[Federal Register Volume 59, Number 230 (Thursday, December 1, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-29324]


[[Page Unknown]]

[Federal Register: December 1, 1994]


_______________________________________________________________________

Part V





Department of Education





_______________________________________________________________________



34 CFR Part 668, et al.




Student Assistance General Provisions; Federal Perkins Loan Program; 
Federal Supplemental Educational Opportunity Grant Program; Federal 
Work-Study Program; Federal Family Educational Loan Programs; Federal 
Pell Grant Program; Final Rule
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34 CFR Parts 668, 674, 675, 676, 682, and 690
RIN: 1840-AC13
 
Student Assistance General Provisions; Federal Perkins Loan 
Program; Federal Supplemental Educational Opportunity Grant Program; 
Federal Work-Study Program; Federal Family Educational Loan Programs; 
Federal Pell Grant Program
AGENCY: Department of Education.

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

EFFECTIVE DATE: These regulations take effect on July 1, 1995. and 
apply to the 1995-96 and subsequent years. However, affected parties do 
not have to comply with the information collection requirements in 
Sec. 668.164(a) until the Department of Education publishes in the 
Federal Register the control number assigned by the Office of 
Management and Budget (OMB) to these information collection 
requirements. Publication of the control number notifies the public 
that OMB has approved these information collection requirements under 
the Paperwork Reduction Act of 1980.

FOR FURTHER INFORMATION CONTACT: John Kolotos or Kim Goto, U.S. 
Department of Education, 600 Independence Avenue, S.W., Room 4318, 
Regional Office Building 3, Washington, D.C. 20202-5244. Telephone 
(202) 708-7888. Individuals who use a telecommunications device for the 
deaf (TDD) may call the Federal Information Relay Service at 1-800-877-
8339 between 8 a.m. and 8 p.m., Eastern time, Monday through Friday.

SUPPLEMENTARY INFORMATION: On September 29, 1994, the Secretary 
published a Notice of Proposed Rulemaking (NPRM) for part 668 in the 
Federal Register (59 FR 49766). The NPRM included a discussion of the 
major issues surrounding the proposed changes which will not be 
repeated here. The following list summarizes those issues and 
identifies the pages of the preamble to the NPRM on which a discussion 
of those issues can be found:
    The Secretary proposed to define the scope and purpose of subpart K 
to be the promotion of sound cash management practices by institutions 
and third-party servicers, and the minimizing of the financing costs to 
the Federal government of making available title IV, HEA program funds 
to students and institutions (page 49766);
    The Secretary proposed to define the term disburse to encompass all 
the methods by which an institution pays title IV, HEA program funds to 
a student or parent (page 49766);
    The Secretary proposed to define the term issue checks to include 
any means by which an institution pays a student or parent by check 
(page 49767);
    The Secretary proposed to codify existing policy and practice under 
which the Secretary provides title IV, HEA program funds, other than 
FFEL program funds, to institutions (page 49767);
    The Secretary proposed to consolidate and amend several 
requirements of the Federal Perkins Loan Program, the FWS Program, the 
FSEOG Program, the Federal Pell Grant Program, and requirements 
proposed for the Direct Loan Program regulations regarding the account 
into which an institution deposits and otherwise maintains Federal 
funds (pages 49767-49768);
    The Secretary proposed to consolidate and amend several 
requirements of the Federal Perkins Loan Program, the FWS Program, the 
FSEOG Program, the Federal Pell Grant Program, and requirements 
proposed for the Direct Loan Program regulations under which an 
institution disburses title IV, HEA program funds to eligible students 
(pages 49768-49769); and
    The Secretary proposed to define excess cash as any amount of title 
IV, HEA program funds, other than FFEL or Federal Perkins Loan Program 
funds, that an institution does not disburse to students by the end of 
the third business day following the date the institution received 
those funds (pages 49769-49770).
    In addition to changes to the Student Assistance General Provisions 
regulations, to eliminate conflicting requirements between program 
regulations the Secretary publishes conforming amendments to the 
appropriate sections of the Federal Pell Grant, FSEOG, FWS, Federal 
Perkins Loan and FFEL program regulations. The Secretary identifies 
those sections as follows:

Federal Perkins Loan Program, 34 CFR 674.16 and 674.19;
FSEOG, 34 CFR 676.16 and 676.19;
FWS, 34 CFR 675.19;
Federal Family Educational Loan Programs, 34 CFR 682.603 and 682.604;
    Federal Pell Grant Program, 34 CFR 690.78 and 690.81.

    The Secretary publishes conforming amendments to the Direct Loan 
Program regulations as part of the final regulations for that program.
    These regulations establish for the first time uniform rules and 
procedures that an institution must follow in requesting, maintaining, 
disbursing, and otherwise managing title IV, HEA program funds. In 
establishing these rules and procedures, the Secretary seeks to achieve 
an appropriate balance between the needs of an institution in 
administering with integrity these programs, the institution's 
obligation to provide program funds to students in a timely manner, and 
the Federal interest in the use and disposition of program funds. The 
Secretary recognizes however that many institutions manage Federal 
funds soundly and efficiently, albeit somewhat differently from what 
these rules require. The Secretary does not intend for these rules to 
dissuade those institutions from continuing sound cash management 
practices; rather the Secretary believes that these rules will enhance 
those institutions' practices as well as establish a performance 
benchmark for all institutions. In this regard, the Secretary will 
assess the impact of these regulations on students and institutions and 
propose new rules, as may be appropriate, in response to that 
assessment.

Substantive Changes to the NPRM

    The following discussion reflects substantive changes made to the 
NPRM in the final regulations. The provisions are discussed in the 
order in which they appear in the proposed rules.

Section 668.161  Scope and Purpose

    In response to public comment, the Secretary revises this section 
to include the following objectives: (1) to promote sound cash 
management practices by institutions, (2) to minimize the financing 
costs to the Federal government of making available title IV, HEA 
program funds to students and institutions, and (3) to minimize the 
costs that accrue to students under the title IV, HEA loan programs.

Section 668.162  Definitions

    The definition of issue checks has been revised to clarify that an 
institution issues a check by mailing the check, or notifying the 
student or parent expeditiously that the check is available on demand 
for immediate pickup.

Section 668.163  Requesting funds

    The final regulations require that in certifying a loan application 
under Sec. 682.603, an institution may not request from a lender the 
loan proceeds for a student borrower earlier than 13 days before the 
student's period of enrollment. This provision applies only to 
borrowers who are not subject to the delayed disbursement provisions in 
Sec. 682.604(c)(5) and where FFEL program funds are transferred by a 
lender to an institution via EFT or master check. The 13-day timeframe 
was chosen to be consistent with the number of days that an institution 
may request and disburse funds that it receives from the Secretary by 
EFT under all of the other title IV, HEA programs. The Secretary adds 
this provision to minimize the interest costs incurred by a borrower 
during the period in which the borrower does not benefit from the 
receipt of those loan funds.

Section 668.164  Maintaining funds

    The section is revised to require that the institution must comply 
with one of the following provisions: (1) that it notify the bank of 
its accounts that contain Federal funds and retain a record of that 
notice in its files, or (2) that the institution ensure that the name 
of the account discloses clearly that Federal funds are maintained in 
that account. The proposed rules required that an institution would 
have to comply with both provisions. The change was made in response to 
public comment and the Secretary's belief that either of the proposed 
requirements in connection with the filing of a UCC-1 statement will 
provide that Federal funds are safeguarded adequately.
    In response to public comment, the final regulations allow an 
institution to maintain an interest-bearing account under the same 
provisions that apply to interest-bearing accounts under the Federal 
Perkins Loan Program.
    The final regulations have raised the threshold for requiring an 
interest-bearing account to $3 million. These regulations also clarify 
that any institution may maintain an interest-bearing account.
    Under the final regulations, an institution which demonstrates that 
it will not earn more than $250 in interest on holding Title IV, HEA 
program funds is not required to maintain an interest-bearing account 
regardless of the amount of its prior-year drawdowns. In addition, an 
institution that did not earn $250 in interest on the funds it 
maintained in an interest-bearing account in the prior award year, is 
not required to maintain that account in the current award year.

Section 668.165  Disbursing funds

    The final regulations have been revised to require that an 
institution must notify a student or parent of the amount of title IV, 
HEA program funds the student can expect to receive, and how and when 
those funds will be paid.
    The final regulations clarify that an institution must determine if 
the amount of title IV, HEA program funds that the institution applies 
to a student's account exceeds the amount of allowable institutional 
charges, and based on that determination provide any balance to the 
student within specified timeframes.
    In response to public comment, the Secretary has extended the 
timeframes within which an institution must disburse any student credit 
balance, and has provided for a phase-in of this provision. For the 
1995-96 award year, an institution must pay that balance directly to 
the student as soon as possible, but within 21 days of the later of: 
the date that balance occurs; the first day of classes of a payment 
period or period of enrollment, as applicable; or the date the student 
rescinds his or her authorization under Sec. 668.165(d). For students 
enrolled at the institution on or after July 1, 1996, the credit 
balance must be paid as soon as possible, but within 14 days after the 
later of the events stated above.
    The final regulations provide that an institution must obtain a 
student's or parent's authorization to (1) disburse title IV, HEA 
program funds via EFT; (2) apply title IV, HEA program funds to other 
charges; and (3) hold excess student funds. In obtaining authorization 
for any of these activities, an institution may not require the student 
or parent to provide that authorization, and must allow the student or 
parent to rescind that permission at any time. In addition, the 
institution must provide an annual notice to the student that explains 
in a plain and conspicuous manner the provisions regarding the 
student's authorization, including an explanation regarding any 
interest that the institution earns on the student's funds and whether 
the institution will provide that interest to the student.
    If a student authorizes the institution to hold excess funds on his 
or her behalf, and the institution chooses to hold those funds, the 
institution must identify the student and the amount of the funds the 
institution holds for that student in a subsidiary ledger account 
designated for this purpose; and maintain, at all times, cash in its 
bank account for an amount equal to the amount of the funds the 
institution holds for the student. The institution may also retain any 
interest earned on the student's funds while the institution is holding 
those funds. An institution may not hold excess student funds if the 
Secretary determines that the institution does not meet the standards 
of financial responsibility under Sec. 668.15.

Section 668.166  Excess cash.

    In response to public comment, the final regulations have increased 
the allowable excess cash tolerances to three percent of the 
institution's total prior-year drawdowns during a period of peak 
enrollment; and for any other period, one percent of the total prior-
year drawdowns. The Secretary has removed the proposed minimum excess 
cash balance of $5,000 provision based on the increase in the allowable 
percentages.

Analysis of Comments and Changes

    In response to the Secretary's invitation in the NPRM, 
approximately 110 parties submitted comments on the proposed 
regulations. An analysis of the comments and of the changes in the 
regulations since publication are published as an appendix to these 
regulations. 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.

Executive Order 12866

    These 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 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, if any, are identified and 
explained elsewhere in this preamble under the heading Paperwork 
Reduction Act of 1980.
    In assessing the potential costs and benefits--both quantitative 
and qualitative--of these 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, or tribal governments in the 
exercise of their governmental functions.

Paperwork Reduction Act of 1980

    Section 668.164(a) contains information collection requirements. As 
required by the Paperwork Reduction Act of 1980, the U.S. Department of 
Education will submit a copy of this section to the Office of 
Management and Budget (OMB) for its review. (44 U.S.C. 3504(h)).
    The final regulations contain information collection requirements 
regarding the bank account that all participating institutions must 
maintain for the deposit of title IV, HEA program funds. Specifically, 
institutions must (1) notify their bank of the accounts that contain 
Federal funds and maintain a record of that notice in their 
recordkeeping system, and (2) file with the appropriate State or 
municipal government entity a UCC-1 statement disclosing the accounts 
that contain Federal funds and keep a copy of that statement in their 
files. In addition, institutions that draw down more than $3 million in 
title IV, HEA program funds must maintain those funds in an interest-
bearing account and keep records for any interest earned on those 
funds. Institutions may retain annually interest earning on title IV, 
HEA program funds for an amount up to $250, must keep records for the 
amount retained, and return to the Department any interest earnings 
greater than the amount retained. The Department needs and uses this 
information to determine whether institutions have complied with these 
requirements.
    For approximately 8,500 institutions, a one-time public reporting 
burden for this collection of information is estimated at (1) 2,833 
hours for institutions to notify banks of the accounts that contain 
title IV, HEA program funds and maintain a record of that notice in 
their recordkeeping system, and (2) 8,500 hours for institutions to 
file a UCC-1 statement with the appropriate State or municipal 
government entity disclosing the accounts that contain Federal funds 
and keep a copy of that statement in their files. In addition, for 
approximately 757 institutions, the annual public reporting burden for 
this collection of information is estimated at 379 hours for those 
institutions to account for the interest earned on title IV, HEA 
program funds and return to the Federal government any interest 
earnings in excess of $250.
    Organizations and individuals desiring to submit comments on the 
information collection requirements should direct them to the Office of 
Information and Regulatory Affairs, OMB, Room 3002, New Executive 
Office Building, Washington, DC 20503; Attention: Daniel J. Chenok.

Assessment of Educational Impact

    In the NPRM published on September 29, 1994, the Secretary 
requested comment on whether the proposed regulations in this document 
would require transmission of information that is being gathered by or 
is available from any other agency or authority of the United States.
    Based on the response to the proposed rules on its own review, the 
Department has determined that the regulations in this document do not 
require transmission of information that is being gathered by or is 
available from any other agency or authority of the United States.

List of Subjects

34 CFR 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 Parts 674, 675, and 676

    Education loan programs--education, Student aid.

34 CFR Part 682

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

34 CFR Part 690

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

    Dated: November 23, 1994.
Richard W. Riley,
Secretary of Education.

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

    The Secretary amends Parts 668, 674, 675, 676, 682, and 690 of 
Title 34 of the Code of Federal Regulations as follows:

PART 668--STUDENT ASSISTANCE GENERAL PROVISIONS

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

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


Sec. 668.18  [Removed and Reserved]

    2. Section 668.18 is removed and reserved.
    3. A new subpart K is added to Part 668 to read as follows:

Subpart K--Cash Management

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

SUBPART K--CASH MANAGEMENT


Sec. 668.161  Scope and purpose.

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

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


Sec. 668.162  Definitions.

    The following definitions apply to terms used in this subpart:
    Check: A negotiable demand draft or warrant.
    Credit an account: To post a payment of funds to a student's 
account.
    Day: A calendar day unless otherwise specified.
    Disburse: To make a payment of title IV, HEA program funds, or 
deliver the proceeds of a loan under the FFEL Program to or on behalf 
of a student--
    (1) Directly by--
    (i) Check or other means payable to and requiring the endorsement 
or certification of the student, or in the case of a parent borrower 
under the Direct Loan or FFEL programs, the student's parent;
    (ii) Initiating an electronic funds transfer (EFT) to a bank 
account designated by the student, or in the case of a parent borrower 
under the Direct Loan or FFEL programs, to a bank account designated by 
the parent; or
    (iii) Dispensing cash for which an institution obtains a signed 
receipt from the student; or
    (2) By crediting the student's account.
    Drawdown: A process whereby an institution requests and receives 
title IV, HEA program funds.
    Issue checks: To release, distribute, or make available a check 
by--
    (1) Mailing the check to a student or parent; or
    (2) Notifying the student or parent expeditiously that the check is 
available on demand for immediate pickup.
    Period of enrollment: (1) With respect to the Direct Loan Program, 
a period of enrollment as defined in Sec. 685.102;
    (2) With respect to the FFEL Program, a period of enrollment as 
defined in Sec. 682.200.
    Request for cash: A solicitation for cash that is completed and 
submitted in accordance with procedures contained in the Recipient's 
Guide for the Department of Education Payment Management System. This 
guide is published by the Department of Education, 600 Independence 
Avenue, S.W., Room 3321, Federal Office Building 10, Washington, D.C. 
20202-4331, and contains the procedures institutions use to request, 
report, and account for Federal funds.

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

Sec. 668.163  Requesting funds

    (a) General. (1) The Secretary pays an institution in advance, or 
by reimbursement, for the institution to disburse title IV, HEA program 
funds, other than FFEL program funds, to students who qualify to 
receive those funds.
    (2) Advance payment method. (i) Under the advance payment method 
the Secretary accepts an institution's request for cash and transfers 
electronically the amount requested into a bank account designated by 
the institution.
    (ii) An institution's request for cash must not exceed the amount 
of funds the institution needs immediately to make disbursements to 
students. The institution must make the disbursements as soon as 
administratively feasible but no later than three business days 
following the date the institution received those funds.
    (3) Reimbursement payment method. (i) To receive payment of title 
IV, HEA program funds under the reimbursement method an institution 
must first make disbursements to eligible students before it submits a 
request for cash.
    (ii) The amount of the institution's request for cash may not 
exceed the amount of the actual disbursements the institution made to 
students included in that request.
    (iii) The Secretary may require the institution to submit 
documentation that each student included in the request was eligible to 
receive and received payment for the title IV, HEA program funds for 
which the institution is seeking reimbursement. The Secretary considers 
that an institution has made payments to those students if the 
institution has either credited the students' accounts or paid the 
students directly with its own funds.
    (iv) The Secretary approves the amount of the institution's request 
and transfers electronically that amount into a bank account designated 
by the institution if the Secretary determines that the institution--
    (A) Determined properly the eligibility of each student for title 
IV, HEA program funds;
    (B) Made payments for the correct amounts of title IV, HEA program 
funds to the students included in its request; and
    (C) Submitted any documentation required under paragraph 
(a)(3)(iii) of this section.
    (b) Receiving FFEL Program funds. In certifying a loan application 
under Sec. 682.603 for a borrower who is not subject to the delayed 
disbursement provisions in Sec. 682.604(c)(5), an institution may not 
request that a lender provide by EFT or master check the loan proceeds 
for that borrower earlier than 13 days before the first day of a 
student's period of enrollment.

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

Sec. 668.164  Maintaining funds

    (a) General. (1) Other than for funds an institution receives under 
the FFEL programs, an institution must maintain a bank account that 
meets the requirements under paragraphs (b) or (c) of this section into 
which the Secretary transfers or the institution deposits Federal funds 
that the institution receives from the title IV, HEA programs. Except 
as provided in paragraph (e) of this section, an institution is not 
required to maintain a separate account for title IV, HEA program 
funds.
    (2)(i) An institution must--
    (A) Notify the bank of the accounts that contain Federal funds and 
retain a record of that notice in its recordkeeping system; or
    (B) Ensure that the name of the account discloses clearly that 
Federal funds are maintained in that account; and
    (ii) File with the appropriate State or municipal government entity 
a UCC-1 statement disclosing that the account contains federal funds 
and maintain a copy of that statement in its records.
    (b) Interest-bearing account. (1) Notwithstanding any other 
requirements in this section, an institution that participates in the 
Federal Perkins Loan Program must maintain--
    (i) An interest-bearing account that is--
    (A) Federally insured; or
    (B) Secured by collateral of value reasonably equivalent to the 
amount of title IV, HEA program funds in the account; or
    (ii) An investment account consisting predominately of low-risk 
income-producing securities, such as obligations issued or guaranteed 
by the United States.
    (2) Except as provided in paragraph (c) of this section, for any 
award year, an institution must maintain an account that meets the 
requirements in paragraphs (b)(1)(i) or (ii) of this section. If an 
institution maintains Federal funds in an investment account as 
provided in paragraph (b)(1)(ii) of this section, the institution must 
maintain sufficient liquidity in that account to make required 
disbursements to students.
    (c) Non-interest-bearing account. (1) For any award year, an 
institution is not required to maintain an interest-bearing account 
if--
    (i) In the prior award year, the institution drew down less than $3 
million from the title IV, HEA programs;
    (ii) For the total amount of title IV, HEA program funds that the 
institution drew down in the prior award year and maintained in an 
interest-bearing account, the institution earned less than $250 in 
interest on those funds; or
    (iii) For the total amount of title IV, HEA program funds that the 
institution draws down during the award year, the institution 
demonstrates by its cash management practices that it would not earn 
over $250 in interest by maintaining those funds in an interest-bearing 
account.
    (2) An institution's non-interest-bearing account must be--
    (i) Federally insured; or
    (ii) Secured by collateral of value reasonably equivalent to the 
amount of title IV, HEA program funds in the account.
    (d) Interest earnings. Except as provided in paragraphs (d)(1) and 
(2) of this section, an institution must remit at least annually to the 
Secretary the interest or investment revenue earned on title IV, HEA 
program funds maintained in an interest-bearing or investment account.
    (1) Pursuant to 34 CFR Part 674, an institution must retain for the 
purposes of the Federal Perkins Loan Program all interest or investment 
revenue earned on Federal Perkins Loan Program funds maintained in an 
interest-bearing or investment account.
    (2) Other than interest or investment revenue earned on Federal 
Perkins Loan Program funds, an institution may retain for 
administrative expense up to $250 per year of the interest or 
investment revenue earned on title IV, HEA program funds maintained in 
an interest-bearing or investment account.
    (e) Separate account. The Secretary may require an institution to 
maintain title IV, HEA program funds, including the funds an 
institution maintains for purposes of the Federal Perkins Loan Program, 
in a separate bank account that contains no other funds if the 
Secretary determines that-
    (1) The institution's accounting and internal control systems do 
not--
    (i) Identify the cash balances of title IV, HEA program funds 
maintained in the institution's bank account as readily as if those 
funds were maintained for each program in a separate account; or
    (ii) Identify adequately the interest or investment revenue earned 
on title IV, HEA program funds maintained in its bank account;
    (2) The institution's financial records--
    (i) Are not maintained on a current basis;
    (ii) Do not reflect accurately all title IV, HEA program 
transactions; or
    (iii) Are not reconciled at least monthly; or
    (3) The institution has otherwise failed to comply with the 
recordkeeping and reporting requirements in subpart B of this part or 
in the regulations that govern each title IV, HEA program in which the 
institution participates.
    (f) Standard of conduct. An institution must exercise the level of 
care and diligence required of a fiduciary with regard to maintaining 
and investing Federal funds.

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


Sec. 668.165  Disbursing funds.

    (a) Method of payment. (1) An institution must notify a student or 
the student's parent of the amount of title IV, HEA program funds the 
student can expect to receive, and how and when those funds will be 
paid.
    (2) If the institution chooses to disburse to the student or the 
student's parent by initiating an electronic funds transfer to the bank 
account designated by the student or parent, as applicable, the 
institution must obtain authorization from the student or parent, as 
applicable, to disburse by that method.
    (3) An institution must follow the disbursement procedures in 
Sec. 675.16 for paying a student his or her wages under the FWS 
Program.
    (b) Crediting a student's account--(1) General. An institution may 
disburse to a student by crediting the student's account. In crediting 
the student's account with title IV, HEA program funds, the institution 
may apply those funds only to allowable charges described under 
paragraph (b)(4) of this section, except that the institution may not 
apply the student's title IV, HEA program funds to any charges the 
institution assessed the student in a prior award year or period of 
enrollment. An institution must provide written notification 
expeditiously to a student or parent, as applicable, that the 
institution has credited the student's account with Direct Loan or FFEL 
program funds.
    (2) Student account balances. Unless otherwise authorized, by a 
student, whenever an institution applies title IV, HEA program funds to 
a student's account and determines that an amount of those funds 
exceeds, or exceeded, the amount of allowable charges the institution 
assesses the student, the institution must pay that balance directly to 
the student as soon as possible but--
    (i) For students enrolled at the institution at any time during the 
period beginning July 1, 1995 and ending June 30, 1996, within 21 days 
of the later of--
    (A) The date that balance occurs;
    (B) The first day of classes of a payment period or period of 
enrollment, as applicable; or
    (C) The date the student rescinds his or her authorization under 
paragraph (d) of this section; and
    (ii) For students enrolled at the institution on or after July 1, 
1996, within 14 days of the later of the events described in paragraph 
(b)(2)(i) (A), (B), or (C) of this section.
    (3) Allowable charges. For the purposes of this section, allowable 
charges include--
    (i) Tuition and fees;
    (ii) Board, if the student contracts with the institution for 
board;
    (iii) Room, if the student contracts with the institution for room; 
and
    (iv) If an institution obtains the student's or parent's 
authorization under paragraph (d) of this section--
    (A) Other cost-of-attendance charges, as provided under section 472 
of the HEA, included in that authorization; and
    (B) Other institutional charges that a student incurs at his or her 
discretion.
    (4) Holding student funds. (i) Except as provided in paragraph 
(b)(4)(ii) of this section, an institution, as a fiduciary for the 
benefit of a student, may hold student funds from the title IV, HEA 
programs in excess of institutional charges included in paragraph 
(b)(3) of this section, if the student authorizes the institution to 
retain the excess funds to assist the student in managing those funds. 
If an institution chooses to hold excess student funds, the 
institution--
    (A) Must identify the student and the amount of the funds the 
institution holds for that student in a subsidiary ledger account 
designated for that purpose;
    (B) Must maintain, at all times, cash in its bank account for an 
amount at least equal to the amount of the funds the institution holds 
for the student; and
    (C) May retain any interest earned on the student's funds.
    (ii) If the Secretary determines that an institution has failed to 
meet the standards of financial responsibility under Sec. 668.15, an 
institution may not hold a student's excess funds for this purpose.
    (c) Early payments. (1) An institution may not make a payment to a 
student for a payment period or period of enrollment, as applicable, 
until the student is enrolled for classes for that period.
    (2) Except as provided in paragraph (c)(3) of this section, the 
earliest an institution may pay directly or credit the account of an 
enrolled student is 10 days before--
    (i) The first day of a payment period or period of enrollment, as 
applicable; and
    (ii) For second and subsequent disbursements of loan funds under 
the Direct Loan and FFEL programs, the first day of a semester, term, 
or other period of enrollment for which that disbursement is intended.
    (3) Pursuant to Sec. 682.604(c) and Sec. 685.303(b)(4), if a 
student is enrolled in the first year of an undergraduate program of 
study and the student has not previously received an FFEL or Direct 
Loan Program loan, the institution may not release to the student for 
endorsement the first installment of his or her FFEL or Direct Loan 
Program loan, as applicable, until 30 days after the first day of the 
student's classes.
    (d) Student authorization. (1) An institution must obtain from a 
student or parent, as applicable, written authorization allowing the 
institution to--
    (i) Disburse title IV, HEA program funds by initiating an 
electronic funds transfer as provided in paragraph (b)(2) of this 
section;
    (ii) Use the student's or parent's title IV, HEA program funds to 
pay for other charges as provided in paragraph (b)(3)(iv) of this 
section; or
    (iii) Hold excess student funds under paragraph (c) of this 
section.
    (2) In obtaining authorization for any of these activities, an 
institution--
    (i) May not require the student or parent to provide that 
authorization; and
    (ii) Must allow the student or parent to rescind that authorization 
at any time.
    (3) The authorization granted to an institution is valid for the 
award year or period of enrollment in which the institution obtains 
that authorization. The Secretary considers that initial authorization 
to continue to be valid provided that the institution notifies the 
student or parent of the provisions regarding the student's or parent's 
current authorization prior to conducting any of the activities that 
require that authorization for any subsequent award year or period of 
enrollment. The institution's notice to the student or parent must--
    (i) In a plain and conspicuous manner, explain those provisions, 
including an explanation regarding any interest that the institution 
earns on the student's funds and whether the institution will provide 
that interest to the student; and
    (ii) Provide the student or parent with the opportunity to cancel 
or modify those provisions.

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


Sec. 668.166  Excess cash.

    (a) General. The Secretary considers excess cash to be any amount 
of title IV, HEA program funds, other than FFEL or Federal Perkins Loan 
Program funds, that an institution does not disburse to students by the 
end of the third business day following the date the institution 
received those funds. Except as provided in paragraph (b) of this 
section, an institution must return promptly to the Secretary any 
amount of excess cash in its account.
    (b) Excess cash tolerances. (1) If an institution draws down title 
IV, HEA program funds in excess of its immediate cash needs, the 
institution may maintain the excess cash balance in the account the 
institution established under Sec. 668.164 only if--
    (i) In the award year preceding that drawdown, the amount of that 
excess cash balance is less than--
    (A) For a period of peak enrollment at the institution during which 
that drawdown occurs, three percent of its total prior-year drawdowns; 
or
    (B) For any other period, one percent of its total prior-year 
drawdowns; and
    (ii) Within the next seven days, the institution eliminates its 
excess cash balance by disbursing title IV, HEA program funds to 
students for at least the amount of that balance.
    (2) For the purposes of this section, a period of peak enrollment 
at an institution occurs when at least 25 percent of the institution's 
students start classes during a given 30-day period. For any award 
year, an institution calculates the percentage of students who started 
classes during a given 30-day period by--
    (i) For the prior award year in which the 30-day period began, 
determining the number of students who started classes during that 
period;
    (ii) Determining the total number of students who started classes 
during the entire award year used in paragraph (b)(2)(i) of this 
section;
    (iii) Dividing the number of students in paragraph (b)(2)(i) of 
this section by the number of students in paragraph (b)(2)(ii) of this 
section; and
    (iv) Multiplying the result obtained in paragraph (b)(2)(iii) of 
this section by 100.
    (3) For the purpose of determining the total amount of title IV, 
HEA program funds under paragraph (b)(1)(i) of this section, an 
institution that participates in the Direct Loan Program may include, 
for the latest year for which the Secretary has complete data, the 
total amount of loans guaranteed under the FFEL Program for students 
attending the institution during that year.
    (c) Consequences for maintaining excess cash balances. (1) If the 
Secretary finds that an institution maintains in its account excess 
cash balances greater than those allowed under paragraph (b) of this 
section, the Secretary--
    (i) As provided in paragraph (c)(2) of this section, requires the 
institution to reimburse the Secretary for the costs the Secretary 
deems to have incurred in making those excess funds available to the 
institution; and
    (ii) May initiate a proceeding to fine, limit, suspend, or 
terminate the institution's participation in one or more title IV, HEA 
programs under subpart G of this part.
    (2) For the purposes of this section, upon a finding that an 
institution has maintained excess cash, the Secretary--
    (i) Considers the institution to have issued a check to a student 
on the date that the check cleared the institution's bank account, 
unless the institution demonstrates to the satisfaction of the 
Secretary that it issued the check shortly after the institution wrote 
the check; and
    (ii) Calculates, or requires the institution to calculate, a 
liability for maintaining excess cash balances in accordance with 
procedures established by the Secretary. Under those procedures, the 
Secretary assesses a liability that is equal to the difference between 
the earnings that the excess cash balances would have yielded if 
invested under the applicable current value of funds rate and the 
actual interest earned on those balances. The current value of funds 
rate is an annual percentage rate, published in a Treasury Financial 
Manual (TFM) bulletin, that reflects the current value of funds to the 
Department of Treasury based on certain investment rates. The current 
value of funds rate is computed each year by averaging investment rates 
for the 12-month period ending every September. The TFM bulletin is 
published annually by the Department of Treasury. Each annual bulletin 
identifies the current value of funds rate and the effective date of 
that rate.

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

PART 674--FEDERAL PERKINS LOAN PROGRAM

    1. The authority citation for part 674 continues to read as 
follows:

    Authority: 20 U.S.C. 1087aa-1087hh and 20 U.S.C. 421-429, unless 
otherwise noted.

    2. Section 674.16 is amended by revising paragraph (d) and by 
revising paragraph (e) to read as follows:


Sec. 674.16  Making and disbursing loans.

* * * * *
    (d) The institution shall disburse funds to a student or the 
student's account in accordance with the provisions of Sec. 668.165.
    (e) The institution shall advance funds to a student in accordance 
with the provisions of Sec. 668.165.
* * * * *
    3. Section 674.19 is amended by revising paragraph (b) to read as 
follows:


Sec. 674.19  Fiscal procedures and records.

* * * * *
    (b) Account for Perkins Loan Fund. An institution shall maintain 
the funds it receives under this part in accordance with the 
requirements in Sec. 668.164.
* * * * *

PART 675--FEDERAL WORK-STUDY PROGRAM

    1. The authority citation for part 675 continues to read as 
follows:

    Authority: 42 U.S.C. 2571-2756b, unless otherwise noted.

    2. Section 675.19 is amended by revising paragraph (a)(3) to read 
as follows:


Sec. 675.19  Fiscal procedures and records.

    (a) * * *
    (3) An institution shall maintain funds received under this part in 
accordance with the requirements in Sec. 668.164.
* * * * *

PART 676--FEDERAL SUPPLEMENTAL EDUCATIONAL OPPORTUNITY GRANT 
PROGRAM

    1. The authority citation for part 676 continues to read as 
follows:

    Authority: 20 U.S.C. 1070b-1070b-3, unless otherwise noted.

    2. Section 676.16 is amended by removing paragraph (d), 
redesignating paragraphs (e), (f), (g), and (h) as paragraphs (d), (e), 
(f), and (g) respectively, and revising paragraph (c) to read as 
follows:


Sec. 676.16  Payment of an SEOG.

* * * * *
    (c) An institution shall disburse funds to a student or the 
student's account in accordance with the provisions in Sec. 668.165.
* * * * *


Sec. 676.19  [Amended]

    3. Section 676.19 is amended by revising paragraph (a)(2) to read 
as follows:
* * * * *
    (a) * * *
    (2) An institution shall maintain funds received under this part in 
accordance with the requirements in Sec. 668.164.
* * * * *

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

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

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

    2. Section 682.603 is amended by revising paragraph (h) to read as 
follows:


Sec. 682.603  Certification by a participating school in connection 
with a loan application.

* * * * *
    (h) Pursuant to paragraph (b)(5) of this section, a school may not 
request the disbursement of loan proceeds--
    (1) For a FFEL loan disbursed by EFT or by master check to a 
borrower who is not subject to paragraph (h)(2) of this section, 
earlier than the 13th day before the first day of the student's period 
of enrollment; and
    (2) For a borrower who is enrolled in the first year of an 
undergraduate program of study and who has not previously received a 
Stafford or SLS loan, earlier than the 24th day of the student's period 
of enrollment.
    3. Section 682.604 is amended by revising paragraph (c)(2)(ii)(B); 
by revising paragraph (c)(3)(ii); by revising paragraphs (d)(1)(i) and 
(ii)(A); and by revising the last sentence of paragraph (d)(1)(ii)(B) 
to read as follows.


Sec. 682.604  Processing the borrower's loan proceeds and counseling 
borrowers.

* * * * *
    (c) * * *
    (2) * * *
    (ii) * * *
    (B) Obtain the student borrower's endorsement on the check, endorse 
the check on its own behalf and, after the student has registered, 
credit the student's account, in accordance with paragraph (d)(1) of 
this section, and deliver the remaining loan proceeds to the student, 
as specified in Sec. 668.165(b)(2).
    (3) * * *
    (ii) Credit the student's account in accordance with paragraph 
(d)(1) of this section, notify the student or parent borrower in 
writing that it has so credited that account, and deliver to the 
student or parent borrower the remaining loan proceeds, subject to 
paragraph (d)(2) of this section, not later than--
    (A) In the case of a PLUS loan, 45 days after the school's receipt 
of the funds; and
    (B) In the case of a Stafford loan, the timeframe specified in 
668.165(b)(2).
* * * * *
    (d) * * *
    (1)(i) For purposes of paragraphs (c)(2)(ii)(B) and (c)(3)(ii) of 
this section, a school may not credit a registered student's account 
earlier than the period specified in Sec. 668.165(c)(2).
    (ii)(A) The school may credit a registered student's account with 
only those loan proceeds covering costs specified in 
Sec. 668.165(b)(2).
    (B) * * * The school shall maintain these funds, as provided in 
Sec. 668.165(b)(4).
* * * * *

PART 690--FEDERAL PELL GRANT PROGRAM

    1. The authority citation for part 690 continues to read as 
follows:

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

     2. Section 690.78 is amended by revising paragraph (a), and by 
removing paragraph (b), by redesignating paragraphs (c) and (d) as 
paragraphs (b) and (c), respectively, and by revising redesignated 
paragraph (c)(1) to read as follows:


Sec. 690.78  Method of disbursement--by check or credit to a student's 
account.

    (a) An institution shall disburse funds to a student or the 
student's account in accordance with the provisions in Sec. 668.165.
* * * * *
    (c)(1) An institution that intends to pay a student directly must 
notify the student in accordance with Sec. 668.165(a).
* * * * *
    3. Section 690.81 is amended by revising paragraph (b) to read as 
follows:


Sec. 690.81  Fiscal control and fund accounting procedures.

* * * * *
    (b) An institution shall maintain funds received under this part in 
accordance with the requirements in Sec. 668.164.
* * * * *

Appendix--Analysis of Comments and Changes

(Note: This appendix will not be codified in the Code of Federal 
Regulations.)

Section 668.161  Scope and Purpose

    Comments: Many commenters supported the Secretary's decision to 
consolidate, codify, and make uniform the cash management policies and 
procedures under which an institution requests, maintains, and 
disburses title IV, HEA program funds. A few commenters believed that 
the proposed consolidation of cash management policies and procedures 
would create confusion rather than clarify those policies and 
procedures because the consolidation was incomplete. Some of these 
commenters suggested that to facilitate an institution's compliance 
with all of the cash management policies and procedures, the Secretary 
should reference in final regulations the other unconsolidated policies 
and procedures contained in each of the title IV, HEA program 
regulations.
    Commenters writing on behalf of student legal services 
organizations supported the Secretary's stated goals, but urged the 
Secretary to incorporate in final regulations the following additional 
goals:
    (1) The promotion of program integrity; and
    (2) The mitigation of costs that accrue to a student when title IV, 
HEA program loan funds are held by an institution and not made 
available timely to borrowers.
    Discussion: As noted in the NPRM and discussed more fully under the 
heading SUPPLEMENTARY INFORMATION, the Secretary has amended each of 
the title IV, HEA program regulations to conform with the rules and 
procedures under these regulations. Although the Secretary agrees that 
it is preferable to consolidate and make uniform all of the cash 
management rules and procedures now contained in the title IV, HEA 
program regulations, the Secretary chose to consolidate and make 
uniform the requirements only in those areas where there is much 
commonality among all the title IV, HEA programs. The Secretary notes 
that other cash management provisions pertain mostly to the areas of 
fiscal control, accounting and program reporting requirements.
    The Secretary believes that the commenter's first goal, to promote 
program integrity, is accomplished by these regulations. The Secretary 
agrees to incorporate the second goal suggested by the last commenters, 
to minimize the costs that accrue to students under the title IV, HEA 
loan programs, because this goal is in keeping with the Secretary's 
stated objective of promoting sound cash management practices. 
Moreover, this goal is consonant with an institution's fiduciary 
responsibility to hold in trust for the benefit of a student or the 
Secretary any funds the institution receives under the title IV, HEA 
programs.
    Changes: Section 668.161(a) is revised to (1) articulate the 
objectives stated by the Secretary in the NPRM that the purpose of 
these regulations is to promote sound cash management practices by 
institutions and to minimize the financing costs to the Federal 
government of making available title IV, HEA program funds to students 
and institutions, and (2) include the objective suggested by the 
commenters--to minimize the costs that accrue to students under the 
title IV, HEA loan programs.

Section 668.162  Definitions

Credit an Account

    Comments: Several commenters supported the proposed definition for 
crediting an account. A few commenters urged the Secretary to clarify 
in final regulations that listing a student's ``estimated financial 
assistance'' on his or her bill is not the same as crediting the 
student's account. One commenter suggested that the Secretary clarify 
the meaning of the term ``account'' in each section where that term is 
used. One commenter believed this definition should indicate that the 
payment of title IV, HEA program funds is considered to be credited to 
the student's account only after the funds have been drawn down.
    Discussion: An institution may disburse funds to a student by 
crediting his or her account. In the context of these regulations, a 
student's account may be any recordkeeping system that an institution 
uses to post institutional charges and payments of title IV, HEA 
program funds. Unless an institution has posted a payment to the 
student's account the institution's bill to the student may merely 
indicate his or her ``estimated financial assistance.'' Similarly, with 
respect to the issue presented by the last commenter, for an 
institution that establishes a receivable for a student's title IV, HEA 
program funds by making an accounting entry for those funds, the 
Secretary considers the disbursement to occur on the date that the 
institution makes the payment or credits the student's account with the 
title IV, HEA program funds that the institution drew down or will draw 
down for that purpose.
    Changes: None.

Issue Checks

    Comments: Commenters writing on behalf of student legal services 
organizations contend that it has been common for certain institutions 
to write checks but not deliver, or deliver belatedly, those checks to 
students. The commenters expressed concern that the proposed definition 
of issue checks leaves leeway for an unscrupulous institution to delay 
delivery of the check to a student. The commenters suggested that at 
the very least the Secretary should in the preamble to the final 
regulations clarify the meaning of the phrase ``release, distribute, or 
make available'' to mean that an institution must mail a check to a 
student or notify the student by some expeditious means that the check 
is available and may be picked up immediately by the student.
    One commenter recommended that the Secretary provide guidance 
relating to the use of the term issue checks as that term is used in 
the excess cash section of these regulations.
    Discussion: The Secretary considers a check to be issued if it is 
released, distributed, or made available along the lines suggested by 
the commenters. The reader is referred to the discussion under the 
heading Excess cash for more information regarding the term issue 
checks.
    Changes: The definition of issue checks is clarified to provide 
that an institution issues a check by (1) mailing the check to a 
student or parent, or (2) notifying the student or parent expeditiously 
that the check is available on demand for immediate pickup.

Section 668.163  Requesting Funds

    Comments: One commenter requested that the Secretary specify in 
final regulations the requirements for institutions that draw down 
title IV, HEA program funds through FEDWIRE. Two commenters questioned 
the reliability of the ACH/EFT (Automated Clearing House/Electronic 
Funds Transfer) payment system.
    A few commenters believed that the 3-day immediate need standard 
would be onerous and unworkable in view of the excess cash provisions 
in Sec. 668.166 under which the Secretary considers an institution to 
have issued a check on the date the check cleared the institution's 
bank account. These commenters argued that a five-day immediate-need 
standard would be more reasonable because an institution has no control 
over when a student cashes his or her check. Another commenter 
suggested a 15-day immediate-need standard.
    One commenter requested clarification regarding the concept of 
immediate need with respect to making draws against the Federal capital 
contributions (FCC) for the Federal Perkins Loan Program.
    In view of the use of electronic funds transfers (EFT) under which 
a student borrower would not be required to endorse a loan check, 
commenters representing student legal services organizations urged the 
Secretary to establish disbursement procedures that would ensure that a 
student has adequate control over his or her student aid funds. The 
commenters were concerned that a borrower not incur excessive interest 
charges for the time that an institution used his or her loan proceeds, 
particularly with regard to unsubsidized loans.
    Discussion: Under current departmental procedures, an institution 
that draws down funds through FEDWIRE must use those funds within one 
business day following its receipt of those funds. The Secretary wishes 
to clarify that under these regulations an institution must disburse 
title IV, HEA program funds within three business days following the 
date that the institution received the funds, regardless of whether the 
institution drew down those funds through FEDWIRE or under the ACH/EFT 
system. In addition, the Secretary reiterates that the Department is 
able to transfer funds electronically to an institution quickly and 
reliably.
    The Secretary disagrees with the commenters who suggested extending 
the three-day immediate-need standard to five or 15 days to allow for 
the clearance of checks. The clearance pattern of checks issued by an 
institution has no bearing on an institution's determination of its 
immediate cash needs. Under the immediate-need concept, an institution 
draws down only that amount of cash that it needs to make disbursements 
to students within a specified time. As long as an institution makes 
the disbursements within that time, including making disbursements by 
issuing checks properly, the institution has satisfied the immediate-
need standard regardless of when its students cashed the checks after 
receiving the checks. The reader is referred to the discussion under 
the heading Excess cash for more information regarding the issuance of 
checks.
    The Secretary wishes to make clear that the concept of immediate 
need also applies to draws of Federal capital under the Federal Perkins 
Loan Program. Thus, before making a draw of Federal capital an 
institution must determine whether the cash in its Federal Perkins Loan 
Fund is sufficient to meet its immediate loan disbursement and 
administrative needs. The Secretary recognizes that this may be 
difficult for an institution to accomplish because student loan 
repayments, the cost of collection activities, and the cost of other 
administrative actions affect the amount of cash in the Fund. 
Nevertheless, an institution must view its allocation of Federal 
capital as it views its authorizations for other title IV, HEA programs 
and make draws on that allocation only to meet its immediate Federal 
Perkins Loan cash needs.
    Finally, the Secretary agrees that borrowers should not incur 
unnecessary interest costs on loan funds, particularly during the 
periods that those funds are held or otherwise used by an institution. 
If a lender provides by EFT or mastercheck loan funds to an institution 
well ahead of the time that the institution needs the funds to make 
disbursements to loan borrowers, an institution may earn and retain 
interest on those funds. Under the unsubsidized loan programs, a 
borrower incurs interest costs from the date the lender disbursed the 
funds to the institution even though the borrower does not benefit from 
that early disbursement until he or she receives those loan funds.
    Changes: Section 668.163 is revised to provide that under 
Sec. 682.603, in certifying a loan application for a borrower who is 
not subject to the delayed disbursement provisions in 
Sec. 682.604(c)(5), an institution may not request that a lender 
provide by EFT or master check the loan proceeds for the borrower 
earlier than 13 days before the first day of a student's period of 
enrollment. The Secretary adds this provision to minimize the interest 
costs incurred by a borrower during the period in which the borrower 
does not benefit from the receipt of loan funds. The selection of 13 
days is consistent with the number of days that an institution may 
request and disburse funds that it receives from the Secretary by EFT 
under all of the other title IV, HEA programs.
    Comments: Several commenters urged the Secretary to specify in 
final regulations the criteria the Secretary considers in determining 
whether to place an institution on the reimbursement payment method, 
and to detail the procedures under which (1) an institution may appeal 
the Secretary's determination, and (2) the Secretary approves an 
institution's reimbursement request, including the length of time the 
Secretary takes in approving all or part of that request.
    Discussion: The Secretary places an institution on the 
reimbursement payment method when the Secretary determines that there 
is a heightened need to monitor Federal funds or when other reasons 
exist to recover program liabilities through administrative offset. The 
Secretary has sole discretion in making that determination and makes 
that determination on a case-by-case basis. In addition, the Secretary 
reserves the authority to require an institution to submit any 
documentation the Secretary deems appropriate in determining whether to 
approve an institution's reimbursement request.
    Changes: None.
    Section 668.164 Maintaining Funds.
    Comments: For the following reasons commenters writing on behalf of 
institutions and higher education organizations suggested that the 
Secretary adopt the current Federal Perkins Loan program bank account 
provisions under which an institution is required to either notify its 
bank of the accounts that contain Federal funds or ensure that the name 
of the account discloses clearly that Federal funds are deposited into 
that account. First, the commenters noted that existing State laws may 
prevent some public institutions from complying with the requirement 
that the word ``Federal'' be included in the name of their bank 
accounts. Second, the commenters believed that either of the proposed 
requirements would be adequate for Federal purposes.
    Another commenter believed that both requirements were necessary to 
safeguard adequately against the possibility of erroneous levies on an 
institution's account.
    A few commenters urged the Secretary to explain the purpose of the 
proposed requirement.
    Discussion: In proposing that an institution comply with both of 
these requirements, the Secretary sought to safeguard Federal funds by 
alerting potential creditors of the institution that Federal funds are 
contained in the institution's bank account. In the past, some 
institutions have used Federal funds to secure credit or obtain a loan 
by misrepresenting to a creditor that the funds in their Federal 
accounts were the institutions' own funds.
    In view of the public comment, the Secretary believes the goal of 
safeguarding Federal funds is equally accomplished by providing that an 
institution comply with either of the proposed measures provided that 
the institution also files with the appropriate State or municipal 
government entity a UCC-1 statement disclosing that the account 
contains Federal funds. An institution may satisfy the requirement of 
notifying its bank of the accounts that contain Federal funds by 
submitting to the bank a copy of the UCC-1 statement that the 
institution files with the appropriate State or municipal government 
entity.
    Changes: Section 668.164(a)(2) is revised to provide that an 
institution (1) may either notify its bank of the accounts that contain 
Federal funds or ensure that the name of the account discloses clearly 
that Federal funds are maintained in that account, and (2) except as 
may be prohibited by State law, must file with the appropriate State or 
municipal government entity aP UCC-1 form.
    Comments: A few commenters writing on behalf of institutions and 
higher education organizations opined that the interest-bearing account 
requirements would not only prohibit an institution from commingling 
Federal funds with funds the institution maintains in higher-paying 
investment accounts but would also force an institution to establish 
separate accounts for Perkins and non-Perkins related funds. The 
commenters believed that for an institution to comply with the proposed 
requirements, the institution would have to establish a vast array of 
parallel FDIC accounts that would increase greatly the costs of 
maintaining Federal funds while only marginally reducing the Federal 
risk. Therefore these commenters, as well as other commenters, 
suggested that the Secretary include as an option the current Perkins 
loan requirements under which an institution may maintain Federal funds 
in an investment account that consists predominately of low-risk income 
producing securities.
    Commenters writing on behalf of business officers stated that most 
colleges and universities pool their operating funds in a single 
investment account that is often not a federally insured bank account 
because (1) the amounts involved far exceed FDIC insurance limits, and 
(2) the rate of return is much higher on investment opportunities. In 
addition, these commenters believed that the Secretary should allow an 
institution that commingles Federal funds with its own funds in a 
pooled investment account to allocate to the various fund components 
the interest or investment revenue earned on the pooled funds, instead 
of requiring the institution to determine the actual interest earned on 
the Federal-funds component. Further, the commenters opined that an 
institution would be forced to establish a separate account for title 
IV, HEA program funds because it will be difficult for the institution 
to comply with the entire set of proposed requirements that its bank 
account contain the word ``Federal'', that it be federally insured, and 
that the institution be able to account for the actual interest earned 
on Federal funds if those funds are commingled with the institution's 
own funds. Moreover, these commenters argued that an institution that 
uses only its own funds to make disbursements to students prior to 
drawing down the equivalent amount of title IV, HEA program funds 
should not have to comply with these requirements because the funds 
that the institution ultimately draws down lose their ``character'' as 
Federal funds when they are received by the institution.
    Still other commenters recommended the Federal Perkins Loan Program 
investment account option, arguing that Federal funds maintained in 
such an account would provide the Secretary greater security than if 
the funds were maintained in an FDIC account. The Federal funds would, 
in effect, be secured by no-risk U.S. Treasury obligations.
    One commenter suggested that after one year the Secretary revisit 
the interest-bearing account provisions to determine if the cost to 
institutions of carrying out these provisions justify the stated 
savings to the government and whether the $250 administrative cost 
allowance is sufficient to cover the costs to institutions of carrying 
out these provisions. A few other commenters believed that the $250 
allowance was too low to cover an institution's administrative expenses 
and suggested that the Secretary allow an institution to maintain up to 
one percent of the interest calculated on its annual drawdowns or 15 
percent of the interest earned. One commenter believed that the 
proposed allowance would be sufficient to absorb bank fees because most 
institutions would be able to avoid monthly service charges by 
informing their banks that the interest-bearing account contained 
Federal funds.
    A few commenters agreed with the proposed requirement that an 
institution maintain a interest-bearing account where the institution's 
prior year draws of Federal funds exceeded $1 million. Other commenters 
believed that the proposed threshold was too low and would impose 
financial and administrative burdens on small institutions or on 
institutions that draw down title IV, HEA program funds only after 
making disbursements to students. These commenters suggested that the 
Secretary raise the threshold or establish another measurement for 
requiring institutions to maintain interest-bearing accounts, such as 
average monthly account balances.
    Discussion: The Secretary acknowledges that while the interest 
earned on title IV, HEA program funds maintained in investment accounts 
will offset to a greater degree the costs to the Federal government of 
making the funds available than if the funds were maintained in an 
interest-bearing account, the Secretary believes that the investment-
account-interest benefit is of secondary importance. In proposing the 
requirement that an institution maintain a Federally insured interest-
bearing account, the Secretary intended primarily to ensure the safety 
and liquidity of the title IV, HEA program funds maintained temporarily 
in that account. The Secretary believes strongly that an institution 
must not place in jeopardy title IV, HEA program funds by maintaining 
the funds in high-risk, albeit high-yielding, investment accounts--
program funds must only be drawn down pending immediate disbursement to 
students. However, the Secretary finds compelling the argument that 
Federal funds maintained in a low-risk investment account secured by 
U.S. Treasury obligations will provide greater security than if the 
funds were maintained in a Federally insured bank account, provided 
that an institution maintains sufficient liquidity in that investment 
account to make required disbursements to students.
    The Secretary wishes to clarify that an institution is not required 
to maintain more than one Federally insured bank account. In addition, 
regarding the issue of determining the interest earned on title IV, HEA 
programs where those funds are commingled with an institution's own 
funds, the Secretary believes than an institution should be able to 
account adequately for the interest earned on the Federal amounts.
    The Secretary disagrees with the commenters who argued that an 
institution should not be required to comply with the bank account 
requirements if an institution uses it's own funds to make title IV,HEA 
program disbursements to students and only draws down the equivalent 
amount of program funds to replenish its own funds. An institution's 
Federal bank account is the repository for title IV, HEA program funds 
and must be so designated for the institution to receive program funds 
from the Secretary. In addition, an institution must maintain a Federal 
account to make deposits of title IV, HEA program funds (for example, a 
deposit of title IV, HEA program funds made by the institution for a 
refund of institutional charges).
    With regard to the comments regarding the one million dollar 
threshold requirement, the Secretary agrees that it may not be cost-
effective to require small institutions, or institutions that have a 
practice of drawing down title IV, HEA programs funds only after making 
disbursements to students, to maintain interest-bearing accounts. 
Finally, the Secretary believes that the $250 administrative allowance 
is sufficient to offset an institution's costs of maintaining an 
interest-bearing account.
    Changes: Section 668.164(b) is revised to provide the following. 
First, an institution may maintain an interest-bearing account in 
accordance with the current requirements under the Federal Perkins Loan 
Program. Second, the Secretary has raised the interest-bearing-account 
threshold requirement from one million dollars to three million 
dollars. Third, an institution that maintained in the prior award year 
Federal funds in an interest-bearing account is not required to 
maintain the interest-bearing account in the current award year if the 
institution did not earn $250 in interest on the funds maintained in 
that account in the prior award year. Finally, an institution that 
demonstrates by its cash management practices that it will not earn 
more than $250 in interest on title IV, HEA program funds is not 
required to maintain an interest-bearing account regardless of the 
amount of its prior-year drawdowns.
    As noted under the heading SUPPLEMENTARY INFORMATION, the Secretary 
establishes these interest-bearing-account provisions as performance 
benchmarks for all institutions. However, the Secretary remains 
interested in (1) the process by which institutions draw down Federal 
funds and time within which the funds must be disbursed to students, 
(2) the maintenance of the funds in interest-bearing accounts, and (3) 
the use of the funds by an institution while the funds are pending 
disbursement to students. The Secretary will assess the impact and 
effectiveness of these provisions and propose new rules, if 
appropriate, in response to that assessment.
    Comments: Several commenters supported the proposed provisions 
under which the Secretary could require an institution to maintain a 
separate account for title IV, HEA program funds if the Secretary found 
that the institution did not account adequately for the receipt, 
disbursement, or use of those funds.
    Commenters writing on behalf of student legal services 
organizations urged the Secretary to require certain institutions to 
maintain a separate account for title IV, HEA program funds for the 
following reasons. First, the separate account requirement is purely 
within the Secretary's discretion. Second, as proposed, the requirement 
places the onus on the Secretary to act affirmatively to require the 
separate account. The commenters believe that given the Department's 
scarce resources for enforcement actions and absent a requirement that 
an institution establish a separate Federal bank account, Federal and 
student funds would be placed in jeopardy unnecessarily. The commenters 
contend there has been a longstanding and persistent problem at certain 
institutions caused by commingling Federal funds with operating 
revenues. The commenters maintained that these institutions fail to pay 
loan refunds due students and otherwise use Federal funds for other 
purposes. The commenters cite U.S. v. Kammer, 1 F. 3d 1161 (11th Cir. 
1993) as an example that courts have been reluctant to find culpable 
such failures by institutions so long as the Department permitted title 
IV, HEA program funds to be commingled with institutional funds. In 
addition, the commenters believed that the accounting effort involved 
for the Department to untangle such commingled funds would be 
staggering. For these reasons, the commenters feel strongly that the 
Secretary should exercise his discretion and require an institution to 
maintain a separate bank account for title IV, HEA program funds, 
except in cases where the institution has adequate accounting 
procedures and a demonstrated track record of making student refunds 
and has otherwise used Federal funds for their intended purposes. 
Moreover, the commenters argue that the situation presented when a 
student withdraws and is owed a refund is analogous to the situation 
where an institution holds excess funds for the benefit of the student, 
as in proposed Sec. 685.303(c) and Sec. 668.165(b)(4), because under 
both situations an institution is responsible and liable for those 
funds. The commenters note that under those proposed regulations, the 
Secretary requires an institution to maintain excess student funds in a 
separate bank account.
    Discussion: The Secretary has carefully considered the 
recommendations made by these commenters, but has decided to adopt the 
structure in the proposed regulations that will not require initially 
that an institution establish separate accounts for title IV, HEA 
program funds. Although the Secretary believes that in most instances 
sound financial management practices will lead an institution to 
establish such separate accounts, the Secretary will not require this 
so long as an institution is able to meet its cash management and 
accounting obligations under the regulations. The Secretary also notes 
that the court case identified by the commenters encompassed many more 
fact-specific issues concerning whether and under what circumstances a 
showing could be made that an institution had willfully converted 
student refunds. In the U.S. v. Kammer case cited by the commenters, 
the Court concluded that the institution's obligation to pay refunds 
out of its operating funds made it difficult to distinguish between the 
institution's inability to pay refunds due to financial hardship and a 
deliberate decision by the institution to misappropriate those funds. 
The Secretary notes that this analysis is not directly relevant to the 
question of whether federal funds must initially be placed into a 
separate bank account, but focuses instead on the institution's conduct 
in conjunction with its financial operations.
    The Secretary wishes to assure the commenters that the Secretary 
will take appropriate enforcement actions and require an institution 
that does not account, disburse, or use Federal funds properly to 
maintain a separate account for those funds.
    Changes: None.

Section 668.165  Disbursing Funds

Comments Regarding the Method of Payment

    Many commenters recommended that the Secretary modify the proposed 
EFT payment provisions, under which an institution would need to obtain 
each award year written authorization from a student or parent to 
disburse title IV, HEA program funds by that method, by providing that 
once an institution obtained that authorization, the institution would 
be required only to provide annual notices to the student or parent to 
continue to use that initial authorization to make EFT payments in 
future award years. Still other commenters suggested that the one-time 
authorization stay in effect until it was cancelled or modified by the 
student or parent.
    Many commenters believed that the requirement that an institution 
obtain from a student each award year permission to credit his or her 
account for other cost-of-attendance charges is administratively 
burdensome and unnecessary because the student may at any time withdraw 
that permission.
    Several commenters believed that the Secretary should allow an 
institution that obtains permission from the student or parent to apply 
a student's current title IV, HEA program funds to any outstanding 
institutional charges.
    Discussion: The Secretary agrees that a one-time authorization is 
adequate, provided that the notice suggested by the first commenters 
explains in a plain and conspicuous manner the provisions for which a 
student is granting his or her authorization. The Secretary further 
agrees to allow the one-time authorization for all circumstances where 
the institution seeks to obtain a student's permission to perform an 
activity on behalf of the student.
    In addition, the Secretary notes that under both the FFEL and 
Direct Loan programs an institution must notify a student or the 
student's parent, in writing, that the institution has credited the 
student's account. This requirement was established in those programs 
because a significant amount of time may elapse between the time a 
borrower signs a promissory note or other document authorizing the 
transfer of loan funds and the time the funds are applied to the 
student's account. The Secretary believes that a borrower is entitled 
to a written disclosure of the date on which the student's account is 
credited.
    Changes: Section 668.165 is revised to include a new paragraph (d) 
that provides the procedures under which an institution obtains a 
student's authorization to (1) disburse title IV, HEA program funds to 
a student, or parent, by initiating an electronic funds transfer, (2) 
apply a student's title IV, HEA program funds to other charges, or (3) 
hold excess student funds.
    Under these procedures, the institution notice to the student must 
explain in plain and conspicuous manner the provisions regarding the 
student's or parent's authorization, including an explanation regarding 
any interest that the institution earns on the student's funds and 
whether the institution will provide that interest to the student 
including an explanation regarding any interest that the institution 
earns on the student's funds and whether the institution will provide 
that interest to the student.including an explanation regarding any 
interest that the institution earns on the student's funds and whether 
the institution will provide that interest to the student. In addition 
the notice must provide the student or parent with the opportunity to 
cancel or modify those provisions.
    Also, Sec. 668.165(a) is revised to provide that an institution 
must notify a student or parent of the amount of title IV, HEA program 
funds the student can expect to receive, and how and when those funds 
will be paid.

Comments Regarding Crediting a Student's Account and Allowable 
Charges

    Commenters writing on behalf of business officers believed that the 
proposed requirements for crediting a student's account assume that 
institutions have in place elaborate and very detailed accounting 
systems that enable institutions to analyze the various type of charges 
and sources of funds posted to student accounts. The commenters contend 
that most institutions have fairly simple accounting systems where 
charges are merely posted and payments credited--these systems are not 
designed to track or to ensure that selected revenue sources are 
applied to discrete charges. The commenters note that while existing 
provisions require that an institution may credit a student's account 
with his or her Federal Pell Grant award only for tuition and fees and 
room and board charges, those provisions do not present a problem to 
institutions because the amount of the student's Federal Pell Grant 
program award seldom exceeds the charges to which it is applied. 
However, extending the Federal Pell Grant program requirement to all 
title IV, HEA programs, as proposed, would pose great difficulties for 
institutions. Therefore, the commenters suggested that the Secretary 
delete the references to the ``application of funds'' in proposed 
Sec. 668.165(b)(1), and replace those references with the term ``use 
the funds.'' The commenters believe that this substitution would 
clarify that the Secretary did not intend to require institutions to 
track funding sources on an individual basis to determine which dollars 
would be applied to specific institutional charges or which dollars 
would be become part of a student's credit balance.
    A few commenters argued that if the a student's total title IV, HEA 
program awards were less than the allowable charges assessed by the 
institution, then any balance on the student's account could result 
only from crediting the student's account with non-Federal funds. 
Therefore, the commenters concluded that an institution would not be 
subject to the proposed credit balance provisions because the student's 
balance would consists solely of non-title IV, HEA program funds. One 
commenter recommended that the Secretary establish a credit balance 
threshold of $200. Under that recommendation, an institution would not 
have to meet the proposed timeframes for student credit balances less 
than that amount.
    Several commenters objected strongly to the proposed definition of 
allowable charges, under which an institution may apply a student's 
title IV, HEA program funds only to tuition and fees, and room and 
board charges unless the institution obtains a student's permission to 
apply his or her program funds to other cost-of-attendance charges. 
These commenters argued that it will require costly and unnecessary 
overhauls to institutions' existing computer and billing systems to 
account for the application of title IV, HEA program funds to these 
charges and saw no reason why an institution should be precluded from 
crediting a student's account without his or her permission for charges 
that were originally used to determine the student's cost of 
attendance. Consequently, the commenters suggested that the Secretary 
maintain the current policy which specifies the charges, such as fines 
and other non-educational costs, are not allowable.
    Other commenters argued that the practical effect of the proposed 
provisions regarding student consent and allowable charges would be to 
require institutions to obtain from each student every year written 
consent to apply the students' title IV, HEA program funds to a wider 
range of student debts represented in the institution billing system. 
The commenters maintained that in addition to the burden associated 
with obtaining this consent, students who decline or, more frequently, 
neglect to provide such consent will most likely experience disruption 
in the delivery of their aid awards. The commenters argue that the 
Secretary's rationale for adopting the Federal Pell Grant program rules 
overlooks the fact that the dollar amounts of the Federal Pell Grant 
are so small that they seldom exceed the total of tuition and fees and 
room and board at most institutions. Consequently, credit balances 
associated with Federal Pell Grant awards are extremely rare. 
Therefore, the commenters recommended that the Secretary permit 
institutions to apply title IV, HEA program funds to cost-of-attendance 
charges as currently allowed under the FFEL and campus-based programs, 
and impose the proposed restriction on those institutions that charge 
students for goods and services inappropriately or that withhold 
student funds inappropriately.
    Several commenters noted that under their institutional policies 
and procedures, a student who has an outstanding balance is allowed to 
register for an upcoming semester but only with the understanding that 
his or her title IV, HEA program funds will be used to pay for the 
outstanding charges. One of these commenters was concerned that the 
proposed restriction on prior year charges would not only preclude a 
student from registering until the student paid those charges, but also 
prohibit a student from charging books in the University book store. A 
few other commenters believed that it should be the institution's 
prerogative to determine how to apply payments on a student's account.
    A few commenters believed strongly that if a student authorizes an 
institution to charge him or her for other allowable charges, the 
institution should be allowed to charge the student for personal and 
other costs that were included in the ``miscellaneous cost'' component 
of the student's cost of attendance, including fines.
    One commenter noted that at his institution a non-payment of 
tuition and other cost-of-attendance charges would result in a block or 
hold on a student's registration for the following term. Therefore, the 
commenter argued that it would be irresponsible to allow the student to 
first take title IV, HEA program funds and use them for non-educational 
purposes before first assuring that the direct costs of education are 
paid. The commenter opined that the proposed rule, by requiring 
permission and allowing the student to rescind that permission at any 
time, would inadvertently encourage ``walkers'', i.e., students who get 
money and walk or leave.
    Several commenters recommended that the restriction on prior year 
charges, as proposed in Sec. 668.165(b)(1), be amended to provide that 
an institution may not apply the funds that a student is eligible to 
receive from a title IV, HEA program to any charges the institution 
assessed the student if those charges were not included in the period 
of the cost of attendance used by the institution to calculate the 
student's eligibility for that title IV, HEA program.
    Other commenters urged the Secretary to allow institutions to apply 
any current year's award balance remaining, after application of all 
current charges, to allowable and prior year charges and other cost-of-
attendance charges without seeking the student's permission in advance. 
The commenters argue that the administrative overhead required to issue 
checks to students for current year balances, only to bill them for 
outstanding prior year and other cost-of-attendance charges, does not 
seem defensible, especially when the students cannot be allowed to 
return to school with outstanding balances from any prior period or 
source.
    Discussion: The Secretary notes that under the Federal Pell Grant 
and Direct Loan programs an institution may credit a student's account 
only for tuition and fees and room and board charges. The Secretary 
further notes that the restriction on crediting funds to specific 
charges is statutory (see: sections 401(e) and 455(j) of the HEA) and 
cannot be changed by the Secretary in regulations. However, as a matter 
of policy that is in keeping with the statutory provisions that an 
institution may not retain excess student funds, and based on the 
presumption that an institution pays those excess funds to a student in 
a timely manner, the Secretary allows an institution to apply the total 
amount of these program funds to a student's account. Otherwise, if an 
institution draws down the total amount of the student's funds, within 
three days the institution would have to credit the student's account 
only for the amount of the specified charges and write a check to, or 
otherwise pay, the student for the amount in excess of those charges. 
In addition, the Secretary does not require that an institution track 
the title IV, HEA program funds it applies to a student's account to 
determine (1) that the funds are used to pay for specific charges, or 
(2) which funds are in excess of statutory-specific charges. Rather, an 
institution determines that funds are due to a student if the amount of 
a student's title IV, HEA program funds exceeds the amount of the 
specified charges. The institution makes this determination whenever it 
applies title IV, HEA program funds to the student's account. Although 
the Secretary proposed policy changes relating to allowable charges and 
timeframes for paying a student excess funds, the Secretary did not 
change this concept of applying funds to a student's account. The 
Secretary recognizes that the statutory restriction on crediting a 
student's account with Federal Pell Grant Program funds did not pose 
difficulties for many institutions because the amount of the student 
award was less than the amount of tuition and fees and room and board 
charges. However, because the same statutory restrictions apply to 
Direct Loan Program funds, the Secretary believes that this will no 
longer be the case when institutions credit a student's account with 
those loan funds.
    With regard to the comments concerning the rationale for limiting 
the application of title IV, HEA program funds to charges for tuition 
and fees, and room and board, the Secretary believes that these charges 
constitute the bulk of the costs that a student is likely to incur at 
most institutions, and notes that an institution may apply a student's 
title IV, HEA program funds to those charges without obtaining the 
student's authorization. Moreover, the Secretary believes that a 
student should have control over program funds in excess of direct 
institutional charges--the student uses these funds at his or her 
discretion to pay for other-cost-of-attendance and other miscellaneous 
institutional charges. Thus, if a student wishes to charge books and 
supplies at the institution's book store, the student will grant the 
proper authorization to the institution. Alternatively, the student may 
decide to purchase those books and supplies elsewhere. Further, the 
Secretary believes that students are serious about their education and 
thus are not likely to jeopardize their standing at an institution by 
failing to pay past due bills.
    The Secretary agrees that it may be burdensome for some 
institutions to obtain a student's authorization to apply his or her 
title IV, HEA program funds to other charges and, as discussed 
previously in this section, the Secretary has taken steps to reduce 
this burden by removing the proposed requirement that an institution 
obtain that authorization every award year. The Secretary also agrees 
that it may be administratively burdensome for some institutions to 
determine if a student's title IV, HEA program funds exceed allowable 
charges whenever those program funds are applied to the student's 
account. The Secretary notes, however, that an institution may mitigate 
this burden by (1) making an initial determination that the amount of 
title IV, HEA program funds that the institution will apply to the 
student's account during a semester, term, or other enrollment period 
will not exceed the amount of allowable charges the institution 
assesses the student for that semester, term, or other enrollment 
period, (2) obtaining the student's authorization to apply program 
funds to other charges, or (3) paying a student any credit balance 
within the specified timeframes.
    Changes: Section 668.165(b)(2) is revised to clarify that funds are 
due a student if the amount of a student's title IV, HEA program funds 
exceed the amount of allowable charges. In addition, Sec. 668.165(b)(4) 
is revised to include as allowable charges other institutional charges 
that a student incurs at his or her discretion, provided that an 
institution has obtained the student's authorization to credit his or 
her account for those charges.
Comments Regarding the Proposed Timeframes
    Several commenters agreed with the proposal that an institution 
must pay a student directly any balance remaining on his or her account 
within the later of (1) 7 days after that balance occurs, (2) 14 days 
after the first day of classes, or (3) 7 days after the student 
rescinds his or her permission regarding the charges for which the 
institution may debit the student's account.
    One commenter concurred with the Secretary that some institutions 
maintain for long periods, and use for their own purposes, title IV, 
HEA program funds in excess of allowable institutional charges. The 
commenter suggested that those institutions be identified in the 
Secretary's review of annual compliance audits and penalized 
accordingly for their non-compliance with Federal regulations.
    A number of other commenters argued that the 7-day requirements for 
paying a student his or her credit balance are unreasonable and 
burdensome in view of the time it takes for an institution to review, 
authorize, and write a check. These commenters suggested that the 
Secretary adopt the proposed 14-day requirement for all credit balance 
circumstances.
    Other commenters agreed with the Secretary that institutions should 
be required to pay a student the balance on his or her account in a 
timely manner. However, the commenters argued that since the deadline 
date for adding classes occurs after the second week of classes for 
most institutions, the Secretary should allow institutions to pay a 
student his or her balance no later than 14 days after the 
institution's deadline date for adding classes, and not 14 days after 
the start of classes. A few other commenters suggested the 14-day add-
period deadline date but suggested that the Secretary also require that 
all credit balance refunds be paid to students no later than 30 days 
after the first day of classes. Still other commenters suggested a 
variety of timeframes ranging from 7 days to 45 days.
    A few commenters noted that the add/drop period is a matter of 
academic policy that is not determined by an institution's business 
office and therefore should not be affected by Federal cash management 
rules.
    Several commenters noted that some State institutions do not have 
check writing authority and must follow procedures imposed by the State 
for requesting checks for students. Some of these commenters 
recommended that the Secretary allow a State institution 14 days after 
its add/drop period to pay a student his or her credit balance. In 
addition, the commenters recommended that the Secretary specify in 
final regulations that a student must notify an institution in writing 
if he or she wishes to rescind permission previously granted to the 
institution to apply title IV, HEA program funds to other cost-of-
attendance charges.
    One commenter noted that some institutions employ procedures under 
which credit balance checks are mailed to most students on or around 
the first day of classes. If a student does not receive a check through 
that mailing the student may request payment and the institution pays 
the student almost immediately by means of an ``on-demand'' check 
process. If a student does not request payment, the institution mails a 
check to the student at the end of the month. Therefore, the commenter 
recommended that the Secretary amend the proposed Sec. 668.265(b)(2) to 
provide that an institution must pay ``or otherwise make available'' 
the balance remaining on the student's account. Similarly, several 
other commenters suggested that, absent a request from a student, the 
Secretary should allow an institution to hold the student's credit 
balance, but be required to pay the student within 7 days after the 
student makes that request.
    The commenters representing student legal services organizations 
supported the Secretary's 7-14-7 day credit balance requirements, but 
urged the Secretary to specify in final regulations that, with respect 
to loan proceeds, the credit balance payment must be made by check or 
other means that requires the borrower's endorsement or certification. 
In addition, in view of the use of electronic funds transfers (EFT) 
under which a student borrower would not be required to endorse a loan 
check, these commenters urged the Secretary to establish disbursement 
procedures that would ensure that (1) a student does not incur a loan 
liability that he or she does not understand or mean to incur, and (2) 
a student's aid funds in excess of tuition and fees be paid promptly to 
the student by an institution.
    Discussion: The Secretary thanks the commenters for responding to 
the Secretary's request for comment regarding the proposed credit-
balance timeframes. While the Secretary believes strongly that an 
institution has an obligation to pay a student any funds in excess of 
institutional charges as soon as possible, in view of the public 
comment regarding all of the requirements for applying title IV, HEA 
program funds to a student's account, the Secretary has decided to 
phase-in over a 2-year period the following requirements. For the award 
year in which these regulations take effect, July 1, 1995 to June 30, 
1996, when an institution applies title IV, HEA program funds to a 
student's account and determines that any amount of those funds exceeds 
allowable charges, the institution must pay a student that balance 
within 21 days of the later of (1) the date that excess balance occurs, 
(2) the first day of classes of a payment period or period of 
enrollment, or (3) the date the student rescinds his or her 
authorization under Sec. 668.165(d). For the award year beginning July 
1, 1996 and for subsequent award years, an institution must pay an 
excess balance to a student within 14 days of the later of events 
described above. The Secretary does not intend for these requirements 
to conflict with an institution's academic policies regarding the 
length of its add/drop period. Rather, the Secretary is interested only 
in assuring that students receive their funds in a timely manner.
    Finally, with regard to the comments that the Secretary establish 
disbursement procedures that ensure that a student does not unknowingly 
or unnecessarily incur a loan liability the Secretary notes that these 
regulations require an institution to both notify a student that loan 
proceeds have been credited to the student's account and to require 
institutions to obtain the student's authorization to apply the 
student's loan proceeds to charges other than tuition and fees and room 
and board.
    Changes: Section 668.165(b) is revised to reflect the timeframes 
discussed above.
Comments Regarding Early Payments
    A few commenters agreed with the proposed requirement that an 
institution may not credit a student's account or pay the student 
directly earlier than 10 days before the student starts classes.
    Many commenters opposed 10-day early payment requirement on the 
grounds that (1) the requirement would disadvantage students who incur 
educationally-related costs prior to those 10 days, or (2) institutions 
need additional time to prepare bills and to otherwise complete student 
registrations. Most of these commenters recommended that the Secretary 
retain the current provisions under which an institution may credit a 
student's account 21 days before the student starts classes. One of 
these commenters noted that the 10-day requirement would be burdensome 
for students in study abroad programs.
    Discussion: As noted in the discussion under the heading Credit an 
account, the crediting of title IV, HEA program funds to a student's 
account has no bearing on when an institution bills a student; an 
institution's bill to a student may indicate that title IV, HEA program 
funds were credited to the student's account or may merely indicate the 
expected amounts of those funds. In addition, the Secretary notes a 
student who does not contract with the institution for room and board 
or other services does not benefit from any additional time that the 
institution may have to credit his or her account for these charges or 
services.
    Changes: None.
Comments Regarding Holding Excess Student Funds
    Many commenters opposed the proposed requirement that an 
institution maintain a separate account for holding excess student 
funds on the grounds that it is unnecessarily burdensome. These 
commenters opined that most institutions would not offer this service 
to its students if the Secretary does not remove the separate account 
requirement.
    One commenter suggested an alternative approach under which an 
institution would hold excess student funds in a separately-designated 
subsidiary account under its general ledger account. The commenter 
argued that under this approach, the Secretary could ensure than an 
institution would segregate student funds without requiring the 
institution to develop new accounting procedures.
    Another commenter requested that the Secretary specify in final 
regulations that any interest earned on excess student funds accrues to 
an institution.
    Discussion: Based on public comment and further review, the 
Secretary agrees to remove the proposed separate bank account 
requirements for holding excess student funds. In proposing that an 
institution maintain a separate bank account for excess student funds, 
the Secretary sought to ensure that an institution would not use the 
funds for its own purposes and thus be unable to provide the funds at 
the student's request.
    The Secretary agrees to adopt the commenter's approach, but with 
some modifications. First, an institution must maintain, at all times, 
an amount of cash in its bank account that is equal to the amount it 
holds for students. Second, to safeguard the student's funds, the 
Secretary prohibits an institution that does not satisfy the standards 
of financial responsibility under Sec. 668.15 from holding excess 
student funds.
    Finally, the Secretary clarifies that an institution is not 
required to hold excess student funds and clarifies that any interest 
earned on those funds accrues to the institution.
    Changes: Section 668.165(b)(4) is revised to provide that if an 
institution chooses to hold excess student funds, the institution (1) 
must account for those funds in a separately-designated subsidiary 
ledger account, (2) must maintain at all times in its bank account an 
amount of cash equal to the funds it holds for the student, (3) may 
retain any interest earned on the student's funds, and (4) may not hold 
excess student funds if the Secretary determines that the institution 
does not meet the standards of financial responsibility under 
Sec. 668.15.

Section 668.166  Excess Cash

    Comments: Several commenters agreed with the proposed excess cash 
tolerance requirements under which the Secretary would not require an 
institution to return immediately an amount of title IV, HEA program 
funds the institution drew down in excess of its immediate needs if 
that amount was less than $5,000 or, for an institution that drew down 
in the prior year more than one million dollars, one-half of one 
percent of those prior year draws. An institution in the latter 
category would not be required to return an excess cash balance that 
was less that its threshold amount if the institution drew down within 
the following seven days an amount greater than that excess cash 
balance. Other commenters suggested that the Secretary increase the 
$5,000 tolerance to $10,000 or $30,000.
    One commenter writing on behalf of a higher education association 
believed that the proposed one-half of one percent excess cash 
tolerance was too low because any interest earned on such amounts may 
not exceed the transaction costs an institution would incur in 
returning the excess funds to the Department. For this reason, the 
commenter suggested that the threshold be increased to three percent of 
prior-year drawdowns. Alternatively, the commenter suggested that the 
Secretary either eliminate the percentage threshold or the seven-day 
drawdown requirement. Other commenters recommended that the threshold 
requirement be set at one percent, two percent or three percent of an 
institution's prior year drawdowns, or that institution be allowed 
greater flexibility in managing its cash needs during peak enrollment 
periods.
    A few commenters recommended that the Secretary conduct a survey to 
establish a basis for the promulgation of restrictions pertaining to 
excess cash thresholds. In the meantime, the commenters suggested that 
the Secretary should limit an institution's ability to participate in 
the title IV HEA programs if the institution routinely draws down 
amounts that are unreasonable. These commenters argued that since any 
earnings on idle funds become the property of the Federal government, 
the Federal fiscal interest is not at risk, unless an institution uses 
those funds for its own gain.
    Another commenter suggested that for purposes of calculating excess 
cash balances the Secretary should exclude refund amounts if those 
refunds were made on a timely basis and disbursed to students within 14 
days.
    Discussion: Under current Departmental procedures, institutions 
must return immediately any amount of excess cash greater than $500. In 
proposing the excess cash tolerances, which would increase this amount, 
the Secretary intended to reduce administrative burden by providing an 
institution more latitude in managing its cash needs without 
compromising the objective that the institution establish sound cash 
management practices.
    The Secretary acknowledged in the preamble to the NPRM that an 
institution may not always be able to disburse within three business 
days the amount of title IV, HEA program funds that the institution 
drew down because of variables beyond its control. Those variables 
include the failure of students to start classes as anticipated and 
changes in students' anticipated enrollment status. Although an 
institution must consider, along with other factors relating to the 
institution's student enrollment patterns, the effect of these 
variables in determining its immediate cash needs, it follows that the 
magnitude of the effect of these variables, in dollars, increases with 
the number of students enrolled at the institution.
    In response to the comments, the Secretary has modified the 
proposed language to permit an institution to maintain in its federal 
account for up to seven days an amount of excess funds that is based on 
a percentage of the total title IV, HEA program funds that the 
institution drew down during the previous award year. The usual 
percentage limitation for maintaining excess funds is doubled from the 
amount set out in the proposed regulations to one percent, with the 
exception that the percentage tolerance may rise from one percent to 
three percent during periods of peak enrollment. A peak enrollment 
period is defined as any 30-day period during which at least 25 percent 
of the institution's students start classes. The Secretary believes 
that this increase in acceptable cash levels during peak enrollment 
periods will provide the institution with an operating tolerance that 
responds to some of the concerns expressed in the comments, while still 
ensuring that non-peak cash levels are minimized. Furthermore, the 
seven-day time limitation for maintaining these funds in the 
institution's account will further the goal of efficient cash 
management by requiring that excess funds either be disbursed or 
returned. Given the increased permissible cash levels of one percent 
for non-peak enrollment periods and three percent for peak enrollment 
periods, the Secretary has eliminated the alternative proposed minimum 
balance of $5,000. The Secretary has decided instead that the 
percentage levels provide a fairer cash standard because they are 
responsive to the relative size of the institution and to its specific 
cash flow patterns.
    Changes: The Secretary has revised the regulations to provide that 
an institution may maintain in its Federal account for up to seven days 
an amount of excess cash that is less than one percent of the total 
title IV, HEA program funds that the institution drew down in the prior 
award year, except that the permissible amount of excess cash may 
increase to three percent for any 30-day period during which at least 
25 percent of the institution's students start classes. The Secretary 
has also removed the proposed minimum excess cash balance of $5,000 
based upon the increase in the allowable percentages.
    Comments: Many commenters objected to the provision under which the 
Secretary would consider an institution to have issued a check on the 
date the check cleared the institution's account unless the institution 
demonstrates to the satisfaction of the Secretary that it issued the 
check shortly after the institution wrote the check. The commenters 
argued that the Secretary could more reasonably establish that an 
institution did not issue checks shortly after it wrote the checks by 
examining the clearance pattern of those checks. In addition, the 
commenters noted that an institution has no control over how long a 
student takes to cash a check. Also, the commenters believed that the 
term ``shortly'' was vague, and suggested that the Secretary provide 
guidance as to the documentation an institution should maintain to 
demonstrate to the Secretary that it issued a check in a timely manner.
    Other commenters believed that the provisions allow the Secretary 
to impose severe sanctions for minor excess cash violations, and 
suggested that the Secretary establish a graduated scale of sanctions 
depending on the severity of the violations. The commenters suggest 
that the Secretary should provide clear parameters or criteria for 
imposing a sanction, including the amount of excess cash and the number 
of days the institution maintained the excess cash balances. Moreover, 
the commenters contend that it would be inappropriate to impose severe 
sanctions for excess cash violations because there would be no harm to 
the government--interest that accrues on excess cash balances must be 
returned to the government and the institution would derive no benefit 
from holding excess cash.
    Several commenters requested that the Secretary define the term 
``routinely'' as that term is used in this section.
    Discussion: The Secretary continues to believe that the proposed 
procedures are reasonable, but believes that some further discussion is 
needed to explain the circumstances when such an examination would be 
made to determine if the institution was properly administering the 
cash balances in its federal account. First, as explained in the 
regulations, upon a finding of excess cash the Secretary will consider 
checks to have been issued to students or, in some cases, to their 
parents, on the date that they were written. If a situation occurs 
where the Department has identified what appears to be excess cash 
levels maintained in an institution's account, one way for the 
institution to reduce the cash levels attributed to its account would 
be to show that it had promptly issued the checks by mailing them or 
making them available for immediate pick-up, and that subsequent delays 
by the recipients in processing the checks are responsible for excess 
cash that had been attributed to the institution account. The Secretary 
believes that this procedure provides the proper incentive to an 
institution to monitor its check issuances to reduce delay between 
issuance and processing by the recipients, and provides a reasonable 
administrative review process where the specific cash management 
practices can be examined on a case-by-case basis if a potential 
problem is identified.
    The Secretary also disagrees with the comments that the proposed 
penalties are either unnecessary or excessive given that the excess 
cash balances would be kept in interest bearing accounts. First, not 
every institution will be required to establish the Federal account as 
interest bearing, so there will be instances where no interest earnings 
have been made to offset the costs to the government of providing those 
funds in advance of the institution's immediate need. Second, the 
proposed penalties are designed to reimburse the government for the 
interest costs of providing those funds in advance of the institution's 
immediate need. For that reason, the penalty is based upon the 
calculated interest costs to the government, minus a credit for the 
interest earnings on those funds in the institution's account for that 
period. The Secretary believes that this is a fair procedure that 
balances the needs of both the Department and the institution, while 
furthering the policy objective of encouraging sound cash management.
    Finally, the Secretary eliminates the proposed language that 
prohibited certain excess cash balances within the tolerances given in 
the proposed regulations if they were ``routinely'' kept by the 
institution.
    Changes: Sections 668.166(b) and (c) are revised by removing the 
references to the term ``routinely.''

[FR Doc. 94-29324 Filed 11-30-94; 8:45 am]
BILLING CODE 4000-01-P