact an equivalent degree.
    Two commenters were concerned about the impact of the clock-hour/
credit-hour conversion regulations on hospital-based diploma nursing 
programs that do not lead to a degree. The commenters believed that it 
was unfair to reduce Federal financial assistance to students who were 
enrolled at a hospital-based diploma school of nursing but were taking 
a substantial number of credits at a local university or community 
college. The two commenters requested that the Secretary allow programs 
that offer equivalent credentials to be exempted from the clock-hour/
credit-hour conversion requirements.
    One commenter requested that the Secretary allow an undergraduate 
program offered over at least two years to be exempted from the clock-
hour/credit-hour conversion regulations if the program was equivalent 
to an associate degree, as defined under paragraph (b) of this section.
    Discussion: The Secretary agrees with those commenters who 
requested that the Secretary reinsert the provision (previously removed 
from the clock-hour/credit-hour conversion regulations in the April 29, 
1994 final regulations) that an institution offering an undergraduate 
educational program measured in credit hours and at least two academic 
years in duration 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. Since publication of the final regulations on April 
29, 1994, the Secretary has encountered at least one instance of a 
degree that the Secretary considers to be an equivalent degree to a 
baccalaureate degree. Given this additional information, the Secretary 
believes that it is necessary to reinsert the ``equivalent degree as 
determined by the Secretary'' language back into the clock-hour/credit-
hour conversion regulations so as not to penalize those institutions 
that offer the equivalent degree.
    With respect to those commenters who were concerned about the 
impact of the clock-hour/credit-hour conversion regulations on 
hospital-based diploma schools of nursing and who suggested inserting 
``equivalent credential'' into the regulations to exclude these types 
of programs, the Secretary believes that the issue has been resolved. 
Pub. L. 103-382, which was signed by the President on October 20, 1994, 
amends the HEA to specify that public or private nonprofit hospital-
based diploma schools of nursing programs are exempt from the clock-
hour/credit-hour conversion regulations as of July 1, 1994. The 
Secretary has incorporated this statutory exemption into new 
Sec. 668.9(b) (see discussion in the preamble for Sec. 668.9 under 
significant changes to the final regulations). Because there is now a 
statutory exemption for hospital-based diploma schools of nursing, the 
Secretary sees no reason to provide a broad-based exclusion for non-
degree programs and therefore does not believe it to be appropriate to 
exclude programs that lead to an equivalent credential.
    The Secretary disagrees with the commenter who specifically 
recommended excluding programs that are the ``equivalent of an 
associate degree'' as defined under Sec. 668.8(b), from the 
requirements of the clock-hour/credit-hour conversion regulations. The 
Secretary believes that under the definition of the ``equivalent of an 
associate degree,'' associate degree programs are already exempt from 
the requirements of the clock-hour/credit-hour conversion regulations, 
provided that the associate degree program is at least two academic 
years of study. Furthermore, a two academic year program that is 
acceptable for full credit towards a bachelor's degree is also exempted 
from the clock-hour/credit-hour conversion requirements, provided that 
the bachelor's degree program is offered at the same institution that 
provides the two academic year program.
    Changes: Changes have been made. The Secretary is amending 
Sec. 668.8(k) (1) and (2) to exempt a program from the clock-hour/
credit-hour conversion requirements if the program is an equivalent 
degree as determined by the Secretary or if each course within the 
program is fully acceptable for credit toward the institution's 
equivalent degree.
    Comments: One commenter asked if there were any clock-hour/credit-
hour conversion requirements for programs offered in number of courses, 
rather than in credit hours.
    Discussion: Institutions that participate in the Title IV, HEA 
programs must measure their programs in clock hours or in credit hours.
    Changes: None.

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

Section 668.12  Application procedures

    Comments: There were a number of comments on this section. Many 
commenters suggested that the requirement that an entire institution 
must be recertified if the institution proposes to establish a branch 
campus or an additional location that will offer 100 percent of an 
educational program off site be deleted. Institutions expressed their 
concern that this provision would act as a disincentive for 
institutions to agree to offer programs at employer sites and would 
therefore be at odds with the Administration's efforts to increase 
education and training collaboration between institutions and 
employers. Some commenters suggested that this provision be revised to 
exclude programs offered by degree-granting institutions.
    Discussion: The Secretary agrees that not all institutions that add 
an additional location that offers 100 percent of a program need to be 
required to be recertified. However, 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.
    Therefore, the Secretary has removed the requirement that an 
institution must apply to the Secretary for a certification that the 
institution continues to meet the standards for participation in the 
Title IV, HEA programs if the institution adds an additional location 
that offers 100 percent of a program. However, the Secretary requires 
the institution to notify the Secretary of the addition of such a 
location (as institutions that add an additional location that offers 
at least 50 percent of an educational program are currently required to 
do) 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 if the Secretary determines that 
the addition of the location might impair an institution's 
administrative capacity or financial strength.
    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 the employer is paying for the cost of training, and 
that no Title IV, HEA program funds are involved, there is no need for 
the institution to notify the Secretary.
    Changes: Section 668.12 has been revised to no longer require an 
institution to apply to the Secretary for a certification that the 
institution continues to meet the standards for participation in the 
Title IV, HEA programs if the institution adds an additional location 
that offers 100 percent of a program. Section 668.12 has been further 
revised to require that, if an institution adds an additional location 
that offers 100 percent of a program, the institution is required to 
notify the Secretary in accordance with 34 CFR 600.30. The current 
regulations already provide that the institution may be required to 
file a complete recertification application if the Secretary deems it 
necessary.

Section 668.15  Factors of Financial Responsibility

General Standards of Financial Responsibility Cash Reserve
    Comments: Many commenters believed that requiring an institution to 
maintain a cash reserve fund equal to at least 25 percent of the total 
dollar amount of refunds paid by the institution in the previous fiscal 
year would not protect students or the Federal government if the 
institution failed or went bankrupt. The commenters opined that in a 
bankruptcy proceeding the disposition of any balance in the cash 
reserve fund would fall under the jurisdiction of a Federal bankruptcy 
court and therefore would not be available immediately to students or 
to the government. Furthermore, some commenters indicated that because 
an institution would have unrestricted access to cash reserve funds the 
cash assets held in such funds are potentially at risk due to the 
possibility of preferential transfer or fraudulent conveyance by an 
owner in advance of a bankruptcy proceeding.
    Many other commenters believed that the cash reserve fund 
requirement was unnecessary in view of all the other requirements that 
an institution must now satisfy to demonstrate that it is financially 
responsible. The commenters contended that this requirement would place 
an ``undue burden'' on an institution and could prevent the institution 
from otherwise meeting other financial responsibility standards or even 
cause the institution to become financially unstable. Moreover, based 
on the new criteria for calculating a refund under the ``fair and 
equitable'' refund provisions, the commenters were concerned that the 
amount of the cash reserve could grow significantly in a short period 
of time and would thus place an increasing and on-going financial 
burden on the institution. Some of these commenters, and other 
commenters, urged the Secretary to reduce the amount of the required 
reserve from 25 percent to either 10 percent or an amount that would be 
necessary for the institution to be able to make refunds for a 30-day 
period. Another commenter suggested that the Secretary impose the cash 
reserve requirement only on an institution that does not satisfy all 
other financial responsibility standards; or, require that the 
institution maintain, temporarily, a cash reserve fund until the 
institution is able to provide, to the Secretary, an irrevocable letter 
of credit.
    Other commenters believed that the cash reserve requirement would 
adversely affect an institution's ability to maintain its educational 
standards because capital that would traditionally be available to the 
institution for reinvestment in the institution or otherwise used to 
support the institution's educational services and facilities would now 
have to be wastefully set aside in a reserve fund. The commenters 
suggested that the Secretary restructure the requirement to allow an 
institution to mitigate or eliminate its cash reserve if the 
institution could demonstrate set levels of reinvestment in its 
business through capital acquisition. At a minimum, the commenters 
urged the Secretary to allow an institution to provide a bond or letter 
of credit in lieu of the cash reserve fund requirement.
    One commenter believed that the separate fund provision of this 
requirement would be particularly troublesome because it would impose 
accounting, reporting, and management burdens that would not be 
warranted for all institutions. The commenter recommended that the 
Secretary provide an alternative method under which an institution 
could prove that it met all the requirements of this section. 
Specifically, the commenter suggested that the Secretary allow an 
institution that issues debt in the public debt markets and achieves an 
``investment grade'' credit rating on that debt issue with a nationally 
recognized debt rating service to establish that it is financially 
responsible in this manner.
    Still other commenters believed that the Secretary was imposing an 
unreasonable financial burden on an institution that participates in a 
State tuition recovery program. The commenters noted that since the 
Secretary has not approved any State tuition recovery funds, an 
institution that would otherwise be exempt from the cash reserve 
requirement would have to continue to contribute to the State's fund 
and would, for identical reasons, be required to maintain for Federal 
purposes a cash reserve fund. These commenters urged the Secretary to 
grant relief to institutions by acting expeditiously to approve State 
tuition recovery programs.
    One commenter noted that the term ``refunds'', as used in this 
section, could mean tuition refunds, institutional refunds, or any 
disbursements made to students. The commenter suggested that the 
Secretary clarify the meaning of the term so that an institution may 
calculate correctly the amount of its required cash reserve.
    A number of commenters contended that the requirement to maintain 
the cash reserve fund in a bank account or in the form of short-term 
securities was unnecessary and restrictive. One of these commenters 
believed that the Secretary should exempt from the separate cash-
reserve fund requirement an institution that had sufficient 
unrestricted funds to pay required refunds. Other commenters urged the 
Secretary to allow an institution to maintain its cash reserve in a 
money market fund or in other Federal government securities with 
maturities of one year or less.
    A few commenters believed that the establishment of a cash reserve 
fund could be a problem for public institutions located in a State that 
controls directly the receipt and disbursement of funds. The commenters 
noted that those institutions may not have the authority under State 
law to establish a cash reserve fund. Another commenter noted that many 
public university systems operate under a pooled treasury concept. 
Under that scheme, the three-month U.S. Treasury notes that could be 
used to satisfy the cash reserve fund requirement would not be 
earmarked to one campus. Consequently, the commenter recommended that 
instead of requiring each campus to calculate the amount of a reserve 
fund and maintain that fund, the Secretary should revise the 
regulations to allow a public university system to (1) calculate the 
amount of the reserve fund based on the total refunds of all system 
campuses and, (2) maintain one consolidated reserve fund for all the 
system's campuses.
    Discussion: Under section 498(c)(6) of the HEA, the Secretary is 
charged with establishing requirements to ensure that an institution 
maintains sufficient cash reserves to pay required refunds. The 
Secretary believes that an institution's ability to make required 
refunds is enhanced by requiring the institution to reserve a portion 
of the cash it receives from students in advance of providing 
educational services. In this regard, the Secretary established the 
cash-reserve-fund requirement on the premise that if an institution, at 
the beginning of its fiscal year, reserved a reasonable amount of cash 
of an amount based on a percentage of the institution's historical 
refund experience, the institution would have sufficient cash reserves 
to make refunds to students. However, the Secretary is convinced that 
many points made by the commenters are valid, and that a performance-
based approach will better accomplish the statutory requirements and 
the Secretary's objectives.
    Under this performance-based approach, the Secretary would consider 
an institution to have satisfied the statutory requirement, that the 
institution maintained sufficient cash reserves to make required 
refunds, if for two consecutive years (1) the institution demonstrates, 
to the satisfaction of the Secretary, that it has made all required 
refunds to students in a timely manner, and (2) that it has met or 
exceeded all of the financial responsibility standards in 
Sec. 668.15(b) in both of its last two consecutive fiscal years. An 
institution that demonstrates that it satisfies these criteria provides 
reasonable assurance to the Secretary that the institution will 
continue to make required refunds in a timely manner. Moreover, the 
Secretary believes that such an institution is not likely to close 
precipitously because the institution will have demonstrated over a 
period of time that it is financially responsible. Along the same 
lines, the Secretary acknowledges that there is little, if any, risk 
associated with an institution that has its liabilities backed by the 
full faith and credit of a State, or by an equivalent governmental 
entity, and therefore considers such an institution to have sufficient 
cash reserves to make required refunds.
    Conversely, the Secretary believes that the risk of precipitous 
closure increases significantly for an institution that is unable, or 
unwilling, to make required refunds in a timely manner, or that fails 
to meet the financial responsibility standards. Therefore, upon a 
finding by the Secretary, or an independent auditor engaged in the 
performance of a financial or compliance audit, or a SPRE, or a State 
licensing authority, that the institution failed to make required 
refunds in a timely manner, or failed to satisfy the standards of 
financial responsibility under Sec. 668.15(b) in either of the 
institution's last two complete fiscal years, the Secretary shall 
require the institution to submit to the Secretary an irrevocable 
letter of credit equal to at least 25 percent of the total amount of 
refunds the institution made, or should have made, during the 
institution's last complete fiscal year. This irrevocable letter of 
credit requirement may be satisfied in conjunction with any letter of 
credit that may be required under Sec. 668.13(d)(1) or 
Sec. 668.15(d)(2). The Secretary may, in his sole discretion, require 
that two or more letters of credit be established separately with 
common expiration dates or combined into a single letter of credit.
    In establishing this performance-based requirement, the Secretary 
considered carefully the points made by the commenters who noted that 
the reserve-fund requirement would provide little, if any, protection 
to students in the event that an institution went bankrupt, and the 
commenters who argued that it was unnecessary or counter-productive to 
require an institution that otherwise satisfies its financial and 
fiduciary responsibilities to maintain a reserve fund. The Secretary 
believes that by applying the letter of credit provision only to non-
performing institutions, this requirement provides the necessary 
incentive for institutions to make, and to continue to make, refunds in 
a timely manner, provides reasonable assurance that the Secretary will 
be able to make refunds to students in the event that an institution 
closes precipitously, and at the same time relieves the burden on 
performing institutions.
    The Secretary notes that since this requirement will not take 
effect until July 1, 1995, an institution must continue to comply with 
the current 25 percent cash-reserve requirement until that date. 
Therefore, in response to public comment and further review, the 
Secretary wishes to clarify the following issues. First, with respect 
to calculating the amount of the cash reserve, the term ``refunds'' 
includes only refunds of title IV, HEA program funds. Second, an 
institution may borrow cash from its reserve fund but only when this is 
necessary for the institution to comply with the requirement that it 
make timely refunds. If an institution uses the reserve fund for this 
reason, the Secretary will consider the institution to be in compliance 
with the requirement in Sec. 668.15(b)(5)(i) if the institution 
demonstrates that it maintained an average monthly fund balance in its 
cash reserve fund that was at least equal to the amount of the required 
cash reserve. Lastly, because an institution must demonstrate its 
compliance with the reserve-fund requirement by providing the required 
information in a note to its audited financial statement, the 
institution may, in lieu of establishing a separate cash-reserve fund 
for each of its locations, establish a single cash-reserve fund that 
represents the institution's combined refund exposure for all 
locations. To enable the Secretary to make a determination regarding an 
institution's compliance with this provision, the refund experience and 
cash reserve requirement for each eligible and participating 
institution shall be disclosed separately in the required footnote.
    Changes: Section 668.15(b)(5) is amended to require that, 
institutions not coming within the performance-based exception set out 
in Sec. 668.15(d)(1), must submit to the Secretary an irrevocable 
letter of credit, that is acceptable and payable to the Secretary, for 
an amount equal to at least 25 percent of the total amount of title IV, 
HEA program refunds the institution made, or should have made, during 
the institution's last complete fiscal year.
    In addition, the Secretary makes the following conforming changes 
to Sec. 668.15(d), Exceptions to the general standards of financial 
responsibility. First, the Secretary amends Sec. 668.15(d)(1) to exempt 
from the requirement to submit an irrevocable letter of credit, an 
institution that (1) has its liabilities backed by the full faith and 
credit of a State, or equivalent governmental entity, or (2) any 
institution that has, for both of its two latest consecutive fiscal 
years demonstrated, to the satisfaction of the Secretary, with the 
support of an audited financial statement submitted in accordance with 
Sec. 668.15(e) and Sec. 668.23(c), that it has made all of its required 
title IV, HEA program refunds in accordance with the ``timely payment'' 
provisions in Sec. 668.22(j)(4), and has for both of those years met or 
exceeded the standards of financial responsibility under 
Sec. 668.15(b). Second, in Sec. 668.15(d) the Secretary determines an 
institution's compliance with the two-consecutive-year performance 
requirement by evaluating (1) the institution's compliance audit 
reports and audited financial statements covering that 2-year period, 
and (2) any untimely refund findings during that two-year period from a 
program review, a SPRE, other State agency or an independent auditor. 
This section also requires the institution to have met the standards of 
financial responsibility under Sec. 668.15(b) for the 2-year period. If 
an institution is cited by an auditor for a condition that would no 
longer permit it to use the exemption in 668.15(d)(1), the institution 
must notify the Secretary of that fact within 30 days of receiving such 
notice from its auditor, and must take immediate steps to secure the 
required letter of credit.
    The Secretary has made a conforming change to Secs. 668.15(b) 
(7)(i)(A) and (8)(i)(B) by removing the reference to the cash reserve 
fund in the delineation of items that would be included in the list of 
institutional assets for the acid test analysis.
Acid Test Ratio
    Comments: A number of commenters agreed with the Secretary's 
decision to exclude from the calculation of the acid test ratio 
uncollateralized receivables from owners and related parties.
    Several commenters argued that the use of an acid test ratio, as 
more of a test of liquidity than of assets, was contrary to 
Congressional intent.
    Other commenters believed that the acid test ratio was defined too 
narrowly in the regulations to include as current assets only cash, 
cash equivalents, and current accounts receivables. The commenters 
noted that generally the acid test ratio is defined as current assets 
less inventory divided by current liabilities. Such a definition would 
allow other current assets not included in the regulatory definition to 
be used in calculating the acid test ratio. However, the commenters 
opined that an acid test ratio, regardless of how it is calculated, is 
inappropriate and therefore not applicable to the education training 
industry. The commenters argued that the short-term liquidity 
requirements imposed by the acid test ratio would force an institution 
to delay making capital investments to the detriment of its students. 
To make a better assessment of the financial performance and stability 
of an institution, some of the commenters suggested that the Secretary 
should evaluate the significance of the ratio in view of other 
financial indicators such as operating losses, negative equity, or 
commercial loan defaults. Other commenters suggested that in view of 
the new institutional oversight provisions under Part H of the HEA the 
Secretary should adopt for these regulations the previous 1:1 current 
ratio requirement. A few other commenters urged the Secretary to remove 
the acid test ratio requirement because they believed that the new 
audit requirements would provide safeguards sufficient to ensure that 
an institution could meet its liabilities and remain operational. Still 
other commenters suggested that if an institution failed to meet the 
acid test ratio requirement, the Secretary should merely refer the 
institution to the State for review under the provisions of the State 
Postsecondary Review Program. Yet another commenter urged the Secretary 
to adopt as a satisfactory measure of liquidity the acid test ratio of 
between 0.5 to 0.75:1 suggested by the American Institute of Certified 
Public Accountants (AICPA).
    One commenter believed strongly that the Secretary should not allow 
an institution to include accounts receivable on the asset side of the 
acid test ratio because the receivables could not be readily 
liquidated.
    A few commenters believed that for purposes of calculating the acid 
test ratio an institution should not be able to consider as a cash 
equivalent the cash reserve under Sec. 668.15(b)(5). The commenters 
noted that the cash reserve would be a restricted fund (i.e., used only 
for the payment of refunds) and therefore would not be available to pay 
the general debts of the institution. Thus, the commenters contended 
that if the Secretary allowed institutions to include the cash reserve 
as a current asset an otherwise insolvent institution might be able to 
satisfy the acid test requirement. Another commenter agreed with the 
provision that cash reserves should be included in the acid test ratio 
but believed that the provision should be expanded to read as follows: 
``Reserve funds created in accordance with Sec. 668.15(b)(5) may be 
included as cash equivalents in calculating the institution's acid test 
ratio.'' Still other commenters suggested that fixed assets, prepaid 
expenses, and inventory be included in calculating the ratio.
    One commenter noted that an institution could be financially stable 
despite its failure to meet the 1:1 acid test ratio requirement. The 
commenter opined that an auditor would be in the best position to 
determine whether an institution was financially stable and suggested 
that the Secretary require the auditor to make that determination based 
on guidance issued by the AICPA regarding an auditor's responsibility 
for determining an institution's ability to continue as a going 
concern. The commenter suggested that in lieu of the acid test ratio 
the Secretary should require an auditor to make a ``going concern'' 
determination and hold the auditor responsible for applying the AICPA 
guidelines in making that determination.
    Discussion: Section 498(c)(2) of the HEA directs the Secretary to 
prescribe criteria with respect to operating losses, net worth and 
assets-to-liabilities ratios to determine that an institution is 
financially responsible. The Secretary maintains that the acid test 
ratio is an appropriate measure of financial responsibility for an 
educational institution because it provides a reliable measure of an 
institution's ability to meet current obligations as they come due. 
Because, in general, financial obligations must be satisfied in cash, 
the Secretary has chosen an acid test ratio, because it relies only on 
those assets that have the highest probability of conversion into cash. 
The Secretary has chosen to exclude less liquid items such as 
inventory, related party receivables, and prepaid or deferred items for 
the following reasons: (1) As a provider of services, an educational 
institution does not, in general, acquire and maintain significant 
inventories of saleable products. Accordingly, for most educational 
institutions, the exclusion of inventory from any calculation yields a 
value that is not significantly different from one that would be 
obtained if such inventories were included. Furthermore, because of 
difficulties associated with the valuation of inventories, and the 
existence of differing methodologies of accounting for inventories and, 
because a distressed liquidation of inventory items by an institution 
in financial difficulty may result in the realization of only a portion 
of their actual value, comparability of inventory values among 
institutions is extremely difficult. The Secretary, in seeking a fair 
basis of comparison that is applicable to all institutions, chose to 
exclude inventories from any calculation of liquidity;
    (2) Related party receivables that are uncollateralized represent 
unsecured claims on the assets of other businesses or individuals the 
repayment of which is substantially at the discretion of the 
controlling individual or business entity. While in many cases these 
assets are accounted for as demand notes and hence they are 
appropriately classified as current, they are in fact repayable at the 
discretion of the controlling individual, and the Secretary has seen 
institutions close for financial reasons without having demanded such 
repayments from related parties. Because the Secretary cannot 
reasonably determine the probability that such claims will be paid, the 
Secretary believes that he is justified in excluding these items from 
any calculation of liquidity; and
    (3) In general, prepaid items and deferrals represent past outflows 
of cash that may provide future economic benefits to an institution. 
Because the realization of these assets depends in large part on the 
continued existence of the educational institution, the Secretary 
believes it is appropriate to exclude these items when evaluating an 
institution at a fixed point in time.
    The Secretary believes that a minimum ratio of at least cash and 
current accounts receivable to all current liabilities is an 
appropriate measure of an institution's ability to meet all of its 
financial obligations. While many have argued that unearned tuition 
liabilities do not represent financial claims on the assets of an 
institution, and therefore should be excluded, the Secretary would 
argue that unearned tuition liabilities are more accurately 
characterized as cash collected from students in advance of providing 
educational services. As these funds are not yet earned by the 
institution, the Secretary believes that it is appropriate to require 
that an institution have adequate liquid resources on hand to provide 
refunds to students that withdraw or to fund a teachout should the 
institution close at other than the end of an academic period. 
Furthermore, while the Secretary concedes that such claims are not 
direct financial claims comparable to a fixed debt they represent 
obligations to perform a service. The performance of that service will 
incur liabilities or the liquidation of assets over the next operating 
period. Since a substantial portion of the unearned tuition income that 
flows into an institution's revenue accounts is immediately expended to 
provide for such things as instructor's salaries, rent, utilities and 
other operational expenses, only a portion of unearned tuition 
liabilities are ultimately realized as profit by the institution. It is 
the Secretary's belief that a financially responsible institution 
should be able to finance continuing operations out of earnings 
retained as a result of past profits and not from the cash prepayments 
of students who have yet to receive any educational benefit.
    The Secretary believes that, for the most part, institutions that 
make significant capital expenditures that are expected to benefit the 
institution in future periods will finance those expenditures with 
long-term financing arrangements. Accordingly, the Secretary believes 
that capital acquisitions to the extent that they are externally 
financed or funded from long-term sources of funds would not 
significantly impact the acid test ratio. The Secretary recognizes that 
a number of institutions incur significant expenses associated with 
marketing and advertising and that many institutions refer to these 
operating expenses as capitalized costs, often including these past 
expenses as a current asset on the institution's balance sheet. The 
Secretary believes that these costs are more appropriately 
characterized as operating expenses and does not recognize such 
capitalized assets in the acid test calculation.
    Contrary to the opinion expressed in the comment, the AICPA does 
not establish standards with respect to performance indicators such as 
the acid test ratio.
    While the Secretary does not agree that fixed assets should be 
included in the calculation of the acid test ratio because such assets 
are considerably less liquid than those that are included in the ratio 
calculation, the Secretary does consider the institution's total 
financial circumstances in determining an institution's compliance with 
Federal financial responsibility standards. The Secretary includes in 
his calculation of tangible net worth all the assets of an institution 
to the extent that the value of these assets exceeds the institution's 
liabilities after adjusting for intangible assets.
    Changes: See conforming changes made as a result of comments on the 
cash reserve requirement.
Exceptions to the General Standards of Financial Responsibility
    Comments: One commenter was concerned that an institution that 
participated in an inadequate State tuition recovery fund would be able 
to avoid the more rigorous requirement in Sec. 668.15(b) under which 
the institution would need to maintain in a separate fund a cash 
reserve equal to at least 25% of the total dollar amount of refunds 
paid by the institution in the previous fiscal year. The commenter 
suggested specific criteria that the Secretary should consider in 
determining the adequacy of a State's tuition recovery fund. 
Specifically, the commenter suggested that in assessing a State's fund 
the Secretary should consider (1) the maximum fund level, (2) the 
current fund balance, (3) the amount of annual assessments collected by 
the fund, (4) the amount of claims paid out by the fund, (5) the 
authority of the fund administrator to levy against institutions 
participating in the fund additional assessments and the 
administrator's history of levying and collecting additional 
assessments, (6) the fund's history of paying claims, including the 
percentage of claims paid, (7) the compliance by an institution (or 
institutions) with the fund's assessment and payment requirements and, 
(8) whether students at an institution have received their refund 
payments from the fund instead of from the institution. Furthermore, 
the commenter urged the Secretary to exempt an institution from the 25% 
cash reserve requirement only if the Secretary concluded from the 
criteria identified above that a State would be able to pay all claims 
made against the fund.
    A few commenters questioned the authority of the Secretary to 
determine the acceptability of a State's tuition recovery fund. These 
commenters argued that since the statute mandated the use of State 
tuition recovery funds the Secretary should merely require a State to 
certify that its fund would be able to pay required refunds to students 
for institutions that closed precipitously. In addition, regardless of 
the Secretary's authority in this matter, the commenters believed 
strongly that if the Secretary approves State tuition recovery funds on 
a State-by-State basis, in determining whether to approve a State's 
fund the Secretary should consider the State's entire plan for dealing 
with closed institutions, including provisions for teach-outs.
    Many other commenters urged the Secretary to approve existing State 
tuition recovery funds, or give presumptive approval to those funds, 
because of the reasons identified in the discussion regarding the 25% 
cash reserve requirement.
    Discussion: Section 498(c)(6) of the HEA provides that an 
institution may be granted an exemption from the cash reserve 
requirement if it participates in a state tuition recovery fund that is 
acceptable to the Secretary. At this time the Secretary is evaluating 
possible standards that can be used for determining the acceptability 
of a State's tuition recovery fund. While no definitive criteria have 
yet been established, the Secretary has determined that three specific 
criteria will be examined in the design and operation of a State's 
tuition recovery to determine whether it is acceptable in lieu of the 
other cash reserve requirements.
    The Secretary does not intend to grant presumptive approval to any 
state tuition recovery fund, but instead will examine applications from 
states on a case-by-case basis. In evaluating an application from a 
State for a blanket approval of its tuition recovery fund to exempt its 
participating schools from the federal cash reserve requirements, the 
Secretary will consider the extent to which the state tuition recovery 
fund: 1) provides refunds to both in-state and out of state students, 
2) makes all refunds in accordance with the refund payment procedures 
in Sec. 668.22(h), 3) provides a reliable mechanism for the State to 
replenish a fund should any claims arise that deplete the funds assets.
    Changes: Section 668.15(d)(1)(ii) has been amended to delineate the 
items that the Secretary will consider in determining whether a State 
tuition recovery fund is an acceptable substitute for the federal cash 
reserve requirement. The Secretary may also consider other factors 
presented in an individual state application on a case by case basis. 
See also conforming changes made as a result of comments on the cash 
reserve requirement.

Section 668.16  Standards of Administrative Capability

    Comments: One commenter suggested that as a factor in the 
determination of a designated individual's ability to administer the 
Title IV, HEA programs at an institution, the Department should mandate 
that a capable individual must not have defaulted on a Federal or State 
loan.
    Discussion: The Secretary has no evidence that any notable 
percentage of these individuals has defaulted on a Federal or State 
loan. Furthermore, the Secretary believes that it would be extremely 
burdensome for an institution to adequately screen applicable employees 
to ensure that none of them had defaulted on a Federal or State loan or 
grant.
    Changes: None.
    Comments: Six commenters supported the Secretary's use of third-
party servicers in determining whether or not an institution has an 
adequate number of qualified personnel on hand in determining whether 
or not an institution is administratively capable.
    Discussion: The Secretary is pleased to have been able to make this 
change in the final regulation as a result of public comment on the 
February 28, 1994 NPRM.
    Changes: None.
    Comments: Several commenters suggested that the prohibition on 
having different family members perform the two functions of 
authorizing payments and disbursing or delivering funds is onerous, 
particularly in a small, family-run institution. These commenters 
requested that smaller institutions be exempted from this provision.
    Discussion: This standard was strengthened to provide additional 
deterrence to collusion, which is a major 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.
    The Secretary understands the concern of small family-run 
institutions that arranging for someone outside the family to perform 
one of these tasks may be burdensome. However, at very small 
institutions not meeting this standard, the compliance audit would 
probably report that there are insufficient internal controls unless 
the procedures to use additional staff were followed.
    Changes: None.
    Comments: A number of commenters suggested that the requirement 
that an institution does not meet the administrative capability 
standards if it does not have satisfactory academic progress standards 
of 150 percent of the time it takes to complete a program bears no 
logical relationship to the standards of administrative capability and 
therefore, should be deleted.
    Discussion: Because students are required by Title IV of the HEA to 
maintain satisfactory progress to receive Title IV, HEA program 
assistance, it is 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. 
Furthermore, the general requirements that a school have a satisfactory 
academic progress policy have been a part of the administrative 
capability standards in the general provisions regulations for many 
years.
    In order to maintain the integrity of the Title IV, HEA programs, 
the Secretary does not believe that Title IV, HEA program assistance 
should be provided beyond the point at which a student can reasonably 
be expected to complete his or her education. The Secretary believes 
that this regulation achieves this objective.
    Change: None.
    Comments: A number of commenters felt that the Department is wrong 
in justifying this policy of satisfactory academic progress on the 
grounds that a similar period will be used to calculate completion 
rates under the Student-Right-to-Know Act, since the latter is a 
consumer information statute that does not address student aid 
eligibility. Furthermore, the Student-Right-to-Know Act applies only to 
first-time, full-time degree seeking students while the satisfactory 
academic progress standards would apply to all Title IV students.
    Discussion: The Secretary was not trying to justify the 
satisfactory academic progress policy based on the Student-Right-to-
Know Act. The Secretary was merely pointing out that the Student-Right-
to-Know Act also uses the concept of a full-time undergraduate student 
completing a program in no more than 150 percent of the published 
length of the educational program.
    Changes: None.
    Comments: A number of commenters opposed the minimal satisfactory 
academic progress standards set by the Department on the basis that 
they would discriminate against minority and disabled students. Many 
commenters suggested that the imposition of the 150 percent timeframe 
does not provide traditional students between the ages of 18 and 24 
much leeway to change programmatic decisions. Furthermore, several 
commenters suggested that the regulation should provide for a phase-in 
of the standard, because if it is not phased-in over time, many 
students will have entered postsecondary education under one assumption 
about timeframes for completion only to have these assumptions changed 
sometime during their educational career. The commenters felt that for 
many students, it will not be possible or practical to change these 
timeframes and it would be unfair to hold them to any new standard.
    A few commenters believed that the satisfactory academic progress 
provisions were confusing and overly burdensome.
    Discussion: Section 668.16(e)(3) modifies earlier regulations which 
provided that an institution must establish a maximum timeframe in 
which the student must complete his or her educational objective, by 
providing that the maximum timeframe can be no longer than 150 percent 
of the published length of the educational program. The 150 percent can 
be calculated using credit hours, clock hours, terms, academic years, 
or any other reasonable measure. For example, a school with an 
undergraduate program consisting of 120 credit hours may have a policy 
that includes a provision requiring a student to complete the program 
within 180 credit hours. Such a policy would not only provide a 
traditional student attending full-time 6 years to complete a 4-year 
program, but also easily accommodate most non-traditional students 
because the use of credit hours as the measure allows for less than 
full-time attendance as well as non-consecutive enrollments.
    The Secretary recognizes that these requirements may create a 
hardship for some students who were maintaining progress under the 
institution's old policy but do not meet the requirements of the new 
policy. However, Sec. 668.16(e)(3)(vii) requires each institution to 
have procedures for students to appeal determinations that they are not 
making satisfactory progress, and an institution may consider as part 
of a student's appeal whether mitigating circumstances are present that 
would justify payment to an otherwise-ineligible student. With such a 
determination that mitigating circumstances are present, a student who 
otherwise would fail one or more tests of the institution's 
satisfactory progress standards could still be eligible for payment for 
the increment of education used to measure satisfactory academic 
progress under Sec. 668.16(e)(3)(ii).
    For student appeals under the institution's satisfactory academic 
progress standards for aid disbursed during the 1994-95 award year, a 
student who met the institution's standards prior to July 1, 1994, but 
does not meet the new satisfactory progress standards might be awarded 
an additional disbursement for the increment of education used to 
measure satisfactory academic progress under Sec. 668.16(e)(3)(ii) if 
such a disbursement would permit the student to complete the program 
during that period.
    An institution must determine and document each student's 
eligibility for an extension of eligibility due to a mitigating 
circumstance on an individual basis. An institution cannot routinely 
grant every applicable student an extension of eligibility as a means 
to circumvent the 150 percent provision.
    The Secretary has recognized the need to clarify and simplify the 
provisions related to satisfactory academic progress. While this 
section has been rewritten in an effort to meet these goals, the 
underlying policies as provided for in the April 29, 1994 final 
regulations have not been altered.
    Changes: Section 668.16(e) has been amended to clarify that the 
satisfactory academic progress standards of this section are for 
purposes of determining student eligibility for Title IV, HEA program 
assistance and does not apply to non-Title IV students. The Secretary 
has removed the requirement that an institution's standards are 
considered to be reasonable if the standards conform with the standards 
of satisfactory progress of the institution's nationally recognized 
accrediting agency if the agency has those standards. Section 
668.16(e)(2) has been amended to clarify which required elements of an 
institution's standards are qualitative and which are quantitative. 
Section 668.16(e)(2)(ii)(A) has been amended to clarify that the 
maximum timeframe in which a student must complete his or her 
educational program must be, for an undergraduate program, no longer 
than 150 percent of the published length of the educational program 
measured in academic years, terms, credit hours, or clock hours. 
Section 668.16(e)(4) has been amended to clarify that the Secretary 
considers an institution's satisfactory academic progress standards to 
be reasonable if the standards provide for a determination at the end 
of each increment by the institution as to whether the student has met 
the qualitative and quantitative components of the standards instead of 
a determination that the student has successfully completed the 
appropriate percentage or amount of work according to the established 
schedule. Section 668.16(e)(6) has been amended to clarify that the 
Secretary considers an institution's satisfactory academic progress 
standards to be reasonable if the standards provide specific procedures 
for a student to re-establish that he or she is maintaining 
satisfactory progress rather than for a reinstatement of a student's 
aid.
    Comments: A large number of commenters stated that an institution's 
default rates are not indicative of an institution's administrative 
capability. Many commenters argued that the proposal to use Federal 
Stafford Loan and Federal SLS program default rates as a criterion of 
administrative capability went beyond the statute and Congressional 
intent.
    Other commenters asserted that the use of default rates is unfair 
to institutions with small numbers of students. These commenters 
suggested that institutions with small number of students either be 
exempt from using default rates as an indicator of administrative 
capability or that these institutions be given the opportunity of 
withdrawing from certain programs rather than being penalized for 
participation in high-risk programs.
    Discussion: The Secretary points out that the use of default rates 
as a determining factor in the evaluation of an institution's 
administrative capability is not new. The Secretary does not agree with 
those commenters who assert that default rates are not indicative of 
administrative capability.
    Changes: None.
    Comments: Many commenters suggested that the requirement that an 
institution with an annual withdrawal rate of more than 33 percent does 
not demonstrate administrative capability be eliminated. 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. Most of these commenters 
recommended that this provision be eliminated.
    Several commenters suggested that this provision duplicates efforts 
by the SPREs and should, therefore, be eliminated.
    Discussion: Because SPREs must establish withdrawal rates that are 
applicable to institutions that are referred to the SPRE, the Secretary 
agrees with the commenters that this provision duplicates efforts by 
the SPREs. However, the Secretary believes that the use of a withdrawal 
rate standard to evaluate whether an institution should be permitted to 
begin participation in a Title IV, HEA program is essential to 
effective gatekeeping for the Title IV, HEA programs. Therefore, the 
Secretary has revised the withdrawal rate requirement to make it 
applicable only to institutions that seek initial participation in a 
Title IV, HEA program.
    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 because they 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 drop out of an 
institution in lesser 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.
    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. 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.
    The Secretary also believes it is more appropriate to measure an 
institution's withdrawal rate on an award year time period, rather than 
an academic year time period. The Secretary notes that other enrollment 
information that an institution is required to report to the 
Department, such as the number of correspondence students, incarcerated 
students, and ability-to-benefit students, is all reported for an award 
year. This change will allow an institution that seeks initial 
participation in a Title IV, HEA program to report withdrawal rate 
information in a manner consistent with this other enrollment 
information.
    The regulations currently provide that an institution does not 
count as a withdrawal any student who was entitled to and received in a 
timely manner in accordance with Sec. 668.22, a refund of 100 percent 
of tuition and fees under the institution's refund policy. Because the 
withdrawal rate provision will now only apply to institutions that seek 
initial participation in a Title IV, HEA program and, therefore, have 
not been required to make refunds in accordance with Sec. 668.22, the 
Secretary has removed the requirement that the refund must be made in a 
timely manner in accordance with Sec. 668.22.
    Changes: Section 668.16(l) has been revised to require that an 
institution that seeks initial participation in a Title IV, HEA program 
must have a withdrawal rate less than or equal to 33 percent in order 
to be administratively capable. Section 668.16(l) has been further 
revised to require that an institution calculate its withdrawal rate 
for an award year. Section 668.16(l) has been further revised to remove 
the requirement that a refund must be made in a timely manner in 
accordance with Sec. 668.22.
    Comments: One commenter objected to the elimination of 
Sec. 668.16(l) as proposed in the February 28, 1994 NPRM in which the 
Department proposed to require that institutions provide certain types 
of information to students.
    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: None.
    Comments: One commenter objected to the elimination of 
Sec. 668.16(m) as proposed in the February 28, 1994 NPRM in which the 
Department would have required that institutions have advertising, 
promotion, and recruitment practices that reflected the content and 
objectives of the programs offered by the institution.
    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 who 
recommended that these proposed requirements not be included in the 
final regulations.
    Changes: None.

Section 668.22  Institutional Refunds and Repayments

General
    Comments: Close to 200 commenters requested that the Secretary 
simplify the refund requirements of this section. Many of the 
commenters suggested that the Secretary merely repeat the language of 
the statute. These commenters believed that using only the language of 
the statute will provide institutions with the necessary flexibility to 
administer the statute in the most reasonable and efficient manner. 
Fifty-nine commenters pointed out that the area of refunds has 
traditionally been left to institutions for self-regulation and it 
should remain that way. One hundred commenters felt that the complexity 
of the refund provisions will promote noncompliance. Five commenters 
contended that these refund requirements will cause institutions to 
lose income. The commenters felt that, as a result, an institution will 
be forced to reduce operating expenses by reducing employees, supplies, 
equipment, training, etc., and/or significantly increase tuition. Five 
commenters noted that this provision does not take into account that 
contracts with instructors based on full-class attendance have already 
been made. Sixteen commenters felt that the provisions of this section 
will place too great a financial and administrative burden on 
institutions. Six commenters felt that as a result of the financial 
burden, institutions will not be able to meet the standards set out in 
Sec. 668.15, Factors of financial responsibility. Eight commenters felt 
that the effective date of these provisions should be delayed because 
of the complexity and severe impact of these provisions.
    Discussion: The Secretary understands the commenters' frustrations 
with the intricacies of the refund provisions of this section. The 
Secretary has sought to simplify the refund procedures to reduce 
administrative burdens and make changes that will reduce financial 
burdens on institutions. However, the Secretary notes that the 
Department is committed to reducing the widespread fraud and abuse 
associated with the making of refunds. Any suggested changes that would 
reduce administrative and financial burdens on institutions while 
continuing to provide the level of protection to which the Department 
is committed, were given serious consideration. The Secretary continues 
to welcome suggested amendments to these regulations that will achieve 
these goals. To this end, the Secretary does not believe that merely 
repeating the language of section 484B of the HEA in regulations would 
provide sufficient safeguards to Title IV, HEA program funds.
    Further, because of this commitment to the reduction of fraud and 
abuse, the Secretary does not believe it is in the best interest of the 
student or the Title IV, HEA programs to delay implementation of the 
refund provisions of the April 29, 1994 final regulations. The 
Secretary understands that institutions may inadvertently make mistakes 
in their implementation of the provisions of this section and whenever 
possible the Secretary will take into consideration whether an 
institution that has calculated refunds improperly has, nonetheless, 
made a good faith effort to comply. In determining whether 
administrative sanctions will be pursued against an institution that 
has failed to pay refunds in accordance with the regulations, the 
Secretary will examine whether such an institution can demonstrate a 
good faith effort to comply with the provisions of this section, or 
whether the institution sought to avoid its responsibilities for 
properly making refunds by ignoring the calculations required by 
regulation. An institution must demonstrate that it has made a 
reasonable attempt to implement the refund provisions based on all 
information available at the time.
    Changes: See changes to specific refund sections below.
    Comments: Four commenters stated that it is sufficient that the 
SPREs are charged with setting standards for student refunds that are 
in compliance with the HEA. Four commenters contended that the 
provisions of this section are often in conflict with established State 
policies which have been based on a thorough and realistic analysis of 
the needs and interests of the State. One commenter felt that the 
regulation of refunds should not be used to curb abuse at institutions. 
The commenter felt that other gatekeeping functions will address fraud 
and abuse.
    Discussion: The HEA has specifically charged the Secretary with 
oversight in the area of refunds, and the Secretary therefore has the 
primary responsibility for determining whether refunds are paid timely 
and in accordance with Federal requirements. Although an institution's 
SPRE or other State agency may have certain concerns about an 
institution's refund practices, the Secretary has the primary 
responsibility for establishing refund requirements that will ensure 
the protection of the Title IV, HEA programs.
    Changes: None.
    Comments: Three commenters noted problems with the law on refunds 
and urged the Secretary to support changes to the law that will lead to 
a coherent and consistent Federal policy on refunds. Two commenters 
suggested that all institutions be required to use one refund policy. 
Two commenters suggested the use of the pro rata refund policy for all 
Title IV, HEA program assistance recipients. One commenter suggested 
that an institution should owe a 100 percent refund to a student who 
withdraws within the first two weeks, with the percentage of the refund 
decreasing by 10 percent each week thereafter until the sixth week. No 
refund would be due after this time. The commenter felt that this would 
give a student a sufficient amount of time to assess the institution 
without penalizing the institution. One commenter recommended that all 
institutions use terms to award aid. An institution would retain zero 
percent of institutional charges for a student who withdraws in the 
first week of the program. The amount the institution could retain 
would then increase by 10 percent increments each week for the next 
seven weeks. No refund would be required after that point. The 
commenter suggested that a student who attends at least one day in a 
seven-day period would be counted as having attended a full week. The 
institution would determine the percentage contribution of all sources 
of funds to institutional charges at the time the student is awarded 
aid. The commenter suggested that the institution use these percentages 
to determine the amount that the institution will retain from each 
source of funds. One commenter suggested that only institutions with 
high withdrawal rates or with excessively high tuition be required to 
calculate refunds under the pro rata refund provisions.
    Discussion: The Secretary notes that the specific changes suggested 
by these commenters would require changes in the law. The Secretary 
agrees that certain changes in the law on refunds may be desirable and 
is willing to work with members of the community to achieve legislation 
that is coherent, consistent, and effective.
    Changes: None.
    Comments: One commenter suggested that the Secretary not require 
institutions to pay refunds to students who withdraw for reasons 
outside of the control of the institution, for example, those who 
withdraw for purely personal reasons. Likewise, one commenter felt that 
the pro rata refund provisions should be limited only to those students 
who officially notify the institution of their withdrawal, since most 
students are old enough to be held legally accountable for the 
contractual agreements made during admission to the institution. One 
commenter recommended that the term ``drops out'' be replaced with the 
term ``officially withdraws'' since it is unduly burdensome to require 
an institution to determine the date on which a student has 
unofficially dropped out.
    Discussion: The Secretary believes that the HEA makes clear that 
students who withdraw from an institution for whatever reason are 
entitled to any refund owed in accordance with the law and applicable 
regulations.
    Changes: None.
    Comments: Nine commenters felt that it would be impossible to 
explain these refund policies to students. One commenter supported the 
requirement that an institution provide a clear and conspicuous written 
statement of its refund policy to students and prospective students.
    Discussion: The Secretary believes that information on how a 
student's refund would be calculated should he or she withdraw from the 
institution is vital to a student's assessment of whether to enroll or 
continue enrollment at an institution. Therefore, an institution must 
provide the information necessary for a student to make an informed and 
valid assessment. The Secretary does not believe it is unreasonable to 
expect an institution to provide reasonable examples of common refund 
situations applicable to the average student population, and answer any 
questions on this material, should a student request such information. 
The Secretary believes that the simplifications made to the refund 
section in response to public comment will make it easier for an 
institution to explain the refund policies to a student.
    Changes: See specific changes to the refund sections.
Fair and Equitable Refund Policy
    Comments: Thirteen commenters felt it is very burdensome to require 
an institution to calculate a student's refund under three refund 
policies. Eight commenters suggested that an institution be allowed to 
determine the refund that is generally the most generous (for example, 
with the use of charts that show the refund due based on the number of 
weeks remaining) and use it for all students who withdraw. One 
commenter supported the requirement that an institution calculate every 
student's refund under each applicable policy for comparison purposes.
    Discussion: The Secretary continues to assert 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 law. Further, 
the Secretary notes that it would be difficult for an institution to 
determine that one particular policy always provided the most generous 
refund as refund amounts vary based on the unpaid amount of an 
individual student's scheduled cash payment.
    The Secretary understands that institutions would prefer a simple 
predetermined chart or other reference aid that would enable them to 
complete a refund calculation without doing a student-by-student 
analysis. However, several variable items must always be examined. For 
example, the institution generally is required to determine the amount 
of funds it has earned under its enrollment contract with the student, 
and then return the unearned funds using the allocation priorities set 
out in Sec. 668.22(h). In some cases, the institution may only have 
earned the funds under the contract that were allocated to be paid by 
the student (i.e., the funds remaining under the contract after the 
unearned portion has been returned). In this situation, whether the 
institution gets to keep any of the funds for this student already in 
its possession will depend solely upon whether the student has already 
paid his or her share of the contract price. For these calculations, 
even though the institution might be able to develop a chart showing 
what has been earned under the enrollment contract during the refund 
period, a student-by-student calculation must also be made to determine 
whether the student has already paid his or her share of the contract 
that the institution has earned. Different variables are present in the 
pro rata refund calculation that require student-by-student 
determinations, because the amount of the refund is reduced by the 
amount of any unpaid charges on the enrollment contract at the time of 
withdrawal. For this reason, some degree of student-by-student analysis 
would be required for every refund calculated under these regulations.
    The Secretary would like to clarify the process of determining 
which refund policies to use when calculating a refund for a student. 
For a first-time student who withdraws on or before the 60 percent 
point in time in the period of enrollment for which the student has 
been charged, an institution must: (1) Calculate a refund under the pro 
rata refund calculation; (2) Compare this refund amount with refunds 
calculated under applicable State law and in accordance with the 
institution's accrediting agency's policy, if any. If either the State 
policy or the accrediting agency policy does not exist, the institution 
would compare the pro rata refund amount with the refund amount 
calculated under the remaining policy. For example, if no accrediting 
agency refund policy exists, the institution would compare the pro rata 
refund amount with the refund calculated in accordance with the State 
refund policy; (3) If there is no State refund policy and no 
accrediting agency policy (i.e., nothing with which to compare the pro 
rata refund amount), use the pro rata refund amount as the student's 
refund. (An institution is never required to use the refund calculation 
under Appendix A, Standards for Acceptable Refund Policies by 
Participating Institutions, for a first-time student who withdraws on 
or before the 60 percent point in time in the period of enrollment for 
which the student has been charged. [As discussed later, the Federal 
refund calculation will replace Appendix A, Standards for Acceptable 
Refund Policies by Participating Institutions, for the 1995-96 award 
year and beyond.])
    For a continuing student (the pro rata refund policy does not 
apply), an institution must: (1) Compare refunds calculated under 
applicable State law and in accordance with the institution's 
accrediting agency's policy, if any. If one of these policies does not 
exist, the institution would use the remaining policy to arrive at the 
refund amount. No other refund calculation is necessary. (2) If there 
is no State refund policy and no accrediting agency refund policy, then 
(and only then) must the institution compare refunds calculated in 
accordance with Appendix A, Standards for Acceptable Refund Policies by 
Participating Institutions, [the Federal refund calculation for the 
1995-96 award year and beyond] and the institution's refund policy.
    Changes: None.
    Comments: Two commenters contended that it was inaccurate to refer 
to accrediting agency standards that are approved by the Secretary as 
the Secretary will not be approving the refund standards of accrediting 
agencies.
    Discussion: The Secretary would like to clarify that an accrediting 
agency must have its refund policy approved by the Secretary before an 
institution may use an accrediting agency's refund policy to calculate 
a student's refund under the requirements of this section. In approving 
an accrediting agency's policy, the Secretary will look at factors such 
as whether the accrediting agency's specific refund standards: require 
an institution to make 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 or 
Federal Direct PLUS loan on behalf of the student, if the student 
withdraws from the institution; include standards that specify the 
percentage of funds that will be refunded to a student (or retained by 
the institution) specific to the point in time that the student 
withdraws from the institution; and address the treatment of all 
charges specified in the law.
    Changes: None.
    Comments: One commenter requested that an institution be permitted 
to exclude administrative fees from refunds calculated under policies 
other than the pro rata refund policy.
    Discussion: The Secretary notes that current regulations do not 
prohibit a State, accrediting agency, or institution (if the 
institution is comparing its own policy with a refund under Appendix A, 
Standards for Acceptable Refund Policies by Participating Institutions, 
[the Federal refund calculation for the 1995-96 award year and beyond]) 
from developing refund policies that permit institutions to exclude 
administrative fees. The Secretary does not plan to regulate in this 
area unless necessary to stem abuse. The Secretary notes that the 
Federal refund calculation also permits an institution to exclude an 
administrative fee from the calculation of the refund. The Federal 
refund policy is discussed in the section of Analysis of Comments and 
Changes that addresses comments received on Appendix A, Standards for 
Acceptable Refund Policies by Participating Institutions.
    Changes: None.
Pro Rata Refund
    Comments: Two commenters supported the required calculation of pro 
rata refunds for students who withdraw on or before the 60 percent 
point in time in the period of enrollment for which the student has 
been charged. One commenter felt that permitting institutions to 
subtract any unpaid institutional charges from the initial pro rata 
refund amount is unfair since it encourages students to withhold 
payment of the unpaid charges.
    Discussion: The Secretary notes that the statutory definition of a 
pro rata refund calls for the subtraction of unpaid charges from the 
calculated refund amount. The Secretary agrees that the statutory 
subtraction of unpaid charges from the refund amount may encourage 
students to withhold payment of unpaid charges. The Secretary is also 
concerned that this provision may encourage institutions to enroll 
students who are more likely to withdraw because Title IV, HEA program 
funds will be used to pay the first dollars earned under the enrollment 
contract rather than a student's contribution, should the student 
withdraw. However, the Secretary notes that this benefit to students is 
also consistent with the protections inherent in the extended length of 
the pro rata refund policy.
    Changes: None.
    Comments: One commenter supported the provision that allows a 
student to return equipment if it is in good condition allowing for 
reasonable wear and tear, and then have the amount the student paid for 
the equipment included as part of the pro rata refund. The commenter 
did not believe that there should be any other circumstances beyond 
health and sanitary reasons that would permit an institution to reject 
equipment that is returned by a student. One commenter felt that used 
books, even those in good condition, allowing for reasonable wear and 
tear, are not marketable and an institution should not be forced to 
include these in the calculation of a refund. One commenter suggested 
that the Secretary allow an institution to exclude equipment charges 
from the pro rata refund calculation if the equipment cannot be 
redistributed to a newly enrolled student upon his or her entrance into 
a program. This would include books with student names, but would not 
include transcription machines.
    Discussion: The Secretary agrees that students should be permitted 
to return equipment and have the charge for the equipment included in 
the calculation of the student's refund barring any circumstances that 
would prevent the institution from reissuing the equipment. The 
Secretary believes that the determination of whether equipment can be 
reissued should remain with the institutions. However, the Secretary 
notes that institutions will be responsible for demonstrating that 
their policies for unreturnable equipment are reasonable, consistent 
and fair to the student. The Secretary does not believe it is 
reasonable or fair to the student to classify all used books as 
unreturnable. An institution must demonstrate that there are specific 
circumstances, beyond the fact that the book has been used by other 
students, that prevent the institution from reissuing the equipment. 
The Secretary does not believe that it is reasonable to classify a book 
with a student's name on it as unusable for other students.
    Changes: None.
    Comments: One commenter suggested that the definition of ``other 
charges assessed by the institution'' not include the documented cost 
for services provided by the institution as a convenience to the 
student. For example, a book charge would not be an institutional 
charge if the institution permitted the purchase of the books as a 
convenience and the book charge was not included in the enrollment 
agreement.
    Discussion: The Secretary notes that, consistent with policy under 
the previous FFEL program regulations, an institution is required to 
include the full amount of charges for equipment in the calculation of 
a pro rata refund if a separate charge exists for the equipment by the 
institution or if the institution requires the student to purchase the 
equipment from a certain vendor. If an institution does not have a 
separate charge for equipment and the student has the option of 
purchasing the equipment from more than one source, the institution 
would not have to include the equipment charge in the pro rata refund 
calculation.
    Changes: None.
    Comments: One commenter stated that requiring that 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 20-day period in which to return 
equipment, only to force the institution to rush the calculation and 
processing of a refund. The commenter suggested that a student be 
allowed 15 days to return equipment so that the institution would have 
a more reasonable 15 days to process the refund.
    Discussion: The Secretary does not believe that it is unreasonable 
to require an institution to make a refund within 30 days, even though 
an institution may not know if equipment is to be counted as returned 
or unreturned until the twentieth day. The Secretary notes that the 
return of equipment is only one area of a refund calculation. The 
Secretary believes that 10 days is sufficient time for an institution 
to complete the calculation of a refund and make any refund due to a 
student.
    Changes: None.
    Comments: Two commenters believed that the administrative fee 
should not be required to be a real institutional charge to students. 
One commenter believed that an institution should be permitted to count 
a withdrawal fee as part or all of an administrative fee.
    Discussion: 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 actually charged or paid. An institution may count a 
charge as part of this administrative fee if the charge is used to 
cover administrative work at the institution. The fee must be 
publicized up-front and applied across the board to all students. 
Because a withdrawal fee is only charged to those students who withdraw 
and not to all students, it may not be included in an institution's 
administrative fee.
    Changes: None.
    Comments: Three commenters suggested that the Secretary add the 
provision of the February 28, 1994 NPRM that would have allowed an 
institution to exclude board credits in excess of the attributable 
prorated portion based on the period attended by the student prior to 
withdrawal. One commenter noted that the pro rata formula assumes that 
services are provided evenly throughout the term. The commenter 
suggested that the cost for all services that are provided on an uneven 
basis be excluded from the pro rata refund calculation if the 
institution can document that the service was provided in full. One 
commenter felt that the definition of ``other charges assessed the 
student by the institution'' should be modified to address charges that 
are collected by an institution and passed on to an outside entity (for 
example, physicals, required immunizations, outside housing deposits, 
uniform purchases, and bus passes). The commenter felt that an 
institution should not be required to pro rate these charges.
    Discussion: The Secretary continues to find the provision contained 
in the February 28, 1994 NPRM allowing for the exclusion of expended 
board credits in excess of the attributable prorated portion based on 
the period attended by the student to be excessively complicated and 
not entirely effective for purposes of this section. The Secretary 
agrees that the statutory pro rata refund formula assumes that services 
are provided evenly throughout the term. The Secretary believes that 
excluding all institutional costs that are provided on an uneven basis 
from the pro rata refund calculation is contrary to the requirements of 
the law. The Secretary continues to believe that 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 permitted an institution to exclude the charges 
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. The 
Secretary does not believe it is appropriate to extend this treatment 
to all charges that are passed through the institution to another 
entity.
    Changes: None.
    Comments: Four commenters felt that requiring an institution to use 
hours completed instead of scheduled hours for purposes of calculating 
the 60 percent point in time ignores that institutions have to provide 
space, utilities and instruction, whether a student is in attendance or 
not. One commenter felt that this went against congressional intent 
which was clearly communicated through the use of the phrase ``in 
time.'' The commenters felt that this penalizes the student with good 
attendance who withdraws by in effect charging him or her more than a 
student with poor attendance who withdraws. Two commenters felt that it 
is discriminatory to not allow a clock hour institution to determine 
the 60 percent point in time by using weeks, as credit hour 
institutions do. The commenters felt that this restriction does not 
permit a clock hour institution to factor in absences in determining 
the 60 percent point in time.
    Discussion: Because a student's progression in a clock-hour program 
is measured solely in clock hours completed, the Secretary believes 
that it is most reasonable to use the number of hours completed by the 
student in determining the percentage of the enrollment period that has 
elapsed for these programs. 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. If an institution's 
policy for excused absences is reasonable, the Secretary does not 
believe that an inequity in treatment will exist between a student with 
good attendance who withdraws and a student with ``poor attendance'' 
who withdraws. The Secretary acknowledges that this and other 
provisions of the Title IV, HEA programs 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 notes that this differentiation is due to the Secretary's 
efforts to take into account the many variables and circumstances that 
exist in the postsecondary educational community.
    Changes: None.
    Comments: One commenter felt that it was discriminatory not to 
allow all institutions to use weeks to determine the portion of the 
period of enrollment that remains.
    Discussion: The Secretary notes that the ``portion of the period of 
enrollment that remains'' is defined by statute.
    Changes: None.
Period of Enrollment for Which the Student Has Been Charged
    Comments: A few commenters requested a change to the definition of 
the minimum period of enrollment for which a student has been charged 
for clock-hour programs and credit-hour programs without terms. Seven 
commenters believed that it is unfair to define the minimum period of 
enrollment for which the student has been charged for a non-term 
institution as the lesser of the length of the educational program or 
an academic year. Six commenters felt that it was inconsistent for the 
Secretary to try to dissuade institutions from charging up front for a 
program, yet prohibit institutions with programs measured in clock 
hours or credit hours without terms from charging by anything less than 
the program length or an academic year. Several commenters were 
particularly concerned with this provision's effect on the calculation 
of a student's scheduled cash payment. The commenters noted that a 
student charged for a lengthy period of time is more likely to have a 
larger unpaid amount of his or her scheduled cash payment. 13 
commenters suggested that institutions be permitted to charge by the 
actual period of time for which the student is charged without the 
imposition of a minimum period. 12 commenters suggested that an 
institution be permitted to define its minimum period of enrollment for 
which a student has been charged as a payment period. Two supported the 
use of a month. One suggested the use of one-third of an academic year. 
Two commenters suggested that an institution that charges by the 
program be allowed to calculate refunds for an academic year (if the 
program is no longer than the academic year) because this will make it 
easier to determine the aid awarded.
    Discussion: The Secretary believes that a definition of a minimum 
period of enrollment for which the student has been charged is crucial 
to preventing abuse in the making of refunds. The Secretary seeks to 
prevent institutions from establishing short periods to minimize the 
effectiveness of the pro rata refund requirements, which only apply to 
first-time students who withdraw on or before the 60 percent point in 
time in the period of enrollment for which the student has been 
charged. Upon further examination, the Secretary agrees that this goal 
may be achieved for programs measured in clock hours or credit hours 
without terms by permitting a shorter minimum period than that 
specified in the April 29, 1994 final regulations. The Secretary has 
established a minimum for programs that are longer than an academic 
year, and a minimum for programs that are shorter than an academic 
year. The Secretary believes that a minimum period of the greater of 
the payment period or one-half of the academic year is an appropriate 
minimum for a program that is measured in clock hours or credit hours 
and does not use terms that is longer than or equal to the academic 
year in length. The Secretary does not believe it is adequate to simply 
permit a minimum period equal to a payment period because the minimum 
length of a payment period is institutionally controlled. The Secretary 
believes it is reasonable to define the minimum period of enrollment 
for which the student has been charged in the case of an educational 
program that is measured in credit hours or clock hours and does not 
use terms and is shorter than the academic year in length, as the 
length of the educational program. The Secretary believes that these 
periods are sufficient to provide first-time students with the benefits 
of the pro rata refund provisions for a satisfactory period of time. 
The Secretary believes that these changes will also provide relief in 
the calculation of a student's scheduled cash payment. Scheduled cash 
payments are discussed further in the section of the Analysis of 
Comments and Changes that addresses ``Repayments to Title IV, HEA 
Programs of Institutional Refunds and Repayments.'' The Secretary 
stresses that these minimum periods are to be used by institutions that 
charge by these periods, or periods less than the minimum. An 
institution that charges for periods longer than the minimum period 
specified in the regulations must use the period for which the 
institution actually charges the student as the period of enrollment 
for which the student has been charged. The Secretary believes it is 
reasonable for an institution that requires a student to commit to 
payment for an entire program to provide a refund based on that same 
period.
    Changes: Section 668.22(e)(i) has been amended to define the 
minimum ``period of enrollment for which the student has been charged'' 
as the semester, trimester, quarter, or other academic term in the case 
of an educational program that is measured in credit hours or clock 
hours and uses semesters, trimesters, quarters, or other academic 
terms. Section 668.22(e)(ii) has been amended to define the minimum 
``period of enrollment for which the student has been charged'' in the 
case of an educational program that is measured in credit hours or 
clock hours and does not use terms and is longer than or equal to the 
academic year in length, as the greater of the payment period or one-
half of the academic year. Section 668.22(e)(ii) is also amended to 
define the minimum ``period of enrollment for which the student has 
been charged'' in the case of an educational program that is measured 
in credit hours or clock hours and does not use terms and is shorter 
than the academic year in length, as the length of the educational 
program.
    Comments: 11 commenters believed that the minimum period of 
enrollment for which a student has been charged should be the term for 
clock-hour institutions using terms. The commenters felt that clock-
hour institutions using terms should be treated the same as credit-hour 
institutions using terms. One commenter noted the need to ensure that 
the same time period is used for purposes of determining eligibility 
for student assistance and refund calculations.
    Discussion: The Secretary agrees that the minimum period of 
enrollment for which a student has been charged should be the term for 
clock-hour programs using terms, as it is for credit-hour programs that 
use terms. The Secretary strongly agrees with the commenter who noted 
the need to ensure that the same time period is used for other Title 
IV, HEA program purposes. For example, the Secretary would expect an 
institution that states that it is a term-based institution for refund 
purposes to demonstrate that it has disbursed Title IV, HEA program 
funds to students as required for term-based institutions.
    Changes: None.
    Comments: One commenter felt that it is too difficult to determine 
the amount of funds received for the period of enrollment for which the 
student has been charged. The commenter requested that worksheets be 
provided to reflect the calculation of refunds and repayments without 
the use of attribution of funds.
    Discussion: The Secretary notes that guidance on how to determine 
the amount of funds received for the period of enrollment for which the 
student has been charged was provided to institutions in the April 29, 
1994 final regulations (59 FR 22356-22359). The Secretary will provide 
further guidance in the Federal Student Financial Aid Handbook.
    Changes: None.
Repayments to Title IV, HEA Programs of Institutional Refunds and 
Repayments
    Comments: 45 commenters understood and/or supported the rationale 
for the provision that requires that an institution subtract any unpaid 
amount of a scheduled cash payment from the amount the institution may 
initially retain under refund calculations other than pro rata. In 
particular, one commenter supported the shifting of liability from the 
Federal government to the institution. The commenter agreed with this 
approach because it makes more funds available to other students who 
stay in school. The commenter stated that they had always had a liberal 
refund policy and this provision will not affect the institution's 
operations and cash flow.
    One hundred and forty-one commenters opposed the requirement as 
written. The commenters asserted that the unpaid charges provision 
unfairly leaves students owing large balances to the institution which 
would otherwise have been paid by Title IV, HEA program assistance, and 
that this result obviously is not fair and equitable under the statute. 
Seven commenters believed that this provision flies in the face of the 
language of the statute which clearly states that unpaid charges are to 
be subtracted from the amount of a refund to a student, and does not 
require that an institution subtract unpaid charges from the amount the 
institution may retain. Eight commenters believed that an institution 
should not be required to subtract any unpaid amount of a scheduled 
cash payment from the amount the institution may retain before the 
institution compares the amount of refunds under State, accrediting 
agency and pro rata policies. Five commenters believed that 
institutions who use policies developed by States, accrediting 
agencies, or the institution itself that choose to use pro rata across 
the board should be permitted to subtract any unpaid charges from the 
amount of the refund.
    Thirty-nine commenters felt that these provisions were not fair and 
equitable because institutions will be providing education for periods 
of time for which they will not receive compensation. One commenter 
felt that this provision will force institutions to raise tuition. Four 
commenters contended that this provision will force institutions to 
overfund students with loans or other types of aid. Three commenters 
felt that this provision would require institutions to demand payment 
in full at the start of classes. The commenters stated that demanding 
payment in full at the start of classes will either entirely exclude 
disadvantaged low-income students from access to education or cause 
institutions to reimburse the students when financial assistance 
arrives at a later date. One commenter felt that this provision will 
encourage institutions to lower their satisfactory progress standards 
and simplify curricula to reduce the number of early withdrawals, as 
the institutions are penalized when students withdraw before they have 
received most of their aid. Two commenters felt that this provision 
will result in institutions withholding a student's academic transcript 
until unpaid charges are paid.
    Fourteen commenters contended that many of these students qualified 
for aid because they do not have the resources to pay for their own 
education (for example, a student with an EFC of 0) and, therefore, 
will not have the resources to pay an institution large amounts of 
unpaid charges. One commenter felt that the Secretary's intent with 
this provision was to exclude low-income individuals from participation 
in the Title IV, HEA programs, particularly for attendance at non-
degree granting institutions. 11 commenters felt that this provision 
violates a student's entitlement to Title IV, HEA program assistance 
(particularly Federal Pell Grant funds) by requiring the student to 
assume responsibility for charges when they withdraw that they were not 
responsible for when they enrolled. One commenter stated that the 
Secretary appears to be in breach of a contract made with the student 
or, in the case of FFEL program funds, an interference with third-party 
contracts between the students and their banks. One commenter suggested 
that an institution not be required to return Federal Pell Grant funds 
if unpaid charges exist which the institution must collect from the 
student. One commenter felt that this provision also does not protect 
the institution or the FFEL program.
    Discussion: The provision that requires that an institution 
subtract any unpaid amount of a scheduled cash payment from the amount 
the institution may initially retain under certain refund calculations 
was introduced to address an inequity which existed between students 
who paid their share of institutional charges, and those who did not. 
As demonstrated by examples set forth in the December 23, 1991 NPRM, 
all other things being equal, the student who did not pay his or her 
share of institutional charges received a greater benefit from Title 
IV, HEA program funds than the student who had paid. Under the current 
provision, Title IV, HEA program funds may no longer be used to pay for 
the amount owed by the student. This provision reaffirms the basic 
principle of student financial aid: the family (or student) makes its 
contribution first before financial aid is expended.
    The Amendments of 1992 reinforced the Secretary's use of this 
provision by stating that an institution shall have in place a fair and 
equitable refund policy under which it returns unearned tuition, fees, 
room and board, and other charges. In keeping with prior practice as 
set out in the final regulations published on June 8, 1993, the 
Secretary has applied this analysis of what charges are earned against 
the enrollment contract executed between the student and the 
institution. After a determination is made of how much money the 
institution has earned against the total contract price, the unearned 
funds are returned to their sources in accordance with Section 485 of 
the HEA and Section 668.22(h) of the regulations.
    In accordance with the Amendments of 1992, a modified procedure is 
used to calculate pro rata refunds for first-time students. Under this 
procedure, students receiving the benefit of the elongated refund 
period have the unpaid charges on the contract removed from the 
calculation in determining how much of the earned funds the institution 
keeps. In exchange for the longer pro rata refund period, this 
calculation provides some benefit to the institution because its 
earnings are paid from funds already received without regard to the 
unpaid charges on the contract.
    The Secretary is unwilling to depart from the existing treatment of 
unpaid charges for all other refund calculations. The Secretary 
believes it is clear that Title IV, HEA program funds are provided for 
students who receive an education. The Secretary realizes that a 
certain percentage of students can be expected to withdraw or drop out 
of an institution for reasons beyond the control of the institution. 
However, the Secretary believes that all institutions, especially those 
with withdrawal rates that threaten the institution's financial health, 
must share responsibility for a situation that does not benefit the 
student or, if the student is a recipient of Title IV, HEA program 
funds, the taxpayer. The Secretary's intent was not to bar low-income 
individuals from access to education. However, the Secretary notes that 
providing a student with access to education is not beneficial if the 
student does not complete the educational program and is left with 
financial debt. The Secretary encourages institutions to properly 
counsel and, where appropriate, screen applicants for admission to the 
institution.
    The Secretary expects that institutions will seek to reduce their 
losses of income through refunds by working to keep students enrolled 
rather than overburdening students with loans, raising tuition, or 
demanding payment in full for long periods of enrollment. Obviously, 
keeping students enrolled by lowering satisfactory academic progress 
standards and simplifying curricula to reduce the number of early 
withdrawals does not provide students with the skills necessary to 
market their education. The Secretary encourages institutions to charge 
by the minimum periods of enrollment specified in the regulations in 
order to reduce a student's liability should he or she withdraw from 
the institution. An institution may withhold a student's academic 
transcript until unpaid charges are paid if it so chooses. However, the 
Secretary notes that an institution may not withhold a student's 
financial aid transcript until unpaid charges are paid.
    The Secretary notes that the receipt of all awarded Title IV, HEA 
program assistance (including Federal Pell Grant funds) is intended to 
enable a student to complete a program. Indeed, the statute specifies 
that, should a student withdraw from an institution, any amount of a 
refund must first be returned to the Title IV, HEA program funds, 
including the Federal Pell Grant program, up to the full amount 
received from the programs. Prospective students and students in 
attendance should be informed of this fact.
    Changes: None.
    Comments: Four commenters asserted that pro rata was designed to 
afford first-time students who withdraw within the first 60 percent of 
a program with maximum protection. The commenters contended that 
Congress clearly intended that the pro rata refund policy be used for 
these students.
    Discussion: The Secretary notes that the statute does not require 
that all first-time students who withdraw within the first 60 percent 
of a program be provided a refund under the pro rata refund 
calculation. To the contrary, the statute requires an institution to 
compare refund amounts under the pro rata calculation, the requirements 
of State law, and the specific refund standards of an institution's 
accrediting agency and make a refund of at least the largest amount.
    Changes: None.
    Comments: Nineteen commenters felt that defining the most generous 
refund as the policy that returns the most funds to sources of aid 
without regard to the amount a student owes to the institution is 
unreasonable and does not benefit the student. Six commenters felt that 
a debt to an institution for unpaid charges will prevent a student from 
continuing his or her education.
    Discussion: The Secretary believes that the intent of section 485 
of the HEA was to reduce a student's Title IV, HEA loan obligation when 
a student withdraws from an institution. The Secretary does not believe 
that it is better for the student to owe a debt on a Title IV, HEA 
program loan rather than owing money to the institution. A student who 
defaults on a Title IV, HEA program loan is barred from receipt of 
further Title IV, HEA program funds. This will most likely prevent the 
student from continuing his or her education at any other institution. 
Further, the Secretary believes that it is appropriate to require the 
return of funds to the Title IV, HEA programs, where they will be 
available to students who are continuing to receive an education.
    Changes: None.
    Comments: Seventeen commenters contended that a student's scheduled 
cash payment should be limited to the amount of institutional charges a 
student is responsible for paying at the beginning of the student's 
program; it should not include the amount of other sources of aid that 
was not received by the student at the time of withdrawal. The 
commenters suggested that scheduled cash payment be defined as the 
amount of institutional charges minus the amount of aid awarded to the 
student. One commenter suggested that, alternatively, an institution 
should calculate the percentage of costs to be paid by aid and by the 
student at the time of enrollment. The institution should apply the 
appropriate refund policy and retain no more than the percentage of the 
total amount the school has earned from each source. The commenter felt 
that this would ensure that both the government and the student pay 
their share of expenses while the school receives no more than the 
amount earned. One commenter asserted that an institution should only 
be required to hold a student accountable for any cash payments against 
institutional charges that are due at the time the student withdraws. 
One commenter asserted that this provision creates an inequity between 
students who have not received their financial aid at the same rate. 
Seventy-six commenters believed that a student's scheduled cash payment 
should be attributed to payment periods as it was in the past. The 
commenters feel that it is unreasonable to hold a student accountable 
for charges that were scheduled to be covered by sources of aid.
    Discussion: The Secretary found that the recommended alternatives 
for calculating unpaid charges based on the amount of student financial 
assistance awarded to a student, rather than the amount of student 
financial assistance received by the student at the time of his or her 
withdrawal, did not adequately address all the areas of concern that 
are currently addressed by the existing provisions on unpaid charges. 
As stated previously, a refund is calculated by determining how much 
money the institution has earned against the total contract price, and 
then returning all unearned funds. The Secretary believes that this 
calculation must be based on information available at the time the 
student withdraws from the institution. Also, a student is awarded 
Title IV, HEA program funds under the assumption that the student will 
remain enrolled for at least the period for which the aid is awarded. 
Therefore, it is not accurate to use the amount of aid awarded to 
determine a refund for a student who has not met his or her enrollment 
obligation as this is not an accurate indicator of the amount of 
institutional costs for which a student should be held responsible at 
the time of his or her withdrawal. Although all Title IV, HEA program 
funds awarded may exceed institutional charges at the time of a 
student's enrollment, some of these funds may be disbursed to the 
student for noninstitutional costs. Further, for various reasons Title 
IV, HEA program funds awarded may not be received by the time the 
student withdraws. The Secretary believes that it is only at the point 
when a student withdraws that the unearned portion of institutional 
charges may be determined. In addition, the Secretary believes that 
changing the calculation of a student's unpaid charges to use the 
amount of aid awarded would encourage institutions to overload students 
with Title IV, HEA loans so that the Title IV, HEA program assistance 
awarded is always greater than or equal to institutional charges.
    The Secretary believes that he has addressed some of the most vital 
concerns of the commenters by revising the definition of the period of 
enrollment for which the student has been charged for certain types of 
programs. The revisions will permit institutions who charge by the 
payment period for programs longer than or equal to an academic year 
that are measured in clock hours or credit hours and do not use 
academic terms to use the payment period to determine a student's 
refund, including the calculation of a student's unpaid charges. The 
payment period must be at least as long as one-half of the academic 
year. This change is discussed in more detail in the section of the 
Analysis of Comments and Changes that addresses the definition of 
``period of enrollment for which the student has been charged.''
    Changes: See changes to the definition of ``period of enrollment 
for which the student has been charged.''
    Comments: Two commenters believe that it is unfair to require 
institutions to return funds to a student if the subtraction of unpaid 
charges from the initial amount the institution may retain is a 
negative amount.
    Discussion: The Secretary notes that the regulations do not require 
an institution to return funds to a student if the subtraction of 
unpaid charges from the initial amount the institution may retain is a 
negative amount. The regulations require an institution to return the 
total amount of Title IV, HEA program assistance (other than amounts 
received from the FWS Program) paid for institutional charges if the 
amount of a student's unpaid charges is greater than or equal to the 
amount that may be retained by the institution under the institution's 
refund policy.
    Changes: None.
    Comments: Four commenters believed that the unpaid charges 
provision directly contradicts the 85/15 regulations, that require an 
institution to derive no more than 85 percent of revenues from Title 
IV, HEA program funds. One commenter stated that the refund provisions 
count cash payments by students as the first funds used toward 
institutional charges, while the 85/15 calculation requires Title IV 
funds to be counted as the first funds used for payment. Two commenters 
stated that the 85/15 regulations require an institution to look to 
sources of income other than Title IV, HEA program assistance. On the 
other hand, the commenter feels that the unpaid charges provision 
requires an institution to move away from these other sources of aid 
since many institutions provide funds on a contingency basis. If a 
student who received aid on a contingency basis withdraws, he or she 
will be responsible for the amount of assistance that has not been 
received. One commenter stated that the late disbursement provision 
allows a State to withhold State aid until after the refund period. The 
commenter felt that the regulations should be changed so that a student 
is not held responsible for a State's failure to honor its aid 
commitment.
    Discussion: The Secretary disagrees with the analysis used by these 
commenters. The calculation used for the 85/15 regulations makes no 
assumption concerning the order in which institutions receive funds, 
but only examines the composition of the total funds received by the 
institution as of the end of the award year. Furthermore, to the extent 
that these refund calculations require institutions to recover earned 
funds from sources other than Title IV assistance, institutions whose 
eligibility may be at risk under the 85/15 regulations may benefit from 
the increase in the percentage of funds received from sources other 
than the Title IV programs. The Secretary cannot control the extent to 
which other parties make aid available only on a contingency basis, and 
the institution will be primarily responsible for determining what 
steps are taken to ensure that it will be able to recover earned funds 
under its contract with the student.
    The regulations permit an institution to count late disbursements 
of State aid to reduce a student's unpaid charges ``in accordance with 
the applicable State's written late disbursement policies.'' The 
regulations set a maximum period of time (60 days) beyond which late 
disbursements of State aid will not be counted. States and other 
sources of student financial assistance set the requirements and 
procedures for the attainment of aid that they provide. If another 
source of assistance is not providing the assistance in accordance with 
applicable procedures, an institution must deal directly with that 
source to resolve the issue. The Secretary does not believe it is 
appropriate to interfere with these decisions. However, the Secretary 
encourages other sources of aid to keep the best interests of the 
students in mind.
    Changes: None.
    Comments: One commenter stated that they did not feel it was bad to 
charge students for a program up-front. The commenter noted that this 
benefits the student by ensuring that there will be no increases in 
institutional charges over the course of the program. Further, the 
commenter stated that these students are not actually required to pay 
the full amount of institutional charges up front, but billed 
throughout the program.
    Discussion: How an institution chooses to charge a student is 
purely an institutional decision. However, as stated above, the 
Secretary encourages institutions to charge by the minimum periods of 
enrollment specified in the regulations in order to reduce a student's 
liability should he or she withdraw from the institution. The Secretary 
commends those institutions who seek to ensure that institutional 
charges are not raised over the course of a student's program. However, 
the Secretary believes that an institution can commit to keeping 
institutional charges static without holding students liable for the 
entire cost of a program up-front. The Secretary would like to clarify 
that in determining the period of enrollment for which the student had 
been charged, he is most concerned with a student's period of 
liability. For an institution that ``contracts'' with a student for an 
entire program, but bills the student in increments throughout the 
program, the institution may use the billing periods as the period of 
enrollment for which the student is charged provided that: (1) the 
student is not held liable for any amount beyond the billing period 
that he or she is currently attending; and (2) the billing periods meet 
the regulatory definition of ``period of enrollment for which the 
student has been charged.''
    Changes: None.
    Comments: Five commenters contended that an institution should be 
permitted to automatically credit to a student's account any portion of 
a refund that is scheduled to go to the student if the student had 
unpaid institutional charges. However, one of these commenters felt 
that an institution should be required to inform the student in writing 
that the portion of the refund that was to be returned to the student 
has been applied to unpaid institutional charges.
    Discussion: Upon further examination, the Secretary has decided 
that it is permissible for an institution to automatically credit any 
calculated refund amount slotted for return to a student if the student 
owes a repayment of noninstitutional funds or has unpaid charges that 
he or she owes to the institution. Section 484B requires that an 
institution have in effect a fair and equitable refund policy under 
which the institution refunds unearned institutional charges. By using 
the amount of the refund due to a student to cover unpaid charges, an 
institution would be covering charges that had been earned by the 
institution for the portion of the period of enrollment for which the 
student was in attendance. The Secretary agrees that an institution 
must inform all students in writing that the portion of the refund that 
was to be returned to the student has been applied to unpaid 
institutional charges. Further, as this would be a part of an 
institution's refund policy, an institution must inform all prospective 
and currently enrolled students of this policy in the written statement 
required under Sec. 668.22(a)(2). This change represents a change in 
policy and requires no change to regulatory language.
    Changes: None.
    Comments: Seven commenters requested that the Secretary reconsider 
the provision proposed in the February 28, 1994 NPRM that provided that 
an institution would not have to return any refund of $25 or less. One 
commenter suggested that the Secretary provide that an institution 
would not have to return any refund of $300 or less. The commenters 
felt that it is unreasonable to require an institution to expend the 
administrative resources necessary to make refunds of such a small 
amount. Two commenters felt that section 490 of the HEA does not 
preclude the Secretary from permitting this. The commenters felt that 
the bulk of the administrative costs of processing the refund do come 
after the refund is calculated. Further, the commenters stated that 
because the administrative fee is a small percentage of the charges, it 
does not cover the cost of processing the refunds.
    Discussion: Upon further consideration and in response to 
commenters, the Secretary has decided to permit an institution to not 
pay a refund if the institution demonstrates that the amount of the 
refund would be $25 or less, provided that the institution has obtained 
written authorization from the student in the enrollment agreement to 
retain any amount of the refund that would be allocated to the Title 
IV, HEA loan programs. The Secretary notes that an institution would 
not have to actually calculate the refund to demonstrate that the 
amount of the refund would be $25 or less if the institutional charges 
are so low that it would not be possible to arrive at a refund of $25 
or less. The Secretary agrees that, in instances where the total refund 
is demonstrated to be $25 or less, no refund is required of Federal 
Pell Grant funds or of Title IV, HEA loan funds, provided that the 
institution has obtained authorization from the student in the 
enrollment agreement to keep such loan funds. Because the return of 
funds to reduce a student's loan balance constitutes funds that the 
student will otherwise be required to repay, the institution cannot 
retain such funds without a student's permission. The institution must 
obtain permission from the student through the student's signature on 
an enrollment agreement that the institution may retain these funds. 
The enrollment agreement must clearly explain to a student that he or 
she is permitting the institution to retain the funds, rather than 
having the funds used to reduce the student's Title IV, HEA loan debt, 
should the student withdraw. Since the effective date of these 
regulations is July 1, 1995, institutions have sufficient time to 
incorporate any necessary changes into their enrollment agreements if 
they choose to avail themselves of this option. The Secretary believes 
that $25 is the most reasonable number suggested for establishing this 
threshold.
    Changes: Section 668.22(g)(3)(iii)(B) has been added to provide 
that an institution does not have to pay a refund if the institution 
demonstrates that the amount of a refund would be $25 or less.
Allocation of Refunds and Overpayments
    Comments: Two commenters stated that it was illegal to designate 
where funds must be returned after all Title IV, HEA program assistance 
sources have been satisfied. Fifty-six commenters felt it is unfair to 
ignore significant contributions by other sources of aid by requiring 
that the majority (if not all) of a refund is returned to the Title IV, 
HEA programs. Fifteen commenters requested that the Secretary return to 
the use of the fraction or adopt another method of proportionately 
allocating refunds to the Title IV, HEA programs and other sources of 
aid. The commenters felt that the current allocation of refunds 
inequitably treats other sources of aid that contribute equally to a 
student's education. One commenter felt that this provision provides 
institutions with an incentive to withhold disbursements of aid sources 
other than Title IV until after the student is no longer entitled to a 
refund. In addition, the commenter asserted that the provision provides 
a disincentive for other sources of aid to award assistance, as most 
likely none of the aid will be returned to its source when a student 
withdraws. One commenter contended that the statute did not require 
that the refund to the Title IV, HEA programs exceed the federal 
government's portion of financial aid received by the student, nor did 
it preclude use of the fraction.
    Discussion: The Secretary notes that section 485(a)(1)(F) of the 
HEA specifies the order of return of funds after a refund has been 
calculated, including the return of funds to sources other than the 
Title IV, HEA programs. In fact, 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 further notes that funds are to be returned 
to the Title IV, HEA programs (and other sources of aid) only up to the 
amount awarded to the student under those programs. 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.
    Changes: None.
Refund Dates
    Comments: One commenter felt that tutorial, computer assisted 
instruction, counseling, academic advising, study group notes, and/or 
dormitory records should be admissible forms of documentation for 
determining a student's last date of attendance.
    Discussion: An institution may use documentation that it believes 
is appropriate to demonstrate that a student has remained in academic 
attendance through a specified point in time. The institution must 
demonstrate that a last date of class attendance is based on an event 
that the institution routinely monitors and is confirmed by an employee 
of the institution. With the exception of dormitory records, the 
examples listed above may be acceptable forms of documentation if the 
institution can demonstrate that they meet these requirements. The 
Secretary does not consider dormitory records to be a proper form of 
documentation of attendance as they indicate only that the student may 
have been physically present at the institution for a longer period of 
time without providing assurances that the student was attending 
classes.
    Changes: None.
    Comments: Fifty-two commenters felt strongly that a student who 
takes an approved leave of absence should not be counted as a 
withdrawal for refund and repayment purposes. Fourteen commenters 
stressed that there is a difference between a student who officially 
withdraws or drops out and a student who intends to continue his or her 
education in a program by taking a leave of absence from an 
institution. The commenters noted that frequently a student must take a 
leave of absence for circumstances beyond his or her control. Five 
commenters contended that this provision unfairly affects 
nontraditional students with child care needs, work scheduling 
problems, military reserve duty and/or short-term medical problems, and 
denies them the access to education that the student aid programs are 
supposed to guaranty. One commenter felt that this provision is unfair 
to students affected by natural disasters who are forced to take a 
leave of absence.
    Several commenters described what they felt were unfair 
consequences of this provision. Thirty-two commenters felt that this 
provision creates too much additional paperwork and burden for 
institutions, lenders, and/or students since a refund must be 
processed, the lender informed of the withdrawal, and the student must 
reapply for Title IV, HEA assistance when he or she returns to the 
institution. Thirty-seven commenters believed that it is unfair to 
require a student to pay another origination fee to secure a Title IV, 
HEA loan upon re-enrollment. Nineteen commenters noted that it may be 
more difficult for a returning student who only has a short period of 
enrollment left to find a lender to make a loan for a small amount. One 
commenter noted that the process of canceling and reapplying for a loan 
is unduly complicated, especially where a student is crossing over 
award years. Twenty-five commenters felt that this provision will place 
a great financial burden on students. Eight commenters believed that 
the financial and/or the administrative burden placed on students who 
take a leave of absence will cause more students to completely withdraw 
from the institution. Five commenters felt that this would increase the 
institution's withdrawal rate and, therefore, jeopardize the 
institution's administrative capability. Three commenters believed that 
this provision could cause institutions to not approve any leaves of 
absence, and therefore students would drop out. Six commenters 
contended that requiring the repayment of loan funds during a time of 
personal upheaval may cause students to be unable to return to school 
and increases the likelihood of default. Eight commenters felt that a 
student who takes a leave of absence will have his or her financial aid 
reduced below what the student requires. Three commenters contended 
that this provision will add costs to the Title IV, HEA programs.
    A few commenters felt that this provision was unnecessary. One 
commenter noted that the student's loan funds will have to be paid back 
anyway if the student doesn't return to school. Two commenters felt 
that the Secretary should address the abuse of institutions not 
calculating a refund for students who do not return from a leave of 
absence by aggressively enforcing that provision, not by requiring a 
leave of absence to be treated as a withdrawal.
    A few commenters made observations of the temporary nature of most 
leaves of absence and suggested limitations that the Secretary could 
place on leaves of absence to guard against abuse if the Secretary 
permitted an institution to consider students on certain leaves of 
absence to still be enrolled. Two commenters felt that interruptions 
caused by a leave of absence are usually temporary and are usually 
resolved in 30 to 60 days. One commenter noted that the regulations for 
the FFEL program prohibit an institution from charging a student for a 
leave of absence. The commenter noted that this provides an incentive 
to schools to be selective in granting a leave of absence. Two 
commenters suggested that the Secretary permit a student to take a 
leave of absence for 30 days or less without requiring that the student 
be counted as a withdrawal for refund purposes. One commenter suggested 
that a student be permitted to take one leave of absence not to exceed 
60 days within an academic year or calendar year. One commenter 
suggested that if the student did not return from the leave of absence, 
the student's date of withdrawal would be the last date of attendance. 
One commenter stated that this would be similar to State law in Texas 
which allows a student to take a leave of absence for a minimum of 
three days and a maximum of thirty. State law also limits a student to 
one leave of absence every twelve months. Three commenters suggested 
that the Secretary could protect Title IV, HEA program funds by 
requiring that funds for a student on a leave of absence be held in an 
escrow account until the student returns. One commenter suggested that 
an institution be required to make a refund to a student who has not 
returned from a leave of absence within 30 days of the scheduled date 
of return or the date the student notified the institution that he or 
she did not intend to return from the leave of absence.
    Discussion: Upon further consideration of the commenters' concerns, 
the Secretary has decided to allow institutions to treat a student on 
an approved leave of absence as enrolled for purposes of this section. 
In the April 29, 1994 final regulations, the Secretary stated that all 
students on a leave of absence must be treated as having withdrawn from 
an institution for purposes of calculating a refund in order to ensure 
consistency among the Title IV HEA programs, some of which considered 
the student to have withdrawn and some of which considered the student 
to still be enrolled. To achieve this consistency while addressing the 
concerns of the commenters, a student on an approved leave of absence 
is no longer considered to have withdrawn from an institution for 
purposes of all Title IV, HEA programs. Also, a Title IV, HEA program 
loan borrower on an approved leave of absence is not considered to have 
withdrawn from an institution, for purposes of terminating the 
student's in-school status. Although the Secretary is concerned with 
abuse in this area, the Secretary agrees that requiring an institution 
to treat a student on a leave of absence as having withdrawn from the 
institution in all cases is unduly burdensome, both administratively 
and financially, for the student, the institution, and lenders. The 
Secretary notes that it is the practice of the Department to provide 
specific relief to students and institutions affected by certain 
natural disasters. An institution is not permitted to waive statutory 
and regulatory requirements unless otherwise permitted to do so by 
regulation or law.
    The Secretary agrees that certain limitations need to be set on the 
granting of leaves of absences by institutions. The Secretary agrees 
with the commenter that suggested that an approved leave of absence be 
limited to 60 days and that only one leave of absence be granted to a 
student within any twelve-month period. As stated previously, the 
Secretary believes it is clear that Title IV, HEA program funds are 
designed for students who are receiving an education. Although the 
Secretary agrees that absences for short periods of time (60 days or 
less) may be necessary, the Secretary believes it is unfair to the 
taxpayer and other students to tie up Title IV, HEA funds for students 
who will not be receiving any education for an extended period of time. 
The Secretary also believes that the likelihood that a student will 
return to an institution from a leave of absence decreases as the 
length of the leave of absence increases. The Secretary does not 
believe that it is unreasonable to require a student who has been 
absent from an institution for over 60 days to reapply for Title IV, 
HEA program funds upon his or her return to the institution.
    The Secretary also agrees with the commenter who felt that 
prohibiting an institution from charging a student for a leave of 
absence provides an incentive to schools to be selective in granting a 
leave of absence. Therefore, the Secretary requires that an approved 
leave of absence may not involve additional charges by the institution 
to the student. The Secretary also believes it is important to prevent 
falsification of leaves of absences. In order to have evidence that a 
student has requested a leave of absence the Secretary requires that, 
in order for a leave of absence to be approved, the student must 
request the leave of absence in writing.
    The Secretary agrees with the commenter who suggested that if the 
student does not return from an approved leave of absence, the 
student's date of withdrawal should be the last date of attendance. The 
Secretary believes that, consistent with other provisions in this 
section, this last date of attendance must be documented by the 
institution. The Secretary believes this is also an appropriate date of 
withdrawal for a student who takes a leave of absence that is not 
approved in accordance with the regulations, as a student in this 
situation must be treated as a withdrawal for purposes of this section.
    The Secretary agrees with the commenter who suggested that an 
institution be required to make a refund to a student who has not 
returned from a leave of absence within 30 days of the expiration of 
the leave of absence or the date the student notified the institution 
that he or she did not intend to return from the leave of absence, 
whichever is earlier.
    The Secretary has also added provisions for the timely payment of a 
refund to a student who takes a leave of absence that is not approved 
in accordance with the regulations. If a student takes a leave of 
absence that is not approved in accordance with the regulations, the 
institution must pay a refund due to a student within 30 days after the 
last recorded date of class attendance, as documented by the 
institution.
    Changes: Changes have been made to Secs. 668.22(a)(1)(ii), 
(f)(1)(i), and (h)(2)(iv) to remove language that would have required 
an institution to treat a student on a leave of absence as a withdrawal 
for purposes of this section. Section 668.22(j)(1)(ii) has been amended 
to define the withdrawal date for a student who does not return to the 
institution at the expiration of an approved leave of absence or takes 
a leave of absence that is not approved, as the student's last recorded 
date of class attendance as documented by the institution. Section 
668.22(j)(2) has been added to specify that a leave of absence is 
approved for purposes of this section if no other leave of absence has 
been granted within a twelve-month period, the leave of absence does 
not exceed 60 days, the student makes a written request to be granted 
the leave of absence, and the leave of absence does not involve 
additional charges by the institution to the student. Section 
668.22(j)(4)(iii)(A) has been amended to require that an institution 
pay a refund that is due to a student who does not return to the 
institution at the expiration of an approved leave of absence, within 
30 days of the date of expiration of the leave of absence. Section 
668.22(j)(4)(iii)(B) has been added to require that an institution pay 
a refund that is due to a student who is taking an unapproved leave of 
absence, within 30 days after the student's last recorded date of class 
attendance as documented by the institution.

Appendix A, Standards for Acceptable Refund Policies by 
Participating Institutions

    Comments: Four commenters contended that the requirement that 
institutions use the Appendix A, Standards for Acceptable Refund 
Policies by Participating Institutions refund policy when no State or 
accrediting agency standards exist and the pro rata refund policy does 
not apply further complicates the refund process and is unduly costly. 
Five commenters felt that the Secretary had exceeded his statutory 
authority by mandating use of Appendix A, Standards for Acceptable 
Refund Policies by Participating Institutions in certain situations to 
fix a loophole in the law. The commenters contended that any loophole 
must be fixed by changing the law.
    Discussion: As the Secretary has consistently stated, the Secretary 
believes the Amendments of 1992 clearly give every student who receives 
Title IV, HEA program assistance the right to a fair and equitable 
refund as defined in the statute. The Secretary notes that there are 
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, the Secretary has afforded these 
students access to a fair and equitable refund policy as required by 
law. The Secretary is committed to providing an acceptable refund 
standard in the absence of all other standards.
    Changes: None.
    Comments: One commenter felt that the provisions of Appendix A, 
Standards for Acceptable Refund Policies by Participating Institutions 
are arbitrary, do not take into account the actual expenses incurred by 
students who withdraw, goes beyond the industry standard developed by 
the National Association of College and University Business Officers 
(NACUBO), and is not in conformance with generally acceptable 
accounting principles. The commenter noted that Appendix A, Standards 
for Acceptable Refund Policies by Participating Institutions does not 
address unofficial withdrawals. One commenter felt that the 
requirements of Appendix A, Standards for Acceptable Refund Policies by 
Participating Institutions are unnecessarily burdensome. In particular, 
the commenter contended that, while it is reasonable for an institution 
to have the amount of tuition to be refunded reviewed by the governing 
board and subject to consumer comment, it is unreasonable to require 
the same review of all decisions affecting institutional refund 
policies.
    One commenter felt that it is impossible for an institution to 
comply with Appendix A, Standards for Acceptable Refund Policies by 
Participating Institutions if the institution is not allotted a 
reasonable period of time to implement the various administrative 
requirements. The commenter felt it was inexcusable that the Secretary 
did not provide an example of an Appendix A, Standards for Acceptable 
Refund Policies by Participating Institutions calculation in the 
preamble to the regulations.
    Discussion: The Secretary agrees that certain aspects of Appendix 
A, Standards for Acceptable Refund Policies by Participating 
Institutions are unduly burdensome for institutions. The Secretary 
therefore decided to replace Appendix A, Standards for Acceptable 
Refund Policies by Participating Institutions with a Federal refund 
calculation incorporated into the regulations themselves. The 
percentage calculation of the refund under the Federal refund 
calculation has not changed from the calculation required under 
Appendix A, Standards for Acceptable Refund Policies by Participating 
Institutions of the April 29, 1994 final regulations. However, the 
Secretary has agreed to eliminate the majority of the administrative 
requirements of Appendix A, Standards for Acceptable Refund Policies by 
Participating Institutions from the Federal refund calculation. 
Instead, the Secretary believes it is reasonable to require an 
institution to use any applicable guidance for the calculation of a pro 
rata refund under this section to calculate a refund under the Federal 
refund calculation. The Secretary believes that this will reduce 
administrative burden for institutions because, by law, all 
institutions must be familiar with the pro rata refund requirements in 
order to calculate the pro rata refund for first-time students who 
withdraw on or before the 60 percent point in time in the period of 
enrollment for which the student has been charged. In addition to the 
reduction in institutional burden, these more limited provisions would 
continue to provide the Secretary with the protection necessary to 
reduce fraud and abuse.
    The Secretary has therefore adopted the following provisions from 
the pro rata refund provisions in the Federal refund provisions: (1) An 
institution may exclude from the calculation of a Federal refund under 
this paragraph a reasonable administrative fee as defined by 
regulation; (2) As defined by regulation, an institution may exclude 
from the calculation of a Federal refund the documented cost to the 
institution of unreturnable equipment or of returnable equipment if the 
student does not return the equipment; (3) An institution may not delay 
its payment of the portion of a refund allocable to a Title IV, HEA 
program or a lender by reason of the process for return of equipment 
specified in the regulations; (4) ``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 (5) ``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. The Secretary expects institutions to follow any 
policy guidance issued for these areas of the regulations as it relates 
to the calculation of pro rata refunds.
    As the commenter pointed out, Appendix A, Standards for Acceptable 
Refund Policies by Participating Institutions required that a refund be 
calculated for only those students who notified the institution in 
writing of their withdrawal. The Secretary has made the Federal refund 
calculation applicable to all students who withdraw from the 
institution. The Secretary believes that the HEA makes clear that 
students who withdraw from an institution for whatever reason are 
entitled to any refund owed in accordance with the law and applicable 
regulations, and therefore, corrects a provision that excluded students 
who do not officially withdraw from the institution from the benefits 
of a fair and equitable refund calculation.
    As stated above, the Secretary agrees that certain administrative 
aspects of Appendix A, Standards for Acceptable Refund Policies by 
Participating Institutions are unduly burdensome for institutions. 
Therefore, for the 1994-95 award year, the Secretary expects an 
institution to be able to demonstrate that it has made (and will 
continue to make) an effort to implement as many of the administrative 
aspects of Appendix A, Standards for Acceptable Refund Policies by 
Participating Institutions as it reasonably can until these regulations 
become effective. However, the Secretary expects that all institutions 
that are required to calculate refunds under Appendix A, Standards for 
Acceptable Refund Policies by Participating Institutions have properly 
calculated the percentage of institutional charges that must be 
refunded.
    Changes: Section 668.22(b)(1)(iv) has been changed to require that, 
if the pro rata refund calculation does not apply and no State or 
accrediting agency refund standards exist, an institution must provide 
a refund of at least the larger of the institution's refund policy or 
the Federal Refund Calculation specified in this section, instead of 
the refund standards contained in Appendix A, Standards for Acceptable 
Refund Policies by Participating Institutions to this part. 
Accordingly, Appendix A, Standards for Acceptable Refund Policies by 
Participating Institutions has been removed from this part.
    A new section 668.22(d) has been added to define the Federal refund 
calculation.
    Comments: Two commenters felt that no appropriate rationale was 
provided for the required calculations of a refund under Appendix A, 
Standards for Acceptable Refund Policies by Participating Institutions. 
The commenters reasoned that since Appendix A, Standards for Acceptable 
Refund Policies by Participating Institutions was created to provide a 
standard until the approval of accrediting agency standards is 
completed, and accrediting agency standards are not being approved, the 
purpose of Appendix A, Standards for Acceptable Refund Policies by 
Participating Institutions is moot and it should be deleted. One 
commenter felt that requiring institutions to provide refunds for 
students through the 50 percent point seems extreme and may force an 
institution to reduce or eliminate services required under 
administrative capability such as counseling, job placement and 
academic advisement. One commenter felt it is unreasonable to expect an 
institution to meet the standards of section VIII (the actual 
calculation of the refund amount) as it would mean expending 
significant effort for a result that did not significantly affect 
students. The commenter cited no more than a 12 percent difference 
between the refund amount provided under Appendix A, Standards for 
Acceptable Refund Policies by Participating Institutions and the refund 
amount provided under its institutional policy. Four commenters felt 
that the refund requirements of Appendix A, Standards for Acceptable 
Refund Policies by Participating Institutions should not extend beyond 
the 20 percent point in time in the period of enrollment for which the 
student has been charged or only through the third week of instruction. 
The commenter felt that measuring in weeks is easier for an auditor to 
follow.
    Discussion: As stated in the February 28, 1994 NPRM, the Secretary 
sought to develop a refund policy that provides a reasonable amount of 
protection for continuing students. The Secretary adapted a 
proportionate calculation that is similar to refund policies used by 
many proprietary institutions. The Secretary does not believe it is 
unreasonable to provide a student with a refund of at least 25 percent 
of institutional charges if the student withdraws between the 25 
percent and the 50 percent point in the student's period of enrollment 
for which the student has been charged. Although one commenter noted 
that the refund amount did not vary greatly from the amount provided 
under its institutional refund policy, the Secretary has had experience 
with institutional refund policies that are far from adequate. The 
Secretary has not specified how an institution must determine the point 
in time that a student has withdrawn from the institution for purposes 
of a Federal refund calculation. However, the Secretary encourages 
institutions to follow the requirements of Sec. 668.22(b)(2) that 
delineate how an institution must determine the 60 percent point in 
time for purposes of determining if a student is eligible for a pro 
rata refund.
    The Secretary does not agree with the commenters who reasoned that 
since Appendix A, Standards for Acceptable Refund Policies by 
Participating Institutions was created to provide a standard until the 
approval of accrediting agency standards is completed, and accrediting 
agency standards are not being approved, the purpose of Appendix A, 
Standards for Acceptable Refund Policies by Participating Institutions 
is moot and it should be deleted. To the contrary, because the 
Department chose not to mandate that all accrediting agencies have 
refund policies, the Secretary is even more concerned that continuing 
students who are not guaranteed protection under an accrediting agency 
policy (and when a State policy does not exist) be provided with a fair 
and equitable refund. The Secretary continues to encourage institutions 
and accrediting agencies and States to work together in developing 
refund standards which can be better suited to the particular needs and 
circumstances of individual institutions. As noted above, the 
administrative requirements of Appendix A, Standards for Acceptable 
Refund Policies by Participating Institutions have not been carried 
over to the Federal refund calculation that will be in effect for the 
1995-96 award year and beyond.
    Changes: See discussion on the removal of Appendix A, Standards for 
Acceptable Refund Policies by Participating Institutions above.

Section 668.23 Audits, Records, and Examinations

    Comments: One commenter suggested that all of the audit 
requirements, both financial and compliance, be placed under a single 
section in the regulations to facilitate an institution's ability to 
understand all of the new audit requirements.
    Discussion: The Secretary does not believe that the centralization 
of the financial and compliance audit requirements would make 
comprehension of those requirements easier for the affected parties. On 
the contrary, the Secretary believes that by providing separate 
sections in the regulations for the financial audit requirements and 
the compliance audit requirements, institutions and third-party 
servicers are more easily able to determine which requirements apply to 
them because the section contents are smaller and therefore easier to 
understand.
    Changes: None.
    Comments: Five commenters suggested that a third-party's 
cooperation with certain entities in the conduct of audits, 
investigations, and program reviews authorized by law of the servicer 
should only take place during the course of a review of a specific 
institution that contracts with the servicer. The commenters believed 
that audits, investigations, and program reviews of third-party 
servicers should only be used for the purpose of reviewing the 
compliance of the institution that contracts with the servicer, and not 
the compliance of the actual third-party servicer.
    Discussion: The Secretary does not agree with the commenters. 
Section 487(c) of the HEA specifically provides that a third-party 
servicer's administration of an institution's participation in the 
Title IV, HEA programs must be audited on an annual basis. Section 
487(c) further provides for an emergency action or the limitation, 
suspension, or termination of the eligibility of a third-party servicer 
to contract with any institution. The Secretary interprets these 
statutory provisions to mean that third-party servicers are to be held 
accountable directly to the Secretary for violations by the servicer of 
Title IV, HEA program requirements. Therefore, the Secretary believes 
that third-party servicers must be required to cooperate with approved 
entities in the conduct of audits, investigations, and program reviews 
authorized by law of the servicer at any time and not just when an 
institution is being audited, investigated, or reviewed for program 
compliance.
    Changes: None.
    Comments: Five commenters suggested that references to the SPRE 
should be clarified to mean the SPRE for the State in which the 
institution that contracts with a third-party servicer is located. The 
five commenters further suggested that a SPRE should only be able to 
conduct a review of a third-party servicer if the SPRE has been 
requested by the Secretary to review the institution that contracts 
with the servicer.
    Discussion: SPRE reviews are governed by the procedures set forth 
under 34 CFR part 667. Under those procedures, a specific SPRE may only 
review a third-party servicer that contracts with an institution that 
is located in the same State as that SPRE unless the institution has 
locations in more than one State. If the institution has locations in 
more than one State, then it is possible that a SPRE other than the 
SPRE in the State in which the institution is located may review a 
third-party servicer that contracts with the institution, pursuant to 
34 CFR 667.9(e). A SPRE may conduct a review of an institution and its 
third-party servicers even if the institution was not referred to the 
SPRE by the Secretary pursuant to 34 CFR 667.6.
    Changes: None.
    Comments: Two commenters argued that third-party servicers should 
not be required to disclose the results of audits to entities other 
than the Department of Education and institutions receiving the third-
party servicer's services. One commenter recommended that a third-party 
servicer should not be required to provide a copy of the servicer's 
audit to a guaranty agency unless the servicer is servicing a loan that 
was guaranteed by the agency. One commenter recommended striking the 
requirement that a third-party servicer should provide a copy of the 
servicer's audit to lenders in the FFEL programs. The commenter 
believed that if a third-party servicer has a business relationship 
with a lender participating in the FFEL programs, the lender would 
receive a copy of the servicer's audit under their contractual 
agreement. Five commenters recommended that third-party servicers 
should only be required to provide copies of audits to those entities 
that are reviewing an institution that has a contract with the 
servicer. The commenters believed that this would limit the access of 
confidential information.
    Discussion: The Secretary disagrees with the commenters. Under 
section 487(c)(6) of the HEA, the Secretary is authorized to provide 
information obtained as a result of audits conducted under section 
487(c) to guaranty agencies, lenders, accrediting agencies, the 
Secretary of Veterans Affairs, and SPREs under subpart 1 of part H of 
Title IV. 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, 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 program requirements.
    Changes: None.
    Comments: One commenter was concerned that third-party servicers 
are required to disclose privileged client information under this 
section to the Secretary or officials designated by the Secretary 
without the applicable client's knowledge. The commenter believed that 
this requirement could subject the servicer to a significant liability 
exposure. The commenter suggested that institutions be notified before 
the information is released.
    Discussion: Third-party servicers as agents of an institution are 
required to provide access to all records or other information 
applicable to the third-party servicer's administration of any aspect 
of an institution's participation in the Title IV, HEA programs. A 
third-party servicer is not required to provide to the Secretary or to 
officials designated by the Secretary, any additional information that 
an institution itself is not required to provide to the Secretary to 
remain in compliance with the Title IV, HEA program requirements. An 
institution thus has no legitimate expectation that information 
regarding its compliance or non-compliance would be withheld from the 
Secretary. Since a third-party servicer provides access to information 
pursuant to regulation and statute, there should be no liability 
exposure to the servicer.
    Changes: None.
    Comments: One commenter believed that a review of financial 
statements prepared by a certified public accountant (CPA) should take 
the place of a comprehensive compliance audit of an institution's 
participation in the Title IV, HEA programs.
    Discussion: Section 487(c)(1) of the HEA specifically requires that 
institutions have performed annually an audit that examines an 
institution's participation in the Title IV, HEA programs. The 
Secretary does not believe that a financial audit alone is sufficient 
where large amounts of Title IV, HEA program funds are disbursed to 
students through the institution although the Secretary does consider 
the audit requirement to be satisfied if the audit is conducted in 
accordance with the Single Audit Act or OMB Circular A-128 or A-133. 
The Secretary will continue to review the concept of a single audit, 
for those institutions that do not submit an audit in accordance with 
the Single Audit Act or OMB Circular A-128 or A-133, that covers both 
the financial and compliance audit standards and may in the future 
adopt a single audit concept for those institutions upon further review 
of the new audited financial statement requirements under Sec. 668.15.
    Changes: None.
    Comments: One commenter requested that the Secretary clarify if the 
audit requirements of Sec. 668.23 and Sec. 682.416(e) were intended to 
be the same. If the requirements were intended to be the same, the 
commenter requested that Sec. 682.416(e) be modified to be consistent 
with Sec. 668.23. If the requirements were not intended to be the same, 
the commenter requested that the regulations clearly delineate the 
differences between the requirements.
    Discussion: Section 487(c)(1)(C) of the HEA mandates that third-
party servicers of institutions, lenders, or guaranty agencies must 
have performed an annual audit of the servicer's administration of any 
aspect of the administration of the institution's, lender's, or 
guaranty agency's participation in the Title IV, HEA programs. Because 
third-party servicers of institutions contract with an institution to 
administer aspects of the institution's participation in the Title IV, 
HEA programs, the Secretary believes that it is only logical that 
third-party servicers of institution should be required to have the 
same audit requirements as institutions. Likewise, it is only logical 
that third-party servicers of lenders or guaranty agencies are required 
to comply with applicable audit requirements for those entities. The 
Secretary believes that the regulations adequately address the 
individual requirements for third-party servicers that contract with 
institutions and third-party servicers that contract with lenders or 
guaranty agencies.
    Changes: None.
    Comments: One commenter requested that the regulations provide for 
a single audit report to cover a third-party servicer's participation 
in all of the Title IV, HEA programs, including the FFEL programs.
    Discussion: The Secretary disagrees with the commenter. Third-party 
servicer audits for institutions need to be separate from third-party 
servicer audits for lenders or guaranty agencies because third-party 
servicers of institutions provide markedly different services for their 
clients than third-party servicers of lenders or guaranty agencies do 
for their clients.
    Changes: None.
    Comments: Five commenters recommended that the regulations clarify 
that an institution could use a third-party servicer's audit, under 
Sec. 668.23(c)(1)(iii), to satisfy the institution's obligation to have 
an audit performed of its compliance with Title IV, HEA program 
requirements in those areas that the servicer has contracted to provide 
services.
    Discussion: The Secretary disagrees with the commenters. 
Institutions may not use the audits of their third-party servicers to 
satisfy the institution's obligation to have an audit performed of the 
institution's compliance with Title IV, HEA program requirements in 
those areas that the institution has contracted out to its third-party 
servicer. Institutions are fiduciaries of the funds received from the 
Federal government and institutions may not delegate their fiduciary 
responsibility to a third-party servicer because the institution is 
ultimately liable for any program violations incurred by itself or by 
its third-party servicer. Therefore, an institution must have performed 
an audit that covers the institution's entire participation in the 
Title IV, HEA programs, regardless of whether the institution uses a 
third-party servicer to help administer some or all aspects of the 
institution's participation in the Title IV, HEA programs. An audit of 
a third-party servicer only would be too limited in its scope. Such an 
audit would not address, for example, the internal control structure of 
the institution in those areas of the Title IV, HEA program 
administration that the institution delegated to its third-party 
servicer.
    Changes: None.
    Comments: One commenter believed that no audit could reasonably 
satisfy the requirement that a compliance audit cover every aspect of a 
third-party servicer's administration of an institution's participation 
in the Title IV, HEA programs. The commenter recommended that the 
regulatory language reflect those aspects of a third-party servicer's 
administration that will be included in the guide developed by the 
Department of Education's Inspector General. The commenter also 
recommended, in the case of a third-party servicer that contracts with 
more than one institution, that the auditor evaluate the effectiveness 
of the servicer's internal control structure over compliance with 
specified requirements, rather than compliance with all aspects of all 
requirements pertaining to the Title IV, HEA programs. The commenter 
believed that this approach would provide appropriate assurance of 
compliance in a cost effective manner.
    Discussion: The Secretary agrees with the commenter that the 
language in the April 29, 1994 final regulations is somewhat broad and 
can be more specifically focused. The Secretary did not intend an audit 
of a third-party servicer to be broader than an audit of an 
institution. The Secretary believes that a third-party servicer should 
only be held to the same compliance audit standards as institutions 
since a third-party servicer contracts with an institution to act as an 
agent of the institution to administer the Title IV, HEA programs on 
the institution's behalf. As with an institution, the compliance audit 
standards for which a third-party servicer will be audited will include 
a review of the third-party servicer's internal control structure over 
the servicer's compliance with applicable Title IV, HEA program 
requirements.
    Changes: A change has been made. Section 668.23(c)(1)(ii) has been 
amended to specify that a third-party servicer shall have performed at 
least annually a compliance audit, meeting the compliance audit 
standards for institutions, of the servicer's administration of the 
participation in the Title IV, HEA programs of each institution with 
which the servicer has a contract. In addition, Sec. 668.23(c)(1)(iii) 
has similarly been amended to parallel the change to 
Sec. 668.23(c)(1)(ii).
    Comments: Seven commenters requested that the Secretary provide for 
audit exceptions for low dollar volume third-party servicers as 
published in the February 17, 1994 NPRM. The commenters felt that 
consensus had been reached during negotiated rulemaking on this issue. 
Two commenters recommended that institutions that receive less than a 
million dollars in Title IV, HEA program assistance per year should 
only be required to file a ``level 2'' audit.
    Discussion: The Secretary disagrees with the commenters. As 
previously stated in the final regulations published in the Federal 
Register on April 29, 1994, the Secretary believes that section 487(c) 
of the HEA requires institutions and third-party servicers to have 
performed, 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, on an annual basis, a compliance audit of the 
servicer's administration of an institution's participation in a Title 
IV, HEA program.
    Changes: None.
    Comments: Four commenters supported the provision that requires a 
third-party servicer's first audit to cover the first full fiscal year 
after the effective date of the regulations as well as any period from 
the effective date to the start of the servicer's first full fiscal 
year. Five commenters believed that a third-party servicer's first 
audit should only include the servicer's first full fiscal year that 
begins after the effective date of the regulations.
    Three commenters argued that the new audit requirements should take 
effect for the institution's first full fiscal year after the effective 
date of the regulations. One commenter recommended that the first 
submission of audit reports under the new regulations should not be 
required prior to January 1, 1995.
    One commenter believed that the period covered by a third-party 
servicer's first audit should not begin until after an audit guide has 
been published by the Department of Education's Inspector General. 
Another commenter suggested that there should be some flexibility of 
the audit report due date because the audit guide had not been 
published.
    Four commenters were concerned that the 120-day deadline for 
submission of compliance audit reports was not enough time for 
institutions with fiscal years ending on June 30 to have performed an 
audit of their participation in the Title IV, HEA programs. In 
addition, four commenters noted that the Fiscal Operations and 
Application to Participate (FISAP) report is not due until September 30 
and therefore an auditor would not be able to complete a compliance 
audit report until after the submission of the FISAP report. One 
commenter recommended leaving the audit report due date at March 31. 
Two commenters recommended that the audit report due date be amended so 
that the audit report is not due until 120 days after receipt by the 
institution of the final FISAP edit from the Department of Education 
or, if applicable, in accordance with the deadlines established in the 
Single Audit Act.
    One commenter recommended developing a cycle for submissions of 
audit reports that would take advantage of the full twelve months of 
the year with institutions that have outstanding audits being required 
to submit their reports first.
    Four commenters argued that basing a compliance audit on a fiscal 
year did not make sense because compliance with the regulations could 
only be accomplished through an audit of a specific award year.
    One commenter requested clarification as to which period of time 
the compliance audit was supposed to cover.
    Five commenters recommended that the regulations should provide a 
third-party servicer with the option of being able to submit the 
servicer's audit report to the Secretary within six months after the 
end of the servicer's fiscal year if the servicer is required to have 
an audit performed under 34 CFR part 682. One commenter recommended 
that the due date for audit reports in this section should be changed 
to six months to be consistent with the audit due date established 
under the FFEL programs. One commenter recommended that the audit 
report deadline be extended from 4 months to 6 months.
    Two commenters requested that the regulations specify that an audit 
conducted in accordance with OMB Circular A-133 would be due in 
accordance with the guidance provided in that circular. The commenters 
also requested that 34 CFR 682.416(e) be modified similarly.
    Discussion: The Secretary has reexamined his position with regard 
to having an annual compliance audit performed on a fiscal year basis. 
Based on public comment, the Secretary believes that it is necessary to 
resume having the compliance audit based upon the award year, instead 
of a fiscal year, since most of the requirements in the Title IV, HEA 
programs are geared to the award year and must be examined within that 
context and time period. The Secretary believes that several commenters 
supported this change and appreciates the support from those 
commenters.
    This change does not mean that the compliance audit report due date 
will now be tied to the award year. The Secretary believes that it is 
still appropriate to continue using the end of the institution's or 
third-party servicer's fiscal year as the basis for submitting the 
compliance audit reports. By tying the audit report due date to a 
fiscal year cycle, the Secretary believes that institutions and third-
party servicers will have greater access to independent auditors 
because the fiscal years of institutions and third-party servicers are 
staggered and therefore not all institutions and third-party servicers 
will be submitting compliance audit reports at the same time.
    The Secretary also agrees with those commenters who were concerned 
with the 120-day compliance audit report submission deadline and 
suggested changing the submission due date of the compliance audit 
report to six months after the end of the institution's or third-party 
servicer's fiscal year. The Secretary acknowledges that institutions 
whose fiscal year coincides with the award year may need more time 
after the final FISAP reconciliation to submit their compliance audit 
report. The Secretary believes that institutions and third-party 
servicers, as applicable, must be given a reasonable amount of time to 
have performed an annual compliance audit. Therefore, the Secretary 
will consider that an institution or third-party servicer has submitted 
its compliance audit report in a timely fashion if the compliance audit 
report is submitted within six months of the end of the institution's 
or third-party servicer's fiscal year. The Secretary believes that six 
months is sufficient time for an institution or third-party servicer to 
submit a compliance audit report. In addition, the submission deadline 
for this report now parallels the submission deadlines established for 
lenders and third-party servicers that contract with lenders or 
guaranty agencies. The Secretary notes that the submission due date for 
an institution's annual audited financial statement under 34 CFR 668.15 
remains unchanged.
    With respect to those comments that requested that the regulations 
clarify that an audit conducted in accordance with OMB Circular A-133 
are due in accordance with the submission deadlines in that circular, 
the Secretary believes that the regulations are clear. Because the 
regulations specify that an audit conducted under the Single Audit Act 
or OMB Circular A-133 satisfies the annual compliance audit 
requirement, which includes submission dates for compliance audits, the 
Secretary does not believe that regulatory clarification is necessary.
    Changes: Changes have been made. Section 668.23(c)(2)(ii) has been 
revised to specify that a third-party servicer's first audit must cover 
the third-party servicer's activities for the award year that begins on 
or after July 1, 1994, in which the servicer began administering any 
aspect of an institution's participation in the Title IV, HEA programs. 
In addition, Sec. 668.23(c)(3) has been amended to specify that an 
institution's or third-party servicer's compliance audit must be 
submitted to the Department of Education within six months after the 
end of the institution's or servicer's fiscal year that ends on or 
after the most recently concluded award year for which the audit is 
performed.
    Comments: One commenter believed that it was unreasonable to 
require foreign institutions to submit an audit report that covered the 
institution's participation in the Title IV, HEA programs back to when 
the institution first began to participate in the Title IV, HEA 
programs because of the long timeframes involved.
    Discussion: The Secretary believes that the commenter has raised a 
valid point. Many foreign institutions have been participating in the 
Title IV, HEA programs since the enactment of the HEA and have never 
been required to submit a compliance audit report to the Department of 
Education. To require an audit report from a foreign institution to 
examine compliance with Title IV, HEA requirements back to the 
beginning of the foreign institution's participation would create undue 
burden on the foreign institution unless the foreign institution had 
only been participating in the Title IV, HEA programs for a short-time. 
The Secretary believes that a foreign institution should only be 
required to have performed an audit report that covers the foreign 
institution's participation in the Title IV, HEA programs for the two 
most recently concluded award years unless the Secretary has reason to 
require an audit report to cover a longer period of time which would be 
no longer than the five most recently concluded award years.
    Changes: A change has been made. Under Sec. 668.23(c)(2)(i)(B), a 
foreign institution's first audit report must cover the foreign 
institution's two most recently concluded award years or, if the 
foreign institution has been participating in the Title IV, HEA 
programs for less than two award years, the entire period of time since 
the foreign institution began to participate in the Title IV, HEA 
programs. However, the Secretary reserves the right to request a 
foreign institution's first audit report to cover up to the foreign 
institution's five most recently concluded award years if the Secretary 
has reason to believe that such coverage in the audit report will 
protect the Federal interest in the student financial assistance funds 
that are used by students to pay for their education at the foreign 
institution.
    Comments: One commenter argued that the provisions in this section 
relating to a third-party servicer's responsibility to agree to allow 
its employees to be questioned in private raised questions of due 
process. Four commenters stressed that the presence of management is 
sometimes necessary to clarify the misconceptions of an employee who 
works in a limited area and is not fully aware of the entire procedure. 
One commenter also noted that this process could provide disgruntled 
employees an opportunity to damage a third-party servicer's 
credibility. Two commenters recommended that these provisions be 
stricken from the regulations.
    Discussion: The Secretary has already responded to similar comments 
in the preamble to final regulations for 34 parts 600 and 668 that were 
published in the Federal Register on July 31, 1991 (56 FR 36682). The 
Secretary continues to disagree with these views and does not believe 
that these requirements impose any additional requirements beyond what 
is currently required for institutions that participate in the Title 
IV, HEA programs. Because a third-party servicer is an agent of an 
institution, voluntarily, the Secretary believes that the servicer must 
be subject to the same requirements that an institution is subject to 
in the conduct of audits, investigations, and program reviews that are 
authorized by law.
    Changes: None.
    Comments: One commenter recommended that the provisions relating to 
job placement recordkeeping in this section of the regulations should 
be removed. The commenter argued that the definition of a placement 
service was unclear and too broad. The commenter further believed that 
the issue of institutional claims regarding job placement of students 
was adequately addressed in other sections of the regulations and 
therefore was not needed in this section.
    One commenter objected to the requirement that an institution 
establish and maintain records that are relevant to the institution's 
admission standards and that support the educational qualifications of 
each regular student admitted to the institution whether or not that 
student receives Title IV, HEA program assistance. The commenter 
believed that this requirement went beyond the type of records required 
to ensure an institution's compliance with sections 1201(a), 481 (b), 
and (c) of the HEA.
    One commenter argued that the requirement to have available for 
review records required by the Title IV, HEA program regulations at the 
geographical location where the student will receive his or her degree 
or certificate of program or course completion is unnecessarily 
burdensome. The commenter argued that institutions with multiple 
branches or additional locations should not be required to house 
records at those additional sites; rather, the institution should be 
able to house their records in one central location. The commenter 
suggested that upon notification by the Secretary, an institution could 
provide the physical records at the appropriate geographical location 
and that computer records would always be readily available.
    Discussion: The Secretary has taken the comment regarding removal 
of the job placement record retention provision under consideration and 
concluded that there is no need for the provision in this section of 
the regulations. The regulations contain other regulatory provisions 
governing job placement rates that require an institution to retain 
documentation to support job placement computations.
    The Secretary disagrees with the commenter who objected to the 
requirement that an institution establish and maintain records that are 
relevant to the institution's admission standards and that support the 
educational qualifications of each regular student admitted to the 
institution whether or not that student receives Title IV, HEA program 
assistance. Section 1201(a)(1) of the HEA requires that an institution 
of higher education may only admit as regular students individuals that 
have a certificate of graduation from a school providing secondary 
education, or the recognized equivalent of such a certificate. The 
Secretary construes from this statutory authority that an eligible 
institution must document that each student that it admits is a regular 
student with a high school diploma or a recognized equivalent of a high 
school diploma, as that term is defined in 34 CFR 600.2, in order to 
comply with the statutory language in sections 481 (a), (b), (c), and 
1201(a) of the HEA. However, upon further examination of these 
requirements, the Secretary believes that there is no need in 
regulation to differentiate between institutions whose programs are all 
fully eligible and institutions that have only some programs that are 
eligible. The Secretary believes that by simplifying the regulatory 
language in this area, that the mandates of Executive Order (E.O.) 
12866 are being carried out, in terms of promulgating regulations that 
are easier to understand.
    The Secretary also disagrees with the commenter who questioned the 
requirement that an institution have available for review records 
required by the Title IV, HEA program regulations at the geographical 
location where the student will receive his or her degree or 
certificate of program or course completion. Timely access to relevant 
records at a particular geographical location are very important to 
ensure appropriate oversight over institutional participation in the 
Title IV, HEA programs. Ordinarily, program reviews and audits are 
conducted according to an established schedule. If an institution is on 
that schedule, the Department contacts the institution in advance and 
requests access to the institution's records. Every effort is made to 
accommodate the institution's schedule. However, at times, immediate 
access to an institution is warranted. An institution is expected to 
have its records organized and readily available at the geographical 
location where a student will receive his or her certificate or degree 
of program or course completion and should not object to providing 
prompt access to those records. It is essential for proper 
accountability that the independent auditor, the Secretary, the 
Department of Education's Inspector General, the Comptroller General of 
the United States, or their authorized representatives have immediate 
access to institutional records. Housing records at a location other 
than the geographical location where a student will receive his or her 
certificate or degree of program or course completion defeats the 
purpose of immediate access to Title IV, HEA program records and 
prevents the proper accountability of an institution's participation in 
the Title IV, HEA programs.
    Changes: Changes have been made. Section 668.23(h)(1)(v), 
concerning institutional documentation and record retention of job 
placement rates for Title IV, HEA program student recipients, has been 
removed from the regulations. In addition, Secs. 668.23(h)(2) (i) and 
(ii) have been removed and replaced by a single provision under 
Sec. 668.23(h)(2) that incorporates both of the removed provisions, so 
that an institution shall establish and maintain records regarding the 
admission requirements and educational qualifications of each regular 
student enrolled in any eligible program offered by the institution, 
whether the student received Title IV, HEA program assistance or not.

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 for the April 29, 1994 final 
regulations were identified and explained in those regulations 
(approved by the Office of Management and Budget under control number 
1840-0537).
    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 governments in the 
exercise of their governmental functions.

Paperwork Reduction Act of 1980

    Sections 668.3, 668.8, 668.15, 668.16, 668.22, and 668.23 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 decrease by 23,272 hours 
and 11,692 respondents from the 123,485 hours for 64,695 respondents 
estimated in the April 29, 1994 final regulations, 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, D.C. 20503; Attention: Daniel J. Chenok. 
Comments on this burden estimate should be submitted by December 29, 
1994.

List of Subjects

34 CFR Part 600

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

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.

(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: November 18, 1994.
Richard W. Riley,
Secretary of Education.
    The Secretary amends Parts 600, 668, and 682 of Title 34 of the 
Code of Federal Regulations as follows:

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

    1. The authority citation for Part 600 continues to read as 
follows:

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

    2. Section 600.5 is amended by revising paragraph (e)(1) to read as 
follows:


Sec. 600.5  Proprietary institutions of higher education.

* * * * *
    (e)(1) An institution shall substantiate the calculation required 
in paragraph (a)(8) of this section by having the certified public 
accountant who prepares its audited financial statement under 34 CFR 
668.15 report on the accuracy of the institution's calculation based on 
performing an agreed-upon procedures attestation engagement in 
accordance with the American Institute of Certified Public Accountants 
(AICPA) Statement on Standards for Attestation Engagements, and include 
that report as part of the audit report.
* * * * *

PART 668--STUDENT ASSISTANCE GENERAL PROVISIONS

    3. 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.

    4. Section 668.2 is amended by revising the definitions of 
``Academic year'' and ``Third-party servicer'' in paragraph (b) to read 
as follows:


Sec. 668.2  General definitions

* * * * *
    (b) * * *
    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 12 hours 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)
* * * * *
    Third-party servicer: (1) An individual or a State, or a 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--
    (i) 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--
    (A) Processing student financial aid applications;
    (B) Performing need analysis;
    (C) Determining student eligibility and related activities;
    (D) Certifying loan applications;
    (E) Processing output documents for payment to students;
    (F) Receiving, disbursing, or delivering Title IV, HEA program 
funds, excluding lock-box processing of loan payments and normal bank 
electronic fund transfers;
    (G) Conducting activities required by the provisions governing 
student consumer information services in subpart D of this part;
    (H) Preparing and certifying requests for advance or reimbursement 
funding;
    (I) Loan servicing and collection;
    (J) Preparing and submitting notices and applications required 
under 34 CFR part 600 and subpart B of this part; and
    (K) Preparing a Fiscal Operations Report and Application to 
Participate (FISAP);
    (ii) Exclude the following functions--
    (A) Publishing ability-to-benefit tests;
    (B) Performing functions as a Multiple Data Entry Processor (MDE);
    (C) Financial and compliance auditing;
    (D) Mailing of documents prepared by the institution;
    (E) Warehousing of records; and
    (F) Providing computer services or software; and
    (iii) Notwithstanding the exclusions referred to in paragraph 
(1)(ii) of this definition, include any activity comprised of any 
function described in paragraph (1)(i) of this definition.
    (2) For purposes of this definition, an employee of an institution 
is not a third-party servicer. The Secretary considers an individual to 
be an employee if the individual--
    (i) Works on a full-time, part-time, or temporary basis;
    (ii) Performs all duties on site at the institution under the 
supervision of the institution;
    (iii) Is paid directly by the institution;
    (iv) Is not employed by or associated with a third-party servicer; 
and
    (v) Is not a third-party servicer for any other institution.

(Authority: 20 U.S.C. 1088)
* * * * *
    5. Section 668.3 is amended by revising paragraph (c) and adding a 
new paragraph (d) to read as follows:


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

* * * * *
    (c) Longterm reduction. (1) The Secretary may grant the request of 
any institution that satisfies the requirements of paragraph (a) of 
this section for a longterm reduction in the minimum period of 
instructional time of the academic year. 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.
    (d) An institution may demonstrate compliance with paragraphs 
(b)(3) and (c)(1)(ii) of this section by making arrangements that are 
satisfactory to the Secretary to repay any overawards that resulted 
from the improper awarding, disbursing, or delivering of Title IV, HEA 
program funds.

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

    6. Section 668.8 is amended by removing paragraph (j)(2) and 
redesignating paragraphs (j) (3) and (4) as (j) (2) and (3) and 
revising paragraphs (b)(3)(ii), (f)(2), (k)(1), and (k)(2) to read as 
follows:


Sec. 668.8  Eligible program.

* * * * *
    (b) * * *
    (3) * * *
    (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 12 hours of regularly 
scheduled instruction, examinations, or preparation for examinations 
occurs; and
* * * * *
    (f) * * *
    (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(j)(4), a refund of 100 percent of their 
tuition and fees (less any permitted administrative fee) under the 
institution's refund policy.
* * * * *
    (k) * * *
    (1) The program is at least two academic years in length and 
provides an associate degree, a bachelor's degree, a professional 
degree, or an equivalent degree as determined by the Secretary; or
    (2) Each course within the program is acceptable for full credit 
toward that institution's associate degree, bachelor's degree, 
professional degree, or equivalent degree as determined by the 
Secretary, provided that the institution's degree requires at least two 
academic years of study.
* * * * *
    7. 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.

    (a) 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.
    (b) Notwithstanding paragraph (a) of this section, a public or 
private nonprofit hospital-based school of nursing that awards a 
diploma at the completion of the school's program of education is not 
required to apply the formula contained in Sec. 668.8(l) to determine 
the number of semester, trimester, or quarter hours in that program for 
purposes of calculating Title IV, HEA program assistance.

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

    8. Section 668.12 is amended by revising paragraphs (b)(2) and 
(c)(1)(i) to read as follows:


Sec. 668.12  Application procedures.

* * * * *
    (b) * * *
    (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 the Secretary requires 
the institution to apply for certification under paragraph (c) of this 
section;
    (c) * * *
    (1) * * *
    (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 of an 
educational program; or
* * * * *
    9. Section 668.15 amended by revising paragraphs (b)(5), (7)(i) and 
(8)(i)(B), and (d)(1) and by adding a new paragraph (g) to read as 
follows:


Sec. 668.15  Factors of financial responsibility.

* * * * *
    (b) * * *
    (5) Except as provided in paragraph (d) of this section, in 
accordance with procedures established by the Secretary, submits to the 
Secretary an irrevocable letter of credit, acceptable and payable to 
the Secretary equal to 25 percent of the total dollar amount of Title 
IV, HEA program refunds paid by the institution in the previous fiscal 
year;
* * * * *
    (7) * * *
    (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;
    (B) Has not had operating losses in either or both of its two 
latest fiscal years that in sum 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 two-year period. The 
Secretary may calculate an 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
* * * * *
    (8) * * *
    (i) * * *
    (B) 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.
* * * * *
    (d) Exceptions to the general standards of financial 
responsibility. (1)(i) An institution is not required to meet the 
standard in paragraph (b)(5) of this section if the Secretary 
determines that the institution--
    (A)(1) 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
    (2) Contributes to that tuition recovery fund.
    (B) Has its liabilities backed by the full faith and credit of the 
State, or by an equivalent governmental entity; or
    (C) As determined under paragraph (g) of this section, 
demonstrates, to the satisfaction of the Secretary, that for each of 
the institution's two most recently completed fiscal years, it has made 
timely refunds to students in accordance with Sec. 668.22(j)(4), and 
that it has met or exceeded all of the financial responsibility 
standards in this section that were in effect for the corresponding 
periods during the two-year period.
    (ii) In evaluating an application to approve a State tuition 
recovery fund to exempt its participating schools from the federal cash 
reserve requirements, the Secretary will consider the extent to which 
the State tuition recovery fund:
    (A) Provides refunds to both in-state and out-of-state students;
    (B) Allocates all refunds in accordance with the order delineated 
in Sec. 668.22(h); and
    (C) Provides a reliable mechanism for the State to replenish the 
fund should any claims arise that deplete the funds assets.
* * * * *
    (g) Two-year performance requirement. (1) The Secretary considers 
an institution to have satisfied the requirements in paragraph 
(d)(1)(C) of this section, if the institution--
    (i) Has not failed for the preceding 2 years to make timely refund 
payments or to demonstrate financial responsibility under this section, 
with such showing supported by its compliance audits and audited 
financial statements for the most recent 2-year period; and
    (ii) Was not cited in a review report for either of those years, by 
the Secretary, a State postsecondary review entity designated under 34 
CFR part 667, or other State agency, for its failure to make timely 
refunds or its failure to meet the federal financial responsibility 
standards during the preceding 2 years.
    (2) If an institution is cited in an audit or review referenced in 
paragraph (g)(1)(i) for a condition that would no longer permit it to 
use the exemption in 668.15(d)(1), the institution must notify the 
Secretary of that fact within 30 days of receiving such notice from its 
auditor, and must take immediate steps to secure the letter of credit 
required under paragraph (b)(5) of this section.
* * * * *
    10. Section 668.16 is amended by revising paragraphs (e) and (l) to 
read as follows:


Sec. 668.16  Standards of administrative capability.

* * * * *
    (e) For purposes of determining student eligibility for assistance 
under a Title IV, HEA program, 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) 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;
    (2) Include the following elements:
    (i) A qualitative component which consists of grades (provided that 
the standards meet or exceed the requirements of Sec. 668.7(c)), work 
projects completed, or comparable factors that are measurable against a 
norm.
    (ii) A quantitative component that consists of a maximum timeframe 
in which a student must complete his or her educational program. The 
timeframe must--
    (A) For an undergraduate program, be no longer than 150 percent of 
the published length of the educational program measured in academic 
years, terms, credit hours attempted, clock hours completed, etc. as 
appropriate;
    (B) Be divided into increments, not to exceed the lesser of one 
academic year or one-half the published length of the educational 
program;
    (C) Include 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 timeframe; and
    (D) Include specific policies defining the effect of course 
incompletes, withdrawals, repetitions, and noncredit remedial courses 
on satisfactory progress;
    (3) Provide for 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;
    (4) Provide for a determination at the end of each increment by the 
institution as to whether the student has met the qualitative and 
quantitative components of the standards (as provided for in paragraphs 
(e)(2)(i) and (ii) of this section);
    (5) Provide specific procedures under which a student may appeal a 
determination that the student is not making satisfactory progress; and
    (6) Provide specific procedures for a student to re-establish that 
he or she is maintaining satisfactory progress.
* * * * *
    (1) For an institution that seeks initial participation in a Title 
IV, HEA program, does not have more than 33 percent of its 
undergraduate regular students withdraw from the institution during the 
institution's latest completed award year. The institution must count 
all regular students who are enrolled during the latest completed award 
year, except those students who, during that period--
    (1) Withdrew from, dropped out of, or were expelled from the 
institution; and
    (2) Were entitled to and actually received in a timely manner, a 
refund of 100 percent of their tuition and fees (less any permitted 
administrative fee) under the institution's refund policy;
* * * * *
    11. 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 or Federal Direct PLUS loan on behalf of the student 
if the student--
    (i) Does not register for the period of enrollment for which the 
student was charged; or
    (ii) Withdraws, drops out, is expelled from the institution, or 
otherwise fails to complete the program on or after his or her first 
day of class of the period of enrollment for which he or she was 
charged.
    (2) The institution shall provide a clear and conspicuous written 
statement containing its refund policy, including the allocation of 
refunds and repayments to sources of aid 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 a refund under State law under paragraph (b)(1)(i) 
and no standards established by the institution's accrediting agency 
under (b)(1)(ii) of this section exist, the larger of--
    (A) The Federal refund calculation contained in paragraph (d) of 
this section; or
    (B) The institution's refund policy.
    (2) For purposes of the calculation of a pro rata refund under 
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 (e) 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 (e) 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.
    (4) For all refund calculations other than the pro rata refund 
calculation under paragraph (b)(1)(iii) of this section, an institution 
must subtract the unpaid amount of a scheduled cash payment from the 
amount the institution may retain in accordance with paragraph (f)(2) 
of this section.
    (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 in accordance with 34 CFR 685.303(d); 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 (j)(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's late disbursement 
amount; and
    (B) Return any additional refund amounts due as a result of the 
recalculation in accordance with paragraph (h) 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) Federal refund. (1) ``Federal refund,'' as used in this 
section, means a refund by an institution to a student attending that 
institution of not less than the portion of tuition, fees, room, board, 
and other charges assessed the student by the institution to be 
refunded as follows--
    (i) 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 a student withdraws from the institution on 
or before the first day of classes for the period of enrollment for 
which the student was charged;
    (ii) The institution must refund at least 90 percent of the tuition 
charges if the student withdraws between the end of the period of time 
specified in paragraph (d)(1) of this section and the end of the first 
10 percent (in time) of the period of enrollment for which the student 
was charged;
    (iii) The institution must refund at least 50 percent of the 
tuition charges if the student withdraws 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; and
    (iv) The institution must refund at least 25 percent of the tuition 
charges if the student withdraws 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.
    (2) An institution may exclude from the calculation of a Federal 
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.
    (3)(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 Federal 
refund under this paragraph the documented cost to the institution of 
unreturnable equipment issued to the student in accordance with 
paragraph (d)(3)(i) of this section or of returnable equipment issued 
to the student in accordance with paragraph (d)(3)(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)(3) of this section.
    (4) 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.
    (e) 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 or clock 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 or clock hours and does not use semesters, trimesters, 
quarters, or other academic terms and is--
    (A) Longer than or equal to the academic year in length, the 
greater of the payment period or one-half of the academic year;
    (B) Shorter than the academic year in length, the length of the 
educational program.
    (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.
    (f) Overpayments. (1) An institution shall determine whether a 
student has received an overpayment for noninstitutional costs for the 
period of enrollment for which the student has been charged if--
    (i) The student officially withdraws, drops out, or is expelled, on 
or after his or her first day of class of that period; and
    (ii) The student received Title IV, HEA program assistance other 
than from the FWS, Federal Stafford loan, Federal PLUS, Federal SLS, 
Federal Direct Stafford, or Federal Direct PLUS 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, Federal SLS Program, 
Federal Direct Stafford, or Federal Direct PLUS) 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.
    (g) 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, for all refund calculations other 
than the pro rata refund calculation 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 (g)(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 in accordance with 34 CFR 685.303(d); 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 (j)(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 (h) 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 (f) 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, Federal SLS, Federal Direct Stafford, or 
Federal Direct PLUS Program for the period of enrollment for which the 
student has been charged.
    (iii) Unless otherwise provided for in applicable program 
regulations--
    (A) If the amount of the overpayment is less than $100, the student 
is considered not to owe an overpayment, and the institution is not 
required to contact the student or recover the overpayment; and
    (B) If an institution demonstrates that the total amount of a 
refund would be $25 or less, the institution is not required to pay the 
refund, provided that the institution has obtained written 
authorization from the student in the enrollment agreement to retain 
any amount of the refund that would be allocated to the Title IV, HEA 
loan programs.
    (h) Allocation of refunds and overpayments. (1) Except as provided 
in paragraph (h)(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, Federal SLS, Federal Direct Stafford, or Federal Direct 
PLUS Program) must repay an overpayment calculated in accordance with 
paragraph (f) 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 unsubsidized 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 subsidized Federal Direct 
Stafford loans received by the student for the period of enrollment for 
which he or she was charged.
    (vii) 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.
    (viii) To eliminate outstanding balances on Federal Perkins loans 
received by the student for the period of enrollment for which he or 
she was charged.
    (ix) To eliminate any amount of Federal Pell Grants awarded to the 
student for the period of enrollment for which he or she was charged.
    (x) 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.
    (xi) 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.
    (xii) To repay required refunds of other Federal, State, private, 
or institutional student financial assistance received by the student.
    (xiii) To the student.
    (2) The institution must apply the allocation policy described in 
paragraph (h)(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, Federal SLS, Federal Direct Stafford Loan 
or Federal Direct PLUS Program.
    (iii) The amount of the Title IV, HEA program portion of the refund 
allocated to the Federal Stafford Loan, Federal PLUS, 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, 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, Federal SLS, Federal Direct 
Stafford, and Federal Direct PLUS programs must be returned to the 
appropriate program account or accounts within 30 days of the date that 
the student repays the overpayment.
    (i) Financial aid. For purposes of this section ``financial aid'' 
is assistance that a student has been or will be awarded (including 
Federal PLUS loans and Federal Direct PLUS loans received on the 
student's behalf) from Federal; State; institutional; or other 
scholarship, grant, or loan programs.
    (j) Refund dates. (1) Withdrawal date. (i) Except as provided in 
paragraph (j)(1)(ii) and (iii) of this section, a student's withdrawal 
date is the earlier of--
    (A) The date that the student notifies an institution of the 
student's withdrawal, or the date of withdrawal specified by the 
student, whichever is later; or
    (B) If the student drops out of the institution without notifying 
the institution (does not withdraw officially), the last recorded date 
of class attendance by the student, as documented by the institution.
    (ii) If the student does not return to the institution at the 
expiration of an approved leave of absence under paragraph (j)(2) of 
this section, or takes a leave of absence that is not approved under 
paragraph (j)(2) of this section, the student's withdrawal date is the 
last recorded date of class attendance by the student, as documented by 
the institution.
    (iii) If the student is enrolled in an educational program that 
consists predominantly of correspondence courses, the student's 
withdrawal date is normally the date of the last lesson submitted by 
the student, if the student failed to submit the subsequent lesson in 
accordance with the schedule for lessons established by the 
institution. However, if the student establishes in writing, within 60 
days of the date of the last lesson that he or she submitted, a desire 
to continue in the program and an understanding that the required 
lessons must be submitted on time, the institution may restore that 
student to ``in school'' status for purposes of funds received under 
the Title IV, HEA programs. The institution may not grant the student 
more than one restoration to ``in school'' status on this basis.
    (2) Approved leave of absence. A student who has been granted a 
leave of absence by an institution is not considered to have withdrawn 
from the institution and is considered to be on an ``approved leave of 
absence'' for purposes of this section (and, for a Title IV, HEA 
program loan borrower, for purposes of terminating the student's in-
school status) under the following conditions--
    (i) In any twelve-month period, the institution may grant a single 
leave of absence to a student, not to exceed 60 days;
    (ii) The student must make a written request to be granted a leave 
of absence; and
    (iii) The leave of absence may not involve additional charges by 
the institution to the student.
    (3) Timely determination of withdrawal for students who drop out. 
An institution must determine the withdrawal date for a student who 
drops out within 30 days after the expiration of the earlier of the--
    (i) Period of enrollment for which the student has been charged;
    (ii) Academic year in which the student withdrew;
    (iii) Educational program from which the student withdrew
    (4) 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;
    (iii) If a student--
    (A) Does not return to the institution at the expiration of an 
approved leave of absence under paragraph (j)(2) of this section, 
within 30 days of the earlier of the date of expiration of the leave of 
absence or the date the student notifies the institution that the 
student will not be returning to the institution after the expiration 
of an approved leave of absence; (B) Is taking a leave of absence that 
is not approved under paragraph (j)(2) of this section, 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)

    12. Section 668.23 is revised to read as follows:


Sec. 668.23  Audits, records, and examinations.

    (a) An institution 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 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 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 that meets the compliance audit standards for 
institutions 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 meets the compliance audit standards for institutions and that 
covers the servicer's administration of the participation in the Title 
IV, HEA programs of 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) Government Auditing Standards. 
(This publication is available from the Superintendent of Documents, 
U.S. Government Printing Office, Washington, DC 20402.)
    (2)(i)(A) 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 programs. Each 
subsequent audit must cover the institution's activities for the entire 
period of time since the preceding audit.
    (B) A foreign institution's first audit must cover the foreign 
institution's activities for the two most recently concluded award 
years in which the foreign institution has participated in the Title 
IV, HEA programs, unless otherwise specified by the Secretary. A 
foreign institution that has participated in the Title IV, HEA programs 
for less than two years must have performed an audit that covers the 
entire period of time since the foreign institution began to 
participate in the Title IV, HEA programs. Each subsequent audit must 
cover the foreign institution's activities for the entire period of 
time since the preceding audit.
    (ii) The third-party servicer's first audit must cover the 
servicer's activities for the award year, ending on or after July 1, 
1994, in which the servicer began to administer any aspect of an 
institution's participation in the Title IV, HEA programs. 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 within six months of the 
end of the institution's or servicer's fiscal year ending on or after 
the most recently concluded award year for which the audit is performed 
or, if applicable, in accordance with deadlines established in--
    (i) The Single Audit Act;
    (ii) Office of Management and Budget Circular A-133, ``Audits of 
Institutions of Higher Education and Other Nonprofit Organizations;'' 
or
    (iii) Office of Management and Budget Circular A-128, ``Audits of 
State and Local Governments.''
    (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 Government Auditing Standards. (This publication is available 
from the Superintendent of Documents, U.S. Government Printing Office, 
Washington, DC 20402.)
    (e)(1) An institution 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);
    (2) Office of Management and Budget Circular A-133, ``Audits of 
Institutions of Higher Education and Other Nonprofit Organizations;'' 
or
    (3) Office of Management and Budget Circular A-128, ``Audits of 
State and Local Governments.''
    (g) Upon written request, an institution 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 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 prior receipt of financial aid (see Sec. 668.19);
    (vi) The verification of student aid application data; and
    (vii) Financial and other institutional records necessary to 
determine the institutional eligibility, financial responsibility, and 
administrative capability of the institution; and
    (2) An institution shall establish and maintain records regarding 
the admission requirements and educational qualifications of each 
regular student enrolled in any eligible program offered by the 
institution, 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)

    13. Section 668.81 is amended by adding paragraph (e) and revising 
the authority citation to read as follows:


Sec. 668.81  Scope and special definitions.

* * * * *
    (e) This subpart does not apply to the termination of the 
eligibility of an institution to participate in the Title IV, HEA 
programs if that termination results from the Secretary's receipt of a 
notice from a State postsecondary review entity under 34 CFR part 667 
that indicates the SPRE has determined that the institution should not 
be eligible to participate in those programs.

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

* * * * *
    14. Section 668.116 is amended by revising paragraph (e)(1)(vi) to 
read as follows:


Sec. 668.116  Hearing.

* * * * *
    (e)(1) * * *
    (vi) Other Department of Education records and materials if the 
records and materials were provided to the hearing official no later 
than 30 days after the institution's or servicer's filing of its 
request for review.
* * * * *
    15. Appendix A to Part 668 is revised to read as follows:

BILLING CODE 4000-01-P

Appendix A to Part 668--Flow Charts for Procedures for Calculating 
Refunds Under Sec. 668.22

TR29NO94.000


TR29NO94.001


TR29NO94.002


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

    16. The authority citation for Part 682 continues to read as 
follows:

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

    17. Section 682.413 is amended by revising paragraph (e)(1) to read 
as follows:


Sec. 682.413  Remedial actions.

* * * * *
    (e)(1) The Secretary's decision to require repayment of funds, 
withhold funds, or to limit, suspend, or terminate a lender, agency, or 
third-party servicer from participation in the FFEL programs does not 
become final until the Secretary provides the lender, agency, or 
servicer with written notice of the intended action and an opportunity 
to be heard thereon, at a time and in a manner the Secretary determines 
to be appropriate to the resolution of the issues on which the lender, 
agency, or servicer requests an opportunity to be heard.
* * * * *
[FR Doc. 94-29048 Filed 11-28-94; 8:45 am]
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